UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
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
(State
or
other
jurisdiction
of
incorporation
or
organization)
52-1726127
(I.R.S.
Employer
Identification
Number)
200
Westgate
Circle,
Suite
200,
Annapolis,
Maryland
(Address
of
principal
executive
offices)
21401
(Zip
Code)
Registrant’s
telephone
number,
including
area
code:
(410)
260-2000
Securities
registered
pursuant
to
Section
12(b)
of
the
Act:
Title
of
each
class
Name
of
each
exchange
on
which
registered
Common
Stock,
par
value
$.01
per
share
Nasdaq
Capital
Market
Indicate
by
check
mark
if
the
registrant
is
a
well-known
seasoned
issuer,
as
defined
in
Rule
405
of
the
Securities
Act.
Securities
registered
pursuant
to
Section
12(g)
of
the
Act:
None
Indicate
by
check
mark
if
the
registrant
is
not
required
to
file
reports
pursuant
to
Section
13
or
Section
15(d)
of
the
Act.
Yes
☐
No
☑
Yes
☐
No
☑
Note -
Checking
the
box
above
will
not
relieve
any
registrant
required
to
file
reports
pursuant
to
Section
13
of
15(d)
of
the
Exchange
Act
from
their
obligations
under
those
Sections.
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
☑
No
☐
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
files).
Yes
☑
No
☐
Indicate
by
check
mark
if
disclosure
of
delinquent
filers
pursuant
to
Item
405
of
Regulation
S-K
(section
229.405
of
this
chapter)
is
not
contained
herein,
and
will
not
be
contained,
to
the
best
of
registrant’s
knowledge,
in
definitive
proxy
or
information
statements
incorporated
by
reference
in
Part
III
of
this
Form
10-K
or
any
amendment
to
this
Form
10-K.
☑
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
the
definitions
of
“large
accelerated
filer”,
“accelerated
filer”,
and
“smaller
reporting
company”
in
Rule
12b-2
of
the
Exchange
Act.
Large
accelerated
filer
☐
Accelerated
filer
☐
Smaller
reporting
company
☑
Non-accelerated
filer
☐
(Do
not
check
if
a
smaller
reporting
company)
Indicate
by
check
mark
whether
the
registrant
is
a
shell
company
(as
defined
in
Rule12b-2
of
the
Act).
Yes
☐
No
☑
The
aggregate
market
value
of
the
6,413,607
shares
of
common
stock
held
by
non-affiliates
of
the
registrant,
based
on
the
closing
sale
price
of
the
registrant’s
common
stock
on
June
30,
2015
of
$4.81
per
share
was
$30,849,450.
(APPLICABLE
ONLY
TO
CORPORATE
REGISTRANTS)
Indicate
the
number
of
shares
outstanding
for
each
of
the
registrant’s
classes
of
common
stock,
as
of
the
latest
practicable
date.
As
of
March
1,
2016,
there
were
issued
and
outstanding
10,088,879
shares
of
the
registrant’s
common
stock.
DOCUMENTS
INCORPORATED
BY
REFERENCE
Portions
of
the
registrant’s
Definitive
Proxy
Statement
for
its
2016
Annual
Meeting
of
Stockholders,
which
Definitive
Proxy
Statement
will
be
filed
with
the
Securities
and
Exchange
Commission
no
later
than
120
days
after
the
registrant’s
fiscal
year-ended
December
31,
2015,
are
incorporated
by
reference
into
Part
III
of
this
Form
10-K;
provided,
however,
that
the
Audit
Committee
Report
and
any
other
information
in
such
proxy
statement
that
is
not
required
to
be
included
in
this
Annual
Report
on
Form
10-K,
shall
not
be
deemed
to
be
incorporated
herein
by
reference
or
filed
as
a
part
of
this
Annual
Report
on
Form
10-K.
Table of Contents
Page No.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Registrant
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Section
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 4.1
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Exhibits, Financial Statement Schedules
SIGNATURES
i
1
32
41
41
41
42
42
42
44
48
58
58
58
58
59
59
60
60
60
60
61
63
Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Severn
Bancorp,
Inc.
(“Bancorp”)
may
from
time
to
time
make
written
or
oral
“forward-looking
statements”,
(as
defined
in
the
Securities
Exchange
Act
of
1934,
as
amended,
and
the
regulations
thereunder)
including
statements
contained
in
Bancorp’s
filings
with
the
Securities
and
Exchange
Commission
(including
this
Annual
Report
on
Form
10-K
and
the
exhibits
thereto),
in
its
reports
to
stockholders
and
in
other
communications
by
Bancorp,
pursuant
to
the
“safe
harbor”
provisions
of
the
Private
Securities
Litigation
Reform
Act
of
1995.
Forward-looking
statements
include,
but
are
not
limited
to:
·
·
·
·
Statements
contained
in
“Item
1A.
Risk
Factors;”
Statements
contained
in
“Business”
concerning
strategy,
competitive
strengths,
liquidity
and
business
plans;
Statements
contained
in
“Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations,”
and
the
notes
to
Bancorp’s
consolidated
financial
statements,
such
as
statements
concerning
allowance
for
loan
losses,
liquidity,
capital
adequacy
requirements,
unrealized
losses,
guarantees,
the
Bank
being
well-capitalized,
and
impact
of
accounting
pronouncements;
and
Statements
as
to
trends
or
Bancorp’s
or
management’s
beliefs,
expectations
and
opinions.
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.
These
statements
are
based
on
assumptions
and
assessments
made
by
management
in
light
of
their
experience
and
their
perception
of
historical
trends,
current
conditions,
expected
future
developments
and
other
factors
they
believe
to
be
appropriate.
Any
forward-looking
statements
are
not
guarantees
of
Bancorp’s
future
performance
and
are
subject
to
risks
and
uncertainties
and
may
be
affected
by
various
factors
that
may
cause
actual
results,
developments
and
business
decisions
to
differ
materially
from
those
in
the
forward-looking
statements.
Some
of
the
factors
that
may
cause
actual
results,
developments
and
business
decisions
to
differ
materially
from
those
contemplated
by
such
forward-looking
statements
include
the
risk
factors
discussed
under
“Item
1A.
Risk
Factors”
and
the
following:
·
·
·
Changes
in
general
economic
and
political
conditions
and
by
governmental
monetary
and
fiscal
policies;
Changes
in
the
economic
conditions
of
the
geographic
areas
in
which
Bancorp
conducts
business;
Changes
in
interest
rates;
· A
downturn
in
the
real
estate
markets
in
which
Bancorp
conducts
business;
·
·
·
·
·
·
·
·
The
high
degree
of
risk
exhibited
by
Bancorp’s
loan
portfolio;
Environmental
liabilities
with
respect
to
properties
of
which
Bancorp
has
title;
Changes
in
federal
and
state
regulation,
including
recent
changes
in
capital
requirements;
Bancorp’s
ability
to
estimate
loan
losses;
Competition;
Breaches
in
security
or
interruptions
in
Bancorp’s
information
systems,
including
cyber
security
risks;
Bancorp’s
ability
to
timely
develop
and
implement
technology;
Bancorp’s
ability
to
retain
its
management
team;
ii
Table of Contents
·
·
·
Perception
of
Bancorp
in
the
marketplace;
Bancorp’s
ability
to
maintain
effective
internal
controls
over
financial
reporting
and
disclosure
controls
and
procedures;
and
Terrorist
attacks
and
threats
or
actual
war.
Bancorp
can
give
no
assurance
that
any
of
the
events
anticipated
by
the
forward-looking
statements
will
occur
or,
if
any
of
them
does,
what
impact
they
will
have
on
Bancorp’s
results
of
operations
and
financial
condition.
Bancorp
disclaims
any
intent
or
obligation
to
publicly
update
or
revise
any
forward-looking
statements,
regardless
of
whether
new
information
becomes
available,
future
developments
occur
or
otherwise.
iii
Table of Contents
Item 1. Business
General
PART I
Bancorp
is
a
savings
and
loan
holding
company
chartered
as
a
corporation
in
the
state
of
Maryland
in
1990.
It
conducts
business
primarily
through
two
subsidiaries,
Severn
Savings
Bank,
FSB
(“Bank”)
and
SBI
Mortgage
Company
(“SBI”).
The
Bank’s
principal
subsidiary
Louis
Hyatt,
Inc.
(“Hyatt
Commercial”),
conducts
business
as
Hyatt
Commercial,
a
commercial
real
estate
brokerage
and
property
management
company.
SBI
holds
mortgages
that
do
not
meet
the
underwriting
criteria
of
the
Bank,
and
is
the
parent
company
of
Crownsville
Development
Corporation
(“Crownsville”),
which
is
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,
and
originate
mortgages
in
its
primary
market
of
Anne
Arundel
County,
Maryland
and,
to
a
lesser
extent,
in
other
parts
of
Maryland,
Delaware
and
Virginia.
On
November
23,
2009,
Bancorp
and
the
Bank
each
entered
into
a
supervisory
agreement
with
the
Office
of
Thrift
Supervision
(“OTS”).
As
a
result
of
the
Dodd-Frank
Wall
Street
Reform
and
Consumer
Protection
Act
(the
“Dodd-Frank
Act”),
effective
as
of
July
21,
2011,
the
OTS
was
abolished
and
the
regulatory
oversight
functions
and
authority
of
the
OTS
related
to
the
Bank
were
transferred
to
the
Office
of
the
Comptroller
of
the
Currency
(“OCC”)
and
the
regulatory
oversight
functions
and
authority
of
the
OTS
related
to
Bancorp
were
transferred
to
the
Board
of
Governors
of
the
Federal
Reserve
System
(“Federal
Reserve”
or
“FRB”).
The
Bank’s
supervisory
agreement
was
replaced
by
a
formal
agreement
dated
April
13,
2013
with
the
OCC.
On
October
15,
2015,
the
Bank
was
notified
by
the
OCC
that
its
agreement
was
terminated.
Bancorp’s
supervisory
agreement
was
enforced
by
FRB.
On
January
21,
2016,
Bancorp
was
notified
by
the
FRB
that
its
agreement
was
terminated.
On
April
23,
2013,
the
Bank
was
notified
by
the
OCC
that
the
OCC
established
minimum
capital
ratios
for
the
Bank
requiring
it
to
immediately
maintain
a
Tier
I
Leverage
Capital
Ratio
to
Adjusted
Total
Assets
of
at
least
10%
and
a
Total
Risk-Based
Capital
to
Risk-Weighted
Assets
ratio
of
at
least
15%.
On
October
15,
2015,
the
Bank
was
notified
by
the
OCC
that
these
additional
minimum
capital
ratios
were
no
longer
required.
As
of
December
31,
2015,
Bancorp
had
total
assets
of
$762,079,000,
total
deposits
of
$523,771,000,
and
total
stockholders’
equity
of
$86,456,000.
Bancorp’s
net
income
for
the
year
ended
December
31,
2015
was
$4,535,000.
For
more
information,
see
“Item
6.
Selected
Financial
Data.”
Bancorp’s
internet
address
is
www.severnbank.com.
Bancorp
makes
available
free
of
charge
on
www.severnbank.com
its
annual
report
on
Form
10-K,
quarterly
reports
on
Form
10-Q
and
current
reports
on
Form
8-K,
and
amendments
to
those
reports
filed
or
furnished
pursuant
to
Section
13(a)
or
15(d)
of
the
Exchange
Act,
as
soon
as
reasonably
practicable
after
it
electronically
files
such
material
with,
or
furnishes
it
to,
the
SEC.
In
addition,
we
will
provide,
at
no
cost,
paper
or
electronic
copies
of
our
reports
and
other
filings
made
with
the
SEC.
Requests
should
be
directed
to:
Thomas
G.
Bevivino
Executive
Vice
President
Severn
Bancorp,
Inc.
200
Westgate
Circle,
Suite
200
Annapolis,
Maryland
21401
The
information
on
the
website
listed
above,
is
not
and
should
not
be
considered
part
of
this
Annual
Report
on
Form
10-K
and
is
not
incorporated
by
reference
in
this
document.
This
website
is
and
is
only
intended
to
be
an
inactive
textual
reference.
1
Table of Contents
Business of the Bank
The
Bank
was
organized
in
1946
in
Baltimore,
Maryland
as
Pompei
Permanent
Building
and
Loan
Association.
It
relocated
to
Annapolis,
Maryland
in
1980
and
its
name
was
changed
to
Severn
Savings
Association.
Subsequently,
the
Bank
obtained
a
federal
charter
and
changed
its
name
to
Severn
Savings
Bank,
FSB.
The
Bank
operates
four
full-service
branch
offices
and
one
administrative
office.
The
Bank
operates
as
a
federally
chartered
savings
bank
whose
principal
business
is
attracting
deposits
from
the
general
public
and
investing
those
funds
in
mortgage
and
commercial
loans.
The
Bank
also
uses
advances,
or
loans,
from
the
Federal
Home
Loan
Bank
of
Atlanta,
(“FHLB-Atlanta”)
to
fund
its
lending
activities.
The
Bank
provides
a
wide
range
of
personal
and
commercial
banking
services.
Personal
services
include
mortgage
lending
and
various
other
lending
services
as
well
as
checking,
savings,
money
market,
time
deposit
and
individual
retirement
accounts.
Commercial
services
include
commercial
secured
and
unsecured
lending
services
as
well
as
business
internet
banking,
corporate
cash
management
services
and
deposit
services.
The
Bank
also
provides
safe
deposit
boxes,
ATMs,
debit
cards,
and
personal
internet
banking
including
on-line
bill
pay,
mortgage
lending,
and
telephone
banking,
among
other
products
and
services.
The
Bank’s
revenues
are
derived
principally
from
interest
earned
on
mortgage,
commercial
and
other
loans,
and
fees
charged
in
connection
with
the
loans
and
banking
services.
The
Bank’s
primary
sources
of
funds
are
deposits,
advances
from
the
FHLB-Atlanta,
proceeds
from
loans
sold
on
the
secondary
market,
and
payments
and
principal
prepayment
of
its
loans.
The
principal
executive
offices
of
the
Bank
are
maintained
at
200
Westgate
Circle,
Suite
200,
Annapolis
Maryland,
21401.
Its
telephone
number
is
410-260-2000
and
its
e-mail
address
is
mailman@severnbank.com.
The Thrift Industry
Thrift
institutions
are
financial
intermediaries
which
historically
have
accepted
savings
deposits
from
the
general
public
and,
to
a
lesser
extent,
borrowed
funds
from
outside
sources
and
invested
those
deposits
and
funds
primarily
in
loans
secured
by
first
mortgage
liens
on
residential
and
other
types
of
real
estate.
Such
institutions
may
also
invest
their
funds
in
various
types
of
short-
and
long-term
securities.
The
deposits
of
bank
and
thrift
institutions
are
insured
by
the
Deposit
Insurance
Fund
(“DIF”)
as
administered
by
the
Federal
Deposit
Insurance
Corporation
(“FDIC”),
and
these
institutions
are
subject
to
extensive
regulations.
These
regulations
govern,
among
other
things,
the
lending
and
other
investment
powers
of
thrift
institutions,
including
the
terms
of
mortgage
instruments
these
institutions
are
permitted
to
utilize,
the
types
of
deposits
they
are
permitted
to
accept,
and
reserve
requirements.
The
operations
of
thrift
institutions,
including
those
of
the
Bank,
are
significantly
affected
by
general
economic
conditions
and
by
related
monetary
and
fiscal
policies
of
the
federal
government
and
regulations
and
policies
of
financial
institution
regulatory
authorities,
including
the
Federal
Reserve
and
the
OCC
into
which
the
former
OTS
was
merged.
Lending
activities
are
influenced
by
a
number
of
factors
including
the
demand
for
housing,
conditions
in
the
construction
industry,
and
availability
of
funds.
Sources
of
funds
for
lending
activities
include
savings
deposits,
loan
principal
payments,
proceeds
from
sales
of
loans,
borrowings
from
the
FHLB-Atlanta
and
other
sources.
Savings
flows
at
thrift
institutions
such
as
the
Bank
are
influenced
by
a
number
of
factors
including
interest
rates
on
competing
investments
and
levels
of
personal
income.
2
Table of Contents
Earnings
The
Bank’s
earnings
depend
primarily
on
the
difference
between
income
from
interest-earning
assets
such
as
loans
and
investments,
and
interest
paid
on
interest-bearing
liabilities
such
as
deposits
and
borrowings.
The
Bank
typically
engages
in
long-term
mortgage
lending
at
fixed
rates
of
interest,
generally
for
periods
of
up
to
30
years,
while
accepting
deposits
for
considerably
shorter
periods.
However,
many
of
the
Bank’s
long-term
fixed-rate
loans
are
sold
in
the
secondary
market,
typically
resulting
in
net
gains
on
the
sale
of
such
loans
by
the
Bank.
Generally,
rapidly
rising
interest
rates
cause
the
cost
of
interest-bearing
liabilities
to
increase
more
rapidly
than
yields
on
interest-earning
assets,
thereby
adversely
affecting
the
earnings
of
many
thrift
institutions.
While
the
industry
has
received
expanded
lending
and
borrowing
powers
in
recent
years
permitting
different
types
of
investments
and
mortgage
loans,
including
those
with
floating
or
adjustable
rates
and
those
with
shorter
terms,
earnings
and
operations
are
still
highly
influenced
by
levels
of
interest
rates
and
financial
market
conditions
and
by
substantial
investments
in
long-term
mortgage
loans.
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.
Many
of
the
Bank’s
competitors
have
higher
legal
lending
limits
than
the
Bank.
The
Bank’s
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
short-term
money
market
funds
and
other
corporate
and
government
securities
funds.
The
Bank
also
faces
increased
competition
for
deposits
from
other
financial
institutions
such
as
brokerage
firms,
insurance
companies
and
mutual
funds.
The
Bank
is
a
community-oriented
financial
institution
serving
its
market
area
with
a
wide
selection
of
mortgage
loans.
Management
considers
the
Bank’s
reputation
for
financial
strength
and
customer
service
as
its
major
competitive
advantage
in
attracting
and
retaining
customers
in
its
market
area.
The
Bank
also
believes
it
benefits
from
its
community
orientation.
Net Interest Income
Net
interest
income
increases
during
periods
when
the
spread
between
Bancorp’s
weighted
average
rate
at
which
new
loans
are
originated
and
the
weighted
average
cost
of
interest-bearing
liabilities
widens.
Market
factors
such
as
interest
rates,
competition,
consumer
preferences,
the
supply
of
and
demand
for
housing,
and
the
availability
of
funds
affect
the
Bank’s
ability
to
originate
loans.
Bancorp
has
supplemented
its
interest
income
through
purchases
of
investments
when
appropriate.
This
activity
is
intended
to
generate
positive
interest
rate
spreads
on
large
principal
balances
with
minimal
administrative
expense.
Interest Rate and Volume of Interest-Related Assets and Liabilities
Both
changes
in
rate
and
changes
in
the
composition
of
Bancorp’s
interest-earning
assets
and
interest-bearing
liabilities
can
have
a
significant
effect
on
net
interest
income.
For
information
concerning
the
extent
to
which
changes
in
interest
rates
and
changes
in
volume
of
interest-related
assets
and
liabilities
have
affected
Bancorp’s
interest
income
and
expense
during
the
fiscal
years
ended
December
31,
2015
and
2014,
refer
to
Item
6,
“Selected
Financial
Data
-
Rate
Volume
Table”.
3
Table of Contents
Market Area
The
Bank’s
market
area
is
primarily
Anne
Arundel
County,
Maryland
and
nearby
areas,
due
to
its
four
branch
locations,
all
being
located
in
Anne
Arundel
County.
The
Bank
continues
to
expand
its
business
relationship
banking
department
by
focusing
on
the
needs
of
the
business
community
in
Anne
Arundel
County,
Maryland.
In
addition,
the
Bank
increased
its
offerings
to
businesses
and
consumers,
including
additional
commercial
lending
products,
business
internet
banking,
and
an
expanded
line
of
consumer
deposit
products.
The
Bank
has
traditionally
focused
its
lending
activities
on
first
mortgage
loans
secured
by
real
estate
for
the
purpose
of
purchasing,
refinancing,
developing
and
constructing
one-to-four
family
residences
and
commercial
properties
in
and
near
Anne
Arundel
County,
Maryland.
The
demand
for
first
mortgage
lending
has
increased
in
2015,
as
the
Bank
continues
to
be
a
leading
mortgage
lender
in
its
market
area
in
2015.
The
Bank
participates
in
the
secondary
market
and
sells
loans
it
originates
either
with
mortgage
servicing
rights
released
or
retained.
Supervisory and Formal Agreements
On
November
23,
2009,
Bancorp
and
the
Bank
each
entered
into
a
supervisory
agreement
with
the
OTS.
Bancorp’s
agreement
generally
prohibited
Bancorp
from
paying
dividends
or
distributions,
or
incurring
debt,
without
the
prior
approval
of
the
FRB.
As
a
result
of
the
Dodd-Frank
Act,
Bancorp’s
supervisory
agreement
was
enforced
by
the
FRB.
However,
on
January
21,
2016,
Bancorp
was
notified
by
the
FRB
that
its
supervisory
agreement
was
terminated.
The
Bank’s
supervisory
agreement
was
replaced
by
a
formal
agreement
dated
April
23,
2013
with
the
OCC.
The
formal
agreement
primarily
addressed
issues
identified
in
the
OCC’s
report
and
examination
of
the
Bank’s
operations
and
financial
condition
in
2012
and
prescribed
certain
corrective
actions
that
the
Bank
must
take.
Additionally,
on
April
23,
2013,
the
Bank
was
notified
by
the
OCC
that
the
OCC
established
certain
individual
minimum
capital
ratios
for
the
Bank.
However,
on
October
15,
2015,
the
Bank
was
notified
by
the
OCC
that
its
formal
agreement
was
terminated
and
that
the
additional
minimum
capital
ratios
were
no
longer
required.
4
Table of Contents
Loan Portfolio Composition
The
following
table
sets
forth
the
composition
of
Bancorp’s
loan
portfolios
by
type
of
loan
at
the
dates
indicated.
The
table
includes
a
reconciliation
of
total
net
loans
receivable,
including
loans
held
for
sale,
after
consideration
of
undisbursed
portion
of
loans,
deferred
loan
fees
and
discounts,
and
allowances
for
losses
on
loans
as
of
December
31:
2015
2014
2013
2012
2011
Amount
Percent
Amount
Percent
Amount
Percent
(dollars
in
thousands)
Amount
Percent
Amount
Percent
Residential
mortgage
Construction,
land
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Loans
held
for
sale
$ 285,930
45.00%
$ 309,461
44.91%
$ 258,919
39.56%
$ 269,405
38.60%
$ 295,876
39.78%
77,478
28,677
20,188
174,912
9,296
24,529
1,224
13,203
12.19%
84,325
4.51%
30,426
3.18%
19,251
27.53%
198,539
1.46%
10,167
3.86%
28,750
1,040
0.19%
7,165
2.08%
12.24%
75,539
4.42%
34,429
2.79%
21,598
28.81%
220,160
1.47%
8,583
4.17%
30,339
1,185
0.15%
3,726
1.04%
11.54%
71,523
5.26%
50,900
3.30%
31,428
33.64%
222,038
1.31%
6,120
4.64%
34,609
0.18%
858
0.57%
11,116
10.25%
99,122
7.29%
59,649
4.50%
34,278
31.81%
203,010
0.88%
5,599
4.96%
41,309
897
0.12%
4,128
1.59%
13.32%
8.02%
4.61%
27.29%
0.75%
5.56%
0.12%
0.55%
Total
gross
loans
635,437
100.00%
689,124
100.00%
654,478
100.00%
697,997
100.00%
743,868
100.00%
Deferred
loan
origination
fees
and
costs,
net
(2,719)
(2,480)
(2,131)
(2,047)
(2,485)
Loans
in
process
(21,101)
(36,162)
(34,069)
(15,647)
(18,014)
Allowance
for
loan
losses
(8,758)
(9,435)
(11,739)
(17,478)
(25,938)
Total
loans
net
$ 602,859
$ 641,047
$ 606,539
$ 662,825
$ 697,431
5
Table of Contents
Lending Activities
General
The
Bank
originates
mortgage
loans
of
all
types,
including
residential,
residential-construction,
commercial-construction,
commercial,
land
and
residential
lot
loans.
The
Bank
also
originates
non-mortgage
loans,
which
include
consumer,
business
and
commercial
loans.
These
loans
constitute
a
small
part
of
the
Bank’s
portfolio.
The
Bank
originated
and
funded
$282,828,000
and
$232,781,000
of
loans
for
the
years
ended
December
31,
2015
and
2014,
respectively.
Loan Origination Procedures
The
following
table
contains
information
on
the
activity
of
the
Bank’s
loans
held
for
sale
and
its
loans
held
for
investment
in
its
portfolio:
2015
For
the
Years
Ended
December
31,
2014
(dollars
in
thousands)
2013
Held
for
Sale:
Beginning
balance
Originations
Net
sales
Ending
balance
Held
for
investment:
Beginning
balance
Originations
and
purchases
Transfers
to
foreclosed
real
estate
Repayments/payoffs
Bulk
loan
sales
$
$
$
7,165
$
163,347
(157,309)
3,726
$
93,999
(90,560)
11,116
116,788
(124,178)
13,203
$
7,165
$
3,726
681,959
$
119,481
(2,234)
(176,972)
-
650,752
$
138,782
(847)
(106,728)
-
686,881
132,245
(10,341)
(109,381)
(48,652)
Ending
balance
$
622,234
$
681,959
$
650,752
The
Bank
originates
residential
mortgage
loans
that
are
to
be
held
in
the
Bank’s
loan
portfolio
as
well
as
loans
that
are
intended
for
sale
in
the
secondary
market.
Loans
sold
in
the
secondary
market
are
primarily
sold
to
investors
with
which
the
Bank
maintains
a
correspondent
relationship.
These
loans
are
made
in
conformity
with
standard
underwriting
criteria
to
assure
maximum
eligibility
for
possible
resale
in
the
secondary
market,
and
are
approved
either
by
the
Bank’s
underwriter
or
the
correspondent’s
underwriter.
Loans
considered
for
the
Bank’s
portfolio
with
borrowers
that
have
lending
relationships
less
than
$500,000
are
approved
by
any
of
the
Bank’s
Officers,
which
includes
the
Chief
Executive
Officer,
the
Chief
Operating
Officer,
the
Chief
Financial
Officer,
the
Chief
Credit
Officer
and
the
Chief
Lending
Officer.
Loans
considered
for
the
Bank’s
portfolio
with
borrowers
that
have
lending
relationships
of
$500,000
or
greater
are
approved
by
the
Bank’s
Directors
Loan
Committee.
Meetings
of
the
Directors
Loan
Committee
are
open
to
attendance
by
any
member
of
the
Bank’s
Board
of
Directors
who
wishes
to
attend.
The
loan
committee
reports
to
and
consults
with
the
Board
of
Directors
in
interpreting
and
applying
the
Bank’s
lending
policy.
Single
loans
greater
than
$2,000,000,
or
loans
to
one
borrower
aggregating
more
than
$4,000,000,
up
to
$16,944,000
(the
maximum
amount
of
loans
to
one
borrower
as
of
December
31,
2015),
must
also
have
Board
of
Directors’
approval.
6
Table of Contents
Loans
that
are
sold
are
typically
long-term
(15
or
more
years)
loans
with
fixed
interest
rates
eligible
for
resale
in
the
secondary
market.
Loans
retained
for
Bancorp’s
portfolio
typically
include
construction
loans,
commercial
loans
and
loans
that
periodically
reprice
or
mature
prior
to
the
end
of
an
amortized
term.
Loans
are
sold
with
either
servicing
released
or
retained
by
the
Bank.
As
of
December
31,
2015,
the
Bank
was
servicing
$20,454,000
in
loans
for
Federal
Home
Loan
Mortgage
Corporation
(“FHLMC”),
$44,366,000
in
loans
for
Federal
National
Mortgage
Association
(“FNMA”)
and
$11,640,000
in
loans
for
other
investors.
The
following
table
contains
information,
as
of
December
31,
2015,
on
the
percentage
of
fixed-rate
single-family
loans
serviced
for
others
by
the
Bank,
by
interest
rate
category.
Interest
rate
range
Less
than
5.00%
5.00
–
6.00%
6.01
–
7.00%
7.01
–
8.00%
Over
8.00%
Percentage
of
Portfolio
92.4%
7.4%
0.1%
0.0%
0.1%
100.0%
The
Bank’s
mortgage
loan
approval
process
is
intended
to
assess
the
borrower’s
ability
to
repay
the
loan,
the
viability
of
the
loan,
and
the
adequacy
of
the
value
of
the
property
that
will
secure
the
loan.
The
authority
of
the
Directors
Loan
Committee
to
approve
loans
is
established
by
the
Board
of
Directors
and
currently
is
commensurate
with
the
Bank’s
limitation
on
loans
to
one
borrower.
The
Bank’s
maximum
amount
of
loans
to
one
borrower
currently
is
equal
to
15%
of
the
Bank’s
unimpaired
capital,
or
$16,944,000
as
of
December
31,
2015.
Loans
greater
than
this
amount
require
participation
by
one
or
more
additional
lenders.
Letters
of
credit
are
subject
to
the
same
limitations
as
direct
loans.
The
Bank
utilizes
independent
qualified
appraisers
approved
by
the
Board
of
Directors
to
appraise
the
properties
securing
its
loans
and
requires
title
insurance
or
title
opinions
so
as
to
insure
that
the
Bank
has
a
valid
lien
on
the
mortgaged
real
estate.
The
Bank
requires
borrowers
to
maintain
fire
and
casualty
insurance
on
its
secured
properties.
The
procedure
for
approval
of
construction
loans
is
the
same
for
residential
mortgage
loans,
except
that
the
appraiser
evaluates
the
building
plans,
construction
specifications,
and
estimates
of
construction
costs.
The
Bank
also
evaluates
the
feasibility
of
the
proposed
construction
project
and
the
experience
and
track
record
of
the
developer.
In
addition,
all
construction
loans
generally
require
a
commitment
from
a
third-party
lender
or
from
the
Bank
for
a
permanent
long-term
loan
to
replace
the
construction
loan
upon
completion
of
construction.
Residential Mortgage Loans
At
December
31,
2015,
Bancorp’s
residential
mortgage
loan
portfolio
totaled
$285,930,000,
or
45.0%
of
Bancorp’s
loan
portfolio.
All
of
Bancorp’s
residential
mortgage
loans
are
secured
by
one
to
four
family
residential
properties.
Commercial Real Estate Loans
At
December
31,
2015,
Bancorp’s
commercial
real
estate
loan
portfolio
totaled
$174,912,000,
or
27.5%
of
Bancorp’s
loan
portfolio.
All
of
Bancorp’s
commercial
real
estate
loans
are
secured
by
improved
property
such
as
office
buildings,
retail
strip
shopping
centers,
industrial
condominium
units
and
other
small
businesses,
most
of
which
are
located
in
the
Bank’s
primary
lending
area.
The
largest
commercial
real
estate
loan
outstanding
at
December
31,
2015
was
a
$7,945,000
loan
secured
by
a
commercial
property
in
Edgewater,
Maryland.
This
loan
has
consistently
performed
in
accordance
with
the
terms
of
the
debt
instrument.
Loans
secured
by
commercial
real
estate
properties
generally
involve
a
greater
degree
of
risk
than
residential
mortgage
loans.
Because
payments
on
loans
secured
by
commercial
real
estate
properties
are
often
dependent
on
the
successful
operation
or
management
of
the
properties,
repayment
of
these
loans
may
be
subject
to
a
greater
extent
to
adverse
conditions
in
the
real
estate
market
or
the
economy.
7
Table of Contents
Construction and Land Acquisition and Development Loans
The
Bank
originates
loans
to
finance
the
construction
of
one-to-four
family
dwellings,
and
to
a
lesser
extent,
commercial
real
estate.
It
also
originates
loans
for
the
acquisition
and
development
of
unimproved
property
to
be
used
for
residential
and/or
commercial
purposes
in
cases
where
the
Bank
is
to
provide
the
construction
funds
to
improve
the
properties.
As
of
December
31,
2015,
Bancorp
had
90
construction
loans
outstanding
in
the
gross
aggregate
amount
of
$77,478,000,
representing
12.2%
of
its
loan
portfolio.
Included
in
that
total
were
commitments
to
advance
an
additional
$21,101,000.
Construction
loan
amounts
are
based
on
the
appraised
value
of
the
property
and,
for
builder
loans,
a
feasibility
study
as
to
the
potential
marketability
and
profitability
of
the
project.
Construction
loans
generally
have
terms
of
up
to
one
year,
with
reasonable
extensions
as
needed,
and
typically
have
interest
rates
that
float
monthly
at
margins
ranging
from
the
prime
rate
to
2
percent
above
the
prime
rate.
In
addition
to
builders’
projects,
the
Bank
finances
the
construction
of
single
family,
owner-occupied
houses
where
qualified
contractors
are
involved
and
on
the
basis
of
strict
written
underwriting
and
construction
loan
guidelines.
Construction
loans
are
structured
either
to
be
converted
to
permanent
loans
with
the
Bank
upon
the
expiration
of
the
construction
phase
or
to
be
paid
off
by
financing
from
another
financial
institution.
Construction
loans
afford
the
Bank
the
opportunity
to
increase
the
interest
rate
sensitivity
of
its
loan
portfolio
and
to
receive
yields
higher
than
those
obtainable
on
loans
secured
by
existing
residential
properties.
These
higher
yields
correspond
to
the
higher
risks
associated
with
construction
lending.
Construction
loans
involve
additional
risks
attributable
to
the
fact
that
loan
funds
are
advanced
upon
the
security
of
the
project
under
construction
that
is
of
uncertain
value
prior
to
its
completion.
Because
of
the
uncertainties
inherent
in
estimating
construction
costs
as
well
as
the
market
value
of
the
completed
project
and
the
effects
of
governmental
regulation
of
real
property,
it
is
relatively
difficult
to
value
accurately
the
total
funds
required
to
complete
a
project
and
the
related
loan-to-value
ratio.
As
a
result,
construction
lending
often
involves
the
disbursement
of
substantial
funds
with
repayment
dependent,
in
part,
on
the
ultimate
success
of
the
project
rather
than
the
ability
of
the
borrower
or
guarantor
to
repay
principal
and
interest.
If
the
Bank
is
forced
to
foreclose
on
a
project
prior
to
or
at
completion,
due
to
a
default,
there
can
be
no
assurance
that
the
Bank
will
be
able
to
recover
all
of
the
unpaid
balance
of
the
loan
as
well
as
related
foreclosure
and
holding
costs.
In
addition,
the
Bank
may
be
required
to
fund
additional
amounts
to
complete
the
project
and
may
have
to
hold
the
property
for
an
unspecified
period
of
time.
The
Bank
has
attempted
to
address
these
risks
through
its
underwriting
procedures
and
its
limited
amount
of
construction
lending
on
multi-family
and
commercial
real
estate
properties.
It
is
the
policy
of
the
Bank
to
conduct
physical
inspections
of
each
property
secured
by
a
construction
or
rehabilitation
loan
for
the
purpose
of
reporting
upon
the
progress
of
the
construction
of
improvements.
These
inspections,
referred
to
as
“construction
draw
inspections,”
are
to
be
performed
at
the
time
of
a
request
for
an
advance
of
construction
funds.
If
no
construction
advance
has
been
requested,
a
construction
inspector
or
senior
officer
of
the
institution
makes
an
inspection
of
the
subject
property
at
least
quarterly.
Land and Residential Building Lots
Land
loans
include
loans
to
developers
for
the
development
of
residential
subdivisions
and
loans
on
unimproved
lots
primarily
to
individuals.
At
December
31,
2015,
Bancorp
had
outstanding
land
and
residential
building
lot
loans
totaling
$28,677,000,
or
4.5%
of
the
total
loan
portfolio.
The
largest
of
these
loans
is
for
$4,800,000,
is
secured
by
residential
lots
in
Severn,
Maryland,
and
has
performed
in
accordance
with
the
terms
of
the
debt
instrument.
Land
development
loans
typically
are
short-term
loans;
the
duration
of
these
loans
is
typically
not
greater
than
three
years.
The
interest
rate
on
land
loans
is
generally
at
least
1%
or
2%
over
the
prime
rate.
The
loan-to-value
ratio
generally
does
not
exceed
75%
at
the
time
of
loan
origination.
Land
and
residential
building
lot
loans
typically
are
made
to
customers
of
the
Bank
and
developers
and
contractors
with
whom
the
Bank
has
had
previous
lending
experience.
In
addition
to
the
customary
requirements
for
these
types
of
loans,
the
Bank
may
also
require
a
satisfactory
Phase
I
environmental
study
and
feasibility
study
to
determine
the
profit
potential
of
the
development.
8
Table of Contents
Lines of Credit and Commercial Non-Real Estate Loans
The
Bank
also
offers
other
business
and
commercial
loans.
These
are
loans
to
businesses
are
typically
lines
of
credit
or
other
loans
that
are
not
secured
by
real
estate,
although
equipment,
securities,
or
other
collateral
may
secure
them.
They
typically
are
offered
to
customers
with
long-standing
relationships
with
the
Bank.
At
December
31,
2015,
$29,484,000,
or
4.6%,
of
the
loan
portfolio
consisted
of
lines
of
credit
and
other
commercial
loans.
Home Equity and Other Consumer Loans
The
Bank
also
offers
other
loans
to
consumers,
including
home
equity
loans,
home
equity
lines
of
credit
and
other
consumer
loans.
At
December
31,
2015,
$25,753,000,
or
4.1%
of
the
loan
portfolio
consisted
of
these
loans.
Loan Portfolio Cash Flows
The
following
table
sets
forth
the
estimated
maturity
of
Bancorp’s
loan
portfolios
by
type
of
loan
at
December
31,
2015.
The
estimated
maturity
reflects
contractual
terms
at
December
31,
2015.
Contractual
principal
repayments
of
loans
do
not
necessarily
reflect
the
actual
life
of
the
Bank’s
loan
portfolios.
The
average
life
of
mortgage
loans
is
substantially
less
than
their
contractual
terms
because
of
loan
prepayments
and
because
of
enforcement
of
“due
on
sale”
clauses.
The
average
life
of
mortgage
loans
tends
to
increase,
however,
when
current
mortgage
loan
rates
substantially
exceed
rates
on
existing
mortgage
loans.
Residential
mortgage
*
Construction,
land
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial,
non-real
estate
Home
equity
Consumer
Total
*Includes
loans
categorized
as
held
for
sale.
Due
Within
one
year
or
less
Due
after
1
through
5
years
Due
after
5
years
Total
(dollars
in
thousands)
23,140
$
63,921
12,810
12,563
13,984
160
-
29
126,607
$
27,994
$
13,557
5,715
7,476
46,897
2,550
-
986
105,175
$
247,999
$
-
10,152
149
114,031
6,586
24,529
209
403,655
$
299,133*
77,478
28,677
20,188
174,912
9,296
24,529
1,224
635,437
$
$
9
Table of Contents
The
following
table
contains
certain
information
as
of
December
31,
2015
relating
to
the
loan
portfolio
of
Bancorp
with
the
dollar
amounts
of
loans
due
after
one
year
that
have
fixed
and
floating
rates.
All
loans
are
shown
maturing
based
upon
contractual
maturities
and
include
scheduled
payments
but
not
possible
prepayments.
Residential
mortgage*
Construction,
land
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial,
non-real
estate
Home
equity
Consumer
Total
*Includes
loans
categorized
as
held
for
sale.
Loans to One Borrower
Fixed
Floating
(dollars
in
thousands)
$
$
121,240
$
6,492
4,868
-
61,989
5,730
-
1,195
201,514
$
154,753
$
7,065
10,999
7,625
98,939
3,406
24,529
-
307,316
$
Total
275,993*
13,557
15,867
7,625
160,928
9,136
24,529
1,195
508,830
Under
regulatory
guidelines,
the
aggregate
amount
of
loans
that
the
Bank
may
make
to
one
borrower
was
$16,944,000
at
December
31,
2015,
which
is
15%
of
the
Bank’s
unimpaired
capital
and
unimpaired
surplus.
The
Bank’s
three
largest
loans
at
December
31,
2015
were
a
$7,945,000
loan
secured
by
a
commercial
property
located
in
Edgewater,
Maryland,
a
$5,092,000
loan
secured
by
commercial
property
in
Columbia,
Maryland
and
a
$4,800,000
loan
secured
by
residential
property
located
in
Severn,
Maryland.
All
three
loans
are
performing
as
agreed.
Origination and Purchase and Sale of Loans
The
Bank
originates
residential
loans
in
conformity
with
standard
underwriting
criteria
to
assure
maximum
eligibility
for
possible
resale
in
the
secondary
market.
Although
the
Bank
has
authority
to
lend
anywhere
in
the
United
States,
it
has
confined
its
loan
origination
activities
primarily
to
the
states
of
Maryland,
Virginia
and
Delaware.
Loan
originations
are
developed
from
a
number
of
sources,
primarily
from
referrals
from
real
estate
brokers,
internet
leads,
builders,
and
existing
and
walk‑in
customers.
The
Bank’s
mortgage
loan
approval
process
is
intended
to
assess
the
borrower's
ability
to
repay
the
loan,
the
viability
of
the
loan,
and
the
adequacy
of
the
value
of
the
property
that
will
secure
the
loan.
Loans
considered
for
the
Bank’s
portfolio
with
borrowers
that
have
lending
relationships
less
than
$500,000
are
approved
by
any
of
the
Bank’s
Officers,
which
includes
the
Chief
Executive
Officer,
the
Chief
Operating
Officer,
the
Chief
Financial
Officer,
the
Chief
Credit
Officer
and
the
Chief
Lending
Officer.
Loans
considered
for
the
Bank’s
portfolio
with
borrowers
that
have
lending
relationships
of
$500,000
or
greater
are
approved
by
the
Bank’s
Directors
Loan
Committee.
Meetings
of
the
Directors’
Loan
Committee
are
open
to
attendance
by
any
member
of
the
Bank’s
Board
of
Directors
who
wishes
to
attend.
The
loan
committee
reports
to
and
consults
with
the
Board
of
Directors
in
interpreting
and
applying
the
Bank’s
lending
policy.
Single
loans
greater
than
$2,000,000,
or
loans
to
one
borrower
aggregating
more
than
$4,000,000,
up
to
$16,944,000
(the
maximum
amount
of
loans
to
one
borrower
as
of
December
31,
2015),
must
also
have
Board
of
Directors’
approval.
The
Bank
utilizes
independent
qualified
appraisers
approved
by
the
Board
of
Directors
to
appraise
the
properties
securing
its
loans
and
requires
title
insurance
or
title
opinions
so
as
to
insure
that
the
Bank
has
a
valid
lien
on
the
mortgaged
real
estate.
The
Bank
requires
borrowers
to
maintain
fire
and
casualty
insurance
on
its
secured
properties.
10
Table of Contents
The
procedure
for
approval
of
construction
loans
is
the
same
as
for
residential
mortgage
loans,
except
that
the
appraiser
evaluates
the
building
plans,
construction
specifications,
and
estimates
of
construction
costs.
The
Bank
also
evaluates
the
feasibility
of
the
proposed
construction
project
and
the
experience
and
track
record
of
the
developer.
In
addition,
all
construction
loans
generally
require
a
commitment
from
a
third-party
lender
or
from
the
Bank
for
a
permanent
long-
term
loan
to
replace
the
construction
loan
upon
completion
of
construction.
Consumer
loans
are
underwritten
on
the
basis
of
the
borrower's
credit
history
and
an
analysis
of
the
borrower's
income
and
expenses,
ability
to
repay
the
loan,
and
the
value
of
the
collateral,
if
any.
Currently,
it
is
the
Bank’s
policy
to
originate
both
fixed-rate
and
adjustable-rate
loans.
The
Bank
is
currently
active
in
the
secondary
market
and
sells
a
portion
of
its
fixed-rate
loans.
Interest Rates, Points and Fees
The
Bank
realizes
interest,
point,
and
fee
income
from
its
lending
activities.
The
Bank
also
realizes
income
from
commitment
fees
for
making
commitments
to
originate
loans,
and
from
prepayment
and
late
charges,
loan
fees,
application
fees,
and
fees
for
other
miscellaneous
services.
The
Bank
accounts
for
loan
origination
fees
in
accordance
with
standards
set
on
the
accounting
for
deferred
costs
and
fees.
These
standards
prohibit
the
immediate
recognition
of
loan
origination
fees
as
revenues
and
require
that
such
income
(net
of
certain
direct
loan
origination
costs)
for
each
loan
be
amortized,
generally
by
the
interest
method,
over
the
estimated
life
of
the
loan
as
an
adjustment
of
yield.
The
Bank
also
realizes
income
from
gains
on
sales
of
loans,
and
servicing
released
fees
for
loans
sold
with
servicing
released.
Delinquencies and Classified Assets and Allowance for Loan Losses
Delinquencies
The
Board
of
Directors
reviews
delinquencies
on
all
loans
monthly.
The
Bancorp’s
collection
procedures
include
sending
a
past
due
notice
to
the
borrower
on
the
17th
day
of
nonpayment,
making
telephone
contact
with
the
borrower
between
20
and
30
days
after
nonpayment,
and
sending
a
letter
after
the
30th
day
of
nonpayment.
A
notice
of
intent
to
foreclose
is
generally
sent
between
60
and
90
days
after
delinquency.
When
the
borrower
is
contacted,
Bancorp
attempts
to
obtain
full
payment
of
the
past
due
amount.
However,
Bancorp
generally
will
seek
to
reach
agreement
with
the
borrower
on
a
payment
plan
to
avoid
foreclosure.
Allowance for Loan Losses
An
allowance
for
loan
losses
is
provided
through
charges
to
income
in
an
amount
that
management
believes
will
be
adequate
to
absorb
losses
on
existing
loans
that
may
become
uncollectible,
based
on
evaluations
of
the
collectability
of
loans
and
prior
loan
loss
experience.
The
evaluations
take
into
consideration
such
factors
as
changes
in
the
nature
and
volume
of
the
loan
portfolio,
overall
portfolio
quality,
review
of
specific
problem
loans,
and
current
economic
conditions
that
may
affect
the
borrowers'
ability
to
pay.
Determining
the
amount
of
the
allowance
for
loan
losses
requires
the
use
of
estimates
and
assumptions,
which
is
permitted
under
generally
accepted
accounting
principles.
Actual
results
could
differ
significantly
from
those
estimates.
Management
believes
the
allowance
for
losses
on
loans
is
adequate.
While
management
uses
available
information
to
estimate
losses
on
loans,
future
additions
to
the
allowances
may
be
necessary
based
on
changes
in
economic
conditions,
particularly
in
the
State
of
Maryland.
In
addition,
various
regulatory
agencies,
as
an
integral
part
of
their
examination
process,
periodically
review
the
Bank's
allowance
for
losses
on
loans.
Such
agencies
may
require
the
Bank
to
recognize
additions
to
the
allowance
based
on
their
judgments
about
information
available
to
them
at
the
time
of
their
examination.
The
allowance
consists
of
specific
and
general
components.
The
specific
component
relates
to
loans
that
are
classified
as
impaired.
When
a
real
estate
secured
loan
becomes
impaired,
a
decision
is
made
as
to
whether
an
updated
certified
appraisal
of
the
real
estate
is
necessary.
This
decision
is
based
on
various
considerations,
including
the
age
of
the
most
recent
appraisal,
the
loan-to-value
ratio
based
on
the
original
appraisal
and
the
condition
of
the
property.
Appraised
values
are
discounted
to
arrive
at
the
estimated
selling
price
of
the
collateral,
which
is
considered
to
be
the
estimated
fair
value.
The
discounts
also
include
estimated
costs
to
sell
the
property.
11
Table of Contents
For
loans
secured
by
non-real
estate
collateral,
such
as
accounts
receivable,
inventory
and
equipment,
estimated
fair
values
are
determined
based
on
the
borrower’s
financial
statements,
inventory
reports,
accounts
receivable
aging
or
equipment
appraisals
or
invoices.
Indications
of
value
from
these
sources
are
generally
discounted
based
on
the
age
of
the
financial
information
and
the
quality
of
the
assets.
For
such
loans
that
are
classified
as
impaired,
an
allowance
is
established
when
the
current
market
value
of
the
underlying
collateral
less
its
estimated
disposal
costs
has
not
been
finalized,
but
management
determines
that
it
is
likely
that
the
value
is
lower
than
the
carrying
value
of
that
loan.
Once
the
net
collateral
value
has
been
determined,
a
charge-off
is
taken
for
the
difference
between
the
net
collateral
value
and
the
carrying
value
of
the
loan.
For
loans
that
are
not
solely
collateral
dependent,
an
allowance
is
established
when
the
present
value
of
the
expected
future
cash
flows
of
the
impaired
loan
is
lower
than
the
carrying
value
of
that
loan.
The
general
component
relates
to
loans
that
are
classified
as
doubtful,
substandard
or
special
mention
that
are
not
considered
impaired,
as
well
as
non-
classified
loans.
The
general
reserve
is
based
on
historical
loss
experience
adjusted
for
qualitative
factors.
These
qualitative
factors
include:
Levels
and
trends
in
delinquencies
and
nonaccruals;
Inherent
risk
in
the
loan
portfolio;
Trends
in
volume
and
terms
of
the
loan;
Effects
of
any
change
in
lending
policies
and
procedures;
Experience,
ability
and
depth
of
management;
·
·
·
·
·
· National
and
local
economic
trends
and
conditions;
and
·
Effect
of
any
changes
in
concentration
of
credit.
A
loan
is
generally
considered
impaired
if
it
meets
either
of
the
following
two
criteria:
·
·
Loans
that
are
90
days
or
more
in
arrears
(nonaccrual
loans);
or
Loans
where,
based
on
current
information
and
events,
it
is
probable
that
a
borrower
will
be
unable
to
pay
all
amounts
due
according
to
the
contractual
terms
of
the
loan
agreement.
Credit
quality
risk
ratings
include
regulatory
classifications
of
special
mention,
substandard,
doubtful
and
loss.
Loans,
classified
special
mention
have
potential
weaknesses
that
deserve
management’s
close
attention.
If
uncorrected,
the
potential
weaknesses
may
result
in
deterioration
of
the
repayment
prospects.
Loans
classified
substandard
have
a
well-defined
weakness
or
weaknesses
that
jeopardize
the
liquidation
of
the
debt.
They
include
loans
that
are
inadequately
protected
by
the
current
sound
net
worth
and
paying
capacity
of
the
obligor
or
of
the
collateral
pledged,
if
any.
Loans
classified
doubtful
have
all
the
weaknesses
inherent
in
loans
classified
substandard
with
the
added
characteristic
that
collection
or
liquidation
in
full,
on
the
basis
of
current
conditions
and
facts,
is
highly
improbable.
Loans
classified
as
a
loss
are
considered
uncollectible
and
are
charged
to
the
allowance
for
loan
losses.
Loans
not
classified
are
rated
pass.
A
loan
is
considered
a
troubled
debt
restructuring,
sometimes
referred
to
as
a
TDR,
when
Bancorp
for
economic
or
legal
reasons
relating
to
the
borrowers
financial
difficulties
grants
a
concession
to
the
borrower
that
it
would
not
otherwise
consider.
Loan
modifications
made
with
terms
consistent
with
current
market
conditions
that
the
borrower
could
obtain
in
the
open
market
are
not
considered
a
TDR.
Loans
that
experience
insignificant
payment
delays
and
payment
shortfalls
generally
are
not
classified
as
impaired.
Management
determines
the
significance
of
payment
delays
and
payment
shortfalls
on
a
case-by-case
basis,
taking
into
consideration
all
of
circumstances
surrounding
the
loan
and
the
borrower,
including
the
length
of
the
delay,
the
reasons
for
the
delay,
the
borrower’s
prior
payment
record,
and
the
amount
of
the
shortfall
in
relation
to
the
principal
and
interest
owed.
12
Table of Contents
The
Bank
discontinues
the
accrual
of
interest
on
loans
90
days
or
more
past
due,
at
which
time
all
previously
accrued
but
uncollected
interest
is
deducted
from
income.
$585,000
in
interest
income
would
have
been
recorded
for
the
year
ended
December
31,
2015
if
the
loans
had
been
current
in
accordance
with
their
original
terms
and
had
been
outstanding
throughout
the
year
ended
December
31,
2015
or
since
their
origination
(if
held
for
only
part
of
the
fiscal
year).
For
the
year
ended
December
31,
2015,
$455,000
in
interest
income
on
such
loans
was
actually
included
in
net
income.
The
following
table
sets
forth
information
as
to
non-accrual
loans
and
other
non-performing
assets.
Loans
accounted
for
on
a
non-accrual
basis:
Residential
mortgage
Construction,
land
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
Equity
Consumer
Total
non-accrual
loans
Accruing
loans
greater
than
90
days
past
due
Foreclosed
real-estate
Total
non-performing
assets
Nonaccrual
troubled
debt
restructures
(included
above)
Accruing
troubled
debt
restructurings
Total
non-accrual
loans
to
net
loans
Allowance
for
loan
losses
to
total
non-performing
loans,
including
loans
contractually
past
due
90
days
or
more
Total
non-accrual
and
accruing
loans
greater
than
90
days
past
due
to
total
assets
Total
non-performing
assets
to
total
assets
2015
3,191
244
277
483
2,681
-
2,098
-
8,974
-
1,744
10,718
$
$
$
$
$
1,329
$
24,386
$
1.5%
$
$
$
$
$
$
$
At
December
31,
2014
2013
(dollars
in
thousands)
2012
2011
6,052
115
847
388
652
1,775
3,016
-
12,845
-
1,947
14,792
$
$
$
$
$
2,641
$
27,724
$
2.0%
6,802
814
183
304
1,155
-
1,777
-
11,035
-
8,972
20,007
$
$
$
$
$
2,091
$
34,827
$
1.8%
14,436
8,564
4,688
1,877
5,793
111
2,000
26
37,495
-
11,441
48,936
$
$
$
$
$
5,635
$
56,448
$
5.8%
8,912
10,997
6,813
2,019
2,140
5
343
203
31,432
-
19,932
51,364
19,351
40,424
4.5%
97.6%
73.5%
106.4%
46.6%
82.5%
1.2%
1.4%
1.7%
1.9%
1.4%
2.5%
4.4%
5.7%
3.5%
5.7%
Included
in
non-accrual
residential
mortgage
loans
at
December
31,
2015,
were
seventeen
loans
totaling
$2,891,000
to
consumers
and
two
loans
totaling
$300,000
to
builders.
Included
in
non-accrual
land
loans
at
December
31,
2015
were
three
loans
totaling
$277,000.
13
Table of Contents
Classified Assets
Federal
regulations
provide
for
the
classification
of
loans
and
other
assets,
such
as
debt
and
equity
securities,
considered
by
the
OCC
to
be
of
lesser
quality,
as
“substandard,”
“doubtful”
or
“loss
assets.”
An
asset
is
considered
substandard
if
the
paying
capacity
and
net
worth
of
the
obligor
or
the
collateral
pledged,
if
any,
inadequately
protects
it.
Substandard
assets
include
those
characterized
by
the
distinct
possibility
that
the
insured
institution
will
sustain
some
loss
if
the
deficiencies
are
not
corrected.
Assets
classified
as
doubtful
have
all
of
the
weaknesses
inherent
in
those
classified
substandard
with
the
added
characteristic
that
the
weaknesses
present
make
collection
or
liquidation
in
full
highly
questionable
and
improbable,
on
the
basis
of
currently
existing
facts,
conditions,
and
values.
Assets
classified
as
loss
assets
are
those
considered
uncollectible
and
of
such
little
value
that
their
continuance
as
assets
without
the
establishment
of
a
specific
loss
reserve
is
not
warranted.
Assets
that
do
not
currently
expose
the
insured
institution
to
a
sufficient
degree
of
risk
to
warrant
classification
in
one
of
these
categories
but
possess
credit
deficiencies
or
potential
weakness
are
required
to
be
designated
special
mention
by
management.
When
an
insured
institution
classifies
problem
assets
as
either
substandard
or
doubtful,
it
is
required
to
establish
general
allowances
for
losses
in
an
amount
deemed
prudent
by
management.
General
allowances
represent
loss
allowances
which
have
been
established
to
recognize
the
inherent
risk
associated
with
lending
activities,
but
which,
unlike
specific
allowances,
have
not
been
allocated
to
particular
problem
assets.
When
an
insured
institution
classifies
problem
assets
as
loss
assets,
it
is
to
charge-off
such
amount.
An
institution’s
determination
as
to
the
classification
of
its
assets
is
subject
to
scrutiny
by
the
OCC,
which
can
require
the
establishment
of
additional
general
or
specific
loss
allowances.
The
Bank
reviews
monthly
the
assets
in
its
portfolio
to
determine
whether
any
assets
require
classification
in
accordance
with
applicable
regulations.
Total
classified
loans
decreased
$13,988,000
to
$13,873,000
at
December
31,
2015
from
$27,861,000
at
December
31,
2014
primarily
due
to
an
improving
economy.
All
of
these
loans
were
classified
as
substandard.
The
allowance
for
loan
losses
as
of
December
31,
2015
was
$8,758,000,
which
was
1.4%
of
gross
loans
receivable
and
97.6%
of
total
non-performing
loans.
[see
table
on
following
page]
14
Table of Contents
The
following
table
summarizes
the
allocation
of
the
allowance
for
loan
losses
by
loan
type
and
the
percent
of
loans
in
each
category
compared
to
total
loans
(excluding
loans
held
for
sale)
as
of
December
31,
2015
2014
2013
2012
2011
Percentage
of
Loans
in
each
Category
to
Total
Loans
Allowance
Amount
Allowance
Amount
Percentage
of
Loans
in
each
Category
to
Total
Loans
Percentage
of
Loans
in
each
Category
to
Total
Allowance
Amount
Loans
(dollars
in
thousands)
Percentage
of
Loans
in
each
Category
to
Total
Loans
Percentage
of
Loans
in
each
Category
to
Total
Loans
Allowance
Amount
Allowance
Amount
$
4,188
45.95%
$
4,664
45.38%
$
6,291
39.79%
$
8,418
39.22%
$
12,303
40.00%
446
510
57
2,792
234
528
3
8,758
12.45%
4.61%
3.24%
28.11%
1.50%
3.94%
0.20%
100.00%
$
362
646
12
2,504
280
963
4
9,435
12.37%
4.46%
2.82%
29.11%
414
1,346
36
2,512
11.61%
5.29%
3.32%
33.83%
2,120
2,245
87
3,295
10.41%
7.41%
4.57%
32.33%
3,916
2,405
725
4,157
1.49%
4.22%
0.15%
100.00%
$
135
1,003
2
11,739
1.32%
4.66%
0.18%
100.00%
$
46
1,254
13
17,478
0.89%
5.04%
0.13%
100.00%
$
169
2,257
6
25,938
13.40%
8.06%
4.63%
27.44%
0.76%
5.58%
0.13%
100.00%
15
Residential
mortgage
Construction,
land
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
$
Table of Contents
The
following
table
contains
information
with
respect
to
Bancorp’s
allowance
for
loan
losses
for
the
periods
indicated:
At
of
or
for
the
Year
Ended
December
31
2015
2014
2013
2012
2011
$
$
$
$
Average
loans
outstanding,
net*
Total
gross
loans
outstanding
at
end
of
period*
Total
net
loans
outstanding
at
end
of
period*
Allowance
balance
at
beginning
of
period*
Provision
for
loan
losses
Actual
charge-offs
Residential
real
estate
Construction,
land
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
Equity
Consumer
Total
charge-offs
Recoveries
Residential
real
estate
Construction,
land
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
Equity
Consumer
Total
recoveries
Net
charge
offs
618,309
$
622,935
(dollars
in
thousands)
$
648,959
$
692,831
$
635,437
$
689,124
$
654,478
$
697,997
$
602,859
$
641,047
$
606,539
$
662,825
$
9,435
$
11,739
$
17,478
$
25,938
$
(280)
454
-
-
-
80
154
834
-
1,522
629
-
49
235
-
49
163
-
1,125
397
831
844
63
-
1,324
92
1,410
261
-
3,994
306
-
349
15
25
159
-
5
859
3,135
16,520
7,919
2,439
4,529
521
8,343
687
809
46
25,293
1,034
66
1,773
60
54
8
15
24
3,034
22,259
765
4,299
1,395
1,624
182
416
20
1,407
10
9,353
18
-
-
-
-
110
-
-
128
9,225
753,926
743,868
697,431
29,871
4,612
4,421
1,503
1,054
-
811
-
39
717
8,545
-
-
-
-
-
-
-
-
-
8,545
Allowance
balance
at
end
of
period
$
8,758
$
9,435
$
11,739
$
17,478
$
25,938
Net
charge-offs
as
a
percent
of
average
loans*
Allowance
for
loan
losses
to
total
gross
loans
at
end
of
period*
Allowance
for
loan
losses
to
net
loans
at
end
of
period*
0.06%
1.38%
1.45%
0.50%
1.37%
1.47%
3.43%
1.79%
1.94%
1.33%
2.50%
2.64%
1.13%
3.49%
3.72%
*Includes
held
for
sale
loans.
16
Table of Contents
Investment Activities
Federal
thrift
institutions,
such
as
the
Bank,
have
authority
to
invest
in
various
types
of
liquid
assets,
including
United
States
Treasury
obligations
and
securities
of
various
federal
agencies,
certificates
of
deposit
at
insured
banks,
bankers'
acceptances
and
federal
funds.
As
a
member
of
the
FHLB
System,
the
Bank
must
maintain
minimum
levels
of
liquid
assets
specified
by
the
OCC,
which
vary
from
time
to
time.
Subject
to
various
regulatory
restrictions,
federal
thrift
institutions
may
also
invest
a
portion
of
their
assets
in
certain
commercial
paper,
corporate
debt
securities
and
mutual
funds
whose
assets
conform
to
the
investments
that
a
federal
thrift
institution
is
authorized
to
make
directly.
The
amortized
cost
of
the
Bank’s
investment
securities
held
to
maturity
as
of
the
dates
indicated,
are
presented
in
the
following
table:
US
Treasury
securities
US
Agency
securities
US
Government
sponsored
mortgage-backed
securities
$
21,057
$
20,011
35,065
27,140
$
17,044
15,432
31,235
11,123
2,303
Total
Investment
Securities
Held
to
Maturity
$
76,133
$
59,616
$
44,661
2015
At
December
31,
2014
(dollars
in
thousands)
2013
17
Table of Contents
Investment
Scheduled
Maturity
Table
As
of
December
31,
2015
One
Year
or
Less
Amortized
Cost
Weighted
Average
Yield
More
than
One
to
Five
Years
More
than
Five
to
Ten
Years
More
than
Ten
Years
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
(dollars
in
thousands)
Total
Investment
Securities
Weighted
Average
Yield
Fair
Value
Amortized
Cost
US
Treasury
securities
US
Agency
securities
US
Government
sponsored
mortgage-backed
securities*
Total
securities
$
9,047
1.65%
$
12,010
1.77%
$
-
-
$
2,013
0.87%
16,043
1.39%
1,955
3.15%
44
11,104
$
0.54%
1.50%
$
20,716
48,769
1.86%
1.68%
$
14,305
16,260
2.25%
2.36%
-
-
-
-
-
$
21,057
1.72%
$ 21,325
-
20,011
1.51%
20,074
-
-
$
35,065
76,133
2.02%
34,911
1.80%
$ 76,310
*
The
amortized
cost
of
mortgage-backed
securities
as
of
December
31,
2015,
by
contractual
maturity,
is
shown
above.
Expected
maturities
may
differ
from
contractual
maturities
because
the
securities
may
be
called
or
prepaid
with
or
without
prepayment
penalties.
18
Table of Contents
Deposits
Deposits
are
attracted
principally
from
within
the
Bank’s
primary
market
areas
through
the
offering
of
a
variety
of
deposit
instruments,
including
passbook
and
statement
accounts
and
certificates
of
deposit
ranging
in
terms
from
three
months
to
five
years.
Deposit
account
terms
vary,
principally
on
the
basis
of
the
minimum
balance
required;
the
time
periods
the
funds
must
remain
on
deposit
and
the
interest
rate.
The
Bank
also
offers
individual
retirement
accounts.
The
Bank’s
policies
are
designed
primarily
to
attract
deposits
from
local
residents
rather
than
to
solicit
deposits
from
areas
outside
the
Bank’s
primary
markets.
Interest
rates
paid,
maturity
terms,
service
fees
and
withdrawal
penalties
are
established
by
the
Bank
on
a
periodic
basis.
Determination
of
rates
and
terms
are
predicated
upon
funds
acquisition
and
liquidity
requirements,
rates
paid
by
competitors,
growth
goals
and
federal
regulations.
Deposits
in
the
Bank
as
of
December
31,
2015,
2014
and
2013
consisted
of
savings
programs
described
below:
NOW
accounts
Money
market
accounts
Passbooks
Certificates
of
deposit
Non-interest
bearing
accounts
2015
2014
(dollars
in
thousands)
$
56,096
$
47,690
111,992
277,778
30,215
54,827
$
39,579
126,062
298,489
24,857
2013
40,067
38,619
164,504
301,355
26,704
Total
deposits
$
523,771
$
543,814
$
571,249
The
following
table
contains
information
pertaining
to
the
certificates
of
deposit
held
by
the
Bank
with
a
minimum
denomination
of
$100,000
as
of
December
31,
2015.
Time
Remaining
Until
Maturity
Less
than
three
months
3
months
to
6
months
6
months
to
12
months
Greater
than
12
months
Total
19
Jumbo
Certificates
of
Deposit
(dollars
in
thousands)
$
$
21,635
21,721
39,510
53,111
135,977
Table of Contents
Liquidity and Asset/Liability Management
Two
major
objectives
of
asset
and
liability
management
are
to
maintain
adequate
liquidity
and
to
control
the
interest
sensitivity
of
the
balance
sheet.
Liquidity
is
the
measure
of
a
company’s
ability
to
maintain
sufficient
cash
flow
to
fund
operations
and
to
meet
financial
obligations
to
depositors
and
borrowers.
Liquidity
is
provided
by
the
ability
to
attract
and
retain
deposits
and
by
principal
and
interest
payments
on
loans
and
maturing
securities
in
the
investment
portfolio.
A
strong
core
deposit
base,
supplemented
by
other
deposits
of
varying
maturities
and
rates,
contributes
to
the
Bank’s
liquidity.
Management
believes
that
funds
available
through
short-term
borrowings
and
asset
maturities
are
adequate
to
meet
all
anticipated
needs
for
the
next
twelve
months,
and
management
is
continually
monitoring
the
Bank’s
liquidity
position
to
meet
projected
needs.
Interest
rate
sensitivity
is
maintaining
the
ability
to
reprice
interest
earning
assets
and
interest
bearing
liabilities
in
relationship
to
changes
in
the
general
level
of
interest
rates.
Management
attributes
interest
rate
sensitivity
to
a
steady
net
interest
margin
through
all
phases
of
interest
rate
cycles.
Management
attempts
to
make
the
necessary
adjustments
to
constrain
adverse
swings
in
net
interest
income
resulting
from
interest
rate
movements
through
gap
analysis
and
income
simulation
modeling
techniques.
Borrowings
The
Bank’s
credit
availability
under
the
FHLB
of
Atlanta’s
credit
availability
program
was
$192,672,000
at
December
31,
2015.
The
Bank’s
credit
availability
is
based
on
the
level
of
collateral
pledged
up
to
25%
of
total
assets.
The
Bank,
from
time
to
time,
utilizes
the
line
of
credit
when
interest
rates
under
the
line
are
more
favorable
than
obtaining
deposits
from
the
public.
There
were
no
short-term
borrowings
with
the
FHLB
of
Atlanta
at
December
31,
2015.
Employees
As
of
December
31,
2015,
Bancorp
and
its
subsidiaries
had
approximately
152
full-time
equivalent
employees.
Bancorp’s
employees
are
not
represented
by
any
collective
bargaining
group.
Hyatt Commercial
Hyatt
Commercial
is
a
subsidiary
of
the
bank
and
is
a
real
estate
brokerage
company
specializing
in
commercial
real
estate
sales,
leasing
and
property
management.
SBI Mortgage Company
SBI
Mortgage
Company
(“SBI”)
is
a
subsidiary
of
Bancorp
that
has
engaged
in
the
origination
of
mortgages
not
suitable
for
the
Bank.
It
owns
subsidiary
companies
that
purchase
real
estate
for
investment
purposes.
As
of
December
31,
2015,
SBI
had
$1,444,000
in
outstanding
mortgage
loans
and
it
had
$479,000
invested
in
subsidiaries,
which
funds
were
held
in
cash,
pending
potential
acquisition
of
investment
real
estate.
Crownsville Development Corporation
Crownsville
Development
Corporation,
which
is
doing
business
as
Annapolis
Equity
Group,
is
a
subsidiary
of
SBI
and
is
engaged
in
the
business
of
acquiring
real
estate
for
investment
and
syndication
purposes.
20
Table of Contents
HS West, LLC
HS
West,
LLC
(“HS”)
is
a
subsidiary
of
the
Bank,
and
constructed
a
building
in
Annapolis,
Maryland
that
serves
as
Bancorp’s
and
the
Bank’s
administrative
headquarters.
A
branch
office
of
the
Bank
is
also
located
in
the
building.
In
addition,
HS
leases
space
to
four
unrelated
companies
and
to
a
law
firm
of
which
the
President
of
Bancorp
and
the
Bank
is
a
partner.
Severn Financial Services Corporation
Severn
Financial
Services
Corporation
is
a
subsidiary
of
the
Bank
that
is
part
of
a
joint
venture
with
a
local
insurance
agency
to
provide
various
insurance
products
to
customers
of
Bancorp.
Regulation
The
financial
services
industry
in
the
Bank’s
market
area
is
highly
competitive,
including
competition
from
commercial
banks,
savings
banks,
credit
unions,
finance
companies
and
non-bank
providers
of
financial
services.
Several
of
the
Bank’s
competitors
have
legal
lending
limits
that
exceed
that
of
the
Bank’s,
as
well
as
funding
sources
in
the
capital
markets
that
exceeds
the
Bank’s
availability.
The
increased
competition
has
resulted
from
a
changing
legal
and
regulatory
climate,
as
well
as
from
the
economic
climate.
General
Savings
and
loan
holding
companies
and
savings
associations
are
extensively
regulated
under
both
federal
and
state
law.
This
regulation
is
intended
primarily
to
protect
depositors
and
the
Deposit
Insurance
Fund
(“DIF”),
and
not
the
stockholders
of
Bancorp.
The
summary
below
describes
briefly
the
regulation
that
is
applicable
to
Bancorp
and
the
Bank,
does
not
purport
to
be
complete
and
is
qualified
in
its
entirety
by
reference
to
applicable
laws
and
regulations.
Regulatory Reform and Legislation
On
July
21,
2010,
Congress
enacted
the
Dodd-Frank
Wall
Street
Reform
and
Consumer
Protection
Act
(the
“Dodd-Frank
Act”).
The
Dodd-Frank
Act
has
significantly
changed
the
bank
regulatory
structure
and
significantly
impacted
the
lending,
deposit,
investment,
trading
and
operating
activities
of
financial
institutions
and
their
holding
companies.
The
Dodd-Frank
Act
requires
various
federal
agencies
to
adopt
a
broad
range
of
new
implementing
rules
and
regulations,
and
to
prepare
numerous
studies
and
reports
for
Congress.
The
federal
agencies
have
been
given
significant
discretion
in
drafting
the
implementing
rules
and
regulations,
and
consequently,
many
of
the
details
and
future
impact
of
the
Dodd-Frank
Act
may
not
be
known
for
many
months
or
years.
The
discussion
below
generally
discusses
the
material
provisions
of
the
Dodd-Frank
Act
applicable
to
Bancorp
and
the
Bank
and
is
not
complete
or
meant
to
be
an
exhaustive
discussion.
Pursuant
to
the
Dodd-Frank
Act,
effective
July
21,
2011,
the
OTS,
which
was
the
primary
federal
regulator
for
Bancorp
and
the
Bank,
was
abolished
and
replaced
by
the
FRB
with
respect
to
savings
and
loan
holding
companies
and
their
non-depository
institution
subsidiaries,
including
Bancorp,
and
was
replaced
by
the
OCC
with
respect
to
federal
savings
associations,
including
the
Bank.
The
Dodd-Frank
Act
required
federal
banking
regulators
to
implement
new
capital
requirements.
See
“
Regulatory Capital Requirements ”
below.
The
Dodd-Frank
Act
also
created
a
new
Consumer
Financial
Protection
Bureau
with
broad
powers
to
supervise
and
enforce
consumer
protection
laws.
The
Consumer
Financial
Protection
Bureau
has
broad
rule-making
authority
for
a
wide
range
of
consumer
protection
laws
that
apply
to
all
banks
and
savings
institutions,
including
the
authority
to
prohibit
“unfair,
deceptive
or
abusive”
acts
and
practices.
The
Consumer
Financial
Protection
Bureau
has
examination
and
enforcement
authority
over
all
banks
and
savings
institutions
with
more
than
$10
billion
in
assets.
Savings
institutions
with
$10
billion
or
less
in
assets,
such
as
the
Bank,
continue
to
be
examined
for
compliance
with
the
consumer
laws
by
their
primary
bank
regulators.
21
Table of Contents
Effective
July
21,
2011,
the
federal
prohibitions
on
paying
interest
on
demand
deposits
were
eliminated,
thus
allowing
businesses
to
have
interest
bearing
checking
accounts.
The
Dodd-Frank
Act
weakened
the
federal
preemption
rules
applicable
to
national
banks
and
federal
savings
associations,
allowing
federal
law
to
preempt
state
consumer
protection
law
only
where
state
law
(i)
would
have
a
discriminatory
effect
on
federal
savings
associations,
(ii)
would
prevent
or
significantly
interfere
with
the
exercise
by
a
federal
savings
association
of
its
powers
or
(iii)
is
preempted
by
other
federal
law.
The
OCC
has
the
authority
to
make
preemption
determinations
and
must
make
each
determination
on
a
case
by
case
basis.
The
Dodd-Frank
Act
also
permanently
increased
the
maximum
amount
of
deposit
insurance
for
banks,
savings
institutions
and
credit
unions
to
$250,000
per
depositor.
The
Dodd-Frank
Act
directed
the
FDIC
to
redefine
the
base
for
deposit
insurance
assessments
paid
by
banks.
Assessments
will
now
be
based
on
the
average
consolidated
total
assets
less
tangible
equity
of
a
financial
institution.
This
change
may
proportionally
shift
deposit
insurance
funding
away
from
banks
that
rely
primarily
on
deposits
for
funding
operations,
like
the
Bank.
The
Dodd-Frank
Act
increased
the
minimum
reserve
ratio
for
the
Deposit
Insurance
Fund
from
1.15%
to
1.35%
of
estimated
insured
deposits.
The
FDIC
must
seek
to
achieve
the
1.35%
ratio
by
September
30,
2020.
Insured
institutions
with
assets
of
$10
billion
or
more
are
supposed
to
fund
the
increase.
The
Dodd-Frank
Act
eliminated
the
1.5%
maximum
fund
ratio,
leaving
it,
instead,
to
the
discretion
of
the
FDIC.
The
FDIC
has
recently
exercised
that
discretion
by
establishing
a
long-range
fund
ratio
of
2%.
The
Dodd-Frank
Act
amended
the
Home
Owners
Loan
Act
(HOLA)
to
require
that
leverage
capital
requirements
and
risk
based
capital
requirements
applicable
to
depository
and
bank
holding
companies
be
extended
to
thrift
holding
companies.
It
also
applied
the
Federal
Reserve
Board’s
“source
of
strength”
doctrine,
which
has
long
applied
to
bank
holding
companies,
to
savings
and
loan
holding
companies.
Pursuant
to
the
doctrine,
regulatory
agencies
must
issue
regulations
requiring
holding
companies
to
act
as
a
source
of
strength
to
their
subsidiary
depository
institutions
by
providing
capital,
liquidity
and
other
support
in
times
of
financial
stress.
The
Dodd-Frank
Act
also
included
several
provisions
regarding
executive
compensation.
Publically
traded
companies
must
give
stockholders
a
non-binding
vote
on
executive
compensation
and
so
called
“golden
parachute”
payments.
Companies
will
be
required
to
disclose
the
relationship
between
executive
compensation
and
financial
performance
of
the
issuer
in
annual
proxy
materials.
Federal
banking
agencies
adopted
regulations
implementing
the
provisions
of
the
Dodd-Frank
Act
known
as
the
“Volcker
Rule.”
The
Volcker
Rule
attempts
to
reduce
risk
and
banking
system
instability
by
restricting
U.S.
banks
and
affiliated
companies
from
investing
in
or
engaging
in
proprietary
trading
and
speculation
and
imposing
a
strict
framework
to
justify
exemptions
for
underwriting,
market
making
and
hedging
activities.
It
also
imposes
limits
on
banking
entities’
investments
in,
and
other
relationships
with,
hedge
funds
and
private
equity
funds.
The
regulations
became
effective
on
April
1,
2014
with
full
compliance
being
phased
in
through
July
21,
2015,
except
that
with
respect
to
certain
investments
and
relationships
that
were
in
place
prior
to
December
31,
2013,
the
compliance
period
has
been
extended
to
July
21,
2016.
It
is
difficult
to
predict
the
exact
impact
the
Dodd-Frank
Act
and
the
implementing
rules
and
regulations
will
continue
to
have
on
savings
and
loan
holding
companies
and
banks.
The
Dodd-Frank
Act
and
resulting
rules
and
regulations
may
impact
the
profitability
of
our
business
or
change
certain
of
our
business
practices,
including
our
ability
to
offer
new
products,
make
loans
and
achieve
satisfactory
interest
spreads,
and
could
expose
us
to
additional
costs,
including
increased
regulatory
compliance
costs.
The
changes
also
may
require
us
to
invest
significant
management
attention
and
resources
to
make
any
necessary
changes
to
our
operations
in
order
to
comply,
and
could
materially
adversely
affect
our
business,
results
of
operations
and
financial
condition.
The
following
provides
a
description
of
the
current
regulations
that
are
applicable
to
Bancorp
and
the
Bank
and
selected
changes
to
be
implemented
pursuant
to
the
Dodd-Frank
Act,
all
of
which
are
subject
to
further
change
as
additional
provisions
of
the
Dodd-Frank
Act
are
implemented.
22
Table of Contents
Regulation of Bancorp
General .
As
previously
noted
the
Dodd-Frank
Act
eliminated
the
OTS
and
transferred
supervision
of
savings
and
loan
holding
companies
to
the
FRB
on
July
21,
2011.
As
a
unitary
savings
and
loan
holding
company,
Bancorp
is
now
required
to
register
and
file
reports
with
the
FRB
and
is
subject
to
regulation
and
examination
by
the
FRB.
In
addition,
the
FRB
has
enforcement
authority
over
Bancorp
and
its
subsidiaries,
which
permits
the
FRB
to
restrict
or
prohibit
activities
determined
to
be
a
serious
risk
to
the
subsidiary
savings
association.
Activities Restriction Test.
As
a
unitary
savings
and
loan
holding
company,
Bancorp
generally
is
not
subject
to
activity
restrictions,
provided
the
Bank
satisfies
the
Qualified
Thrift
Lender
(“QTL”)
test
(see
“
Qualified Thrift Lender Test” below).
If
the
Bank
failed
to
meet
the
QTL
test,
then
Bancorp
would
become
subject
to
the
activities
restrictions
applicable
to
multiple
savings
and
loan
holding
companies
and,
unless
the
Bank
qualified
as
a
QTL
within
one
year
thereafter,
Bancorp
would
be
required
to
register
as,
and
would
become
subject
to
the
restrictions
applicable
to,
a
bank
holding
company.
Additionally,
if
Bancorp
acquired
control
of
another
savings
association,
either
through
merger
or
other
combination
with
the
Bank,
other
than
in
a
supervisory
acquisition
where
the
acquired
association
also
met
the
QTL
test,
Bancorp
would
thereupon
become
a
multiple
savings
and
loan
holding
company
and
thereafter
be
subject
to
further
restrictions
on
its
activities.
Bancorp
presently
intends
to
continue
to
operate
as
a
unitary
savings
and
loan
holding
company.
Regulatory Capital Requirements .
Under
amended
capital
regulations
adopted
pursuant
to
the
Dodd-Frank
Act,
savings
and
loan
holding
companies
became
subject
to
the
new
regulatory
capital
requirements.
However,
in
May
2015,
amendments
to
the
FRB’s
small
bank
holding
company
policy
statement
(the
“SBHC
Policy”)
became
effective.
The
amendments
made
the
SBHC
Policy
applicable
to
savings
and
loan
holding
companies,
such
as
Bancorp,
and
increased
the
asset
threshold
to
qualify
to
be
subject
to
the
provisions
of
the
SBHC
Policy
from
$500
million
to
$1.0
billion.
Savings
and
loan
holding
companies
that
have
total
assets
of
$1.0
billion
or
less
are
subject
to
the
SBHC
Policy
and
are
not
required
to
comply
with
the
regulatory
capital
requirements
described
below
provided
that
such
holding
company
(i)
is
not
engaged
in
significant
nonbanking
activities
either
directly
or
through
a
nonbank
subsidiary;
(ii)
does
not
conduct
significant
off-
balance
sheet
activities
(including
securitization
and
asset
management
or
administration)
either
directly
or
through
a
nonbank
subsidiary;
and
(iii)
does
not
have
a
material
amount
of
debt
or
equity
securities
outstanding
(other
than
trust
preferred
securities)
that
are
registered
with
the
Securities
and
Exchange
Commission.
The
FRB
may
in
its
discretion
exclude
any
savings
and
loan
holding
company,
regardless
of
asset
size,
from
the
SBHB
Policy
if
such
action
is
warranted
for
supervisory
purposes.
The
exemption
continues
until
Bancorp’s
total
assets
exceed
$1.0
billion,
does
not
meet
the
other
requirements
discussed
above
or
the
FRB
deems
it
to
be
warranted
for
supervisory
purposes.
Certain
of
the
savings
and
loan
holding
company
capital
requirements
promulgated
by
the
FRB
in
2013
became
effective
as
of
January
1,
2015.
Those
requirements
establish
the
following
four
minimum
capital
ratios
that
savings
and
loan
holding
companies
not
subject
to
the
SBHC
Policy
must
comply
with
as
of
that
date:
(i)
a
common
equity
tier
1
capital
to
total
risk-weighted
assets
ratio
of
4.5%;
(ii)
a
tier
1
capital
to
total
risk-weighted
assets
ratio
of
6.0%
(up
from
4%);
(iii)
a
total
capital
to
total
risk-weighted
assets
ratio
of
8%;
and
(iv)
a
tier
1
capital
to
total
assets
leverage
ratio
of
4%.
For
more
information,
see
“
Regulatory
Capital Requirements ”
under
“
Regulation of the Bank ”
below.
Restrictions on Acquisitions .
Except
under
limited
circumstances,
savings
and
loan
holding
companies,
such
as
Bancorp,
are
prohibited
from
(i)
acquiring,
without
approval
of
the
FRB,
control
of
a
savings
association
or
a
savings
and
loan
holding
company
or
all
or
substantially
all
of
the
assets
of
any
such
association
or
holding
company
(ii)
acquiring,
without
prior
approval
of
the
FRB,
more
than
5%
of
the
voting
shares
of
a
savings
association
or
a
holding
company
which
is
not
a
subsidiary
thereof
or
(iii)
acquiring
control
of
an
uninsured
institution,
or
retaining,
for
more
than
one
year
after
the
date
of
any
savings
association
becomes
uninsured,
control
of
such
association.
In
evaluating
proposed
acquisitions
of
savings
institutions
by
holding
companies,
the
FRB
considers
the
financial
and
managerial
resources
and
future
prospects
of
the
holding
company
and
the
target
institution,
the
effect
of
the
acquisition
on
the
risk
to
the
DIF,
the
convenience
and
the
needs
of
the
community
and
competitive
factors.
23
Table of Contents
N
o
director
or
officer
of
a
savings
and
loan
holding
company
or
person
owning
or
controlling
by
proxy
or
otherwise
more
than
25%
of
such
company’s
stock,
may
acquire
control
of
any
savings
association,
other
than
a
subsidiary
savings
association,
or
of
any
other
savings
and
loan
holding
company,
without
written
approval
of
the
FRB.
Certain
individuals,
including
Alan
J.
Hyatt,
Louis
Hyatt,
and
Melvin
Hyatt,
and
their
respective
spouses
(“Applicants”),
filed
an
Application
for
Notice
of
Change
In
Control
(“Notice”)
in
April
2001
pursuant
to
12
CFR
Section
574.3(b).
The
Notice
permitted
the
Applicants
to
acquire
up
to
32.32%
of
Bancorp’s
issued
and
outstanding
shares
of
stock
of
Bancorp
by
April
16,
2002.
The
OTS
approved
requests
by
the
Applicants
to
extend
the
time
to
consummate
such
acquisition
of
shares
to
December
16,
2011.
The
Applicants
currently
own
approximately
29.86%
of
the
total
outstanding
shares
of
Bancorp
as
of
December
31,
2015.
The
FRB
is
prohibited
from
approving
any
acquisition
that
would
result
in
a
multiple
savings
and
loan
holding
company
controlling
savings
institutions
in
more
than
one
state,
subject
to
two
exceptions:
(i)
the
approval
of
interstate
supervisory
acquisitions
by
savings
and
loan
holding
companies;
and
(ii)
the
acquisition
of
a
savings
institution
in
another
state
if
the
laws
of
the
state
of
the
target
savings
institution
specifically
permit
such
acquisitions.
The
states
vary
in
the
extent
to
which
they
permit
interstate
savings
and
loan
holding
company
acquisitions.
Federal Securities Law .
Bancorp’s
securities
are
registered
with
the
Securities
and
Exchange
Commission
under
the
Securities
Exchange
Act
of
1934,
as
amended.
As
such,
Bancorp
is
subject
to
the
information,
proxy
solicitation,
insider
trading,
and
other
requirements
and
restrictions
of
the
Securities
Exchange
Act
of
1934.
Financial Services Modernization Legislation .
In
November
1999,
the
Gramm-Leach-Bliley
Act
of
1999
(“GLBA”)
was
enacted.
The
GLBA
generally
permits
banks,
other
depository
institutions,
insurance
companies
and
securities
firms
to
enter
into
combinations
that
result
in
a
single
financial
services
organization
to
offer
customers
a
wider
array
of
financial
services
and
products
provided
that
they
do
not
pose
a
substantial
risk
to
the
safety
and
soundness
of
depository
institutions
or
the
financial
system
generally.
The
GLBA
resulted
in
increased
competition
for
Bancorp
and
the
Bank
from
larger
institutions
and
other
types
of
companies
offering
financial
products,
many
of
which
may
have
substantially
more
financial
resources
than
Bancorp
and
the
Bank.
Maryland Corporation Law .
Bancorp
is
incorporated
under
the
laws
of
the
State
of
Maryland,
and
is
therefore
subject
to
regulation
by
the
state
of
Maryland.
The
rights
of
Bancorp’s
stockholders
are
governed
by
the
Maryland
General
Corporation
Law.
Regulation of the Bank
General .
As
noted
above,
the
Dodd-Frank
Act
transferred
supervision
of
savings
associations
like
the
Bank
to
the
OCC,
the
agency
that
regulates
national
banks,
on
July
21,
2011.
As
a
federally
chartered,
DIF-insured
savings
association,
the
Bank
is
subject
to
extensive
regulation
by
the
OCC
and
the
FDIC.
Lending
activities
and
other
investments
of
the
Bank
must
comply
with
various
statutory
and
regulatory
requirements.
The
Bank
is
also
subject
to
certain
reserve
requirements
promulgated
by
the
FRB.
The
OCC,
in
conjunction
with
the
FDIC,
regularly
examines
the
Bank
and
prepares
reports
for
the
consideration
of
the
Bank’s
Board
of
Directors
on
any
deficiencies
found
in
the
operations
of
the
Bank.
The
relationship
between
the
Bank
and
depositors
and
borrowers
is
also
regulated
by
federal
and
state
laws,
especially
in
such
matters
as
the
ownership
of
savings
accounts
and
the
form
and
content
of
mortgage
documents
utilized
by
the
Bank.
The
Bank
must
file
reports
with
the
OCC
and
the
FDIC
concerning
its
activities
and
financial
condition,
in
addition
to
obtaining
regulatory
approvals
prior
to
entering
into
certain
transactions
such
as
mergers
with
or
acquisitions
of
other
financial
institutions.
24
Table of Contents
Regulatory Capital Requirements. On
July
9,
2013,
the
federal
banking
agencies
approved
amendments
to
their
regulatory
capital
rules
to
conform
U.S.
regulatory
capital
rules
with
the
international
regulatory
standards
agreed
to
by
the
Basel
Committee
on
Banking
Supervision
in
the
international
accord
referred
to
as
“Basel
III”
and
to
implement
certain
provisions
of
the
Dodd-Frank
Act.
The
revisions
established
a
new
capital
measure,
“common
equity
tier
1
capital”
as
well
as
new
higher
capital
ratio
requirements,
narrowed
the
definitions
of
capital,
imposed
new
operating
restrictions
on
banking
organizations
with
insufficient
capital
buffers
and
increased
the
risk
weighting
of
certain
assets.
The
new
requirements
apply
to
all
banks
and
savings
associations
and
bank
holding
companies
and
savings
and
loan
holding
companies
(other
than
bank
or
savings
and
loan
holding
companies
that
have
less
than
$1.0
billion
in
assets
and
otherwise
qualify
under
the
SBHB
Policy).
The
rules
became
effective
in
January
2014
for
institutions
with
assets
over
$250
billion
and
internationally
active
institutions
and
became
effective
in
January
2015
for
all
other
institutions,
including
the
Bank.
Under
the
amended
regulations,
the
Bank
is
required
to
meet
minimum
levels
of
regulatory
capital,
including:
(i)
the
new
common
equity
tier
1
capital
to
total
risk-weighted
assets
ratio
of
4.5%;
(ii)
a
tier
1
capital
to
total
risk-weighted
assets
ratio
of
6.0%
(up
from
4%);
(iii)
a
total
capital
to
total
risk-weighted
assets
ratio
of
8%;
(iv)
a
tier
1
capital
to
total
assets
leverage
ratio
of
4%;
and
(v)
a
tangible
capital,
measured
as
core
capital
(tier
1
capital),
to
average
total
assets
ratio
of
1.5%.
Common
equity
tier
1
capital
generally
consists
of
common
stock
and
related
surplus,
retained
earnings,
accumulated
other
comprehensive
income
and,
subject
to
certain
adjustments,
minority
common
equity
interests
in
subsidiaries,
reduced
by
goodwill
and
other
intangible
assets
(other
than
certain
mortgage
servicing
assets),
net
of
associated
deferred
tax
liabilities.
Tier
1
Capital
means
the
sum
of
common
equity
tier
1
capital
and
additional
tier
1
capital.
Additional
tier
1
capital
generally
includes
certain
noncumulative
perpetual
preferred
stock
and
related
surplus
and
minority
interests
in
equity
accounts
of
consolidated
subsidiaries.
Under
the
amendments,
cumulative
preferred
stock
(other
than
cumulative
preferred
stock
issued
to
the
U.S.
Treasury
Department
under
the
TARP
Capital
Purchase
Program
or
the
Small
Business
Lending
Fund)
no
longer
qualifies
as
additional
tier
1
capital.
Trust
preferred
securities
and
other
non-qualifying
capital
instruments
issued
prior
to
May
19,
2010
by
bank
and
savings
and
loan
holding
companies
with
less
than
$15
billion
in
assets
as
of
December
31,
2009
or
by
mutual
holding
companies
may
continue
to
be
included
in
tier
1
capital
but
will
be
phased
out
over
10
years
beginning
in
2016
for
all
other
banking
organizations.
Total
Capital
includes
tier
1
capital
and
tier
2
capital.
Tier
2
capital
is
comprised
of
capital
instruments
and
related
surplus
meeting
specified
requirements,
and
may
include
cumulative
preferred
stock
and
long-term
perpetual
preferred
stock,
mandatory
convertible
securities,
intermediate
preferred
stock,
and
subordinated
debt.
Tangible
Capital
means
the
amount
of
core
capital
(tier
1
capital),
plus
the
amount
of
outstanding
perpetual
preferred
stock
(including
related
surplus)
not
included
in
tier
1
capital.
Calculation
of
all
types
of
regulatory
capital
is
subject
to
deductions
and
adjustments
specified
in
the
regulations.
In
determining
the
amount
of
risk-weighted
assets
for
purposes
of
calculating
risk-based
capital
ratios,
assets,
including
certain
off-balance
sheet
assets
(e.g.,
recourse
obligations,
direct
credit
substitutes,
and
residual
interests)
are
multiplied
by
a
risk
weight
factor
assigned
by
the
regulations
based
on
the
risks
believed
inherent
in
the
type
of
asset.
Higher
levels
of
capital
are
required
for
asset
categories
believed
to
present
greater
risk.
For
example,
a
risk
weight
of
0%
is
assigned
to
cash
and
U.S.
government
securities,
a
risk
weight
of
50%
is
generally
assigned
to
prudently
underwritten
first
lien
residential
mortgages,
a
risk
weight
of
100%
is
assigned
to
first
lien
residential
mortgages
not
qualifying
under
the
prudently
underwritten
standards
as
well
as
commercial
and
consumer
loans,
a
risk
weight
of
150%
is
assigned
to
certain
past
due
loans,
a
risk
weight
of
250%
is
assigned
to
certain
mortgage
serving
rights,
and
a
risk
weight
of
between
0%
to
600%
is
assigned
to
permissible
equity
interests,
depending
on
certain
specified
factors.
25
Table of Contents
In
addition
to
higher
capital
requirements,
the
amended
regulations
provide
that
depository
institutions
and
their
holding
companies
are
required
to
maintain
a
common
equity
tier
1
Capital
conservation
buffer
of
at
least
2.5%
of
risk-weighted
assets
over
and
above
the
minimum
risk-based
capital
requirements.
Institutions
that
do
not
maintain
the
required
capital
buffer
will
become
subject
to
progressively
more
stringent
limitations
on
the
percentage
of
earnings
that
can
be
paid
out
in
dividends
or
used
for
stock
repurchases
or
for
the
payment
of
discretionary
bonuses
to
senior
executive
management.
The
capital
conservation
buffer
requirement
will
be
phased
in
over
four
years
beginning
on
January
1,
2016
at
0.625%
of
risk-weighted
assets
and
increasing
each
year
until
fully
implemented
at
2.5%
on
January
1,
2019.
The
capital
conservation
buffer
requirement
effectively
raises
the
minimum
required
risk-based
capital
ratios
to
7%
common
equity
tier
1
capital,
8.5%
tier
1
capital
and
10.5%
total
capital
on
a
fully
phased-in
basis.
The
amendments
also
revise
the
prompt
corrective
action
framework
discussed
below
by
incorporating
the
common
equity
tier
1
capital
requirement
and
raising
the
capital
requirements
for
certain
capital
categories.
See
“
Prompt Corrective Action ”
below.
In
addition
to
requiring
institutions
to
meet
the
applicable
capital
standards
for
savings
institutions,
the
OCC
may
require
institutions
to
meet
capital
standards
in
excess
of
the
prescribed
standards
as
the
OCC
determines
necessary
or
appropriate
for
such
institution
in
light
of
the
particular
circumstances
of
the
institution.
Such
circumstances
would
include
a
high
degree
of
exposure
to
interest
rate
risk,
concentration
of
credit
risk
and
certain
risks
arising
from
non-traditional
activity.
The
OCC
may
treat
the
failure
of
any
savings
institution
to
maintain
capital
at
or
above
such
level
as
an
unsafe
or
unsound
practice
and
may
issue
a
directive
requiring
any
savings
institution
which
fails
to
maintain
capital
at
or
above
the
minimum
level
required
by
the
OCC
to
submit
and
adhere
to
a
plan
for
increasing
capital.
As
shown
below,
the
Bank’s
regulatory
capital
exceeded
all
minimum
regulatory
capital
requirements
applicable
to
it
as
of
December
31,
2015
and
2014.
Amount
Actual
%
Required
For
Capital
Adequacy
Purposes
Amount
(dollars
in
thousands)
Required
To
Be
Well
Capitalized
Under
Prompt
Corrective
Action
Provisions
%
Amount
%
$
$
112,959
112,959
112,959
112,959
120,193
106,916
106,916
106,916
113,848
14.8%
$
19.6%
19.6%
14.8%
20.8%
13.8%
$
19.4%
13.8%
20.6%
11,423
34,626
25,970
30,461
46,168
11,590
N/A
30,906
44,108
1.50%
6.00%
$
4.50%
4.00%
8.00%
1.50%
N/A
$
4.00%
8.00%
N/A
46,168
37,512
38,076
57,710
N/A
33,081
38,633
55,135
N/A
8.00%
6.50%
5.00%
10.00%
N/A
6.00%
5.00%
10.00%
December
31,
2015
Tangible
(1)
Tier
1
capital
(2)
Common
Equity
Tier
1(2)
)
Leverage
(1)
Total
(2)
December
31,
2014
Tangible
(1)
Tier
1
capital
(2)
Leverage
(1)
Total
(2)
(1)
To
adjusted
total
assets.
(2)
To
risk-weighted
assets.
Enforcement. The
OCC
has
primary
enforcement
responsibility
over
federal
savings
institutions
and
has
the
authority
to
bring
enforcement
action
against
the
institution
and
all
“institution-affiliated
parties,”
including
stockholders,
attorneys,
appraisers
and
accountants
who
knowingly
or
recklessly
participate
in
wrongful
action
likely
to
have
an
adverse
effect
on
an
insured
institution.
Formal
enforcement
actions
by
the
OCC
may
range
from
issuance
of
a
capital
directive
or
cease
and
desist
order,
to
removal
of
officers
or
directors
of
the
institution
and
the
appointment
of
a
receiver
or
conservator.
The
FDIC
also
has
the
authority
to
terminate
deposit
insurance
or
recommend
to
the
director
of
the
OCC
that
enforcement
action
be
taken
with
respect
to
a
particular
savings
institution.
If
action
is
not
taken
by
the
director
of
the
OCC,
the
FDIC
has
authority
to
take
action
under
specific
circumstances.
26
Table of Contents
Safety and Soundness Standards .
Federal
law
requires
each
federal
banking
agency,
including
the
OCC,
to
prescribe
to
certain
standards
relating
to
internal
controls,
information
and
internal
audit
systems,
loan
documentation,
credit
underwriting,
interest
rate
risk
exposure,
asset
growth,
compensation,
fees
and
benefits.
In
general,
the
guidelines
require,
among
other
things,
appropriate
systems
and
practices
to
identify
and
manage
the
risks
and
exposures
specified
in
the
guidelines.
The
guidelines
further
provide
that
savings
institutions
should
maintain
safeguards
to
prevent
the
payment
of
compensation,
fees
and
benefits
that
are
excessive
or
that
could
lead
to
material
financial
loss,
and
should
take
into
account
factors
such
as
comparable
compensation
practices
at
comparable
institutions.
If
the
OCC
determines
that
a
savings
institution
is
not
in
compliance
with
the
safety
and
soundness
guidelines,
it
may
require
the
institution
to
submit
an
acceptable
plan
to
achieve
compliance
with
the
guidelines.
A
savings
institution
must
submit
an
acceptable
compliance
plan
to
the
OCC
within
30
days
of
receipt
of
a
request
for
such
a
plan.
If
the
institution
fails
to
submit
an
acceptable
plan,
the
OCC
must
issue
an
order
directing
the
institution
to
correct
the
deficiency.
Failure
to
submit
or
implement
a
compliance
plan
may
subject
the
institution
to
regulatory
sanctions.
Prompt Corrective Action .
Under
the
prompt
corrective
action
regulations,
the
OCC
is
required
and
authorized
to
take
supervisory
actions
against
undercapitalized
savings
associations.
The
regulations
were
amended
to
incorporate
the
previously
described
amendments
to
regulatory
capital
standards
that
were
effective
January
1,
2015.
For
this
purpose,
a
savings
association
is
placed
into
one
of
the
following
five
categories
dependent
on
their
respective
capital
ratios:
· An
institution
is
deemed
to
be
“well
capitalized”
if
it
has
a
total
risk-based
capital
ratio
of
10.0%
or
greater,
a
tier
1
risk-based
capital
ratio
of
8.0%
or
greater,
a
common
equity
tier
1
risk-based
capital
ratio
of
6.5%
or
greater
and
a
leverage
ratio
of
5.0%
or
greater.
· An
institution
is
“adequately
capitalized”
if
it
has
a
total
risk-based
capital
ratio
of
8.0%
or
greater,
a
tier
1
risk-based
capital
ratio
of
6.0%
or
greater,
a
common
equity
tier
1
risk-based
capital
ratio
of
4.5%
or
greater
and
a
leverage
ratio
of
4.0%
or
greater.
· An
institution
is
“undercapitalized”
if
it
has
a
total
risk-based
capital
ratio
of
less
than
8.0%,
a
tier
1
risk-based
capital
ratio
of
less
than
6.0%,
a
common
equity
tier
1
risk-based
capital
ratio
of
less
than
4.5%
or
a
leverage
ratio
of
less
than
4.0%.
· An
institution
is
deemed
to
be
“significantly
undercapitalized”
if
it
has
a
total
risk-based
capital
ratio
of
less
than
6.0%,
a
tier
1
risk-based
capital
ratio
of
less
than
4.0%,
a
common
equity
tier
1
risk-based
capital
ratio
of
less
than
3.0%
or
a
leverage
ratio
of
less
than
3.0%.
· An
institution
is
considered
to
be
“critically
undercapitalized”
if
it
has
a
ratio
of
tangible
equity
(as
defined
in
the
regulations)
to
total
assets
that
is
equal
to
or
less
than
2.0%.
Generally,
the
Federal
Deposit
Insurance
Act
requires
the
OCC
to
appoint
a
receiver
or
conservator
for
an
institution
within
90
days
of
that
institution
becoming
“critically
undercapitalized”.
The
regulation
also
provides
that
a
capital
restoration
plan
must
be
filed
with
the
OCC
within
45
days
after
an
institution
receives
notice
that
it
is
“undercapitalized”,
“significantly
undercapitalized”
or
“critically
undercapitalized”.
In
addition,
numerous
mandatory
supervisory
actions
become
immediately
applicable
to
the
institution,
including,
but
not
limited
to,
restrictions
on
growth,
investment
activities,
payment
of
dividends
and
other
capital
distributions,
and
affiliate
transactions.
The
OCC
may
also
take
any
one
of
a
number
of
discretionary
supervisory
actions
against
the
undercapitalized
institutions,
including
the
issuance
of
a
capital
directive
and,
in
the
case
of
an
institution
that
fails
to
file
a
required
capital
restoration
plan,
the
replacement
of
senior
executive
officers
and
directors.
As
of
December
31,
2015,
the
Bank
met
the
capital
requirements
of
a
“well
capitalized”
institution
under
applicable
OCC
regulations.
Premiums for Deposit Insurance .
The
Bank’s
deposits
are
insured
up
to
applicable
limits
by
the
DIF
of
the
FDIC
and
are
backed
by
the
full
faith
and
credit
of
the
United
States
government.
27
Table of Contents
The
FDIC
regulations
assess
insurance
premiums
based
on
an
institution’s
risk.
Under
this
assessment
system,
the
FDIC
evaluates
the
risk
of
each
financial
institution
based
on
its
supervisory
rating,
financial
ratios,
and
long-term
debt
issuer
rating.
In
2010,
the
assessment
ranged
from
7
to
77.5
basis
points
of
an
institution's
deposits,
depending
on
its
risk
category.
On
February
7,
2011,
the
FDIC
issued
final
rules,
effective
April
1,
2011,
implementing
changes
to
the
assessment
rules
as
mandated
by
the
Dodd-Frank
Act.
The
final
rules
redefined
the
assessment
base
used
for
calculating
deposit
insurance
assessments.
Specifically,
the
rules
base
assessments
on
an
institution’s
total
assets
less
tangible
capital,
as
opposed
to
total
deposits.
The
base
assessment
rates
range
from
2.5
to
9
basis
points
for
the
least
risky
institutions
to
30
to
45
basis
points
for
the
riskiest.
The
rate
schedules
will
automatically
adjust
in
the
future
as
the
DIF
reaches
certain
milestones.
As
discussed
above,
the
Dodd-Frank
Act
made
permanent
the
maximum
deposit
insurance
amount
of
$250,000
per
depositor.
The
FDIC
is
authorized
to
terminate
a
depository
institution’s
deposit
insurance
upon
a
finding
by
the
FDIC
that
the
institution’s
financial
condition
is
unsafe
or
unsound
or
that
the
institution
has
engaged
in
unsafe
or
unsound
practices
or
has
violated
any
applicable
rule,
regulation,
order
or
condition
enacted
or
imposed
by
the
institution’s
regulatory
agency.
The
termination
of
deposit
insurance
for
the
Bank
could
have
a
material
adverse
effect
on
Bancorp’s
earnings.
All
FDIC-insured
depository
institutions
pay
an
annual
assessment
to
provide
funds
for
the
payment
of
interest
on
bonds
issued
by
the
Financing
Corporation,
a
federal
corporation
chartered
under
the
authority
of
the
Federal
Housing
Finance
Board.
The
bonds,
commonly
referred
to
as
Financing
Corporation
(“FICO”)
bonds,
were
issued
to
capitalize
the
Federal
Savings
and
Loan
Insurance
Corporation.
For
the
quarter
ended
September
30,
2011,
the
annualized
FICO
assessment
rate
equaled
1.0
basis
point
for
each
$100
in
domestic
deposits
maintained
at
an
institution.
Beginning
with
the
fourth
quarter
of
2011,
the
FICO
assessment
was
based
on
total
assets
less
tangible
capital
instead
of
deposits.
The
payment
made
in
the
fourth
quarter
of
2015
was
based
on
a
FICO
assessment
rate
of
0.60
basis
points
and
the
first
quarter
of
2016
FICO
assessment
rate
payment
was
0.58
basis
points.
FICO
assessments
will
continue
until
the
bonds
mature
in
2017
through
2019.
The
FDIC
has
authority
to
increase
insurance
assessments.
A
significant
increase
in
insurance
premiums
would
likely
have
an
adverse
effect
on
the
operating
expenses
and
results
of
operation
of
the
Bank.
Privacy .
The
Bank
is
subject
to
the
Right
to
Financial
Privacy
Act,
which
imposes
a
duty
to
maintain
confidentiality
of
consumer
financial
records
and
prescribes
procedures
for
complying
with
administrative
subpoenas
of
financial
records.
The
GLBA
places
limitations
on
the
sharing
of
consumer
financial
information
by
financial
institutions
with
unaffiliated
third
parties.
Pursuant
to
the
GLBA
and
rules
adopted
thereunder
financial
institutions
must
provide:
·
·
initial
and
annual
notices
to
customers
about
their
privacy
policies,
describing
the
conditions
under
which
they
may
disclose
nonpublic
personal
information
to
nonaffiliated
third
parties
and
affiliates;
and
a
reasonable
method
for
customers
to
“opt
out”
of
disclosures
to
nonaffiliated
third
parties.
Since
the
GLBA’s
enactment,
a
number
of
states
have
implemented
their
own
versions
of
privacy
laws.
The
Bank
has
implemented
its
privacy
policies
in
accordance
with
applicable
law.
Loans-to-One Borrower Limitations .
With
certain
limited
exceptions,
the
maximum
amount
that
a
savings
association
or
a
national
bank
may
lend
on
an
unsecured
basis
to
any
borrower
(including
certain
related
entities
of
the
borrower)
may
not
exceed
15%
of
the
unimpaired
capital
and
surplus
of
the
institution,
plus
an
additional
10%
of
unimpaired
capital
and
surplus
for
loans
fully
secured
by
readily
marketable
collateral.
At
December
31,
2015,
the
Bank’s
loans-to-one-borrower
limit
was
$16,944,000
based
upon
the
15%
of
unimpaired
capital
and
surplus
measurement.
At
December
31,
2015,
the
Bank’s
three
largest
loans
were
a
$7,945,000
loan
secured
by
commercial
property
in
Edgewater,
Maryland,
a
$5,092,000
loan
secured
by
commercial
property
in
Columbia,
Maryland
and
a
$4,800,000
loan
secured
by
residential
property
located
in
Severn,
Maryland.
These
loans
were
performing
in
accordance
with
their
terms.
28
Table of Contents
Qualified Thrift Lender Test .
Savings
associations
must
meet
a
QTL
test,
which
may
be
met
either
by
maintaining,
on
average,
at
least
65%
of
its
portfolio
assets
in
qualified
thrift
investments
in
at
least
nine
of
the
most
recent
twelve
month
period,
or
meeting
the
definition
of
a
“domestic
building
and
loan
association”
as
defined
in
the
Code.
“Portfolio
Assets”
generally
means
total
assets
of
a
savings
institution,
less
the
sum
of
(i)
specified
liquid
assets
up
to
20%
of
total
assets,
(ii)
goodwill
and
other
intangible
assets,
and
(iii)
the
value
of
property
used
in
the
conduct
of
the
savings
association’s
business.
Qualified
thrift
investments
are
primarily
residential
mortgages
and
related
investments,
including
certain
mortgage‑related
securities.
Associations
that
fail
to
meet
the
QTL
test
must
either
convert
to
a
bank
charter
or
operate
under
specified
restrictions.
As
of
December
31,
2015,
the
Bank
was
in
compliance
with
its
QTL
requirement
and
met
the
definition
of
a
domestic
building
and
loan
association.
Affiliate Transactions .
Transactions
between
savings
associations
and
any
affiliate
are
governed
by
Sections
23A
and
23B
of
the
Federal
Reserve
Act
as
made
applicable
to
savings
associations
by
Section
11
of
the
Home
Owners’
Loan
Act
(HOLA).
A
savings
association
affiliate
includes
any
company
or
entity
which
controls
the
savings
institution
or
that
is
controlled
by
a
company
that
controls
the
savings
association.
For
example,
the
holding
company
of
a
savings
association
and
any
companies
which
are
controlled
by
such
holding
company,
are
affiliates
of
the
savings
association.
Generally,
Section
23A
limits
the
extent
to
which
the
savings
association
or
its
subsidiaries
may
engage
in
“covered
transactions”
with
any
one
affiliate
to
an
amount
equal
to
10%
of
such
association’s
capital
stock
and
surplus,
as
well
as
contains
an
aggregate
limit
on
all
such
transactions
with
all
affiliates
to
an
amount
equal
to
20%
of
such
capital
stock
and
surplus.
Section
23B
applies
to
“covered
transactions,”
as
well
as
certain
other
transactions
and
requires
that
all
transactions
be
on
terms
substantially
the
same,
or
at
least
as
favorable,
to
the
savings
association
as
those
provided
to
a
non-affiliate.
“Covered
transaction”
include
the
making
of
loans
to,
purchase
of
assets
from
and
issuance
of
a
guarantee
to
an
affiliate
and
similar
transactions.
Section
23B
transactions
also
include
the
provision
of
services
and
the
sale
of
assets
by
a
savings
association
to
an
affiliate.
In
addition
to
the
restrictions
imposed
by
Sections
23A
and
23B,
Section
11
of
the
Home
Owners’
Loan
Act
prohibits
a
savings
association
from
(i)
making
a
loan
or
other
extension
of
credit
to
an
affiliate,
except
for
any
affiliate
which
engages
only
in
certain
activities
which
are
permissible
for
bank
holding
companies,
or
(ii)
purchasing
or
investing
in
any
stocks,
bonds,
debentures,
notes
or
similar
obligations
of
any
affiliate,
except
for
affiliates
which
are
subsidiaries
of
the
savings
association.
The
Bank’s
authority
to
extend
credit
to
executive
officers,
directors,
trustees
and
10%
stockholders,
as
well
as
entities
under
such
person’s
control,
is
currently
governed
by
Section
22(g)
and
22(h)
of
the
Federal
Reserve
Act
and
Regulation
O
promulgated
by
the
FRB.
Among
other
things,
these
regulations
generally
require
such
loans
to
be
made
on
terms
substantially
similar
to
those
offered
to
unaffiliated
individuals,
place
limits
on
the
amounts
of
the
loans
the
Bank
may
make
to
such
persons
based,
in
part,
on
the
Bank’s
capital
position,
and
require
certain
board
of
directors’
approval
procedures
to
be
followed.
Capital Distribution Limitations .
OCC
regulations
impose
limitations
upon
all
capital
distributions
by
savings
associations,
such
as
cash
dividends,
payments
to
repurchase
or
otherwise
acquire
its
shares,
payments
to
shareholders
of
another
institution
in
a
cash-out
merger
and
other
distributions
charged
against
capital.
The
OCC
regulations
require
a
savings
association
to
file
an
application
for
approval
of
a
capital
distribution
if:
·
·
·
·
the
association
is
not
eligible
for
expedited
treatment
of
its
filings
with
the
OCC;
the
total
amount
of
all
of
capital
distributions,
including
the
proposed
capital
distribution,
for
the
applicable
calendar
year
exceeds
its
net
income
for
that
year
to
date
plus
retained
net
income
for
the
preceding
two
years;
the
association
would
not
be
at
least
adequately
capitalized,
as
determined
under
the
capital
requirements
described
above
under
“
Prompt Corrective
Action ,”
following
the
distribution;
or
the
proposed
capital
distribution
would
violate
any
applicable
statute,
regulation,
or
regulatory
agreement
or
condition.
29
Table of Contents
In
addition,
a
savings
association
must
give
the
OCC
notice
of
a
capital
distribution
if
the
savings
association
is
not
required
to
file
an
application,
but:
· would
not
be
well
capitalized,
as
determined
under
the
capital
requirements
described
above
under
“
Prompt
Corrective Action ,”
following
the
·
·
distribution;
the
proposed
capital
distribution
would
reduce
the
amount
of
or
retire
any
part
of
the
savings
association's
common
or
preferred
stock
or
retire
any
part
of
debt
instruments
such
as
notes
or
debentures
included
in
capital,
other
than
regular
payments
required
under
a
debt
instrument;
or
the
savings
association
is
a
subsidiary
of
a
savings
and
loan
holding
company,
is
filing
a
notice
of
the
distribution
with
the
FRB
and
is
not
otherwise
required
to
file
an
application
or
notice
regarding
the
proposed
distribution
with
the
OCC,
in
which
case
an
information
copy
of
the
notice
filed
by
the
holding
company
with
the
FRB
needs
to
be
simultaneously
provided
to
the
OCC.
Further,
any
savings
association
subsidiary
of
a
savings
and
loan
holding
company
also
must
file
a
notice
with
the
FRB
of
any
proposed
dividend
or
distribution.
The
application
or
notice,
as
applicable,
must
be
filed
with
the
regulators
at
least
30
days
before
the
proposed
declaration
of
dividend
or
approval
of
the
proposed
capital
distribution
by
its
board
of
directors.
The
OCC
or
FRB
may
prohibit
a
proposed
dividend
or
capital
distribution
that
would
otherwise
be
permitted
if
it
determines
that:
·
·
·
following
the
distribution,
the
savings
association
will
be
undercapitalized,
significantly
undercapitalized,
or
critically
undercapitalized,
as
determined
under
the
capital
requirements
described
above
under
“
Prompt
Corrective Action;
the
proposed
distribution
raises
safety
or
soundness
concerns;
or
the
proposed
capital
distribution
would
violate
any
applicable
statute,
regulation
or
regulatory
agreement
or
condition.
In
addition,
as
noted
above,
beginning
in
2016,
if
the
Bank
does
not
have
the
required
capital
conservation
buffer
under
the
amended
capital
rules,
its
ability
to
pay
dividends
to
Bancorp
will
be
limited.
Branching . Under
OCC
branching
regulations,
the
Bank
is
generally
authorized
to
open
branches
in
any
state
of
the
United
States
(i)
if
the
Bank
qualifies
as
a
“domestic
building
and
loan
association”
under
the
Code,
which
qualification
requirements
are
similar
to
those
for
a
Qualified
Thrift
Lender
under
the
Home
Owners’
Loan
Act,
or
(ii)
if
the
law
of
the
state
in
which
the
branch
is
located,
or
is
to
be
located,
would
permit
establishment
of
the
branch
if
the
savings
association
were
a
state
savings
association
chartered
by
such
state.
The
OCC
authority
preempts
any
state
law
purporting
to
regulate
branching
by
federal
savings
banks.
Community Reinvestment Act and the Fair Lending Laws .
Savings
associations
have
a
responsibility
under
the
Community
Reinvestment
Act
and
related
regulations
of
the
OCC
to
help
meet
the
credit
needs
of
their
communities,
including
low-
and
moderate-income
neighborhoods.
In
addition,
the
Equal
Credit
Opportunity
Act
and
the
Fair
Housing
Act
prohibit
lenders
from
discriminating
in
their
lending
practices
on
the
basis
of
characteristics
specified
in
those
statutes.
An
institution's
failure
to
comply
with
the
provisions
of
the
Community
Reinvestment
Act
could,
at
a
minimum,
result
in
regulatory
restrictions
on
its
activities
and
the
denial
of
applications.
In
addition,
an
institution's
failure
to
comply
with
the
Equal
Credit
Opportunity
Act
and
the
Fair
Housing
Act
could
result
in
the
OCC,
other
federal
regulatory
agencies
as
well
as
the
Department
of
Justice
taking
enforcement
actions.
Based
on
an
examination
conducted
June
30,
2015,
the
Bank
received
a
satisfactory
rating.
Federal Home Loan Bank System .
The
Bank
is
a
member
of
the
FHLB-Atlanta.
Among
other
benefits,
each
FHLB
serves
as
a
reserve
or
central
bank
for
its
members
within
its
assigned
region.
Each
FHLB
is
financed
primarily
from
the
sale
of
consolidated
obligations
of
the
FHLB
system.
Each
FHLB
makes
available
loans
or
advances
to
its
members
in
compliance
with
the
policies
and
procedures
established
by
the
Board
of
Directors
of
the
individual
FHLB.
Under
the
capital
plan
of
the
FHLB-Atlanta
as
of
December
31,
2015,
the
Bank
was
required
to
own
at
least
$5,583,000
of
the
capital
stock
of
the
FHLB-
Atlanta.
As
of
such
date,
the
Bank
owned
$5,626,000
of
the
capital
stock
of
the
FHLB-Atlanta
and
was
in
compliance
with
the
capital
plan
requirements.
Federal Reserve System .
The
FRB
requires
all
depository
institutions
to
maintain
non‑interest
bearing
reserves
at
specified
levels
against
their
transaction
accounts
(primarily
checking,
NOW,
and
Super
NOW
checking
accounts)
and
non‑personal
time
deposits.
For
transaction
accounts
in
2016,
the
first
$15.2
million,
up
from
$14.5
million
in
2015,
will
be
exempt
from
reserve
requirements.
A
3
percent
reserve
ratio
will
be
assessed
on
transaction
accounts
over
$15.2
million
up
to
and
including
$110.2
million,
up
from
$103.6
million
in
2015.
A
10
percent
reserve
ratio
will
be
assessed
on
transaction
accounts
in
excess
of
$110.2
million.
At
December
31,
2015,
the
Bank
was
in
compliance
with
the
reserve
requirements.
Activities of Subsidiaries .
A
savings
association
seeking
to
establish
a
new
subsidiary
acquire
control
of
an
existing
company
or
conduct
a
new
activity
through
a
subsidiary
must
provide
30
days
prior
notice
to
the
FDIC
and
the
FRB
and
conduct
any
activities
of
the
subsidiary
in
compliance
with
regulations
and
orders
of
the
FRB.
The
FRB
has
the
power
to
require
a
savings
association
to
divest
any
subsidiary
or
terminate
any
activity
conducted
by
a
subsidiary
that
the
FRB
determines
to
pose
a
serious
threat
to
the
financial
safety,
soundness
or
stability
of
the
savings
association
or
to
be
otherwise
inconsistent
with
sound
banking
practices.
30
Table of Contents
Tying Arrangements .
Federal
savings
associations
are
prohibited,
subject
to
some
exceptions,
from
extending
credit
to
or
offering
any
other
services,
or
fixing
or
varying
the
consideration
for
such
extension
of
credit
or
service,
on
the
condition
that
the
customer
obtain
some
additional
service
from
the
institution
or
its
affiliates
or
not
obtain
services
of
a
competitor
of
the
institution.
Other Regulations. Interest
and
other
charges
collected
or
contracted
for
by
the
Bank
are
subject
to
state
usury
laws
and
federal
laws
concerning
interest
rates.
The
Bank’s
operations
are
also
subject
to
federal
laws
applicable
to
credit
transactions,
such
as
the:
·
·
Truth-In-Lending
Act,
governing
disclosures
of
credit
terms
to
consumer
borrowers;
Real
Estate
Settlement
Procedures
Act,
requiring
that
borrowers
for
mortgage
loans
for
one-to
four
family
residential
real
estate
receive
various
disclosures,
including
good
faith
estimates
of
settlement
costs,
lender
servicing
and
escrow
account
practices,
and
prohibiting
certain
practices
that
increase
the
cost
of
settlement
services;
· Home
Mortgage
Disclosure
Act,
requiring
financial
institutions
to
provide
information
to
enable
the
public
and
public
officials
to
determine
whether
a
financial
institution
is
fulfilling
its
obligation
to
help
meet
the
housing
needs
of
the
community
it
serves;
Equal
Credit
Opportunity
Act,
prohibiting
discrimination
on
the
basis
of
race,
creed
or
other
prohibited
factors
in
extending
credit;
Fair
Credit
Reporting
Act,
governing
the
use
and
provision
of
information
to
credit
reporting
agencies;
Fair
Debt
Collection
Act,
governing
the
manner
in
which
consumer
debts
may
be
collected
by
collection
agencies;
Truth
in
Savings
Act;
and
rules
and
regulations
of
the
various
federal
agencies
charged
with
the
responsibility
of
implementing
such
federal
laws.
·
·
·
·
·
In
addition,
the
Consumer
Financial
Protection
Bureau
issues
regulations
and
standards
under
these
federal
consumer
protection
laws
that
affect
our
consumer
businesses.
These
include
regulations
setting
“ability
to
repay”
and
“qualified
mortgage”
standards
for
residential
mortgage
loans
and
mortgage
loan
servicing
and
originator
compensation
standards.
The
Bank
is
evaluating
recent
regulations
and
proposals,
and
devotes
significant
compliance,
legal
and
operational
resources
to
compliance
with
consumer
protection
regulations
and
standards.
The
operations
of
the
Bank
also
are
subject
to
the:
·
·
·
Electronic
Funds
Transfer
Act
and
Regulation
E
promulgated
thereunder,
which
govern
automatic
deposits
to
and
withdrawals
from
deposit
accounts
and
customers’
rights
and
liabilities
arising
from
the
use
of
automated
teller
machines
and
other
electronic
banking
services;
Check
Clearing
for
the
21st
Century
Act
(also
known
as
“Check
21”),
which
gives
“substitute
checks,”
such
as
digital
check
images
and
copies
made
from
that
image,
the
same
legal
standing
as
the
original
paper
check;
and
The
USA
PATRIOT
Act,
which
requires
savings
associations
to,
among
other
things,
establish
broadened
anti-money
laundering
compliance
programs,
and
due
diligence
policies
and
controls
to
ensure
the
detection
and
reporting
of
money
laundering.
Such
required
compliance
programs
are
intended
to
supplement
existing
compliance
requirements
that
also
apply
to
financial
institutions
under
the
Bank
Secrecy
Act
and
the
Office
of
Foreign
Assets
Control
regulations.
31
Table of Contents
Item 1A. Risk Factors
Unless
the
context
indicates
otherwise,
all
references
to
“we,”
“us,”
“our”
in
this
subsection
“Risk
Factors”
refer
to
Bancorp
and
its
subsidiaries.
You
should
carefully
consider
the
risks
and
uncertainties
described
below
as
well
as
elsewhere
in
this
Annual
Report
on
Form
10-K.
If
any
of
the
risks
or
uncertainties
actually
occurs,
our
business,
financial
condition
or
results
of
future
operations
could
be
materially
adversely
affected.
The
risks
and
uncertainties
described
in
this
Form
10-K
are
not
the
only
ones
we
face.
Additional
risks
and
uncertainties
that
we
are
unaware
of,
or
that
we
currently
deem
immaterial,
also
may
become
important
factors
that
affect
us.
This
Annual
Report
on
Form
10-K
contains
forward-looking
statements
that
involve
risks
and
uncertainties.
Our
actual
results
could
differ
materially
from
those
anticipated
in
the
forward-looking
statements
as
a
result
of
many
factors,
including
the
risks
faced
by
us
described
below
and
elsewhere
in
this
Annual
Report
on
Form
10-K.
We may be adversely affected by changes in economic and political conditions and by governmental monetary and fiscal policies.
The
thrift
industry
is
affected,
directly
and
indirectly,
by
local,
domestic,
and
international
economic
and
political
conditions,
and
by
governmental
monetary
and
fiscal
policies.
Conditions
such
as
inflation,
recession,
unemployment,
volatile
interest
rates,
tight
money
supply,
real
estate
values,
international
conflicts
and
other
factors
beyond
our
control
may
adversely
affect
our
potential
profitability.
Any
future
rises
in
interest
rates,
while
increasing
the
income
yield
on
our
earning
assets,
may
adversely
affect
loan
demand
and
the
cost
of
funds
and,
consequently,
our
profitability.
Any
future
decreases
in
interest
rates
may
adversely
affect
our
profitability
because
such
decreases
may
reduce
the
amounts
that
we
may
earn
on
our
assets.
Economic
downturns
have
resulted
and
may
continue
to
result
in
the
delinquency
of
outstanding
loans.
We
do
not
expect
any
one
particular
factor
to
materially
affect
our
results
of
operations.
However,
downtrends
in
several
areas,
including
real
estate,
construction
and
consumer
spending,
have
had
and
may
continue
to
have
a
material
adverse
impact
on
our
ability
to
remain
profitable.
Further,
there
can
be
no
assurance
that
the
asset
values
of
the
loans
included
in
our
loan
portfolio,
the
value
of
properties
and
other
collateral
securing
such
loans,
or
the
value
of
foreclosed
real
estate
will
remain
at
current
levels.
The changing economic environment poses significant challenges for Bancorp.
Negative
developments
in
the
financial
services
industry
from
2008
into
2015
have
resulted
in
uncertainty
in
the
financial
markets
in
general
and
a
related
general
economic
downturn
globally.
While
we
are
beginning
to
experience
modest
improvement
in
performance,
we
may
experience
negative
conditions
in
2016.
In
addition,
as
a
consequence
of
the
recent
United
States
recession,
business
activity
across
a
wide
range
of
industries
face
serious
difficulties
due
to
the
decline
in
the
housing
market
and
lack
of
consumer
spending.
Although
unemployment
levels
have
fallen
from
the
2008-2009
recession,
any
downturn
in
the
economy
could
cause
unemployment
rates
to
increase.
Although
the
U.S.
economy
has
emerged
from
the
severe
recession
that
occurred
in
2008
and
2009,
economic
growth
has
been
slow
and
uneven.
Recovery
by
many
businesses
has
been
impaired
by
lower
consumer
spending.
A
return
to
prolonged
deteriorating
economic
conditions
could
significantly
affect
the
markets
in
which
we
do
business,
the
value
of
our
loans
and
investments,
and
our
ongoing
operations,
costs
and
profitability.
If
the
Federal
Reserve
Board
continues
to
increase
the
federal
funds
rate,
higher
interest
rates
would
likely
result,
which
may
reduce
our
loan
originations,
and
housing
markets
and
U.S.
economic
activity
would
be
negatively
affected.
Further
declines
in
real
estate
values
and
sales
volumes
and
continued
elevated
unemployment
levels
may
result
in
higher
than
expected
loan
delinquencies,
increases
in
our
nonperforming
and
criticized
and
classified
assets
and
a
decline
in
demand
for
our
products
and
services.
These
events
could
then
result
in
further
increases
in
loan
loss
provisions,
costs
associated
with
monitoring
delinquent
loans
and
disposing
of
foreclosed
property,
which
could
negatively
affect
our
financial
condition
and
results
of
operations.
32
Table of Contents
We
are
operating
in
a
challenging
economic
environment,
including
generally
uncertain
national
and
local
market
conditions.
Negative
market
developments
may
affect
consumer
confidence
levels
and
may
cause
adverse
changes
in
payment
patterns,
causing
increases
in
delinquencies
and
default
rates,
which
may
impact
our
charge-offs
and
provision
for
credit
losses.
If
the
economy
does
not
continue
to
improve,
or
worsens,
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,
could
have
adverse
effects
on
our
borrowers,
which
could
adversely
affect
our
financial
condition
and
results
of
operations.
For
instance,
because
payments
on
loans
secured
by
commercial
real
estate
properties
are
often
dependent
upon
the
successful
operation
of
management
of
the
properties,
repayment
of
these
loans
are
subject
to
adverse
conditions
in
the
economy.
If
consumer
spending
decreases,
businesses
located
in
commercial
real
estate
property
may
close,
reducing
the
rental
income
of
the
Bank’s
borrower.
The
reduction
in
rental
income
may
result
in
the
borrower
being
unable
to
make
payments
on
the
loan.
Any
deterioration
in
economic
conditions
could
drive
losses
beyond
that
which
is
provided
for
in
our
allowance
for
loan
losses
and
could
result
in
the
following:
·
·
·
·
an
increase
in
loan
delinquencies,
problem
assets
and
foreclosures;
a
decline
in
demand
for
our
products
and
services;
a
decrease
in
low
cost
or
non-interest-bearing
deposits;
and
a
decline
in
the
value
of
the
collateral
for
our
loans,
which
in
turn
may
reduce
customers’
borrowing
capacities,
and
reduce
the
value
of
assets
and
collateral
supporting
our
existing
loans.
During
recent
years,
we
experienced
higher
than
normal
levels
of
non-performing
loans.
No
assurance
can
be
given
that
these
conditions
will
improve
in
the
near
term
or
will
not
worsen.
Moreover,
such
conditions
may
result
in
a
further
increase
in
loan
delinquencies,
causing
a
decrease
in
our
interest
income,
and
may
continue
to
have
an
adverse
impact
on
our
loan
loss
experience,
possibly
requiring
us
to
add
to
our
allowance
for
loan
losses.
Until
conditions
improve,
we
expect
our
business,
financial
condition
and
results
of
operations
to
be
adversely
affected.
Changes in interest rates could adversely affect our financial condition and results of operations.
The
operations
of
financial
institutions,
such
as
ours,
are
dependent
to
a
large
degree
on
net
interest
income,
which
is
the
difference
between
interest
income
from
loans
and
investments
and
interest
expense
on
deposits
and
borrowings.
Our
net
interest
income
is
significantly
affected
by
market
rates
of
interest
that
in
turn
are
affected
by
prevailing
economic
conditions,
fiscal
and
monetary
policies
of
the
federal
government
and
the
policies
of
various
regulatory
agencies.
Like
all
financial
institutions,
our
balance
sheet
is
affected
by
fluctuations
in
interest
rates.
Volatility
in
interest
rates
can
also
result
in
disintermediation,
which
is
the
flow
of
funds
away
from
financial
institutions
into
direct
investments,
such
as
U.S.
Government
bonds,
corporate
securities
and
other
investment
vehicles,
including
mutual
funds,
which,
because
of
the
absence
of
federal
insurance
premiums
and
reserve
requirements,
generally
pay
higher
rates
of
return
than
those
offered
by
financial
institutions
such
as
ours.
During
the
last
few
years,
the
Federal
Reserve’s
involvement
in
the
purchase
of
U.S.
government
debt
securities,
commonly
known
as
“quantitative
easing,”
has
caused
interest
rates
to
be
lower
than
they
would
have
been
without
such
involvement;
however,
quantitative
easing
ended
in
October
2014.
Additionally,
in
December
2015,
the
FRB
raised
the
target
range
for
the
federal
funds
rate
for
the
first
time
since
2006
and
indicated
that
further
interest
rate
hikes
may
be
undertaken.
As
a
result
of
the
end
of
quantitative
easing
and
the
FRB
actions,
interest
rates
could
rise,
which
could
disrupt
domestic
and
world
markets
and
could
adversely
affect
the
value
of
our
investment
portfolio
or
our
liquidity
and
results
of
operations.
We
expect
to
experience
continual
competition
for
deposit
accounts
which
may
make
it
difficult
to
reduce
the
interest
paid
on
some
deposits.
We
believe
that,
in
the
current
market
environment,
we
have
adequate
policies
and
procedures
for
maintaining
a
conservative
interest
rate
sensitive
position.
However,
there
is
no
assurance
that
this
condition
will
continue.
A
sharp
movement
up
or
down
in
deposit
rates,
loan
rates,
investment
fund
rates
and
other
interest-sensitive
instruments
on
our
balance
sheet
could
have
a
significant,
adverse
impact
on
our
net
interest
income
and
operating
results.
Further
downgrades
of
the
U.S.
credit
rating,
government
spending
cuts
or
another
government
shutdown
could
negatively
impact
our
liquidity,
financial
conditions
and
earnings.
33
Table of Contents
Recent
U.S.
debt
ceiling
and
budget
deficit
concerns
have
increased
the
possibility
of
additional
credit-rating
downgrades
and
economic
slowdowns,
or
a
recession
in
the
United
States.
Although
lawmakers
passed
legislation
to
raise
the
federal
debt
ceiling
on
multiple
occasions,
ratings
agencies
have
lowered
or
threatened
to
lower
the
long-term
sovereign
credit
rating
on
the
United
States.
The
impact
of
this
or
any
further
downgrades
to
the
government’s
sovereign
credit
rating
or
its
perceived
creditworthiness
could
adversely
affect
the
U.S.
and
global
financial
markets
and
economic
conditions.
Absent
further
quantitative
easing
by
the
Federal
Reserve,
these
developments
could
cause
interest
rates
and
borrowing
costs
to
rise,
which
may
negatively
impact
our
ability
to
access
the
debt
markets
on
favorable
terms.
In
addition,
disagreement
over
the
federal
budget
has
caused
the
U.S.
federal
government
to
shut
down
for
periods
of
time.
Continued
adverse
political
and
economic
conditions
could
have
a
material
adverse
effect
on
our
business,
financial
condition
and
results
of
operations.
Most of our loans are secured by real estate located in our market area. If there is a downturn in the real estate market, additional borrowers may
default on their loans and we may not be able to fully recover our loans.
Although
the
real
estate
market
has
begun
to
rebound
from
the
financial
crisis
of
2008-2009,
it
has
not
fully
recovered
and
a
downturn
in
the
real
estate
market
could
adversely
affect
our
business
because
most
of
our
loans
are
secured
by
real
estate.
Substantially
all
of
our
real
estate
collateral
is
located
in
the
states
of
Maryland,
Virginia
and
Delaware.
Real
estate
values
and
real
estate
markets
are
generally
affected
by
changes
in
national,
regional
or
local
economic
conditions,
fluctuations
in
interest
rates
and
the
availability
of
loans
to
potential
purchasers,
changes
in
tax
laws
and
other
governmental
statutes,
regulations
and
policies
and
acts
of
nature.
In
addition
to
the
risks
generally
present
with
respect
to
mortgage
lending
activities,
our
operations
are
affected
by
other
factors
affecting
our
borrowers,
including:
·
·
·
·
the
ability
of
our
mortgagors
to
make
mortgage
payments,
the
ability
of
our
borrowers
to
attract
and
retain
buyers
or
tenants,
which
may
in
turn
be
affected
by
local
conditions
such
as
an
oversupply
of
space
or
a
reduction
in
demand
for
rental
space
in
the
area,
the
attractiveness
of
properties
to
buyers
and
tenants,
and
competition
from
other
available
space,
or
by
the
ability
of
the
owner
to
pay
leasing
commissions,
provide
adequate
maintenance
and
insurance,
pay
tenant
improvements
costs
and
make
other
tenant
concessions,
interest
rate
levels
and
the
availability
of
credit
to
refinance
loans
at
or
prior
to
maturity,
and
increased
operating
costs,
including
energy
costs,
real
estate
taxes
and
costs
of
compliance
with
environmental
controls
and
regulations.
As
of
December
31,
2015,
approximately
96%
of
the
book
value
of
our
loan
portfolio
consisted
of
loans
collateralized
by
various
types
of
real
estate.
If
real
estate
prices
decline,
the
value
of
real
estate
collateral
securing
our
loans
will
be
reduced.
Our
ability
to
recover
defaulted
loans
by
foreclosing
and
selling
the
real
estate
collateral
would
then
be
diminished,
and
we
would
be
more
likely
to
incur
financial
losses
on
defaulted
loans.
In
addition,
approximately
44%
of
the
book
value
of
our
loans
consisted
of
construction,
land
acquisition
and
development
loans,
commercial
real
estate
loans
and
land
loans,
which
present
additional
risks
described
in
“Item
1.
Business
-
Construction
Loans”
of
this
Form
10-K.
Our loan portfolio exhibits a high degree of risk.
We
have
a
significant
amount
of
nonresidential
loans,
as
well
as
construction
and
land
loans
granted
on
a
speculative
basis.
Although
permanent
single-family,
owner-occupied
loans
currently
represent
the
largest
single
component
of
assets
and
impaired
loans,
we
have
a
significant
level
of
nonresidential
loans,
construction
loans,
and
land
loans
that
have
an
above-average
risk
exposure.
Our
monitoring
of
higher
risk
loans
and
the
internal
asset
review
function
may
be
inadequate
in
view
of
current
real
estate
market
weaknesses.
34
Table of Contents
At
December
31,
2015
and
December
31,
2014,
our
non-accrual
loans
(those
loans
90
or
more
days
in
arrears)
equaled
$8,974,000
and
$12,845,000,
respectively.
There
were
thirty-eight
residential
loans
(including
construction,
land
acquisition
and
development,
land
loans
and
home
equity
lines
of
credit)
in
non-accrual
status
totaling
$5,810,000
and
seven
commercial
loans
in
non-accrual
status
totaling
$2,681,000
at
December
31,
2015,
compared
to
forty-eight
residential
loans
in
non-accrual
status
totaling
$10,030,000,
and
eight
commercial
loans
in
non-accrual
status
totaling
$2,427,000
at
December
31,
2014.
For
the
years
ended
December
31,
2015
and
December
31,
2014,
there
were
$397,000
and
$3,135,000
of
net
loan
charge-offs,
respectively.
At
December
31,
2015,
the
total
allowance
for
loan
losses
was
$8,758,000,
which
was
1.45%
of
total
net
loans,
compared
with
$9,435,000,
which
was
1.47%
of
total
net
loans,
as
of
December
31,
2014.
We are exposed to risk of environmental liabilities with respect to properties to which we take title.
In
the
course
of
our
business,
we
may
foreclose
and
take
title
to
real
estate,
and
could
be
subject
to
environmental
liabilities
with
respect
to
these
properties.
We
may
be
held
liable
to
a
governmental
entity
or
to
third
parties
for
property
damage,
personal
injury,
investigation
and
clean-up
costs
incurred
by
these
parties
in
connection
with
environmental
contamination,
or
may
be
required
to
investigate
or
clean
up
hazardous
or
toxic
substances,
or
chemical
releases
at
a
property.
The
costs
associated
with
investigation
or
remediation
activities
could
be
substantial.
In
addition,
if
we
are
the
owner
or
former
owner
of
a
contaminated
site,
we
may
be
subject
to
common
law
claims
by
third
parties
based
on
damages
and
costs
resulting
from
environmental
contamination
emanating
from
the
property.
If
we
become
subject
to
significant
environmental
liabilities,
our
business,
financial
condition,
results
of
operations
and
cash
flows
could
be
materially
and
adversely
affected.
Our operations are located in Anne Arundel County, Maryland, which makes our business highly susceptible to local economic conditions. An
economic downturn or recession in this area may adversely affect our ability to operate profitably.
Unlike
larger
banking
organizations
that
are
geographically
diversified,
our
operations
are
concentrated
in
Anne
Arundel
County,
Maryland.
In
addition,
nearly
all
of
our
loans
have
been
made
to
borrowers
in
the
states
of
Maryland,
Virginia
and
Delaware.
As
a
result
of
this
geographic
concentration,
our
financial
results
depend
largely
upon
economic
conditions
in
our
market
area.
A
deterioration
or
recession
in
economic
conditions
in
this
market
could
result
in
one
or
more
of
the
following:
·
·
·
·
·
a
decrease
in
deposits;
an
increase
in
loan
delinquencies;
an
increase
in
problem
assets
and
foreclosures;
a
decrease
in
the
demand
for
our
products
and
services;
and
a
decrease
in
the
value
of
collateral
for
loans,
especially
real
estate,
and
reduction
in
customers’
borrowing
capacities.
Any
of
the
foregoing
factors
may
adversely
affect
our
ability
to
operate
profitably.
We are subject to federal and state regulation and the monetary policies of the FRB. Such regulation and policies can have a material adverse effect
on our earnings and prospects.
Our
operations
are
heavily
regulated
and
will
be
affected
by
present
and
future
legislation
and
by
the
policies
established
from
time
to
time
by
various
federal
and
state
regulatory
authorities.
In
particular,
the
monetary
policies
of
the
FRB
have
had
a
significant
effect
on
the
operating
results
of
banks
in
the
past,
and
are
expected
to
continue
to
do
so
in
the
future.
Among
the
instruments
of
monetary
policy
used
by
the
FRB
to
implement
its
objectives
are
changes
in
the
discount
rate
charged
on
bank
borrowings
and
changes
in
the
reserve
requirements
on
bank
deposits.
In
December
2015,
the
FRB
raised
the
target
range
for
the
federal
funds
rate
for
the
first
time
since
2006
and
indicated
that
further
interest
rate
hikes
may
be
undertaken.
It
is
not
possible
to
predict
what
changes,
if
any,
will
be
made
to
the
monetary
polices
of
the
FRB
or
to
existing
federal
and
state
legislation
or
the
effect
that
such
changes
may
have
on
our
future
business
and
earnings
prospects.
35
Table of Contents
If
the
Bank
becomes
“undercapitalized”
as
determined
under
the
“prompt
corrective
action”
initiatives
of
the
federal
bank
regulators,
such
regulatory
authorities
will
have
the
authority
to
require
the
Bank
to,
among
other
things,
alter,
reduce
or
terminate
any
activity
that
the
regulator
determines
poses
an
excessive
risk
to
the
Bank.
The
Bank
could
further
be
directed
to
take
any
other
action
that
the
regulatory
agency
determines
will
better
carry
out
the
purpose
of
prompt
corrective
action.
The
Bank
could
be
subject
to
these
prompt
corrective
action
restrictions
if
federal
regulators
determine
that
the
Bank
is
in
an
unsafe
or
unsound
condition
or
engaging
in
an
unsafe
or
unsound
practice.
Some
or
all
of
the
foregoing
actions
and
restrictions
could
have
a
material
adverse
effect
on
our
operations.
The Dodd-Frank Act may have a material impact on our operations.
The
Dodd-Frank
Act
restructures
the
regulation
of
depository
institutions.
Under
the
Dodd-Frank
Act,
the
OTS
was
merged
into
the
OCC,
which
regulates
national
banks.
Savings
and
loan
holding
companies
are
now
regulated
by
the
FRB.
Also,
included
was
the
creation
of
a
new
federal
agency
to
administer
consumer
protection
and
fair
lending
laws,
a
function
that
was
previously
performed
by
the
depository
institution
regulators.
The
federal
preemption
of
state
laws
currently
accorded
federally
charted
depository
institutions
was
reduced
as
well.
The
Dodd-Frank
Act
imposed
consolidated
capital
requirements
on
savings
and
loan
holding
companies
effective
for
us
in
2015,
which
limits
our
ability
to
borrow
at
the
holding
company
and
invest
the
proceeds
from
such
borrowings
as
capital
in
the
Bank
that
could
be
leveraged
to
support
additional
growth.
The
Dodd-Frank
Act
contains
various
other
provisions
designed
to
enhance
the
regulation
of
depository
institutions
and
prevent
the
recurrence
of
a
financial
crisis
such
as
occurred
in
2008-2009.
The
full
impact
of
the
Dodd-Frank
Act
on
our
business
and
operations
may
not
be
known
for
years
until
all
regulations
implementing
the
statute
are
written,
adopted
and
implemented.
The
Dodd-Frank
Act
may
have
a
material
impact
on
operations,
particularly
through
increased
regulatory
burden
and
compliance
costs.
Bancorp has become subject to more stringent capital requirements, which may have a material adverse effect on Bancorp’s operations.
In
2013,
federal
banking
agencies
adopted
proposals
that
substantially
amend
the
regulatory
capital
rules
applicable
to
us
and
the
Bank.
The
amendments
implemented
the
“Basel
III”
regulatory
capital
reforms
and
changes
required
by
the
Dodd-Frank
Act.
The
amended
rules
establish
new
higher
capital
ratio
requirements,
narrow
the
definitions
of
capital,
impose
new
operating
restrictions
on
banking
organizations
with
insufficient
capital
buffers
and
increase
the
risk
weighting
of
certain
assets.
The
amended
rules
became
effective
with
respect
to
us
and
the
Bank
in
January
2015,
with
certain
requirements
to
be
phased
in
beginning
in
2016.
The
application
of
more
stringent
capital
requirements
to
us
and
the
Bank
could,
among
other
things,
result
in
lower
returns
on
invested
capital,
require
the
raising
of
additional
capital,
and
result
in
regulatory
actions
if
we
were
to
be
unable
to
comply
with
such
requirements.
Implementation
of
changes
to
asset
risk
weightings
for
risk
based
capital
calculations,
items
included
or
deducted
in
calculating
regulatory
capital
and/or
additional
capital
conservation
buffers
could
result
in
management
modifying
its
business
strategy
and
could
further
limit
our
ability
to
make
distributions,
including
paying
out
dividends
or
buying
back
shares,
We have established an allowance for loan losses based on our management's estimates. Actual losses could differ significantly from those estimates.
If the allowance is not adequate, it could have a material adverse effect on our earnings and the price of our common stock.
We
maintain
an
allowance
for
loan
losses,
which
is
a
reserve
established
through
a
provision
for
loan
losses
charged
to
expense,
that
represents
management's
best
estimate
of
probable
incurred
losses
within
the
existing
portfolio
of
loans.
The
allowance,
in
the
judgment
of
management,
is
necessary
to
reserve
for
estimated
loan
losses
and
risks
inherent
in
the
loan
portfolio.
The
level
of
the
allowance
reflects
management's
continuing
evaluation
of
specific
credit
risks;
loan
loss
experience;
current
loan
portfolio
quality;
present
economic,
political
and
regulatory
conditions;
industry
concentrations
and
other
unidentified
losses
inherent
in
the
current
loan
portfolio.
The
determination
of
the
appropriate
level
of
the
allowance
for
loan
losses
inherently
involves
a
high
degree
of
subjectivity
and
judgment
and
requires
us
to
make
significant
estimates
of
current
credit
risks
and
future
trends,
all
of
which
may
undergo
material
changes.
Changes
in
economic
conditions
affecting
borrowers,
new
information
regarding
existing
loans,
identification
of
additional
problem
loans
and
other
factors,
both
within
and
outside
of
our
control,
may
require
an
increase
in
the
allowance
for
loan
losses.
Bancorp
has
seen
a
significant
decrease
in
TDR
balances
compared
to
2012,
due
in
part
to
the
bulk
loan
sales
that
we
undertook
in
the
third
and
fourth
quarters
of
2013.
However,
the
TDR
balances
are
still
high
compared
to
historical
averages.
36
Table of Contents
In
addition,
bank
regulatory
agencies
periodically
review
our
allowance
for
loan
losses
and
may
require
an
increase
in
the
provision
for
loan
losses
or
the
recognition
of
further
loan
charge-offs,
based
on
judgments
different
than
those
of
management.
If
charge-offs
in
future
periods
exceed
the
allowance
for
loan
losses,
we
may
need
additional
provisions
to
increase
the
allowance
for
loan
losses.
Furthermore,
growth
in
the
loan
portfolio
would
generally
lead
to
an
increase
in
the
provision
for
loan
losses.
Any
increases
in
the
allowance
for
loan
losses
will
result
in
a
decrease
in
net
income
and
capital,
and
may
have
a
material
adverse
effect
on
our
financial
condition,
results
of
operations
and
cash
flows.
We compete with a number of local, regional and national financial institutions for customers.
We
face
strong
competition
from
savings
and
loan
associations,
banks,
and
other
financial
institutions
that
have
branch
offices
or
otherwise
operate
in
our
market
area,
as
well
as
many
other
companies
now
offering
a
range
of
financial
services.
Many
of
these
competitors
have
substantially
greater
financial
resources
and
larger
branch
systems
than
us.
In
addition,
many
of
our
competitors
have
higher
legal
lending
limits
than
us.
Particularly
intense
competition
exists
for
sources
of
funds
including
savings
and
retail
time
deposits
as
well
as
for
loans
and
other
services
offered
by
us.
In
addition,
over
the
last
several
years,
the
banking
industry
has
undergone
substantial
consolidation,
and
this
trend
is
expected
to
continue.
Significant
ongoing
consolidation
in
the
banking
industry
may
result
in
one
or
more
large
competitors
emerging
in
our
primary
target
market.
The
financial
resources,
human
capital
and
expertise
of
one
or
more
large
institutions
could
threaten
our
ability
to
maintain
our
competitiveness.
During
the
past
several
years,
significant
legislative
attention
has
been
focused
on
the
regulation
and
deregulation
of
the
financial
services
industry.
Non-bank
financial
institutions,
such
as
securities
brokerage
firms,
insurance
companies
and
mutual
funds,
have
been
permitted
to
engage
in
activities
that
compete
directly
with
traditional
bank
business.
Competition
with
various
financial
institutions
could
hinder
our
ability
to
maintain
profitable
operations
and
grow
our
business.
We face intense competitive pressure on customer pricing, which may materially and adversely affect revenues and profitability.
We
generate
net
interest
income,
and
charge
our
customers
fees,
based
on
prevailing
market
conditions
for
deposits,
loans
and
other
financial
services.
In
order
to
increase
deposit,
loan
and
other
service
volumes,
enter
new
market
segments
and
expand
our
base
of
customers
and
the
size
of
individual
relationships,
we
must
provide
competitive
pricing
for
such
products
and
services.
In
order
to
stay
competitive,
we
have
had
to
intensify
our
efforts
around
attractively
pricing
our
products
and
services.
To
the
extent
that
we
must
continue
to
adjust
our
pricing
to
stay
competitive,
we
will
need
to
grow
our
volumes
and
balances
in
order
to
offset
the
effects
of
declining
net
interest
income
and
fee-based
margins.
Increased
pricing
pressure
also
enhances
the
importance
of
cost
containment
and
productivity
initiatives,
and
we
may
not
succeed
in
these
efforts.
Our brand, reputation and relationship with our customers are key assets of our business and may be affected by how we are perceived in the
marketplace.
Our
brand
and
its
attributes
are
key
assets
of
our
business.
The
ability
to
attract
and
retain
customers
to
Bancorp’s
products
and
services
is
highly
dependent
upon
the
external
perceptions
of
us
and
the
industry
in
which
we
operate.
Our
business
may
be
affected
by
actions
taken
by
competitors,
customers,
third
party
providers,
employees,
regulators,
suppliers
or
others
that
impact
the
perception
of
the
brand,
such
as
creditor
practices
that
may
be
viewed
as
“predatory,”
customer
service
quality
issues,
and
employee
relations
issues.
Adverse
developments
with
respect
to
our
industry
may
also,
by
association,
impair
our
reputation,
or
result
in
greater
regulatory
or
legislative
scrutiny.
37
Table of Contents
The operations of our business, including our interaction with customers, are increasingly done via electronic means, and this has increased our risks
related to cyber-attacks.
We
are
exposed
to
the
risk
of
cyber-attacks
in
the
normal
course
of
business.
In
general,
cyber
incidents
can
result
from
deliberate
attacks
or
unintentional
events.
There
has
been
an
increased
level
of
attention
focused
recently
on
cyber-attacks
against
large
corporations
that
include,
but
are
not
limited
to,
gaining
unauthorized
access
to
digital
systems
for
purposes
of
misappropriating
cash,
other
assets
or
sensitive
information,
corrupting
data,
or
causing
operational
disruption.
Cyber-attacks
may
also
be
carried
out
in
a
manner
that
does
not
require
gaining
unauthorized
access,
such
as
by
causing
denial-of-service
attacks
on
websites.
Cyber-attacks
may
be
carried
out
by
third
parties
or
insiders
using
techniques
that
range
from
highly
sophisticated
efforts
to
electronically
circumvent
network
security
or
overwhelm
websites
to
more
traditional
intelligence
gathering
and
social
engineering
aimed
at
obtaining
information
necessary
to
gain
access.
The
objectives
of
cyber-attacks
vary
widely
and
can
include
theft
of
financial
assets,
intellectual
property,
or
other
sensitive
information,
including
the
information
belonging
to
our
banking
customers.
Cyber-attacks
may
also
be
directed
at
disrupting
our
operations.
While
we
have
not
incurred
any
losses
related
to
cyber-attacks,
nor
are
we
aware
of
any
specific
or
threatened
cyber-incidents
as
of
the
date
of
this
report,
we
may
incur
substantial
costs
and
suffer
other
negative
consequences
if
we
fall
victim
to
successful
cyber-attacks.
Such
negative
consequences
could
include
remediation
costs
that
may
include
liability
for
stolen
assets
or
information
and
repairing
system
damage
that
may
have
been
caused;
increased
cybersecurity
protection
costs
that
may
include
organizational
changes,
deploying
additional
personnel
and
protection
technologies,
training
employees,
and
engaging
third
party
experts
and
consultants;
lost
revenues
resulting
from
unauthorized
use
of
proprietary
information
or
the
failure
to
retain
or
attract
customers
following
an
attack;
litigation;
and
reputational
damage
adversely
affecting
customer
or
investor
confidence.
Our business is highly reliant on technology and our ability to manage the operational risks associated with technology.
We
rely
heavily
on
communications
and
information
systems
to
conduct
our
business.
Our
business
involves
storing
and
processing
sensitive
customer
data.
Any
failure,
interruption
or
breach
in
security
of
these
systems
could
result
in
theft
of
customer
data
or
failures
or
disruptions
in
our
customer
relationship
management,
general
ledger,
deposit,
loan,
data
storage,
processing
and
other
systems.
Our
inability
to
access
these
information
systems
at
critical
points
in
time
could
unfavorably
impact
the
timeliness
and
efficiency
of
our
business
operations.
In
addition,
we
operate
a
number
of
money
transfer
and
related
electronic,
check
and
other
payment
connections
that
are
vulnerable
to
individuals
engaging
in
fraudulent
activities
that
seek
to
compromise
payments
and
related
financial
systems
illegally.
While
we
have
policies
and
procedures
designed
to
prevent
or
limit
the
effect
of
the
failure,
interruption
or
security
breach
of
our
information
systems,
there
can
be
no
assurance
that
failures,
interruptions
or
security
breaches
will
not
occur
or,
if
they
do
occur,
that
they
will
be
adequately
addressed.
The
occurrence
of
any
failures,
interruptions
or
security
breaches
of
our
information
systems
could
damage
our
reputation,
result
in
a
loss
of
customer
business,
subject
us
to
additional
regulatory
scrutiny,
result
in
increased
expense
to
contain
the
event
and/or
require
that
we
provide
credit
monitoring
services
for
affected
customers
or
expose
us
to
civil
litigation
and
regulatory
fines
and
sanctions,
any
of
which
could
have
a
material
adverse
effect
on
our
financial
condition
and
results
of
operations.
Our business is highly reliant on third party vendors and our ability to manage the operational risks associated with outsourcing those services.
We
rely
on
third
parties
to
provide
services
that
are
integral
to
our
operations.
These
vendors
provide
services
that
support
our
operations,
including
storage
and
processing
of
sensitive
consumer
date.
A
cyber
security
breach
of
a
vendor’s
system
may
result
in
theft
of
our
data
or
disruption
of
business
processes.
A
material
breach
of
customer
data
at
a
service
provider’s
site
may
negatively
impact
our
business
reputation
and
cause
a
loss
of
customer
business;
result
in
increased
expense
to
contain
the
event
and/or
require
that
we
provide
credit
monitoring
services
for
affected
customers,
result
in
regulatory
fines
and
sanctions
and
may
result
in
litigation.
In
most
cases,
we
will
remain
primarily
liable
to
our
customers
for
losses
arising
from
a
breach
of
a
vendor’s
data
security
system.
We
rely
on
our
outsourced
service
providers
to
implement
and
maintain
prudent
cyber
security
controls.
We
have
procedures
in
place
to
assess
a
vendor’s
cyber
security
controls
prior
to
establishing
a
contractual
relationship
and
to
periodically
review
assessments
of
those
control
systems;
however,
these
procedures
are
not
infallible
and
a
vendor’s
system
can
be
breached
despite
the
procedures
we
employ.
38
Table of Contents
If
our
third
party
providers
experience
financial,
operational
or
technological
difficulties,
or
if
there
is
any
other
disruption
in
our
relationships
with
them,
we
may
be
required
to
locate
alternative
sources
of
such
services,
and
we
cannot
assure
you
that
we
would
be
able
to
negotiate
terms
that
are
as
favorable
to
us,
or
could
obtain
services
with
similar
functionality
as
found
in
our
existing
systems
without
the
need
to
expend
substantial
resources,
if
at
all.
We continually encounter technological change, and, if we are unable to develop and implement efficient and customer friendly technology, we could
lose business.
The
financial
services
industry
is
continually
undergoing
rapid
technological
change,
with
frequent
introductions
of
new
technology-driven
products
and
services.
The
effective
use
of
technology
increases
efficiency
and
enables
financial
institutions
to
better
serve
customers
and
to
reduce
costs.
Our
future
success
depends,
in
part,
upon
our
ability
to
address
the
needs
of
our
customers
by
using
technology
to
provide
products
and
services
that
will
satisfy
customer
demands,
as
well
as
to
achieve
additional
efficiencies
in
our
operations.
Many
of
our
competitors
have
substantially
greater
resources
to
invest
in
technological
improvements.
We
may
not
be
able
to
effectively
implement
new
technology-driven
products
and
services
or
be
successful
in
marketing
these
products
and
services
to
our
customers.
Failure
to
successfully
keep
pace
with
technological
change
affecting
the
financial
services
industry
could
have
a
material
adverse
impact
on
our
business
and,
in
turn,
our
financial
condition
and
results
of
operations.
Our success depends on our senior management team, and if we are not able to retain our senior management team, it could have a material adverse
effect on us.
We
are
highly
dependent
upon
the
continued
services
and
experience
of
our
senior
management
team,
including
Alan
J.
Hyatt,
our
Chairman,
President
and
Chief
Executive
Officer.
We
depend
on
the
services
of
Mr.
Hyatt
and
the
other
members
of
our
senior
management
team
to,
among
other
things,
continue
the
development
and
implementation
of
our
strategies,
and
maintain
and
develop
our
customer
relationships.
We
do
not
have
an
employment
agreement
with
members
of
our
senior
management,
nor
do
we
maintain
“key-man”
life
insurance
on
our
senior
management.
If
we
are
unable
to
retain
Mr.
Hyatt
and
other
members
of
our
senior
management
team,
our
business
could
be
materially
and
adversely
affected.
If we fail to maintain an effective system of internal control over financial reporting and disclosure controls and procedures, we may be unable to
accurately report our financial results and comply with the reporting requirements under the Securities Exchange Act of 1934. As a result, current and
potential stockholders may lose confidence in our financial reporting and disclosure required under the Securities Exchange Act of 1934, which could
adversely affect our business and stock price and could subject us to regulatory scrutiny.
Pursuant
to
Section
404
of
the
Sarbanes-Oxley
Act
of
2002,
referred
to
as
Section
404,
we
are
required
to
include
in
our
Annual
Reports
on
Form
10-K,
our
management’s
report
on
internal
control
over
financial
reporting.
We
are
currently
not
required
to
include
an
opinion
of
our
independent
registered
public
accounting
firm
as
to
our
internal
controls
because
we
are
a
“smaller
reporting
company”
under
SEC
rules
and,
therefore,
stockholders
do
not
have
the
benefit
of
such
an
independent
review
of
our
internal
controls.
Compliance
with
the
requirements
of
Section
404
is
expensive
and
time-consuming.
If,
in
the
future,
we
fail
to
complete
this
evaluation
in
a
timely
manner,
or,
if
required,
our
independent
registered
public
accounting
firm
cannot
timely
attest
to
our
evaluation,
we
could
be
subject
to
regulatory
scrutiny
and
a
loss
of
public
confidence
in
our
internal
control
over
financial
reporting.
In
addition,
any
failure
to
maintain
an
effective
system
of
disclosure
controls
and
procedures
could
cause
our
current
and
potential
stockholders
and
customers
to
lose
confidence
in
our
financial
reporting
and
disclosure
required
under
the
Securities
Exchange
Act
of
1934,
which
could
adversely
affect
our
business
and
stock
price.
39
Table of Contents
Terrorist attacks and threats or actual war may impact all aspects of our operations, revenues, costs and stock price in unpredictable ways.
Terrorist
attacks
in
the
United
States
and
abroad,
as
well
as
future
events
occurring
in
response
to
or
in
connection
with
them,
including,
without
limitation,
future
terrorist
attacks
against
U.S.
targets,
rumors
or
threats
of
war,
actual
conflicts
involving
the
United
States
or
its
allies
or
military
or
trade
disruptions,
may
impact
our
operations.
Any
of
these
events
could
cause
consumer
confidence
and
savings
to
decrease
or
could
result
in
increased
volatility
in
the
United
States
and
worldwide
financial
markets
and
economy.
Any
of
these
occurrences
could
have
an
adverse
impact
on
our
operating
results,
revenues
and
costs
and
may
result
in
the
volatility
of
the
market
price
for
our
common
stock
and
on
the
future
price
of
our
common
stock.
There can be no assurance that we will pay dividends in the future.
Bank
regulations
govern
and
limit
the
payment
of
dividends
and
capital
distributions
to
stockholders
and
purchases
or
redemption
by
Bancorp
of
its
stock.
In
addition,
Bancorp
suspended
its
common
stock
dividend
in
the
fourth
quarter
of
2009
to
preserve
its
capital.
Although
we
expect
to
be
able
to
resume
our
policy
of
quarterly
dividend
payments,
this
dividend
policy
will
be
reviewed
in
light
of
future
earnings,
bank
regulations
and
other
considerations.
No
assurance
can
be
given,
therefore,
that
cash
dividends
on
our
common
stock
will
be
paid
in
the
future.
Our Series A preferred stock, Series B preferred stock and 2035 Debentures contain restrictions on our ability to declare and pay dividends on, or
repurchase our common stock.
Our
ability
to
declare
dividends
on
our
common
stock
is
limited
by
the
terms
of
our
(i)
8.0%
Non-Cumulative
Convertible
Preferred
Stock,
referred
to
as
Series
A
preferred
stock,
and
(ii)
our
Fixed
Rate
Cumulative
Perpetual
Preferred
Stock,
Series
B,
par
value
$0.01
per
share
and
liquidation
preference
$1,000
per
share,
referred
to
as
Series
B
preferred
stock.
We
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
our
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,
we
may
not
declare
or
pay
any
dividend
or
distribution
on
our
common
stock,
and
we
may
not
purchase,
redeem
or
otherwise
acquire
for
consideration
any
of
our
common
stock,
unless
all
accrued
and
unpaid
dividends
for
all
past
dividend
periods,
including
the
latest
completed
dividend
period,
on
all
outstanding
shares
of
Series
B
preferred
stock
have
been
or
are
contemporaneously
declared
and
paid
in
full
(or
have
been
declared
and
a
sum
sufficient
for
the
payment
thereof
has
been
set
aside),
subject
to
certain
minor
exceptions.
Dividends
on
the
Series
A
preferred
stock
and
Series
B
preferred
stock
have
not
been
declared
since
the
first
quarter
of
2012
because
Bancorp
did
not
receive
approval
from
the
FRB
to
pay
such
dividends.
As
of
December
31,
2015,
the
cumulative
amount
of
dividends
of
the
Series
B
preferred
stock
in
arrears
not
declared,
including
interest
on
unpaid
dividends
at
9%
per
year
was
$7,033,000.
Accordingly,
Bancorp
will
not
be
able
to
pay
dividends
on
its
common
stock
until
the
dividend
arrearages
on
its
Series
B
preferred
stock
have
been
paid
in
full
and
until
Bancorp
declares
and
pays
a
dividend
on
its
Series
A
preferred
stock.
Further,
under
the
terms
of
our
Junior
Subordinated
Debt
Securities
due
2035,
referred
to
as
the
2035
Debentures,
if
(i)
there
has
occurred
and
is
continuing
an
event
of
default,
(ii)
we
are
in
default
with
respect
to
payment
of
any
obligations
under
the
related
guarantee
or
(iii)
we
have
given
notice
of
our
election
to
defer
payments
of
interest
on
the
2035
Debentures
by
extending
the
interest
distribution
period
as
provided
in
the
indenture
governing
the
2035
Debentures
and
such
period,
or
any
extension
thereof,
has
commenced
and
is
continuing,
then
we
may
not,
among
other
things,
declare
or
pay
any
dividends
or
distributions
on,
or
redeem,
purchase,
acquire,
or
make
a
liquidation
payment
with
respect
to,
any
of
our
capital
stock,
including
our
common
stock.
As
permitted
under
the
terms
of
the
2035
Debenture,
as
of
December
31,
2015,
Bancorp
has
deferred
the
payment
of
fifteen
quarters
of
interest
and
the
cumulative
amount
of
interest
in
arrears
not
paid,
including
interest
on
unpaid
interest,
was
$1,863,000.
Accordingly,
Bancorp
will
not
be
able
to
pay
dividends
on
its
common
stock
until
the
interest
deferrals
on
the
2035
Debentures
have
been
paid
in
full.
40
Table of Contents
An investment in our securities is not insured against loss.
Investments
in
our
common
stock
are
not
deposits
insured
against
loss
by
the
FDIC
or
any
other
entity.
As
a
result,
an
investor
may
lose
some
or
all
of
his,
her
or
its
investment.
Conversion of our Series A preferred stock or exercise of the warrant issued to the Treasury Department will dilute the ownership interest of existing
stockholders.
In
two
private
placements
conducted
in
November
2008,
we
issued
Series
A
preferred
stock
convertible
into
437,500
shares
of
our
common
stock,
subject
to
adjustment,
and
a
warrant
to
purchase
556,976
shares
of
our
common
stock,
subject
to
adjustment.
The
conversion
of
some
or
all
of
the
Series
A
preferred
stock
or
the
exercise
of
the
warrant
will
dilute
the
ownership
interest
of
existing
stockholders.
Any
sales
in
the
public
market
of
the
common
stock
issuable
upon
such
conversion
or
exercise
could
adversely
affect
prevailing
market
prices
of
our
common
stock.
In
addition,
the
existence
of
the
Series
A
preferred
stock
or
warrant
may
encourage
short
selling
by
market
participants
because
the
conversion
of
the
Series
A
preferred
stock
or
exercise
of
the
warrant
could
depress
the
price
of
our
common
stock.
“Anti-takeover” provisions will make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to
our equity holders.
Our
charter
presently
contains
certain
provisions
that
may
be
deemed
to
be
“anti-takeover”
and
“anti-greenmail”
in
nature
in
that
such
provisions
may
deter,
discourage
or
make
more
difficult
the
assumption
of
control
of
us
by
another
corporation
or
person
through
a
tender
offer,
merger,
proxy
contest
or
similar
transaction
or
series
of
transactions.
For
example,
currently,
our
charter
provides
that
our
Board
of
Directors
may
amend
the
charter,
without
stockholder
approval,
to
increase
or
decrease
the
aggregate
number
of
shares
of
our
stock
or
the
number
of
shares
of
any
class
that
we
have
authority
to
issue.
In
addition,
our
charter
provides
for
a
classified
Board,
with
each
Board
member
serving
a
staggered
three-year
term.
Directors
may
be
removed
only
for
cause
and
only
with
the
approval
of
the
holders
of
at
least
75
percent
of
our
common
stock.
The
overall
effects
of
the
“anti-takeover”
and
“anti-greenmail”
provisions
may
be
to
discourage,
make
more
costly
or
more
difficult,
or
prevent
a
future
takeover
offer,
prevent
stockholders
from
receiving
a
premium
for
their
securities
in
a
takeover
offer,
and
enhance
the
possibility
that
a
future
bidder
for
control
of
us
will
be
required
to
act
through
arms-length
negotiation
with
our
Board
of
Directors.
These
provisions
may
also
have
the
effect
of
perpetuating
incumbent
management.
Item 1B. Unresolved Staff Comments
Not
applicable.
Item 2. Properties
HS
constructed
a
building
in
Annapolis,
Maryland
that
serves
as
Bancorp’s
and
the
Bank’s
administrative
headquarters.
A
branch
office
of
the
Bank
is
also
included
in
the
building.
Bancorp
and
the
Bank
lease
their
executive
and
administrative
offices
from
HS.
In
addition,
HS
leases
space
to
four
unrelated
companies
and
to
a
law
firm
in
which
the
President
of
Bancorp
and
the
Bank
is
a
partner.
Bancorp
has
four
retail
branch
locations
in
Anne
Arundel
County,
Maryland,
of
which
it
owns
three
and
leases
the
fourth
from
a
third
party.
The
current
term
of
the
lease
expires
in
July
2020.
There
is
no
option
to
renew
the
lease
for
any
additional
terms.
In
addition,
the
Bank
leases
office
space
in
Annapolis,
Maryland
from
a
third
party.
The
lease
expires
January
2017,
with
the
option
to
renew
the
lease
for
one
additional
five
year
term.
Item 3. Legal Proceedings
There
are
no
material
pending
legal
proceedings
to
which
Bancorp,
the
Bank
or
any
subsidiary
is
a
party
or
to
which
any
of
their
property
is
subject.
41
Table of Contents
Item 4. Mine Safety Disclosures
Not
applicable.
Item 4.1. Executive Officers of the Registrant
James
M.
Anthony,
age
44,
joined
Bancorp
in
August
2014
and
currently
serves
as
Executive
Vice
President
and
Chief
Operating
Officer.
Mr.
Anthony
has
over
fifteen
years
of
experience
in
the
financial
services
industry,
the
last
ten
of
which
he
spent
at
Chesapeake
Bank
&
Trust
where
he
served
in
key
bank
management
positions
including
Chief
Executive
Officer,
President,
Senior
Lending
Officer,
Head
of
Investment
Services,
and
Chief
Information
Officer.
Mr.
Anthony
holds
an
MBA
from
the
University
of
Chicago
and
two
degrees
from
the
University
of
Maryland:
a
master’s
degree
in
systems
engineering
and
a
bachelor’s
degree
in
mechanical
engineering.
He
is
also
a
graduate
of
ABA
Stonier
Graduate
School
of
Banking
hosted
by
Georgetown
University.
Mr.
Anthony
currently
serves
on
the
board
of
directors
of
the
Atlantic
Community
Bankers
Bank.
Thomas
G.
Bevivino,
age
60,
a
Certified
Public
Accountant,
joined
Bancorp
in
August
2004
and
currently
serves
as
Executive
Vice
President
and
Chief
Financial
Officer.
Mr.
Bevivino
joined
Bancorp
as
Controller,
and
served
as
the
Executive
Vice
President
and
Chief
Financial
Officer
of
Bancorp
and
Bank
from
July,
2005
to
February
2012,
and
was
reappointed
to
the
Chief
Financial
Officer
position
in
September
2013.
Effective
December
2011,
Mr.
Bevivino
became
Chief
Operating
Officer
of
Bancorp
and
the
Bank
and
served
in
such
capacity
until
August
2014.
Mr.
Bevivino,
was
a
financial
consultant
from
2002
until
2004,
and
served
as
Chief
Financial
Officer
of
Luminant
Worldwide
Corporation
from
1999
until
2002.
Christopher
A.
Chick,
age
48,
joined
Bancorp
in
2015
as
Executive
Vice
President
and
Chief
Lending
Officer.
Mr.
Chick
has
over
26
years
in
the
banking
industry.
Prior
to
joining
Bancorp,
Mr.
Chick
held
various
management
positions
at
Susquehanna
Bank
and
was
a
Bank
Examiner
with
the
Office
of
Thrift
Supervision.
Mr.
Chick
is
a
graduate
of
the
University
of
Baltimore
where
he
received
his
Master
of
Finance.
He
is
also
a
graduate
of
the
Maryland
Bankers
Association,
Executive
School
of
Bank
Management.
Mr.
Chick
has
been
recognized
within
the
industry
with
various
awards
including
Next
Leader
in
Banking,
Maryland
Bankers
Association
and
Top
Banker
Award,
Smart
CEO.
Information
concerning
Alan
J.
Hyatt
will
be
contained
in
the
proxy
statement
for
the
2016
Annual
Meeting
of
Shareholders.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The
common
stock
of
Bancorp
is
traded
on
the
Nasdaq
Capital
Market
under
the
symbol
“SVBI”.
As
of
March
10,
2016,
there
were
159
stockholders
of
record
of
Bancorp’s
common
stock.
Computershare,
211
Quality
Circle,
Suite
210,
College
Station,
Texas
77845-4470,
serves
as
the
Transfer
Agent
and
Registrar
for
Bancorp.
The
following
table
sets
forth
the
high
and
low
sales
prices
per
share
of
Bancorp’s
common
stock
for
the
periods
indicated,
as
reported
on
the
Nasdaq
Capital
Market:
42
Table of Contents
2015
Stock
Price
Range
Quarter
1
st
2
nd
3
rd
4
th
$
Low
4.25
4.61
4.65
4.66
Dividend Policy
$
High
4.95
5.12
5.09
5.88
Quarterly
Stock
Information
$
Per
Share
Dividend
-
-
-
-
2014
Stock
Price
Range
Quarter
1
st
2
nd
3
rd
4
th
$
Low
4.31
4.41
4.26
4.30
$
High
5.12
4.93
4.90
4.85
$
Per
Share
Dividend
-
-
-
-
Federal
banking
regulations
limit
the
amount
of
dividends
that
banking
institutions
may
pay
and
may
require
prior
approval
or
non-objection
from
federal
banking
regulators
before
any
dividends,
capital
distributions
or
share
redemptions
can
be
made.
Bancorp’s
main
source
of
income
is
dividends
from
the
Bank.
As
a
result,
Bancorp's
dividends
to
its
common
shareholders
depend
primarily
upon
regulatory
approval
and
receipt
of
dividends
from
the
Bank.
Bancorp
suspended
its
common
stock
dividend
in
the
fourth
quarter
of
2009
to
preserve
its
capital.
Bancorp’s
ability
to
declare
a
dividend
on
its
common
stock
is
also
limited
by
the
terms
of
Bancorp’s
Series
A
preferred
stock
and
Series
B
preferred
stock.
Bancorp
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,
Bancorp
may
not
declare
or
pay
any
dividend
or
distribution
on
its
common
stock,
and
Bancorp
may
not
purchase,
redeem
or
otherwise
acquire
for
consideration
any
of
its
common
stock,
unless
all
accrued
and
unpaid
dividends
for
all
past
dividend
periods,
including
the
latest
completed
dividend
period,
on
all
outstanding
shares
of
Series
B
preferred
stock
have
been
or
are
contemporaneously
declared
and
paid
in
full
(or
have
been
declared
and
a
sum
sufficient
for
the
payment
thereof
has
been
set
aside),
subject
to
certain
minor
exceptions.
Dividends
on
the
Series
A
preferred
stock
and
Series
B
preferred
stock
have
not
been
declared
since
the
first
quarter
of
2012
because
Bancorp
did
not
receive
approval
from
the
FRB
to
pay
such
dividends.
As
of
December
31,
2015,
the
cumulative
amount
of
dividends
of
the
Series
B
preferred
stock
in
arrears
not
declared,
including
interest
on
unpaid
dividends
was
$7,033,000.
There
is
no
requirement
that
Bancorp’s
board
of
directors
declares
any
dividends
on
the
Series
A
preferred
stock
and
any
unpaid
dividends
are
not
cumulative.
Additionally,
under
the
terms
of
Bancorp's
2035
Debentures,
if
(i)
there
has
occurred
and
is
continuing
an
event
of
default,
(ii)
Bancorp
is
in
default
with
respect
to
payment
of
any
obligations
under
the
related
guarantee
or
(iii)
Bancorp
has
given
notice
of
its
election
to
defer
payments
of
interest
on
the
2035
Debentures
by
extending
the
interest
distribution
period
as
provided
in
the
indenture
governing
the
2035
Debentures
and
such
period,
or
any
extension
thereof,
has
commenced
and
is
continuing,
then
Bancorp
may
not,
among
other
things,
declare
or
pay
any
dividends
or
distributions
on,
or
redeem,
purchase,
acquire,
or
make
a
liquidation
payment
with
respect
to,
any
of
its
capital
stock,
including
common
stock.
As
permitted
under
the
terms
of
the
2035
Debenture,
as
of
December
31,
2015,
Bancorp
has
deferred
the
payment
of
fifteen
quarters
of
interest
and
the
cumulative
amount
of
interest
in
arrears
not
paid,
including
interest
on
unpaid
interest,
was
$1,863,000.
Accordingly,
Bancorp
will
not
be
able
to
pay
dividends
on
its
common
stock
until
the
interest
deferrals
on
the
2035
Debentures
have
been
paid
in
full.
43
Table of Contents
Item 6. Selected Financial Data
The
following
summary
financial
information
is
derived
from
the
audited
financial
statements
of
Bancorp,
except
as
noted
below.
The
information
is
a
summary
and
should
be
read
in
conjunction
with
Bancorp’s
audited
financial
statements
and
Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations.
Balance
Sheet
Data
Total
assets
Total
loans,
net
Investment
securities
held
to
maturity
Non-performing
loans
Total
non-performing
assets
Deposits
Long-term
debt
Total
liabilities
Stockholders’
equity
Book
value
per
common
share
Common
shares
outstanding
Other
Data:
Number
of:
Full
service
retail
banking
facilities
Full-time
equivalent
employees
Summary Financial and Other Data
At
December
31,
2015
2014
2013
2012
2011
(dollars
in
thousands,
except
per
share
information)
$
$
762,079
$
589,656
76,133
8,974
10,718
523,771
115,000
675,623
86,456
5.93
$
10,088,879
776,328
$
633,882
59,616
12,845
14,792
543,814
115,000
692,518
83,810
5.68
$
10,067,379
799,603
$
602,813
44,661
11,035
20,007
571,249
115,000
716,834
82,769
5.57
$
10,066,679
852,118
$
651,709
34,066
37,495
48,936
599,394
115,000
743,122
108,996
8.18
$
10,066,679
901,163
693,303
40,357
31,432
51,364
652,757
115,000
794,698
106,465
7.93
10,066,679
4
150
4
160
4
142
4
127
4
152
44
Table of Contents
Summary of Operations
Interest
income
Interest
expense
Net
interest
income
Provision
for
loan
losses
Net
interest
income
after
provision
for
loan
losses
Non-interest
income
Non-interest
expense
Income
(loss)
before
income
tax
provision
Provision
for
income
taxes
Net
income
(loss)
Per
Common
Share
Data:
Basic
earnings
(loss)
per
common
share
Diluted
earnings
(loss)
per
common
share
Cash
dividends
declared
per
common
share
Weighted
number
of
common
shares
outstanding
basic
Weighted
number
of
common
shares
outstanding
diluted
$
$
$
$
$
2015
31,153
$
8,992
22,161
(280)
22,441
6,110
23,926
4,625
90
4,535
$
For
the
Year
Ended
December
31,
2014
2013
2012
2011
(dollars
in
thousands,
except
per
share
information)
31,816
$
8,634
23,182
831
22,351
4,325
23,736
2,940
31
2,909
$
33,792
$
9,184
24,608
16,520
8,088
5,529
30,072
(16,455)
8,710
(25,165)
$
39,057
$
12,502
26,555
765
25,790
4,123
23,527
6,386
2,658
3,728
$
44,501
15,587
28,914
4,612
24,302
2,510
24,050
2,762
1,210
1,552
0.21
$
0.21
$
-
$
10,083,942
10,112,653
0.06
$
0.06
$
-
$
10,067,379
10,096,387
(2.64)
$
(2.64)
$
-
$
10,066,679
10,066,679
0.22
$
0.22
$
-
$
10,066,679
10,066,679
(0.02)
(0.02)
-
10,066,679
10,066,679
45
Table of Contents
Performance Ratios:
Return
on
average
assets
Return
on
average
equity
Dividend
payout
ratio
Net
interest
margin
Interest
rate
spread
Non-interest
expense
to
average
assets
Efficiency
ratio*
Asset Quality Ratios:
Average
equity
to
average
assets
Nonperforming
assets
to
total
assets
at
end
of
period
Nonperforming
loans
to
total
gross
loans
at
end
of
period**
Allowance
for
loan
losses
to
net
loans
at
end
of
period**
Allowance
for
loan
losses
to
nonperforming
loans
at
end
of
period**
Key Operating Ratios
2015
0.59%
5.45%
-%
3.18%
3.14%
3.09%
83.82%
For
the
Year
Ended
December
31,
2014
2013
2012
2011
0.37%
3.55%
-%
3.26%
3.24%
3.07%
86.25%
(3.00%)
(24.45%)
-%
3.28%
3.24%
3.64%
79.73%
0.42%
3.50%
-%
3.33%
3.27%
2.69%
66.00%
0.17%
1.47%
-%
3.39%
3.34%
2.56%
59.32%
10.75%
10.42%
12.28%
12.11%
11.27%
1.41%
1.91%
2.50%
5.74%
1.41%
1.86%
1.69%
5.37%
1.45%
1.47%
1.95%
2.68%
5.70%
4.23%
3.74%
97.59%
73.45%
106.38%
46.61%
82.52%
*
The
efficiency
ratio
is
non-interest
expenses
less
foreclosure
costs
as
a
percentage
of
net
interest
income
plus
non-interest
income.
**Includes
held
for
sale
loans.
46
Table of Contents
Average Balance Sheet
The
following
table
contains
for
the
periods
indicated
information
regarding
the
total
dollar
amounts
of
interest
income
from
interest-earning
assets
and
the
resulting
average
yields,
the
total
dollar
amount
of
interest
expense
on
interest-bearing
liabilities
and
the
resulting
average
costs,
net
interest
income,
and
the
net
yield
on
interest-earning
assets.
2015
Year
Ended
December
31,
2014
2013
Average
Volume
Interest
Yield/Cost
Average
Volume
Interest
Yield/Cost
Average
Volume
Interest
Yield/Cost
(dollars
in
thousands)
$ 618,309
$ 29,734
709
43,254
395
25,227
10,806
315
697,596
31,153
75,505
$ 773,101
4.81%
$ 622,935
$ 30,574
746
1.64%
44,468
205
1.57%
9,518
2.92%
33,560
291
4.47%
710,481
31,816
4.91%
$ 648,959
$ 32,838
601
1.68%
33,797
35
2.15%
1,269
0.87%
65,436
318
4.48%
749,461
33,792
5.06%
1.78%
2.76%
0.49%
4.51%
75,125
$ 785,606
88,431
$ 837,892
ASSETS
Loans
(1)
Investments
(2)
Mortgage-backed
securities
Other
interest-earning
assets
(3)
Total
interest-earning
assets
Non-interest
earning
assets
Total
Assets
LIABILITIES
AND
STOCKHOLDERS'
EQUITY
Savings
and
checking
deposits
Certificates
of
deposits
Borrowings
$ 244,810
293,174
139,124
677,108
12,857
Non-interest
bearing
liabilities
Stockholders'
equity
83,136
Total
liabilities
and
stockholders'
equity
$ 773,101
Total
interest-bearing
liabilities
635
3,415
4,942
8,992
417
3,511
4,706
8,634
0.26%
$ 261,513
1.16%
293,682
3.55%
139,122
1.33%
694,317
9,457
81,832
$ 785,606
0.16%
$ 273,750
1.20%
311,654
3.38%
139,119
1.24%
724,523
10,450
102,919
$ 837,892
768
3,938
4,478
9,184
0.28%
1.26%
3.22%
1.27%
Net
interest
income
and
Interest
rate
spread
Net
interest
margin
Average
interest-earning
assets
to
average
interest-bearing
liabilities
$ 22,161
3.14%
3.18%
103.03%
$ 23,182
3.24%
3.26%
102.33%
$ 24,608
3.24%
3.28%
103.44%
(1)
Held
for
sale
and
non-accrual
loans
are
included
in
the
average
balances
and
in
the
computation
of
yields.
(2)
Bancorp
does
not
have
any
tax-exempt
investment
securities.
(3)
Other
interest
earning
assets
include
interest
bearing
deposits
in
other
banks,
federal
funds,
and
FHLB
stock
investments.
47
Table of Contents
Rate Volume Table
Year
ended
December
31,
2015
vs.
Year
ended
December
31,
2014
Changes
Due
to
Volume
(1)
Total
Change
Year
ended
December
31,
2014
vs.
Year
ended
December
31,
2013
Changes
Due
to
Volume
(1)
Rate
(1)
Total
Change
Rate
(1)
(dollars
in
thousands)
Interest-earning
assets
Loans
Investments
Mortgage-backed
securities
Other
interest-earning
assets
Total
interest
income
Interest-bearing
liabilities
Savings
and
checking
deposits
Certificates
of
deposits
Borrowings
Total
interest
expense
$
(840)
$
(37)
190
24
(663)
218
(96)
236
358
(223)
$
(20)
246
(663)
(660)
(43)
(6)
-
(49)
(617)
$
(17)
(56)
687
(3)
(2,264)
$
145
170
(27)
(1,976)
(1,277)
$
179
178
(277)
(1,197)
261
(90)
236
407
(351)
(427)
228
(550)
(20)
(215)
-
(235)
(987)
(34)
(8)
250
(779)
(331)
(212)
228
(315)
Net
change
in
net
interest
income
$
(1,021)
$
(611)
$
(410)
$
(1,426)
$
(962)
$
(464)
(1)
Changes
in
interest
income/expense
not
arising
from
volume
or
rate
variances
are
allocated
proportionately
to
rate
and
volume.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Bancorp
provides
a
wide
range
of
personal
and
commercial
banking
services.
Personal
services
include
mortgage
lending
and
various
other
lending
services
as
well
as
deposit
products
such
as
personal
internet
banking
and
online
bill
pay,
checking
accounts,
individual
retirement
accounts,
money
market
accounts,
and
savings
and
time
deposit
accounts.
Commercial
services
include
commercial
secured
and
unsecured
lending
services
as
well
as
business
internet
banking,
corporate
cash
management
services
and
deposit
services.
Bancorp
also
provides
ATMs,
debit
cards,
mortgage
lending,
safe
deposit
boxes,
and
telephone
banking,
among
other
products
and
services.
Bancorp
has
experienced
an
improved
level
of
profitability
in
2015,
as
well
as
increased
loan
originations
and
expanded
local
economic
activity.
In
addition,
Bancorp’s
levels
of
non-performing
assets,
foreclosed
real
estate
and
provision
for
loan
losses
have
improved
in
2015.
Management
believes
that,
while
conditions
continue
to
improve,
and
real
estate
values
in
Bancorp’s
market
area
continue
to
stabilize
and,
in
some
cases
improve,
including
job
losses
and
other
factors,
still
exist
for
some
customers.
The
interest
rate
spread
between
Bancorp’s
cost
of
funds
and
what
it
earns
on
loans
has
decreased
from
2014
levels
and
competition
for
new
loans
and
deposits
remains
strong.
Bancorp’s
total
loan
portfolio
has
decreased
from
2014
primarily
due
to
management’s
decision
to
sell
a
larger
portion
of
newly
originated
residential
loans
on
the
secondary
market.
Bancorp
has
experienced
a
decrease
in
loan
delinquencies
in
part
due
to
an
improved
economy.
The
allowance
for
loan
losses
decreased
from
levels
needed
in
2014
primarily
due
to
an
improvement
in
the
level
of
problem
assets
at
December
31,
2015
compared
to
the
level
at
December
31,
2014
and
management’s
assessment
of
the
collectability
of
the
loans
in
Bancorp’s
portfolio.
In
addition,
Bancorp
has
seen
a
decrease
in
foreclosed
real
estate
in
2015
as
compared
to
2014.
This
is
due
to
an
improved
economy
resulting
in
a
lower
level
of
loan
foreclosures
in
2015
compared
to
2014.
Bancorp
expects
to
experience
similar
market
conditions
in
2016
as
2015,
as
the
national
and
local
economies
continue
to
improve
and
as
the
employment
environment
in
its
market
improves.
However,
the
Federal
Reserve
Board
has
ended
its
quantitative
easing
program
and
recently
raised
the
federal
funds
interest
rate,
and
if
interest
rates
increase,
demand
for
borrowing
may
decrease
and
Bancorp’s
interest
rate
spread
could
decrease.
Bancorp
will
continue
to
manage
loan
and
deposit
pricing
against
the
risks
of
rising
costs
of
its
deposits
and
borrowings.
Interest
rates
are
outside
the
control
of
Bancorp,
so
it
must
attempt
to
balance
its
pricing
and
duration
of
its
loan
portfolio
against
the
risks
of
rising
costs
of
its
deposits
and
borrowings.
48
Table of Contents
The
continued
success
and
attraction
of
Anne
Arundel
County,
Maryland,
and
vicinity,
will
also
be
important
to
Bancorp’s
ability
to
originate
and
grow
its
mortgage
loans
and
deposits,
as
will
Bancorp’s
continued
focus
on
maintaining
a
low
overhead.
If
the
volatility
in
the
market
and
the
economy
continues
or
worsens,
Bancorp’s
business,
financial
condition,
results
of
operations,
access
to
funds
and
the
price
of
its
stock
could
be
materially
and
adversely
impacted.
On
November
23,
2009,
Bancorp
and
the
Bank
each
entered
into
a
supervisory
agreement
with
the
OTS.
The
Bank’s
supervisory
agreement
was
replaced
by
a
formal
agreement
dated
April
23,
2013
with
the
OCC.
On
October
15,
2015,
the
Bank
was
notified
by
the
OCC
that
its
agreement
was
terminated.
Bancorp’s
supervisory
agreement
was
enforced
by
the
FRB.
On
January
21,
2016,
Bancorp
was
notified
by
FRB
that
its
agreement
was
terminated.
See
“Supervisory
and
Formal
Agreements”
for
more
information.
Critical Accounting Policies and Recent Accounting Pronouncements
Bancorp’s
significant
accounting
policies
and
recent
accounting
pronouncements
are
set
forth
in
Note
1
of
the
consolidated
financial
statements
which
are
included
elsewhere
in
this
Form
10-K.
Of
these
significant
accounting
policies,
Bancorp
considers
the
policies
regarding
the
allowance
for
loan
losses,
the
valuation
of
foreclosed
real
estate,
the
evaluation
of
other
than
temporary
impairment
of
investment
securities
and
the
valuation
of
the
deferred
tax
asset
to
be
its
most
critical
accounting
policies,
given
the
uncertainty
in
evaluating
the
level
of
the
allowance
required
to
cover
credit
losses
inherent
in
the
loan
portfolio
and
the
material
effect
that
such
judgments
can
have
on
the
results
of
operations
and
future
taxable
income.
In
addition,
changes
in
economic
conditions
can
have
a
significant
impact
on
real
estate
values
of
underlying
collateral
affecting
the
allowance
for
loan
losses
and
therefore
the
provision
for
loan
losses
and
results
of
operations
as
well
as
the
valuation
of
foreclosed
real
estate.
Bancorp
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.
Bancorp’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.
Recent Accounting Pronouncements – Under
ASU
2014-04,
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon
Foreclosure ,
a
creditor
will
be
considered
to
have
physical
possession
of
residential
real
estate
property
that
is
collateral
for
a
residential
mortgage
loan
and
therefore
should
reclassify
the
loan
to
other
real
estate
owned
when
either
(a)
the
creditor
obtains
legal
title
to
the
property
upon
completion
of
a
foreclosure,
or
(b)
the
borrower
conveys
all
interest
in
the
real
estate
property
to
the
lender
to
satisfy
that
loan
even
though
legal
title
may
not
have
passed.
The
amendments
are
effective
for
public
business
entities
for
annual
periods
and
interim
periods
within
those
annual
periods,
beginning
after
December
15,
2014.
Bancorp
adopted
this
guidance
on
January
1,
2015
using
a
prospective
transition
method;
it
did
not
have
material
impact
on
the
consolidated
financial
statements.
The
guidance
requires
disclosure
of
both
(1)
the
amount
of
foreclosed
residential
real
estate
property
held
by
the
creditor
and
(2)
the
recorded
investment
in
consumer
mortgage
loans
collateralized
by
residential
real
estate
property
that
are
in
the
process
of
foreclosure.
Bancorp
has
included
these
disclosures
in
Note
16
Fair
Values
of
Financial
Instruments.
Under
ASU
2014-09,
Revenue from Contracts with Customers ,
establishes
a
comprehensive
revenue
recognition
standard
for
virtually
all
industries
under
U.S.
GAAP,
including
those
that
previously
followed
industry-specific
guidance.
The
revenue
standard’s
core
principal
is
built
on
the
contract
between
a
vendor
and
a
customer
for
the
provision
of
goods
and
services.
It
attempts
to
depict
the
exchange
of
rights
and
obligations
between
the
parties
in
the
pattern
of
revenue
recognition
based
on
the
consideration
to
which
the
vendor
is
entitled.
The
new
standard
applies
to
all
public
entities
for
annual
periods
beginning
after
December
15,
2017.
Early
adoption
is
permitted
only
as
of
annual
reporting
periods
beginning
after
December
15,
2016
including
interim
periods
within
that
year.
Bancorp
has
evaluated
the
effect
of
ASU
2014-09
and
believes
adoption
will
not
have
a
material
effect
on
the
Consolidated
Financial
Statements.
49
Table of Contents
Under
ASU
2016-01,
Amendment to the Recognition and Measurement Guidance for Financial Instruments ,
an
entity
is
required
to:
(i)
measure
equity
investments
at
fair
value
through
net
income,
with
certain
exceptions;
(ii)
present
in
Other
Comprehensive
Income
the
changes
in
instrument-specific
credit
risk
for
financial
liabilities
measured
using
the
fair
value
option;
(iii)
present
financial
assets
and
financial
liabilities
by
measurement
category
and
form
of
financial
asset;
(iv)
calculate
the
fair
value
of
financial
instruments
for
disclosure
purposes
based
on
an
exit
price
and;
(v)
assess
a
valuation
allowance
on
deferred
tax
assets
related
to
unrealized
losses
of
Available
For
Sale
debt
securities
in
combination
with
other
deferred
tax
assets.
The
Amendment
provides
an
election
to
subsequently
measure
certain
nonmarketable
equity
investments
at
cost
less
any
impairment
and
adjusted
for
certain
observable
price
changes.
The
Amendment
also
requires
a
qualitative
impairment
assessment
of
such
equity
investments
and
amends
certain
fair
value
disclosure
requirements.
The
new
standard
takes
effect
in
2018
for
public
companies.
Early
adoption
is
only
permitted
for
the
provision
related
to
instrument-specific
credit
risk
and
the
fair
value
disclosure
exemption
provided
to
nonpublic
entities.
Bancorp
has
evaluated
the
effect
of
ASU
2016-01
and
believes
adoption
will
not
have
a
material
effect
on
the
Consolidated
Financial
Statements.
In
February
2016,
the
FASB
issued
ASU
2016-02,
“
Leases .”
The
new
standard
establishes
a
right-to-use
(ROU)
model
that
requires
a
lessee
to
record
a
ROU
asset
and
a
lease
liability
on
the
balance
sheet
for
all
leases
with
terms
longer
than
12
months.
Leases
will
be
classified
as
either
finance
or
operating,
with
classification
affecting
the
pattern
of
expense
recognition
in
the
income
statement.
The
new
standard
is
effective
for
fiscal
years
beginning
after
December
15,
2018,
including
interim
periods
within
those
fiscal
years.
A
modified
retrospective
transition
approach
is
required
for
lessees
for
capital
and
operating
leases
existing
at,
or
entered
into
after,
the
beginning
of
the
earliest
comparative
period
presented
in
the
financial
statements,
with
certain
practical
expedients
available.
The
Company
is
currently
evaluating
the
impact
this
update
will
have
on
its
consolidated
financial
position
and
results
of
operations.
Financial Condition
Total
assets
decreased
by
$14,249,000,
or
1.8%
to
$762,079,000
at
December
31,
2015,
compared
to
the
$776,328,000
at
December
31,
2014.
The
following
discusses
the
material
changes
between
the
December
31,
2015
and
2014
statements
of
financial
condition.
Cash
Cash
and
cash
equivalents
increased
by
$10,256,000,
or
30.8%,
to
$43,591,000
at
December
31,
2015,
compared
to
$33,335,000
at
December
31,
2014.
This
increase
was
primarily
due
to
proceeds
received
in
2015
from
loan
payoffs
and
higher
proceeds
from
a
larger
portion
of
newly
originated
residential
loans
sold
on
the
secondary
market,
partially
offset
by
cash
used
in
2015
to
purchase
additional
securities
for
the
investment
portfolio.
Investments
Investment
securities
held
to
maturity
increased
by
$16,517,000,
or
27.7%,
to
$76,133,000
at
December
31,
2015,
compared
to
$59,616,000
at
December
31,
2014.
This
increase
was
primarily
due
to
management’s
decision
to
purchase
additional
securities
to
gain
higher
yields
than
cash
held
in
federal
funds
sold
since
loan
demand
was
low.
Loans
Loans Held For Sale. Loans
held
for
sale
increased
by
$6,038,000,
or
84.3%,
to
$13,203,000
at
December
31,
2015,
compared
to
$7,165,000
at
December
31,
2014.
This
increase
was
primarily
due
to
an
increase
in
residential
loans
originated
for
sale
on
the
secondary
market
and
the
timing
of
loans
pending
sale
as
of
December
31,
2015
compared
to
December
31,
2014.
Loans Receivable. Total
loans
receivable,
net
decreased
by
$44,226,000,
or
7.0%,
to
$589,656,000
at
December
31,
2015,
compared
to
$633,882,000
at
December
31,
2014.
This
decrease
was
primarily
due
to
a
decrease
in
portfolio
loan
demand
and
higher
loan
payoffs
than
expected
in
2015.
In
addition,
the
allowance
for
loan
losses
decreased
by
$677,000,
or
7.2%,
at
December
31,
2015
to
$8,758,000,
compared
to
$9,435,000
at
December
31,
2014.
This
decrease
in
the
allowance
was
primarily
due
to
a
decreased
loan
portfolio,
and
an
improvement
in
the
level
of
problem
loans
at
December
31,
2015
compared
to
the
level
at
December
31,
2014
and
management’s
assessment
of
the
collectability
of
the
loans
in
Bancorp’s
portfolio.
50
Table of Contents
Foreclosed Real Estate
Foreclosed
real
estate
decreased
by
$203,000,
or
10.4%,
to
$1,744,000
at
December
31,
2015,
compared
to
$1,947,000
at
December
31,
2014.
This
decrease
was
primarily
due
to
an
increase
in
the
number
of
foreclosed
properties
sold
in
2015
that
were
included
in
the
balance
as
of
December
31,
2014,
and
the
lower
level
of
loans
foreclosed
on
in
2015
compared
to
2014.
Premises and Equipment
Premises
and
equipment
decreased
by
$869,000,
or
3.5%,
to
$24,290,000
at
December
31,
2015,
compared
to
$25,159,000
at
December
31,
2014.
This
decrease
was
primarily
due
to
the
annual
depreciation
taken
on
premises
and
equipment
in
2015,
partially
offset
by
new
fixed
assets
acquired
in
2015.
Accrued Interest Receivable and Other Assets
Accrued
interest
receivable
and
other
assets
decreased
by
$1,452,000,
or
15.6%,
to
$7,836,000
at
December
31,
2015,
compared
to
$9,288,000
at
December
31,
2014.
This
decrease
is
primarily
due
to
a
reimbursement
of
a
security
deposit
in
2015.
Liabilities
Deposits. Total
deposits
decreased
by
$20,043,000,
or
3.7%,
to
$523,771,000
at
December
31,
2015,
compared
to
$543,814,000
at
December
31,
2014.
This
decrease
was
primarily
the
result
of
management’s
decision
to
not
renew
higher
priced
certificates
of
deposit
given
the
higher
amount
of
cash
received
from
loan
payoffs
and
proceeds
received
from
loans
sold
on
the
secondary
market.
FHLB-Atlanta Advances. FHLB-Atlanta
advances
at
December
31,
2015
were
$115,000,000,
which
was
unchanged
from
December
31,
2014.
There
were
no
contractual
advance
payoffs
scheduled
during
2015
and
no
additional
advances
were
needed.
Subordinated Debentures. As
of
December
31,
2015,
Bancorp
had
outstanding
approximately
$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
Bancorp
and
Wells
Fargo
Bank,
National
Association
as
Trustee.
The
2035
Debentures
pay
interest
quarterly
at
a
floating
rate
of
interest
of
3-month
LIBOR
(0.32%
December
31,
2015)
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
Bancorp,
as
defined
in
the
2035
Indenture.
The
2035
Debentures
became
redeemable,
in
whole
or
in
part,
by
Bancorp
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
Bancorp.
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.
Bancorp
has
entered
into
an
agreement
which,
taken
collectively,
fully
and
unconditionally
guarantees
the
Capital
Securities
subject
to
the
terms
of
the
guarantee.
Under
the
terms
of
the
2035
Debenture,
Bancorp
is
permitted
to
defer
the
payment
of
interest
on
the
2035
Debentures
for
up
to
20
consecutive
quarterly
periods,
provided
that
no
event
of
default
has
occurred
and
is
continuing.
As
of
December
31,
2015,
Bancorp
has
deferred
the
payment
of
fifteen
quarters
of
interest
and
the
cumulative
amount
of
interest
in
arrears
not
paid,
including
interest
on
unpaid
interest,
was
$1,863,000.
Subordinated Notes and Series A Preferred Stock. On
November
15,
2008,
Bancorp
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
$7,000,000.
Each
unit
consists
of
6,250
shares
of
Bancorp's
Series
A
8.0%
Non-Cumulative
Convertible
Preferred
Stock
and
Bancorp's
Subordinated
Notes
(“Subordinated
Notes”)
in
the
original
principal
amount
of
$50,000.
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
Bancorp
at
any
time
beginning
on
December
31,
2009
until
maturity,
which
is
December
31,
2018.
Dividends
will
not
be
paid
on
Bancorp’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
Bancorp’s
board
of
directors
declare
any
dividends
on
the
Series
A
Preferred
Stock
and
any
unpaid
dividends
are
not
cumulative.
51
Table of Contents
Dividends
on
the
Series
A
Preferred
Stock
have
not
been
paid
since
the
first
quarter
of
2012
because
Bancorp
has
not
received
approval
from
the
Federal
Reserve
to
pay
such
dividends.
Series B Preferred Stock. On
November
21,
2008,
Bancorp
entered
into
an
agreement
with
the
United
States
Department
of
the
Treasury
(“Treasury”),
pursuant
to
which
Bancorp
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
Bancorp’s
common
stock,
par
value
$0.01
per
share,
for
an
aggregate
purchase
price
of
$23,393,000.
On
September
25,
2013,
the
Treasury
sold
all
of
its
23,393
shares
of
Series
B
Preferred
Stock
to
outside
investors
as
part
of
their
ongoing
efforts
to
wind
down
and
recover
its
remaining
investments
under
the
Troubled
Asset
Relief
Program
(“TARP”).
The
terms
of
the
Series
B
Preferred
Stock
remain
the
same.
The
Treasury
continues
to
hold
the
Warrant.
The
Series
B
Preferred
Stock
qualifies
as
Tier
1
capital
and
pays
cumulative
compounding
dividends
at
the
rate
of
9%
per
annum.
The
Series
B
Preferred
Stock
may
be
redeemed
by
Bancorp.
The
Series
B
Preferred
Stock
has
no
maturity
date
and
ranks
pari
passu
with
Bancorp’s
existing
Series
A
Preferred
Stock,
in
terms
of
dividend
payments
and
distributions
upon
liquidation,
dissolution
and
winding
up
of
Bancorp.
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,
Bancorp’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
Bancorp’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.
In
connection
with
the
sale
by
the
Treasury
of
the
Series
B
Preferred
Stock,
the
Federal
Reserve
obtained
waivers
from
the
outside
investors
who
purchased
the
Series
B
Preferred
Stock
in
which
such
investors
agreed
not
to
exercise
their
right
to
elect
directors,
and
certain
other
voting
or
control
rights,
without
the
prior
approval
of
the
Federal
Reserve
Board.
Dividends
on
the
Series
B
Preferred
Stock
have
not
been
paid
since
the
first
quarter
of
2012
because
Bancorp
has
not
received
approval
from
the
Federal
Reserve
to
pay
such
dividends.
As
of
December
31,
2015,
Bancorp
had
cumulative
dividends
and
interest
in
arrears
on
the
Series
B
Preferred
Stock
of
$7,033,000.
Accordingly,
Bancorp
will
not
be
able
to
pay
dividends
on
its
common
stock
until
the
dividends
in
arrearage
on
its
Series
B
Preferred
Stock
has
been
paid
in
full
and
until
Bancorp
declares
and
pays
a
dividend
on
its
Series
A
preferred
stock.
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.
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.
Off-Balance Sheet Arrangements .
Bancorp
has
certain
outstanding
commitments
and
obligations
that
could
impact
Bancorp’s
financial
condition,
liquidity,
revenues
or
expenses.
These
commitments
and
obligations
include
standby
letters
of
credit,
home
equity
lines
of
credit,
loan
commitments,
lines
of
credit,
and
loans
sold
and
serviced
with
limited
repurchase
provisions.
Standby
letters
of
credit,
which
are
conditional
commitments
of
Bancorp
to
guarantee
performance
of
customers
to
various
municipalities,
decreased
$1,420,000,
or
19.3%,
as
of
December
31,
2015
to
$5,937,000,
compared
to
$7,357,000
as
of
December
31,
2014.
Bancorp
continues
to
experience
a
decrease
in
demand
from
its
customers
for
letter
of
credit
requirements.
Bancorp
requires
collateral
supporting
these
letters
of
credit
as
deemed
necessary,
and
believes
that
the
proceeds
obtained
through
a
liquidation
of
such
collateral
would
be
sufficient
to
cover
the
maximum
potential
amount
of
future
payments
required
under
the
corresponding
guarantees.
The
current
amount
of
the
liability
for
guarantees
under
standby
letters
of
credit
issued
as
of
December
31,
2015
and
2014
was
$115,000
and
$314,000,
respectively.
52
Table of Contents
Unadvanced
construction
commitments
decreased
$15,061,000,
or
41.6%,
as
of
December
31,
2015
to
$21,101,000,
compared
to
$36,162,000
as
of
December
31,
2014.
This
decrease
was
primarily
the
result
of
decreased
construction
activity
in
2015
and
the
resulting
lower
level
of
new
construction
loan
originations.
Home
equity
lines
of
credit
decreased
$1,104,000,
or
12.9%,
as
of
December
31,
2015
to
$7,467,000,
compared
to
$8,571,000
as
of
December
31,
2014.
This
decrease
was
primarily
due
to
management’s
decision
to
not
aggressively
seek
new
lines
of
credit
and
lower
customer
demand
for
home
equity
loans
in
2015
because
of
lower
home
values
in
the
marketplace.
Home
equity
lines
of
credit
allow
the
borrowers
to
draw
funds
up
to
a
specified
loan
amount,
from
time
to
time.
Bancorp’s
management
believes
it
has
sufficient
liquidity
resources
to
have
the
funding
available
as
these
borrowers
draw
on
these
loans.
Mortgage
loan
commitments
increased
$1,113,000,
or
52.5%,
as
of
December
31,
2015
to
$3,233,000,
compared
to
$2,120,000
as
of
December
31,
2014.
This
increase
was
primarily
due
to
the
timing
of
loan
commitments
at
year
end.
Loan
commitments
are
obligations
of
Bancorp
to
provide
loans,
and
such
commitments
are
made
in
the
usual
course
of
business,
however,
these
obligations
can
and
do
fluctuate
based
on
the
timing
of
when
new
loans
are
entered
into.
Lines
of
credit,
which
are
obligations
of
Bancorp
to
fund
loans
made
to
certain
borrowers,
increased
$3,345,000,
or
14.0%,
to
$27,189,000
as
of
December
31,
2015,
compared
to
$23,844,000
as
of
December
31,
2014.
The
increase
was
a
result
of
slightly
higher
demand
for
this
type
of
loan
product
during
2015.
Bancorp’s
management
believes
it
has
sufficient
liquidity
resources
to
have
the
funding
available
as
these
borrowers
draw
on
these
loans.
Loans
sold
and
serviced
with
limited
repurchase
provisions
increased
$26,860,000,
or
70.2%,
to
$65,107,000
as
of
December
31,
2015,
compared
to
$38,247,000
as
of
December
31,
2014.
This
increase
was
primarily
due
to
an
increase
in
demand
for
new
residential
loan
originated
for
sale
on
the
secondary
market
in
2015
and
management’s
decision
to
sell
a
larger
portion
of
the
new
loan
originations
with
servicing
retained
by
Bancorp.
Management
typically
retains
servicing
on
those
loans
that
are
originated
in
Bancorp’s
primary
market
area.
Bancorp
uses
the
same
credit
policies
in
making
commitments
and
conditional
obligations
as
it
does
for
its
on-balance
sheet
instruments.
Except
for
the
liability
recorded
for
standby
letters
of
credit
at
December
31,
2015,
liabilities
for
credit
losses
associated
with
these
commitments
were
not
material
at
December
31,
2015
and
2014.
Comparison of Results of Operations for the Years Ended December 31, 2015 and 2014.
General. Net
income
increased
$1,626,000,
or
55.9%,
to
$4,535,000
for
the
year
ended
December
31,
2015
compared
to
$2,909,000
for
the
year
ended
December
31,
2014.
Earnings
per
common
share,
after
the
effect
of
dividends
declared
on
preferred
stock
and
amortization
of
discount
on
preferred
stock,
increased
to
$0.21
per
common
share
for
the
year
ended
December
31,
2015
compared
to
$0.06
per
common
share
for
the
year
ended
December
31,
2014.
This
increase
in
net
income
was
primarily
due
to
higher
non-interest
income
and
a
lower
provision
for
loan
losses,
partially
offset
by
lower
net
interest
income
in
2015
compared
to
2014.
Net Interest Income. Net
interest
income
(interest
earned
net
of
interest
charges)
decreased
$1,021,000,
or
4.4%,
to
$22,161,000
for
the
year
ended
December
31,
2015,
compared
to
$23,182,000
for
the
year
ended
December
31,
2014.
This
decrease
was
primarily
due
to
a
decrease
in
Bancorp’s
loan
portfolio
and
from
higher
interest
expense
on
deposits
and
borrowings.
Bancorp’s
interest
rate
spread
declined
10
basis
points
to
3.14%
for
the
year
ended
December
31,
2015,
compared
to
3.24%
for
the
year
ended
December
31,
2014.
Provision for Loan Losses. Bancorp’s
loan
portfolio
is
subject
to
varying
degrees
of
credit
risk
and
an
allowance
for
loan
losses
is
maintained
to
absorb
losses
inherent
in
its
loan
portfolio.
Credit
risk
includes,
but
is
not
limited
to,
the
potential
for
borrower
default
and
the
failure
of
collateral
to
be
worth
what
the
Bank
determined
it
was
worth
at
the
time
of
the
granting
of
the
loan.
The
Bank
monitors
its
loan
portfolio
loan
delinquencies
at
least
as
often
as
monthly.
All
loans
that
are
delinquent
and
all
loans
within
the
various
categories
of
the
Bank’s
portfolio
as
a
group
are
evaluated.
The
Bank’s
Board,
with
the
advice
and
recommendation
of
the
Bank’s
loss
mitigation
committee,
estimates
an
allowance
to
be
set
aside
for
loan
losses.
Included
in
determining
the
calculation
are
such
factors
as
historical
losses
for
each
loan
portfolio,
current
market
value
of
the
loan’s
underlying
collateral,
inherent
risk
contained
within
the
portfolio
after
considering
the
state
of
the
general
economy,
economic
trends,
consideration
of
particular
risks
inherent
in
different
kinds
of
lending
and
consideration
of
known
information
that
may
affect
loan
collectibility.
53
Table of Contents
During
the
year
ended
December
31,
2015,
the
provision
for
loan
losses
was
($280,000)
compared
to
$831,000
for
the
year
ended
December
31,
2014.
This
decrease
of
$1,111,000
was
primarily
due
to
lower
total
loans
and
improved
asset
quality
at
December
31,
2015
compared
to
December
31,
2014
and
lower
net
charge-offs
taken
in
2015
compared
to
2014.
The
total
allowance
for
loan
losses
decreased
$677,000,
or
7.2%
to
$8,758,000
as
of
December
31,
2015,
compared
to
$9,435,000
as
of
December
31,
2014.
This
decrease
in
the
allowance
was
primarily
due
to
a
decreased
loan
portfolio,
and
an
improvement
in
the
level
of
criticized
loans
at
December
31,
2015
compared
to
the
level
at
December
31,
2014
and
management’s
assessment
of
the
collectability
of
the
loans
in
Bancorp’s
portfolio.
Non-Interest Income. Total
non-interest
income
increased
$1,785,000,
or
41.3%,
to
$6,110,000
for
the
year
ended
December
31,
2015
compared
to
$4,325,000
for
the
year
ended
December
31,
2014.
Revenues
from
mortgage
banking
activities
increased
$1,328,000,
or
83.0%,
to
$2,928,000
for
the
year
ended
December
31,
2015,
compared
to
$1,600,000
for
the
year
ended
December
31,
2014.
This
increase
was
primarily
a
result
of
higher
residential
loan
originations
sold
on
the
secondary
market
in
2015,
compared
to
2014.
Real
estate
commissions
increased
$285,000,
or
27.6%,
to
$1,319,000
for
the
year
ended
December
31,
2015,
compared
to
$1,034,000
for
the
year
ended
December
31,
2014.
This
increase
was
primarily
the
result
of
an
improvement
in
general
business
conditions
in
Bancorp’s
market
and
a
resulting
increase
in
commercial
sales
and
leasing
in
2015
compared
to
2014.
Real
estate
management
fees
decreased
$84,000,
or
11.3%,
to
$658,000
for
the
year
ended
December
31,
2015,
compared
to
$742,000
for
the
year
ended
December
31,
2014.
This
decrease
was
primarily
due
to
a
decrease
in
properties
managed
in
2015
compared
to
2014.
Other
non-interest
income
increased
$256,000,
or
27.0%,
to
$1,205,000
for
the
year
ended
December
31,
2015,
compared
to
$949,000
for
the
year
ended
December
31,
2014.
This
increase
was
primarily
due
to
an
approximate
$88,000
gain
recorded
for
the
sale
of
collateral
from
a
subsidiary
investment,
and
higher
fees
collected
for
credit
reports
and
appraisals,
partially
offset
by
lower
income
recorded
for
the
fair
value
of
interest
rate
lock
commitments
and
mandatory
contracts
in
2015,
compared
to
2014.
Non-Interest Expenses. Total
non-interest
expense
increased
$190,000,
or
0.8%,
to
$23,926,000
for
the
year
ended
December
31,
2015
compared
to
$23,736,000
for
the
year
ended
December
31,
2014.
Compensation
and
related
expenses
increased
$976,000,
or
6.7%,
to
$15,630,000
for
the
year
ended
December
31,
2015,
compared
to
$14,654,000
for
the
year
ended
December
31,
2014.
This
increase
was
primarily
the
result
of
hiring
certain
higher
level
employees
in
2015,
including
senior
management
and
credit
department
personnel,
and
an
increase
in
commissions
on
real
estate
loan
sales.
As
of
December
31,
2015,
Bancorp
had
152
full-time
equivalent
employees
compared
to
150
at
December
31,
2014.
Occupancy
expense
decreased
$56,000,
or
3.2%,
to
$1,676,000
for
the
year
ended
December
31,
2015,
compared
to
$1,732,000
for
the
year
ended
December
31,
2014.
This
decrease
was
primarily
due
to
lower
maintenance
costs
and
utilities
expenses
in
2015.
Foreclosed
real
estate
expenses,
net
increased
$220,000,
or
2,200.0%,
to
$230,000
for
the
year
ended
December
31,
2015,
compared
to
$10,000
for
the
year
ended
December
31,
2014.
This
increase
was
primarily
due
to
higher
expenses
and
writedowns
associated
with
the
properties
and
lower
gains
from
sales
compared
to
2014.
Included
in
expenses
for
2015
were
writedowns
of
approximately
$58,000
and
other
expenses
of
approximately
$221,000,
partially
offset
by
net
gains
on
sale
of
REO
of
approximately
$49,000.
54
Table of Contents
Legal
fees
increased
$38,000,
or
12.0%,
to
$354,000
for
the
year
ended
December
31,
2015,
compared
to
$316,000
the
year
ended
December
31,
2014.
This
increase
was
primarily
due
to
additional
law
firms
used
in
2015
for
customer
loans
compared
to
2014.
The
FDIC
assessment
decreased
$97,000,
or
7.3%,
to
$1,234,000
for
the
year
ended
December
31,
2015,
compared
to
$1,331,000
for
the
year
ended
December
31,
2014.
This
decrease
was
primarily
the
result
of
a
decreased
level
of
net
assets
in
2015
used
by
the
FDIC
to
calculate
assessment
charge.
Professional
fees
decreased
$34,000,
or
3.7%,
to
$887,000
for
the
year
ended
December
31,
2015,
compared
to
$921,000
for
the
year
ended
December
31,
2014.
This
decrease
was
primarily
the
result
of
a
decrease
in
accounting
fees,
partially
offset
by
an
increase
in
consulting
fees
for
loan
reviews,
marketing
and
loan
workouts
in
2015
compared
to
2014.
Advertising
fees
increased
$73,000,
or
10.6%,
to
$760,000
for
the
year
ended
December
31,
2015,
compared
to
$687,000
for
the
year
ended
December
31,
2014.
This
increase
was
primarily
due
a
marketing
campaign
in
2015
for
new
online
banking
products
offered
by
Bancorp.
Online
charges
decreased
$43,000,
or
4.7%,
to
$864,000
for
the
year
ended
December
31,
2015,
compared
to
$907,000
for
the
year
ended
December
31,
2014.
This
decrease
was
due
to
cost
savings
realized
by
a
newly
negotiated
contract
for
core
processing
in
late
2014.
Credit
report
and
appraisal
fees
decreased
$117,000,
or
13.1%,
to
$773,000
for
the
year
ended
December
31,
2015,
compared
to
$890,000
for
the
year
ended
December
31,
2014.
This
decrease
was
due
to
a
lower
level
of
appraisals
ordered
for
fewer
problem
assets
in
2015.
Other
non-interest
expense
decreased
$770,000,
or
33.7%,
to
$1,518,000
for
the
year
ended
December
31,
2015,
compared
to
$2,288,000
for
the
year
ended
December
31,
2014.
This
decrease
was
primarily
the
result
of
a
lower
reserve
required
on
the
improved
quality
of
standby
letters
of
credit
in
2015
and
the
increased
fair
value
of
interest
rate
lock
commitments
and
mandatory
forward
contracts
in
2015,
compared
to
2014.
Income Taxes. Income
taxes
increased
$59,000,
or
190.3%,
to
$90,000
for
the
year
ended
December
31,
2015,
compared
to
$31,000
for
the
year
ended
December
31,
2014.
This
increase
in
the
income
tax
provision
in
2015
was
due
to
higher
net
income
and
a
higher
provision
calculated
based
on
an
alternative
minimum
tax
calculation.
Liquidity and Capital Resources
In
2015,
Bancorp’s
sources
of
liquidity
were
loan
repayments,
maturing
investments,
deposits,
borrowed
funds,
and
proceeds
from
loans
sold
on
the
secondary
market.
Bancorp
considers
core
deposits
stable
funding
sources
and
includes
all
deposits,
except
time
deposits
of
$100,000
or
more.
The
Bank’s
experience
has
been
that
a
substantial
portion
of
certificates
of
deposit
renew
at
time
of
maturity
and
remain
on
deposit
with
the
Bank.
Additionally,
loan
payments,
maturities,
deposit
growth
and
earnings
contributed
to
Bancorp’s
flow
of
funds.
In
addition
to
its
ability
to
generate
deposits,
Bancorp
has
external
sources
of
funds,
which
may
be
drawn
upon
when
desired.
The
primary
source
of
external
liquidity
is
an
available
line
of
credit
with
the
FHLB-Atlanta.
The
Bank’s
credit
availability
under
the
FHLB
of
Atlanta’s
credit
availability
program
was
$192,672,000
at
December
31,
2015,
of
which
$115,000,000
was
outstanding.
The
Bank’s
credit
availability
is
based
on
the
level
of
collateral
pledged
up
to
25%
of
total
assets.
55
Table of Contents
The
maturities
of
these
long-term
advances
at
December
31,
2015
were
as
follows
(dollars
in
thousands):
Rate
1.81%
to
1.83%
$
2.43%
to
4.05%
2.58%
to
3.43%
4.00%
$
Amount
15,000
70,000
15,000
15,000
115,000
Maturity
2016
2017
2018
2019
As
of
December
31,
2015,
Bancorp
had
outstanding
an
aggregate
of
$24,119,000
principal
amount
of
subordinated
debt,
consisting
of
the
2035
Debentures
and
the
Subordinated
Notes.
The
2035
Debentures
total
$20,619,000
in
principal
amount
pay
interest
quarterly
at
a
floating
rate
of
interest
of
3-month
LIBOR
(0.32%
December
31,
2015)
plus
200
basis
points,
and
mature
on
January
7,
2035.
The
Subordinated
Notes
total
$3,500,000
and
pay
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
Bancorp
at
any
time
beginning
on
December
31,
2009
until
maturity,
which
is
December
31,
2018.
As
of
December
31,
2015,
Bancorp
had
$3,233,000
outstanding
in
mortgage
loan
commitments,
and
unadvanced
construction
commitments
of
$21,101,000
which
Bancorp
expects
to
fund
from
the
sources
of
liquidity
described
above.
These
amounts
do
not
include
undisbursed
lines
of
credit,
home
equity
lines
of
credit
and
standby
letters
of
credit,
in
the
aggregate
amount
of
$40,593,000
at
December
31,
2015,
which
Bancorp
anticipates
it
will
be
able
to
fund,
if
required,
from
these
liquidity
sources
in
the
regular
course
of
business.
In
addition
to
the
foregoing,
the
payment
of
dividends
is
a
use
of
cash,
but
is
not
expected
to
have
a
material
effect
on
liquidity.
As
of
December
31,
2015,
Bancorp
had
no
material
commitments
for
capital
expenditures.
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
Bank’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.
Management
believes,
as
of
December
31,
2015,
that
the
Bank
meets
all
capital
adequacy
requirements
to
which
it
is
subject.
In
2013,
the
federal
banking
agencies
have
adopted
proposals
that
substantially
amended
the
regulatory
capital
rules
applicable
to
us
and
the
Bank.
The
amended
rules
established
new
higher
capital
ratio
requirements,
narrowed
the
definitions
of
capital,
imposed
new
operating
restrictions
on
banking
organizations
with
insufficient
capital
buffers
and
increased
the
risk
weighting
of
certain
assets.
The
amended
rules
became
effective
with
respect
to
us
and
the
Bank
in
January
2015,
with
certain
requirements
to
be
phased
in
beginning
in
2016.
Management
believes
that
the
current
capital
levels
of
Bancorp
and
the
Bank
are
sufficient
to
comply
with
the
standards
under
the
new
rules.
We
anticipate
that
our
primary
sources
of
liquidity
in
fiscal
2016
will
be
from
loan
repayments,
maturing
investments,
deposits,
borrowed
funds,
and
proceeds
from
loans
sold
on
the
secondary
market.
We
believe
that
these
sources
of
liquidity
will
be
sufficient
for
Bancorp
to
meet
its
liquidity
needs
over
the
next
twelve
months.
Cash
generated
from
these
liquidity
sources
may
be
affected
by
a
number
of
factors.
See
“Risk
Factors”
for
a
discussion
of
the
factors
that
can
negatively
impact
the
amount
of
cash
we
could
receive.
56
Table of Contents
Contractual Obligations
The
following
table
contains,
for
the
periods
indicated,
information
regarding
the
financial
obligations
owing
by
Bancorp
under
contractual
obligations.
Long-term
borrowings
Subordinated
debentures
Operating
lease
obligations
Certificates
of
Deposit
Payments due by period
(dollars
in
thousands)
Total
Less than
1 year
1 to 3 years
3 to 5 years
More than
5 years
$
115,000
$
15,000
$
85,000
$
15,000
$
-
24,119
-
3,500
-
20,619
666
152
286
228
277,778
169,298
78,234
30,246
-
-
Total
$
417,563
$
184,450
$
167,020
$
45,474
$
20,619
Qualitative Information About Market Risk. The
principal
objective
of
Bancorp’s
interest
rate
risk
management
is
to
evaluate
the
interest
rate
risk
included
in
balance
sheet
accounts,
determine
the
level
of
risks
appropriate
given
Bancorp’s
business
strategy,
operating
environment,
capital
and
liquidity
requirements
and
performance
objectives,
and
manage
the
risk
consistent
with
Bancorp’s
interest
rate
risk
management
policy.
Through
this
management,
Bancorp
seeks
to
reduce
the
vulnerability
of
its
operations
to
changes
in
interest
rates.
The
Board
of
Directors
of
Bancorp
is
responsible
for
reviewing
assets/liability
policies
and
interest
rate
risk
position.
The
Board
of
Directors
reviews
the
interest
rate
risk
position
on
a
quarterly
basis
and,
in
connection
with
this
review,
evaluates
Bancorp’s
business
activities
and
strategies,
the
effect
of
those
strategies
on
Bancorp’s
net
interest
margin
and
the
effect
that
changes
in
interest
rates
will
have
on
Bancorp’s
loan
portfolio.
While
continuous
movement
of
interest
rates
is
certain,
the
extent
and
timing
of
these
movements
is
not
always
predictable.
Any
movement
in
interest
rates
has
an
effect
on
Bancorp’s
profitability.
Bancorp
faces
the
risk
that
rising
interest
rates
could
cause
the
cost
of
interest
bearing
liabilities,
such
as
deposits
and
borrowings,
to
rise
faster
than
the
yield
on
interest
earning
assets,
such
as
loans
and
investments.
Bancorp’s
interest
rate
spread
and
interest
rate
margin
also
may
be
negatively
impacted
in
a
declining
interest
rate
environment
even
though
Bancorp
generally
borrows
at
short-term
interest
rates
and
lends
at
longer-term
interest
rates.
This
is
because
loans
and
other
interest
earning
assets
may
be
prepaid
and
replaced
with
lower
yielding
assets
before
the
supporting
interest
bearing
liabilities
reprice
downward.
Bancorp’s
interest
rate
margin
may
also
be
negatively
impacted
in
a
flat
or
inverse-yield
curve
environment.
Mortgage
origination
activity
tends
to
increase
when
interest
rates
trend
lower
and
decrease
when
interest
rates
rise.
Bancorp’s
primary
strategy
to
control
interest
rate
risk
is
to
sell
substantially
all
long-term
fixed-rate
loans
in
the
secondary
market.
Bancorp
did
retain
a
higher
amount
of
certain
loans,
including
residential
mortgages
with
floating
rates,
but
these
loans
typically
have
interest
rates
that
reset
after
a
period
of
three
to
seven
years.
To
further
control
interest
rate
risk
related
to
its
loan
portfolio,
Bancorp
originates
construction
loans
that
typically
have
terms
of
one
year
or
less.
The
turnover
in
construction
loan
portfolio
assists
Bancorp
in
maintaining
a
reasonable
level
of
interest
rate
risk.
Quantitative Information About Market Risk. The
primary
market
risk
facing
Bancorp
is
interest
rate
risk.
From
an
enterprise
prospective,
Bancorp
manages
this
risk
by
striving
to
balance
its
loan
origination
activities
with
the
interest
rate
market.
Bancorp
attempts
to
maintain
a
substantial
portion
of
its
loan
portfolio
in
short-term
loans
such
as
construction
loans.
This
has
proven
to
be
an
effective
hedge
against
rapid
increases
in
interest
rates
as
the
construction
loan
portfolio
reprices
rapidly.
The
matching
of
maturity
or
repricing
of
interest
earning
assets
and
interest
bearing
liabilities
may
be
analyzed
by
examining
the
extent
to
which
these
assets
and
liabilities
are
interest
rate
sensitive
and
by
monitoring
the
Bank’s
interest
rate
sensitivity
gap.
An
interest
earning
asset
or
interest
bearing
liability
is
interest
rate
sensitive
within
a
specific
time
period
if
it
will
mature
or
reprice
within
that
time
period.
The
difference
between
rate
sensitive
assets
and
rate
sensitive
liabilities
represents
the
Bank’s
interest
sensitivity
gap.
57
Table of Contents
Exposure
to
interest
rate
risk
is
actively
monitored
by
Bancorp’s
management.
Its
objective
is
to
maintain
a
consistent
level
of
profitability
within
acceptable
risk
tolerances
across
a
broad
range
of
potential
interest
rate
environments
.
Bancorp
uses
the
BankersGPS
model
to
monitor
its
exposure
to
interest
rate
risk,
which
calculates
changes
in
the
economic
value
of
equity
(“EVE”).
The
following
table
represents
Bancorp’s
EVE
at
December
31,
2015.
The
EVE
was
calculated
based
upon
information
provided
to
the
OCC.
ECONOMIC
VALUE
OF
EQUITY
(EVE)
Change
In
Rates
$
Amount
Economic
Value
of
Equity
%
Change
$
Change
+400bp
+300bp
+200bp
+100bp
0bp
-100bp
-200bp
-300bp
-400bp
91,143
94,472
98,602
103,703
109,716
116,642
124,258
133,183
143,482
(18,573)
(15,244)
(11,114)
(4,013)
6,926
14,542
23,467
33,766
(16.9)%
(13.9)%
(10.1)%
(5.5)%
6.3%
13.3%
21.4%
30.8%
The
above
table
suggests
that
if
interest
rates
rise
100
basis
points,
Bancorp’s
market
value
of
equity
would
decrease
in
value
by
$4,013,000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not
applicable.
Item 8. Financial Statements and Supplementary Data
Financial
statements
and
supplementary
data
are
included
herein
at
pages
F-1
through
F-56,
and
incorporated
herein
by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures,
Under
the
supervision
and
with
the
participation
of
Bancorp's
management,
including
its
Chief
Executive
Officer
and
Chief
Financial
Officer,
Bancorp
has
evaluated
the
effectiveness
of
its
disclosure
controls
and
procedures
as
of
December
31,
2015.
Based
upon
this
evaluation,
the
Chief
Executive
Officer
and
Chief
Financial
Officer
have
concluded
that,
as
of
the
period
covered
by
this
report,
Bancorp’s
disclosure
controls
and
procedures
were
effective
in
reaching
a
reasonable
level
of
assurance
that
(i)
information
required
to
be
disclosed
by
Bancorp
in
the
reports
that
it
files
or
submits
under
the
Securities
Exchange
Act
of
1934
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
Bancorp
in
its
reports
that
it
files
or
submits
under
the
Securities
Exchange
Act
of
1934
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.
58
Table of Contents
Bancorp’s
management,
with
the
participation
of
its
Chief
Executive
Officer
and
Chief
Financial
Officer,
also
conducted
an
evaluation
of
Bancorp’s
internal
control
over
financial
reporting,
as
defined
in
Exchange
Act
Rule
13a-15(f),
to
determine
whether
any
changes
occurred
during
the
quarter
ended
December
31,
2015,
that
have
materially
affected,
or
are
reasonably
likely
to
materially
affect,
Bancorp’s
internal
control
over
financial
reporting.
Based
on
that
evaluation,
there
was
no
such
change
during
the
quarter
ended
December
31,
2015.
A
control
system,
no
matter
how
well
conceived
and
operated,
can
provide
only
reasonable,
not
absolute,
assurance
that
the
objectives
of
the
control
system
are
met.
Further,
the
design
of
a
control
system
must
reflect
the
fact
that
there
are
resource
constraints,
and
the
benefits
of
controls
must
be
considered
relative
to
their
costs.
Because
of
the
inherent
limitations
in
all
control
systems,
no
evaluation
of
controls
can
provide
absolute
assurance
that
all
control
issues
and
instances
of
fraud,
if
any,
within
Bancorp
have
been
detected.
Because
of
the
inherent
limitations
in
a
cost-effective
control
system,
misstatements
due
to
error
or
fraud
may
occur
and
not
be
detected.
Management’s Report on Internal Control over Financial Reporting
Bancorp
is
responsible
for
the
preparation,
integrity,
and
fair
presentation
of
the
consolidated
financial
statements
included
in
this
annual
report.
The
consolidated
financial
statements
and
notes
included
in
this
annual
report
have
been
prepared
in
conformity
with
accounting
principles
generally
accepted
in
the
United
States
of
America,
and
as
such,
include
some
amounts
that
are
based
on
management’s
best
estimates
and
judgments.
Bancorp’s
management
is
responsible
for
establishing
and
maintaining
effective
internal
control
over
financial
reporting.
The
system
of
internal
control
over
financial
reporting,
as
it
relates
to
the
consolidated
financial
statements,
is
evaluated
for
effectiveness
by
management
and
tested
for
reliability
through
a
program
of
internal
audits
and
management
testing
and
review.
Actions
are
taken
to
correct
potential
deficiencies
as
they
are
identified.
Any
system
of
internal
control,
no
matter
how
well
designed,
has
inherent
limitations,
including
the
possibility
that
a
control
can
be
circumvented
or
overridden
and
misstatements
due
to
error
or
fraud
may
occur
and
not
be
detected.
Also,
because
of
changes
in
conditions,
internal
control
effectiveness
may
vary
over
time.
Accordingly,
even
an
effective
system
of
internal
control
will
provide
only
reasonable
assurance
with
respect
to
financial
statement
preparation.
Management
assessed
the
effectiveness
of
Bancorp’s
internal
control
over
financial
reporting
as
of
December
31,
2015.
In
making
this
assessment,
it
used
the
criteria
set
forth
by
the
Committee
of
Sponsoring
Organizations
of
the
Treadway
Commission
(COSO)
in
Internal Control – Integrated Framework 2013 .
Based
on
its
assessment,
management
concluded
that
as
of
December
31,
2013,
Bancorp’s
internal
control
over
financial
reporting
is
effective
and
meets
the
criteria
of
the
Internal Control – Integrated Framework .
This
Annual
Report
does
not
include
an
attestation
report
of
Bancorp’s
registered
public
accounting
firm
regarding
internal
control
over
financial
reporting.
Management’s
report
was
not
subject
to
attestation
by
Bancorp’s
registered
public
accounting
firm
pursuant
to
a
provision
of
the
Dodd-Frank
Act
which
eliminates
such
requirement
for
“smaller
reporting
companies”,
as
defined
in
SEC
regulations.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The
information
contained
in
Item
4.1,
“Executive
Officers
of
the
Registrant,”
of
this
Form
10-K
is
incorporated
herein
by
reference.
The
additional
information
required
by
this
item
will
be
included
in
Bancorp’s
definitive
Proxy
Statement
relating
to
the
2016
Annual
Stockholders
Meeting
(“Proxy
Statement”),
which
Bancorp
intends
to
file
with
the
Securities
and
Exchange
Commission
within
120
days
after
December
31,
2015,
and
is
incorporated
herein
by
reference.
Bancorp
has
adopted
a
code
of
ethics
that
applies
to
its
employees,
including
its
chief
executive
officer,
chief
financial
officer,
and
persons
performing
similar
functions
and
directors.
A
copy
of
the
code
of
ethics
is
filed
as
an
exhibit
to
Bancorp’s
Form
10-K
for
the
year
ended
December
31,
2003,
which
was
filed
with
the
Securities
and
Exchange
Commission
on
March
25,
2004.
Bancorp
intends
to
satisfy
the
disclosure
requirement
under
Item
10
of
Form
8-K
regarding
any
future
amendments
to
a
provision
of
its
code
of
ethics
by
posting
such
information
on
Bancorp’s
website:
www.severnbank.com.
59
Table of Contents
Item 11. Executive Compensation
The
information
required
by
this
item
will
be
included
in
Bancorp’s
Proxy
Statement,
which
Bancorp
intends
to
file
with
the
Securities
and
Exchange
Commission
within
120
days
after
December
31,
2015,
and
is
incorporated
herein
by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The
following
table
provides
certain
information
as
of
December
31,
2015
with
respect
to
Bancorp’s
equity
based
compensation
plans.
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
339,800
-
339,800
Weighted-average
exercise price of
outstanding
options, warrants
and rights
$4.83
-
$4.83
Number of
securities
remaining available
for future issuance
under equity
compensation
plans
250,501
-
250,501
Plan Category
Equity compensation
plan approved by security
holders
Equity compensation plans
not approved by security
holders
Total
The
additional
information
required
by
this
item
will
be
included
in
Bancorp’s
Proxy
Statement,
which
Bancorp
intends
to
file
with
the
Securities
and
Exchange
Commission
within
120
days
after
December
31,
2015,
and
is
incorporated
herein
by
reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The
information
required
by
this
item
will
be
included
in
Bancorp’s
Proxy
Statement,
which
Bancorp
intends
to
file
with
the
Securities
and
Exchange
Commission
with
120
days
after
December
31,
2015,
and
is
incorporated
herein
by
reference.
Item 14. Principal Accounting Fees and Services
The
information
required
by
this
item
will
be
included
in
Bancorp’s
Proxy
Statement,
which
Bancorp
intends
to
file
with
the
Securities
and
Exchange
Commission
with
120
days
after
December
31,
2015,
and
is
incorporated
herein
by
reference.
60
Table of Contents
Item 15. Exhibits, Financial Statement Schedules
PART IV
(a)
The
following
consolidated
financial
statements
of
Bancorp
and
its
wholly
owned
sub-sidiaries
are
filed
as
part
of
this
report:
1.
Financial
Statements
●
●
●
●
●
●
Report
of
BDO
USA,
LLP,
independent
registered
public
accounting
firm.
Consolidated
statements
of
financial
condition
at
December
31,
2015
and
December
31,
2014
Consolidated
statements
of
operations
for
the
years
ended
December
31,
2015
and
2014,
Consolidated
statements
of
stockholders’
equity
for
the
years
ended
December
31,
2015
and
2014
Consolidated
statements
of
cash
flows
for
the
years
ended
December
31,
2015
and
2014
Notes
to
consolidated
financial
statements
2.
3.
Exhibit No.
3.1
3.2
4.1
10.1+
10.2+
10.3+
10.4+
10.5+
10.6
10.7
10.8
10.9
10.10+
10.11+
10.12
14.1
21.1*
23.1*
31.1*
31.2*
32
*
101*
Financial
Statement
Schedules
All
financial
statement
schedules
have
been
omitted,
as
required
information
is
either
inapplicable
or
included
in
the
consolidated
financial
statements
or
related
notes.
Exhibits
The
following
exhibits
are
filed
as
part
of
this
report:
Description of Exhibit
Articles
of
Incorporation
of
Severn
Bancorp,
Inc.,
as
amended
(1)
Bylaws
of
Severn
Bancorp,
Inc.,
as
amended
(2)
Warrant
for
Purchase
of
Shares
of
Common
Stock
(3)
Stock
Option
Plan
(4)
Employee
Stock
Ownership
Plan
(5)
Form
of
Common
Stock
Option
Agreement
(6)
2008
Equity
Incentive
Plan
(7)
Form
of
Subscription
Agreement
(8)
Form
of
Subordinated
Note
(8)
Purchase
Agreement,
dated
November
21,
2008,
between
Bancorp
and
the
United
States
Department
of
the
Treasury
(3)
Supervisory
Agreement
dated
November
23,
2009
between
Severn
Savings
Bank,
FSB
and
the
OTS
(9)
Supervisory
Agreement
dated
November
23,
2009
between
Severn
Bancorp,
Inc.
and
the
OTS
(9)
Form
of
Director
Option
Award
(10)
Form
of
Employee
Option
Award
(10)
Formal
Agreement
between
Severn
Savings
Bank,
FSB
and
the
Office
of
the
Comptroller
of
the
Currency,
dated
April
23,
2013.
(11)
Code
of
Ethics
(12)
Subsidiaries
of
Severn
Bancorp,
Inc.
Consent
of
BDO
USA,
LLP
Certification
of
CEO
pursuant
to
Section
302
of
Sarbanes-Oxley
Act
of
2002
Certification
of
CFO
pursuant
to
Section
302
of
Sarbanes-Oxley
Act
of
2002
Certification
of
CEO
and
CFO
pursuant
to
Section
906
of
Sarbanes-Oxley
Act
of
2002
The
following
financial
statements
from
Severn
Bancorp,
Inc.
Annual
Report
on
Form
10-K
as
of
December
31,
2015,
formatted
in
XBRL
(Extensible
Business
Reporting
Language):
(i)
the
Consolidated
Statements
of
Financial
Condition;
(ii)
the
Consolidated
Statements
of
Operations;
(iii)
the
Consolidated
Statements
of
Stockholders’
Equity;
(iv)
the
Consolidated
Statements
of
Cash
Flows;
and
(v)
the
Notes
to
Consolidated
Financial
Statements.
61
Table of Contents
+
Denotes
management
contract,
compensatory
plan
or
arrangement.
*
Filed
herewith.
(1)
Incorporated
by
reference
from
Bancorp’s
Annual
Report
on
Form
10-K
for
fiscal
year
ended
December
31,
2008
and
filed
with
the
Securities
and
Exchange
Commission
on
March
11,
2009.
(2)
Incorporated
by
reference
from
Bancorp’s
Annual
Report
on
Form
10-K
for
fiscal
year
ended
December
31,
2007
and
filed
with
Securities
and
Exchange
Commission
on
March
12,
2008.
(3)
Incorporated
by
reference
from
Bancorp’s
Current
Report
on
Form
8-K
filed
with
the
Securities
and
Exchange
Commission
on
November
24,
2008.
(4)
Incorporated
by
reference
from
Bancorp's
Annual
Report
on
Form
10-K
filed
for
fiscal
year
ended
December
31,
2004
and
with
the
Securities
and
Exchange
Commission
on
March
21,
2005.
(5)
Incorporated
by
reference
from
Bancorp's
Registration
Statement
on
Form
10
filed
with
the
Securities
and
Exchange
Commission
on
June
7,
2002.
(6)
Incorporated
by
reference
from
Bancorp’s
Current
Report
on
Form
8-K
filed
with
the
Securities
and
Exchange
Commission
on
March
20,
2006.
(7)
Incorporated
by
reference
from
Bancorp’s
2008
Proxy
Statement
filed
with
Securities
and
Exchange
Commission
on
March
12,
2008.
(8)
Incorporated
by
reference
from
Bancorp’s
Current
Report
on
Form
8-K
filed
with
the
Securities
and
Exchange
Commission
on
November
18,
2008.
(9)
Incorporated
by
reference
from
Bancorp's
Annual
Report
on
Form
10-K
for
fiscal
year
ended
December
31,
2009
and
filed
with
the
Securities
and
Exchange
Commission
on
March
15,
2010.
(10)
Incorporated
by
reference
from
Bancorp's
Quarterly
Report
on
Form
10-Q
for
the
quarter
ended
June
30,
2010
and
filed
with
the
Securities
and
Exchange
Commission
on
August
13,
2010.
(11)
Incorporated
by
reference
from
Bancorp's
Quarterly
Report
on
Form
10-Q
for
the
quarter
ended
March
31,
2013
and
filed
with
the
Securities
and
Exchange
Commission
on
May
8,
2013.
(12)
Incorporated
by
reference
from
Bancorp's
Annual
Report
on
Form
10-K
for
fiscal
year
ended
December
31,
2003
and
filed
with
the
Securities
and
Exchange
Commission
on
March
25,
2004.
62
Table of Contents
SIGNATURES
Pursuant
to
the
requirements
of
Section
13
or
15(d)
of
the
Securities
Exchange
Act
of
1934,
the
registrant
has
duly
caused
this
report
to
be
signed
on
its
behalf
by
the
undersigned,
thereunto
duly
authorized.
March
17,
2016
SEVERN
BANCORP,
INC.
/s/
Alan
J.
Hyatt
Alan
J.
Hyatt
Chairman
of
the
Board,
President,
Chief
Executive
Officer
and
Director
63
Table of Contents
Pursuant
to
the
requirements
of
the
Securities
Exchange
Act
of
1934,
this
report
has
been
signed
below
by
the
following
persons
on
behalf
of
the
registrant
and
in
the
capacities
and
on
the
dates
indicated.
March
17,
2016
March
17,
2016
March
17,
2016
March
17,
2016
March
17,
2016
March
17,
2016
March
17,
2016
March
17,
2016
March
17,
2016
March
17,
2016
/
s /
Alan
J.
Hyatt
Alan
J.
Hyatt
Chairman
of
the
Board,
President,
Chief
Executive
Officer
and
Director
/s/
Thomas
G.
Bevivino
Thomas
G.
Bevivino,
Executive
Vice
President,
and
Chief
Financial
Officer
/s/
Konrad
M.
Wayson
Konrad
M.
Wayson,
Director
Vice
Chairman
of
the
Board
/s/
Raymond
S.
Crosby
Raymond
S.
Crosby,
Director
/ s
/ James
H.
Johnson,
Jr.
James
H.
Johnson,
Jr.,
Director
/s/
David
S.
Jones
David
S.
Jones,
Director
/ s
/ Eric
M.
Keitz
Eric
M.
Keitz,
Director
/s/
John
A.
Lamon
III
John
A.
Lamon
III,
Director
/s/
Albert
W.
Shields
Albert
W.
Shields,
Director
/s/
Mary
Kathleen
Sulick
Mary
Kathleen
Sulick,
Director
64
Table of Contents
Board
of
Directors
and
Stockholders
Severn
Bancorp,
Inc.
Report of Independent Registered Public Accounting Firm
We
have
audited
the
accompanying
consolidated
statements
of
financial
condition
of
Severn
Bancorp,
Inc.
and
Subsidiaries
(the
“Company”)
as
of
December
31,
2015
and
2014,
and
the
related
consolidated
statements
of
operations,
stockholders’
equity,
and
cash
flows
for
the
years
then
ended.
These
consolidated
financial
statements
are
the
responsibility
of
the
Company’s
management.
Our
responsibility
is
to
express
an
opinion
on
these
financial
statements
based
on
our
audits.
We
conducted
our
audits
in
accordance
with
the
standards
of
the
Public
Company
Accounting
Oversight
Board
(United
States).
Those
standards
require
that
we
plan
and
perform
the
audit
to
obtain
reasonable
assurance
about
whether
the
financial
statements
are
free
of
material
misstatement.
The
Company
is
not
required
to
have,
nor
were
we
engaged
to
perform,
an
audit
of
its
internal
control
over
financial
reporting.
Our
audits
included
consideration
of
internal
control
over
financial
reporting
as
a
basis
for
designing
audit
procedures
that
are
appropriate
in
the
circumstances,
but
not
for
the
purpose
of
expressing
an
opinion
on
the
effectiveness
of
the
Company’s
internal
control
over
financial
reporting.
Accordingly,
we
express
no
such
opinion.
An
audit
includes
examining,
on
a
test
basis,
evidence
supporting
the
amounts
and
disclosures
in
the
financial
statements.
An
audit
also
includes
assessing
the
accounting
principles
used
and
significant
estimates
made
by
management,
as
well
as
evaluating
the
overall
financial
statement
presentation.
We
believe
that
our
audits
provide
a
reasonable
basis
for
our
opinion.
In
our
opinion,
the
consolidated
financial
statements
referred
to
above
present
fairly,
in
all
material
respects,
the
financial
position
of
Severn
Bancorp,
Inc.
and
Subsidiaries
as
of
December
31,
2015
and
2014,
and
the
results
of
their
operations
and
their
cash
flows
for
the
years
then
ended,
in
conformity
with
accounting
principles
generally
accepted
in
the
United
States
of
America.
/s/BDO USA, LLP
Harrisburg,
Pennsylvania
March
17,
2016
F-1
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
CONSOLIDATED
STATEMENTS
OF
FINANCIAL
CONDITION
(dollars
in
thousands,
except
per
share
data)
Cash
and
due
from
banks
Interest
bearing
deposits
in
other
banks
Cash
and
cash
equivalents
ASSETS
Investment
securities
held
to
maturity
(fair
value:
$76,310
at
December
31,
2015;
$60,123
at
December
31,
2014)
Loans
held
for
sale
Loans
receivable,
net
of
allowance
for
loan
losses
of
$8,758
and
$9,435
in
2015
and
2014,
respectively
Premises
and
equipment,
net
Foreclosed
real
estate
Federal
Home
Loan
Bank
stock,
at
cost
Accrued
interest
receivable
and
other
assets
Total
assets
LIABILITIES
AND
STOCKHOLDERS'
EQUITY
Liabilities
Deposits
Long-term
borrowings
Subordinated
debentures
Accrued
interest
payable
and
other
liabilities
Total
Liabilities
Stockholders’
Equity
Preferred
stock,
$0.01
par
value,
1,000,000
shares
authorized:
Preferred
stock
series
“A”,
437,500
shares
issued
and
outstanding;
$3,500
liquidation
preference
at
December
31,
2015
and
December
31,
2014
Preferred
stock
series
“B”,
23,393
shares
issued
and
outstanding;
$23,393
liquidation
preference
at
December
31,
2015
and
December
31,
2014
Common
stock,
$0.01
par
value,
20,000,000
shares
authorized;
10,088,879
and
10,067,379
shares
issued
and
outstanding,
respectively
Additional
paid-in
capital
Retained
earnings
Total
stockholders'
equity
$
$
$
December
31,
2015
2014
28,366
$
15,225
43,591
76,133
13,203
589,656
24,290
1,744
5,626
7,836
24,866
8,469
33,335
59,616
7,165
633,882
25,159
1,947
5,936
9,288
762,079
$
776,328
523,771
$
115,000
24,119
12,733
543,814
115,000
24,119
9,585
675,623
692,518
4
-
4
-
101
76,335
10,016
101
75,848
7,857
86,456
83,810
Total
liabilities
and
stockholders'
equity
$
762,079
$
776,328
The
accompanying
notes
to
consolidated
financial
statements
are
an
integral
part
of
these
statements.
F-2
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
CONSOLIDATED
STATEMENTS
OF
OPERATIONS
(dollars
in
thousands,
except
per
share
data)
Table of Contents
Interest
Income
Loans,
including
fees
Securities,
taxable
Other
Total
interest
income
Interest
Expense
Deposits
Long-term
borrowings
and
subordinated
debentures
Total
interest
expense
Net
interest
income
Provision
for
loan
losses
Net
interest
income
after
provision
for
loan
losses
Non-Interest
Income
Mortgage
banking
activities
Real
estate
commissions
Real
estate
management
fees
Other
Total
non-interest
income
Non-Interest
Expenses
Compensation
and
related
expenses
Occupancy
Foreclosed
real
estate
expenses,
net
Legal
FDIC
assessments
and
regulatory
expense
Professional
fees
Advertising
Online
charges
Credit
reports
and
appraisal
fees
Other
Total
non-interest
expenses
Income
before
income
tax
provision
Income
tax
provision
Net
income
Amortization
of
discount
on
preferred
stock
Dividends
on
preferred
stock
Net
income
available
to
common
stockholders
Basic
income
per
common
share
Diluted
income
per
common
share
Years
Ended
December
31,
2015
2014
29,734
$
1,104
315
31,153
4,050
4,942
8,992
22,161
(280)
22,441
2,928
1,319
658
1,205
6,110
15,630
1,676
230
354
1,234
887
760
864
773
1,518
23,926
4,625
90
4,535
271
2,105
2,159
$
0.21
$
0.21
$
30,574
951
291
31,816
3,928
4,706
8,634
23,182
831
22,351
1,600
1,034
742
949
4,325
14,654
1,732
10
316
1,331
921
687
907
890
2,288
23,736
2,940
31
2,909
270
2,072
567
0.06
0.06
$
$
$
$
The
accompanying
notes
to
consolidated
financial
statements
are
an
integral
part
of
these
statement
s.
F-3
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
CONSOLIDATED
STATEMENTS
OF
STOCKHOLDERS'
EQUITY
Years
Ended
December
31,
2015
and
2014
(dollars
in
thousands,
except
per
share
data)
Preferred
Stock
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Total
Stockholders’
Equity
Balance
-
December
31,
2013
$
4
$
101
$
75,374
$
7,290
$
82,769
Net
Income
Stock-based
compensation
Dividend
declared
on
Series
B
preferred
stock
Amortization
of
discount
on
Series
B
preferred
stock
Exercised
Options
(700
shares)
Balance
-
December
31,
2014
Net
Income
Stock-based
compensation
Dividend
declared
on
Series
B
preferred
stock
Amortization
of
discount
on
Series
B
preferred
stock
Exercised
Options
(21,500
shares)
-
-
-
-
-
4
-
-
-
-
-
-
-
-
-
101
-
-
-
-
-
201
-
270
3
75,848
-
120
-
271
96
2,909
-
(2,072)
(270)
-
7,857
4,535
-
(2,105)
(271)
-
2,909
201
(2,072)
-
3
83,810
4,535
120
(2,105)
-
96
Balance
-
December
31,
2015
$
4
$
101
$
76,335
$
10,016
$
86,456
The
accompanying
notes
to
consolidated
financial
statements
are
an
integral
part
of
these
statements.
F-4
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
CONSOLIDATED
STATEMENTS
OF
CASH
FLOWS
(dollars
in
thousands)
Cash
Flows
from
Operating
Activities
Net
income
Adjustments
to
reconcile
net
income
to
net
cash
provided
by
operating
activities:
Amortization
of
deferred
loan
fees
Net
amortization
of
premiums
and
discounts
Provision
for
loan
losses
Provision
for
depreciation
Provision
for
foreclosed
real
estate
Gain
on
sale
of
loans
Gain
on
sale
of
foreclosed
real
estate
Proceeds
from
loans
sold
to
others
Loans
originated
for
sale
Stock-based
compensation
expense
Decrease
(increase)
in
accrued
interest
receivable
and
other
assets
Increase
in
accrued
interest
payable
and
other
liabilities
Net
cash
provided
by
operating
activities
Cash
Flows
from
Investing
Activities
Purchase
of
investment
securities
held
to
maturity
Proceeds
from
maturing
investment
securities
held
to
maturity
Principal
collected
on
mortgage-backed
securities
held
to
maturity
Net
decrease
(increase)
in
loans
Proceeds
from
sale
of
foreclosed
real
estate
Investment
in
premises
and
equipment
Redemption
of
FHLB
stock
Net
cash
provided
by
(used
in)
investing
activities
F-5
Years
Ended
December
31,
2015
2014
$
4,535
$
2,909
(1,283)
458
(280)
1,137
58
(2,927)
(49)
160,236
(163,347)
120
1,452
1,043
(995)
239
831
1,110
-
(2,207)
(302)
92,767
(93,999)
201
(261)
1,047
1,153
1,340
(27,830)
7,000
3,855
43,555
2,428
(268)
310
(21,549)
5,000
1,355
(31,752)
8,174
(431)
254
29,050
(38,949)
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
CONSOLIDATED
STATEMENTS
OF
CASH
FLOWS
(Continued)
(dollars
in
thousands)
Cash
Flows
from
Financing
Activities
Net
decrease
in
deposits
Proceeds
from
exercise
of
options
Net
cash
used
in
financing
activities
Increase
(decrease)
in
cash
and
cash
equivalents
Cash
and
cash
equivalents
at
beginning
of
year
Years
Ended
December
31,
2015
2014
$
(20,043)
$
96
(27,435)
3
(19,947)
(27,432)
10,256
33,335
(65,041)
98,376
Cash
and
cash
equivalents
at
end
of
year
$
43,591
$
33,335
Supplemental
disclosure
of
cash
flows
information:
Cash
(received)
paid
during
year
for:
Interest
Income
taxes
Transfer
of
net
loans
to
foreclosed
real
estate
$
$
$
7,991
$
7,874
(273)
$
2,234
$
9
847
The
accompanying
notes
to
consolidated
financial
statements
are
an
integral
part
of
these
statements.
F-6
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 1 - Summary of Significant Accounting Policies
A.
B.
C.
D.
Principles of Consolidation - The
consolidated
financial
statements
include
the
accounts
of
Severn
Bancorp,
Inc.
("Bancorp"),
and
its
wholly-owned
subsidiaries,
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
consolidated
financial
statements.
Business - The
Bank's
primary
business
activity
is
the
acceptance
of
deposits
from
the
general
public
and
the
use
of
the
proceeds
for
investments
and
loan
originations.
The
Bank
is
subject
to
competition
from
other
financial
institutions.
In
addition,
the
Bank
is
subject
to
the
regulations
of
certain
federal
agencies
and
undergoes
periodic
examinations
by
those
regulatory
authorities.
Bancorp
has
no
reportable
segments.
Management
does
not
separately
allocate
expenses,
including
the
cost
of
funding
loan
demand,
between
the
retail
and
real
estate
operations
of
Bancorp.
As
such,
discrete
financial
information
is
not
available
and
segment
reporting
would
not
be
meaningful.
Estimates - The
consolidated
financial
statements
have
been
prepared
in
conformity
with
accounting
principles
generally
accepted
in
the
United
States
of
America.
In
preparing
the
financial
statements,
management
is
required
to
make
estimates
and
assumptions
that
affect
the
reported
amounts
of
assets
and
liabilities
as
of
the
date
of
the
statement
of
financial
condition
and
revenues
and
expenses
for
the
period.
Actual
results
could
differ
significantly
from
those
estimates.
Material
estimates
that
are
particularly
susceptible
to
significant
change
in
the
near-term
relate
to
the
determination
of
the
allowance
for
loan
losses,
the
fair
value
of
foreclosed
real
estate,
the
evaluation
of
other
than
temporary
impairment
of
investment
securities
and
the
valuation
allowance
of
deferred
tax
assets.
Investment Securities Held to Maturity – Investment
securities
for
which
the
Bank
has
the
positive
intent
and
ability
to
hold
to
maturity
are
reported
at
cost,
adjusted
for
premiums
and
discounts
that
are
recognized
in
interest
income
using
the
interest
method
over
the
period
to
maturity.
Declines
in
the
fair
value
of
held
to
maturity
securities
below
their
cost
that
are
deemed
to
be
other
than
temporary
are
reflected
in
earnings
as
realized
losses.
In
estimating
other
than
temporary
impairment
losses,
management
considers
(1)
the
length
of
time
and
the
extent
to
which
the
fair
value
has
been
less
than
cost,
(2)
the
financial
condition
and
near
term
prospects
of
the
issuer
and
(3)
determines
if
the
Bank
does
not
intend
to
sell
the
security
before
recovery
of
its
amortized
cost.
F-7
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 1 - Summary of Significant Accounting Policies - Continued
E.
F.
G.
H.
Federal Home Loan Bank Stock – Federal
Home
Loan
Bank
of
Atlanta
(the
“FHLB”)
stock
is
an
equity
interest
in
the
FHLB,
which
does
not
have
a
readily
determinable
fair
value
for
purposes
of
generally
accepted
accounting
principles,
because
its
ownership
is
restricted
and
it
lacks
a
market.
FHLB
stock
can
be
sold
back
only
at
par
value
of
$100
per
share
and
only
to
the
FHLB
or
another
member
institution.
As
of
December
31,
2015
and
2014,
the
Bank
owned
shares
totaling
$5,626,000
and
$5,936,000,
respectively.
The
Bank
evaluated
the
FHLB
stock
for
impairment
in
accordance
with
generally
accepted
accounting
principles.
The
Bank’s
determination
of
whether
this
investment
is
impaired
is
based
on
an
assessment
of
the
ultimate
recoverability
of
its
cost
rather
than
by
recognizing
temporary
declines
in
value.
The
determination
of
whether
a
decline
in
value
affects
the
ultimate
recoverability
of
its
cost
is
influenced
by
criteria
such
as
(1)
the
significance
of
the
decline
in
net
assets
of
the
FHLB
as
compared
to
the
capital
stock
amount
for
the
FHLB
and
the
length
of
time
this
situation
has
persisted,
(2)
commitments
by
the
FHLB
to
make
payments
required
by
law
or
regulation
and
the
level
of
such
payments
in
relation
to
the
operating
performance
of
the
FHLB,
(3)
the
impact
of
legislative
and
regulatory
changes
on
institutions
and
accordingly
on
the
customer
base
of
the
FHLB,
and
(4)
the
liquidity
position
of
the
FHLB.
Management
has
evaluated
the
FHLB
stock
for
impairment
and
believes
that
no
impairment
charge
is
necessary
as
of
December
31,
2015.
Loans Held for Sale - Loans
held
for
sale
are
carried
at
lower
of
cost
or
market
value
in
the
aggregate
based
on
investor
quotes.
Net
unrealized
losses
are
recognized
through
a
valuation
allowance
by
charges
to
income.
Derivative Financial Instruments –
The
Bank
enters
into
commitments
to
fund
residential
loans
with
intentions
of
selling
them
in
the
secondary
market.
The
Bank
also
enters
into
forward
sales
agreements
for
certain
funded
loans
and
loan
commitments.
The
Bank
records
unfunded
commitments
intended
for
loans
held
for
sale
and
forward
sale
agreements
at
fair
value
with
changes
in
fair
value
recorded
as
a
component
of
other
income.
Loans
originated
and
intended
for
sale
in
the
secondary
market
are
carried
at
lower
of
cost
or
fair
value
based
on
those
sales
commitments.
For
pipeline
loans
which
are
not
pre-sold
to
an
investor,
the
Bank
manages
the
interest
rate
risk
on
rate
lock
commitments
by
entering
into
forward
sales
contracts
of
mortgage
backed
securities,
whereby
the
Bank
obtains
the
right
to
deliver
securities
to
investors
in
the
future
at
a
specific
price.
Such
contracts
are
accounted
for
as
derivatives
and
are
recorded
at
fair
value
in
derivative
assets
or
liabilities,
with
changes
in
fair
value
recorded
in
other
income.
Loan Servicing - Mortgage
loans
held
for
sale
are
sold
either
with
the
mortgage
servicing
rights
released
or
retained
by
the
Bank.
Gains
and
losses
on
sales
of
mortgage
loans
are
recognized
based
on
the
difference
between
the
selling
price
and
the
carrying
values
of
the
loan
servicing
rights,
if
retained,
and
related
mortgage
loans
sold.
Mortgage
servicing
rights
totaled
$623,000
and
$658,000
at
December
31,
2015
and
2014,
respectively.
Loans
serviced
for
others
not
included
in
the
accompanying
consolidated
statements
of
financial
condition
totaled
$76,460,000
and
$93,332,000
at
December
31,
2015
and
2014,
respectively.
As
of
December
31,
2015,
the
Bank
was
servicing
$20,454,000
in
loans
for
Federal
Home
Loan
Mortgage
Corporation
(“FHLMC”),
$44,366,000
in
loans
for
Federal
National
Mortgage
Association
(“FNMA”)
and
$11,640,000
in
loans
for
other
investors.
F-8
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 1 - Summary of Significant Accounting Policies - Continued
I.
Loans - Loans
that
management
has
the
intent
and
ability
to
hold
for
the
foreseeable
future
or
until
maturity
or
pay-off
generally
are
reported
at
their
outstanding
unpaid
principal
balances
adjusted
for
charge-offs,
the
allowance
for
loan
losses,
and
any
deferred
fees
or
costs
on
originated
loans.
The
Bank
categorizes
the
loans
into
eight
classifications:
residential
mortgage;
construction;
land
acquisition
and
development;
land;
lines
of
credit;
commercial
real
estate;
commercial
non-real
estate;
home
equity;
and
consumer.
Interest
income
is
accrued
on
the
unpaid
principal
balance.
Loan
origination
fees,
net
of
certain
direct
origination
costs,
are
deferred
and
recognized
as
an
adjustment
of
the
related
loan
yield
using
the
interest
method.
Residential
lending
is
generally
considered
to
involve
less
risk
than
other
forms
of
lending,
although
payment
experience
on
these
loans
is
dependent
to
some
extent
on
economic
and
market
conditions
in
the
Bank's
lending
area.
Multifamily
residential,
commercial,
construction
and
other
loan
repayments
are
generally
dependent
on
the
operations
of
the
related
properties
or
the
financial
condition
of
its
borrower
or
guarantor.
Accordingly,
repayment
of
such
loans
can
be
more
susceptible
to
adverse
conditions
in
the
real
estate
market
and
the
regional
economy.
A
substantial
portion
of
the
Bank's
loans
receivable
is
mortgage
loans
secured
by
residential
and
commercial
real
estate
properties
located
in
the
State
of
Maryland.
Loans
are
extended
only
after
evaluation
by
management
of
customers'
creditworthiness
and
other
relevant
factors
on
a
case-by-case
basis.
The
Bank
generally
does
not
lend
more
than
80%
of
the
appraised
value
of
a
property
and
requires
private
mortgage
insurance
on
residential
mortgages
with
loan-to-value
ratios
in
excess
of
80%.
In
addition,
the
Bank
generally
obtains
personal
guarantees
of
repayment
from
borrowers
and/or
others
for
construction,
commercial
and
multifamily
residential
loans
and
disburses
the
proceeds
of
construction
and
similar
loans
only
as
work
progresses
on
the
related
projects.
The
accrual
of
interest
on
loans
is
discontinued
at
the
time
the
loan
is
90
days
past
due.
Past
due
status
is
based
on
contractual
terms
of
the
loan.
In
all
cases,
loans
are
placed
on
non-accrual
or
charged-off
at
an
earlier
date
if
collection
of
principal
or
interest
is
considered
doubtful.
All
interest
accrued
in
the
current
year,
but
not
collected
for
loans
that
are
placed
on
non-accrual
or
charged-off,
is
reversed
against
interest
income.
Any
interest
accrued
in
prior
years
for
loans
that
are
placed
on
non-accrual
or
charged-off
is
charged
against
the
allowance
for
loan
losses.
The
interest
on
these
loans
is
accounted
for
on
the
cash-basis
or
cost-recovery
method,
until
qualifying
for
return
to
accrual.
Loans
are
returned
to
accrual
status
when
all
the
principal
and
interest
amounts
contractually
due
are
brought
current
and
future
payments
are
reasonably
assured.
F-9
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 1 - Summary of Significant Accounting Policies – Continued
J.
Allowance for Loan Losses - An
allowance
for
loan
losses
is
provided
through
charges
to
income
in
an
amount
that
management
believes
will
be
adequate
to
absorb
losses
on
existing
loans
that
may
become
uncollectible,
based
on
evaluations
of
the
collectability
of
loans
and
prior
loan
loss
experience.
The
evaluations
take
into
consideration
such
factors
as
changes
in
the
nature
and
volume
of
the
loan
portfolio,
overall
portfolio
quality,
review
of
specific
problem
loans,
and
current
economic
conditions
that
may
affect
the
borrowers'
ability
to
pay.
Determining
the
amount
of
the
allowance
for
loan
losses
requires
the
use
of
estimates
and
assumptions,
which
is
permitted
under
generally
accepted
accounting
principles.
Actual
results
could
differ
significantly
from
those
estimates.
Management
believes
the
allowance
for
losses
on
loans
is
adequate.
While
management
uses
available
information
to
estimate
losses
on
loans,
future
additions
to
the
allowances
may
be
necessary
based
on
changes
in
economic
conditions,
particularly
in
the
State
of
Maryland.
In
addition,
various
regulatory
agencies,
as
an
integral
part
of
their
examination
process,
periodically
review
the
Bank's
allowance
for
losses
on
loans.
Such
agencies
may
require
the
Bank
to
recognize
additions
to
the
allowance
based
on
their
judgments
about
information
available
to
them
at
the
time
of
their
examination.
The
allowance
consists
of
specific
and
general
components.
The
specific
component
relates
to
loans
that
are
classified
as
impaired.
When
a
real
estate
secured
loan
becomes
impaired,
a
decision
is
made
as
to
whether
an
updated
certified
appraisal
of
the
real
estate
is
necessary.
This
decision
is
based
on
various
considerations,
including
the
age
of
the
most
recent
appraisal,
the
loan-to-value
ratio
based
on
the
original
appraisal
and
the
condition
of
the
property.
Appraised
values
are
discounted
to
arrive
at
the
estimated
selling
price
of
the
collateral,
which
is
considered
to
be
the
estimated
fair
value.
The
discounts
also
include
estimated
costs
to
sell
the
property.
For
loans
secured
by
non-real
estate
collateral,
such
as
accounts
receivable,
inventory
and
equipment,
estimated
fair
values
are
determined
based
on
the
borrower’s
financial
statements,
inventory
reports,
accounts
receivable
aging
or
equipment
appraisals
or
invoices.
Indications
of
value
from
these
sources
are
generally
discounted
based
on
the
age
of
the
financial
information
or
the
quality
of
the
assets.
For
such
loans
that
are
classified
as
impaired,
an
allowance
is
established
when
the
current
market
value
of
the
underlying
collateral
less
its
estimated
disposal
costs
has
not
been
finalized,
but
management
determines
that
it
is
likely
that
the
value
is
lower
than
the
carrying
value
of
that
loan.
Once
the
net
collateral
value
has
been
determined,
a
charge-off
is
taken
for
the
difference
between
the
net
collateral
value
and
the
carrying
value
of
the
loan.
For
loans
that
are
not
solely
collateral
dependent,
an
allowance
is
established
when
the
present
value
of
the
expected
future
cash
flows
of
the
impaired
loan
is
lower
than
the
carrying
value
of
that
loan.
The
general
component
relates
to
loans
that
are
classified
as
doubtful,
substandard
or
special
mention
that
are
not
considered
impaired,
as
well
as
non-classified
loans.
The
general
reserve
is
based
on
historical
loss
experience
adjusted
for
qualitative
factors.
These
qualitative
factors
include:
Levels
and
trends
in
delinquencies
and
nonaccruals;
Inherent
risk
in
the
loan
portfolio;
Trends
in
volume
and
terms
of
the
loan;
Effects
of
any
change
in
lending
policies
and
procedures;
Experience,
ability
and
depth
of
management;
·
·
·
·
·
· National
and
local
economic
trends
and
conditions;
and
·
Effect
of
any
changes
in
concentration
of
credit.
F-10
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 1 - Summary of Significant Accounting Policies – Continued
A
loan
is
generally
considered
impaired
if
it
meets
either
of
the
following
two
criteria:
·
·
Loans
that
are
90
days
or
more
in
arrears
(nonaccrual
loans);
or
Loans
where,
based
on
current
information
and
events,
it
is
probable
that
a
borrower
will
be
unable
to
pay
all
amounts
due
according
to
the
contractual
terms
of
the
loan
agreement.
Credit
quality
risk
ratings
include
regulatory
classifications
of
special
mention,
substandard,
doubtful
and
loss.
Loans
classified
special
mention
have
potential
weaknesses
that
deserve
management’s
close
attention.
If
uncorrected,
the
potential
weaknesses
may
result
in
deterioration
of
the
repayment
prospects.
Loans
classified
substandard
have
a
well-defined
weakness
or
weaknesses
that
jeopardize
the
liquidation
of
the
debt.
They
include
loans
that
are
inadequately
protected
by
the
current
sound
net
worth
and
paying
capacity
of
the
obligor
or
of
the
collateral
pledged,
if
any.
Loans
classified
doubtful
have
all
the
weaknesses
inherent
in
loans
classified
substandard
with
the
added
characteristic
that
collection
or
liquidation
in
full,
on
the
basis
of
current
conditions
and
facts,
is
highly
improbable.
Loans
classified
as
a
loss
are
considered
uncollectible
and
are
charged
to
the
allowance
for
loan
losses.
Loans
not
classified
are
rated
pass.
Loans
that
experience
insignificant
payment
delays
and
payment
shortfalls
generally
are
not
classified
as
impaired.
Management
determines
the
significance
of
payment
delays
and
payment
shortfalls
on
a
case-by-case
basis,
taking
into
consideration
all
of
circumstances
surrounding
the
loan
and
the
borrower,
including
the
length
of
the
delay,
the
reasons
for
the
delay,
the
borrower’s
prior
payment
record,
and
the
amount
of
the
shortfall
in
relation
to
the
principal
and
interest
owed.
K .
Foreclosed Real Estate -
Real
estate
acquired
through
or
in
the
process
of
foreclosure
is
recorded
at
fair
value
less
estimated
disposal
costs.
Management
periodically
evaluates
the
recoverability
of
the
carrying
value
of
the
real
estate
acquired
through
foreclosure
using
estimates
as
described
under
the
caption
"Allowance
for
Loan
Losses".
In
the
event
of
a
subsequent
decline,
management
provides
a
specific
reserve
to
reduce
real
estate
acquired
through
foreclosure
to
fair
value
less
estimated
disposal
cost.
Expenses
on
foreclosed
real
estate
incurred
prior
to
the
disposition
of
the
property,
such
as
maintenance,
insurance
and
taxes,
and
physical
security,
are
charged
to
expense.
Material
expenses
that
improve
the
property
to
its
best
use
are
capitalized
to
the
property.
Gains
or
losses
on
the
sale
of
foreclosed
real
estate
are
recognized
upon
disposition
of
the
property.
F-11
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 1 - Summary of Significant Accounting Policies – Continued
L.
M.
N.
O.
Transfers of Financial Assets – Transfers
of
financial
assets,
including
loan
and
loan
participation
sales,
are
accounted
for
as
sales
when
control
over
the
assets
has
been
surrendered.
Control
over
transferred
assets
is
deemed
to
be
surrendered
when
(1)
the
assets
have
been
isolated
from
Bancorp,
(2)
the
transferee
obtains
the
right
(free
of
conditions
that
constrain
it
from
taking
advantage
of
that
right)
to
pledge
or
exchange
the
transferred
assets
and
(3)
Bancorp
does
not
maintain
effective
control
over
the
transferred
assets
through
an
agreement
to
repurchase
them
before
their
maturity
or
the
ability
to
unilaterally
cause
the
holder
to
return
the
specific
assets.
Premises and Equipment - Premises
and
equipment
are
carried
at
cost
less
accumulated
depreciation.
Depreciation
and
amortization
of
premises
and
equipment
is
accumulated
by
the
use
of
the
straight-line
method
over
the
estimated
useful
lives
of
the
assets.
Additions
and
improvements
are
capitalized,
and
charges
for
repairs
and
maintenance
are
expensed
when
incurred.
The
related
cost
and
accumulated
depreciation
are
eliminated
from
the
accounts
when
an
asset
is
sold
or
retired
and
the
resultant
gain
or
loss
is
credited
or
charged
to
income.
Statement of Cash Flows - In
the
statement
of
cash
flows,
cash
and
cash
equivalents
include
cash
on
hand,
amounts
due
from
banks,
Federal
Home
Loan
Bank
of
Atlanta
overnight
deposits,
and
federal
funds
sold.
Generally,
federal
funds
are
sold
for
one
day
periods.
Income Taxes - Deferred
income
taxes
are
recognized
for
temporary
differences
between
the
financial
reporting
basis
and
income
tax
basis
of
assets
and
liabilities
based
on
enacted
tax
rates
expected
to
be
in
effect
when
such
amounts
are
realized
or
settled.
Deferred
tax
assets
are
recognized
only
to
the
extent
that
it
is
more
likely
than
not
that
such
amount
will
be
realized
based
on
consideration
of
available
evidence.
The
effect
on
deferred
tax
assets
and
liabilities
of
a
change
in
tax
rates
is
recognized
in
income
in
the
period
that
includes
the
enactment
date.
To
the
extent
that
current
available
evidence
about
the
future
raises
doubt
about
the
likelihood
of
a
deferred
tax
asset
being
realized,
a
valuation
allowance
is
established.
Bancorp
recognizes
a
tax
position
as
a
benefit
only
if
it
“more
likely
than
not”
that
the
tax
position
would
be
sustained
in
a
tax
examination,
with
a
tax
examination
presumed
to
occur.
The
amount
recognized
is
the
largest
amount
of
tax
benefit
that
is
greater
than
50%
likely
of
being
realized
on
examination.
For
tax
positions
not
meeting
the
“more
likely
than
not”
test,
no
tax
benefit
is
recorded.
The
judgment
about
the
level
of
future
taxable
income
is
inherently
subjective
and
is
reviewed
on
a
continual
basis
as
regulatory
and
business
factors
change.
Bancorp
recognizes
interest
and
penalties
on
income
taxes
as
a
component
of
income
tax
expense.
F-12
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 1 - Summary of Significant Accounting Policies – Continued
P.
Q.
R.
Earnings Per Common Share -
Basic
earnings
per
share
of
common
stock
for
the
years
ended
December
31,
2015
and
2014
is
computed
by
dividing
net
income
available
to
common
stockholders
by
the
weighted
average
number
of
shares
of
common
stock
outstanding
for
each
year.
Diluted
earnings
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
Bancorp
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
years
ended
December
31,
2015
and
2014,
because
they
were
anti-
dilutive,
were
shares
of
common
stock
issuable
upon
exercise
of
outstanding
stock
options
totaling
151,500
and
172,000,
respectively,
556,976
shares
of
common
stock
issuable
upon
the
exercise
of
a
warrant
and
437,500
shares
of
common
stock
issuable
upon
conversion
of
Bancorp’s
Series
A
preferred
stock.
Common
shares
–
weighted
average
(basic)
Common
share
equivalents
–
weighted
average
Common
shares
–
weighted
average
(diluted)
Year
Ended
December
31,
2015
10,083,942
28,711
10,112,653
2014
10,067,379
29,008
10,096,387
Advertising Cost -
Advertising
cost
is
expensed
as
incurred
and
totaled
$760,000,
and
$687,000
for
the
years
ended
December
31,
2015,
and
2014,
respectively.
Troubled Debt Restructuring – Loans
are
classified
as
troubled
debt
restructurings
if
the
Bank
grants
such
borrowers
concessions
and
it
is
deemed
that
those
borrowers
are
experiencing
financial
difficulty.
Concessions
granted
under
a
troubled
debt
restructuring
may
be
modified
by
means
of
extending
the
maturity
date
of
the
loan,
reducing
the
interest
rate
on
the
loan
to
a
rate
below
market,
a
combination
of
rate
adjustments
and
maturity
extensions,
or
by
other
means
including
covenant
modifications,
forbearances
or
other
concessions.
All
troubled
debt
restructurings,
or
TDRs,
are
considered
impaired.
F-13
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 1 - Summary of Significant Accounting Policies – Continued
S .
T.
U.
Significant Group Concentrations of Credit Risk – Most
of
Bancorp’s
activities
are
with
customers
located
in
Anne
Arundel
County,
Maryland
and
nearby
areas.
Note
2,
of
the
Notes
to
Consolidated
Financial
Statements
discusses
the
types
of
securities
that
Bancorp
currently
invests
in.
Note
3
discusses
the
types
of
lending
that
Bancorp
engages
in.
Although
Bancorp
intends
to
have
a
diversified
loan
portfolio,
its
debtors’
ability
to
honor
their
contracts
will
be
influenced
by
the
region’s
economy.
Bancorp
does
not
have
any
significant
concentrations
to
any
one
customer.
Bancorp’s
investment
portfolio
consists
principally
of
obligations
of
the
United
States
and
its
agencies.
In
the
opinion
of
management,
there
is
no
concentration
of
credit
risk
in
its
investment
portfolio.
Bancorp
places
deposits
in
correspondent
accounts
and,
on
occasion,
sells
Federal
funds
to
qualified
financial
institutions.
Management
believes
credit
risk
associated
with
correspondent
accounts
and
with
Federal
funds
sold
is
not
significant.
Therefore,
management
believes
that
these
particular
practices
do
not
subject
Bancorp
to
unusual
credit
risk.
Off-Balance Sheet Financial Instruments – In
the
ordinary
course
of
business,
Bancorp
has
entered
into
off-balance
sheet
financial
instruments
consisting
of
commitments
to
extend
credit.
Such
financial
instruments
are
recorded
in
the
consolidated
balance
sheet
when
they
are
funded.
Recent Accounting Pronouncements – Under
ASU
2014-04,
Reclassification
of
Residential
Real
Estate
Collateralized
Consumer
Mortgage
Loans
upon
Foreclosure,
a
creditor
will
be
considered
to
have
physical
possession
of
residential
real
estate
property
that
is
collateral
for
a
residential
mortgage
loan
and
therefore
should
reclassify
the
loan
to
other
real
estate
owned
when
either
(a)
the
creditor
obtains
legal
title
to
the
property
upon
completion
of
a
foreclosure,
or
(b)
the
borrower
conveys
all
interest
in
the
real
estate
property
to
the
lender
to
satisfy
that
loan
even
though
legal
title
may
not
have
passed.
The
amendments
are
effective
for
public
business
entities
for
annual
periods
and
interim
periods
within
those
annual
periods,
beginning
after
December
15,
2014.
Bancorp
adopted
this
guidance
on
January
1,
2015
using
a
prospective
transition
method;
it
did
not
have
material
impact
on
the
consolidated
financial
statements.
The
guidance
requires
disclosure
of
both
(1)
the
amount
of
foreclosed
residential
real
estate
property
held
by
the
creditor
and
(2)
the
recorded
investment
in
consumer
mortgage
loans
collateralized
by
residential
real
estate
property
that
are
in
the
process
of
foreclosure.
Bancorp
has
included
these
disclosures
in
Note
16
Fair
Values
of
Financial
Instruments.
Under
ASU
2014-09,
Revenue
from
Contracts
with
Customers,
establishes
a
comprehensive
revenue
recognition
standard
for
virtually
all
industries
under
U.S.
GAAP,
including
those
that
previously
followed
industry-specific
guidance.
The
revenue
standard’s
core
principal
is
built
on
the
contract
between
a
vendor
and
a
customer
for
the
provision
of
goods
and
services.
It
attempts
to
depict
the
exchange
of
rights
and
obligations
between
the
parties
in
the
pattern
of
revenue
recognition
based
on
the
consideration
to
which
the
vendor
is
entitled.
The
new
standard
applies
to
all
public
entities
for
annual
periods
beginning
after
December
15,
2017.
Early
adoption
is
permitted
only
as
of
annual
reporting
periods
beginning
after
December
15,
2016,
including
interim
periods
within
that
year.
Bancorp
has
evaluated
the
effect
of
ASU
2014-09
and
believes
adoption
will
not
have
a
material
effect
on
the
Consolidated
Financial
Statements.
F-14
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 1 - Summary of Significant Accounting Policies – Continued
Financial
Statements.
Under
ASU
2016-01,
Amendment
to
the
Recognition
and
Measurement
Guidance
for
Financial
Instruments,
an
entity
is
required
to:
(i)
measure
equity
investments
at
fair
value
through
net
income,
with
certain
exceptions;
(ii)
present
in
Other
Comprehensive
Income
the
changes
in
instrument-specific
credit
risk
for
financial
liabilities
measured
using
the
fair
value
option;
(iii)
present
financial
assets
and
financial
liabilities
by
measurement
category
and
form
of
financial
asset;
(iv)
calculate
the
fair
value
of
financial
instruments
for
disclosure
purposes
based
on
an
exit
price
and;
(v)
assess
a
valuation
allowance
on
deferred
tax
assets
related
to
unrealized
losses
of
Available
For
Sale
debt
securities
in
combination
with
other
deferred
tax
assets.
The
Amendment
provides
an
election
to
subsequently
measure
certain
nonmarketable
equity
investments
at
cost
less
any
impairment
and
adjusted
for
certain
observable
price
changes.
The
Amendment
also
requires
a
qualitative
impairment
assessment
of
such
equity
investments
and
amends
certain
fair
value
disclosure
requirements.
The
new
standard
takes
effect
in
2018
for
public
companies.
Early
adoption
is
only
permitted
for
the
provision
related
to
instrument-specific
credit
risk
and
the
fair
value
disclosure
exemption
provided
to
nonpublic
entities.
Bancorp
has
evaluated
the
effect
of
ASU
2016-01
and
believes
adoption
will
not
have
a
material
effect
on
the
Consolidated
Financial
Statements.
In
February
2016,
the
FASB
issued
ASU
2016-02,
“Leases.”
The
new
standard
establishes
a
right-of-use
(ROU)
model
that
requires
a
lessee
to
record
a
ROU
asset
and
a
lease
liability
on
the
balance
sheet
for
all
leases
with
terms
longer
than
12
months.
Leases
will
be
classified
as
either
finance
or
operating,
with
classification
affecting
the
pattern
of
expense
recognition
in
the
income
statement.
The
new
standard
is
effective
for
fiscal
years
beginning
after
December
15,
2018,
including
interim
periods
within
those
fiscal
years.
A
modified
retrospective
transition
approach
is
required
for
lessees
for
capital
and
operating
leases
existing
at,
or
entered
into
after,
the
beginning
of
the
earliest
comparative
period
presented
in
the
financial
statements,
with
certain
practical
expedients
available.
The
Company
is
currently
evaluating
the
impact
this
update
will
have
on
its
consolidated
financial
position
and
results
of
operations.
V.
W.
X.
Subsequent Events – Bancorp
has
evaluated
events
and
transactions
occurring
subsequent
to
December
31,
2015,
the
date
of
the
consolidated
statements
of
financial
condition,
for
items
that
should
potentially
be
recognized
or
disclosed
in
the
consolidated
financial
statements.
The
evaluation
was
conducted
through
the
date
these
consolidated
financial
statements
were
issued.
Concentration of Credit Risk – From
time
to
time,
the
Bank
will
maintain
balances
with
its
correspondent
bank
that
exceed
the
$250,000
federally
insured
deposit
limit.
Management
routinely
evaluates
the
credit
worthiness
of
the
correspondent
bank
and
does
not
feel
they
pose
a
significant
risk
to
Bancorp
.
Reclassifications – Amounts
in
the
prior
year’s
consolidated
financial
statements
have
been
reclassified
whenever
necessary
to
conform
to
the
current
year’s
presentation.
Such
reclassifications
had
no
impact
on
net
income
.
F-15
Table of Contents
Note 2 - Investment Securities
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
The
amortized
cost
and
fair
value
of
investment
securities
held
to
maturity
are
as
follows:
December
31,
2015:
US
Treasury
securities
US
Agency
securities
US
Government
sponsored
mortgage-backed
securities
Total
December
31,
2014:
US
Treasury
securities
US
Agency
securities
US
Government
sponsored
mortgage-backed
securities
Total
Amortized
Cost
Gross
Unrealized
Gross
Unrealized
Gains
Losses
(dollars
in
thousands)
$
$
$
$
21,057
20,011
35,065
76,133
27,140
17,044
15,432
59,616
$
$
$
$
276
139
41
456
465
130
48
643
$
$
$
$
8
76
195
279
29
57
50
136
$
$
$
$
Fair
Value
21,325
20,074
34,911
76,310
27,576
17,117
15,430
60,123
As
of
December
31,
2015
and
2014,
there
were
$0
and
$4,244,000,
respectively,
of
US
Treasury
securities
or
mortgage-backed
securities
pledged
by
Bancorp
as
collateral
for
borrowers’
letters
of
credit
with
Anne
Arundel
County.
Bancorp
is
no
longer
required
to
pledge
collateral
due
to
its
improved
financial
condition.
The
following
table
shows
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
December
31,
2015.
Included
in
the
table
are
four
US
Treasury
securities,
thirteen
Agency
securities
and
twelve
Mortgage-backed
securities
in
a
gross
unrealized
loss
position
at
December
31,
2015.
There
were
seven
US
Treasury
securities,
ten
Agency
securities
and
five
Mortgage-backed
securities
in
a
gross
unrealized
loss
position
at
December
31,
2014.
Management
believes
that
the
unrealized
losses
in
2015
and
2014
were
the
result
of
interest
rate
levels
differing
from
those
existing
at
the
time
of
purchase
of
the
securities
and
actual
and
estimated
prepayment
speeds.
The
Bank
does
not
consider
any
of
these
securities
to
be
other
than
temporarily
impaired
at
December
31,
2015
or
December
31,
2014,
because
the
unrealized
losses
were
related
primarily
to
changes
in
market
interest
rates
and
widening
of
sector
spreads
and
were
not
necessarily
related
to
the
credit
quality
of
the
issuers
of
the
securities.
F-16
Table of Contents
Note 2 - Investment Securities – Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
December
31,
2015:
(dollars
in
thousands)
Less
than
12
months
12
Months
or
More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
US
Treasury
securities
US
Agency
securities
US
Government
sponsored
mortgage-
backed
securities
Total
December
31,
2014:
US
Treasury
securities
US
Agency
securities
US
Government
sponsored
mortgage-
backed
securities
Total
$
$
$
$
3,992
$
12,958
31,091
48,041
$
6,953
$
10,024
13,405
30,382
$
8
$
76
195
279
$
29
$
57
50
136
$
-
$
-
-
-
$
-
$
-
-
-
$
-
$
-
-
-
$
-
$
-
-
-
$
3,992
$
12,958
31,091
48,041
$
6,953
$
10,024
13,405
30,382
$
8
76
195
279
29
57
50
136
The
amortized
cost
and
estimated
fair
value
of
debt
securities
as
of
December
31,
2015,
by
contractual
maturity,
are
shown
in
the
following
table.
Actual
maturities
may
differ
from
contractual
maturities
because
borrowers
may
have
the
right
to
call
or
prepay
obligations
with
or
without
call
or
prepayment
penalties.
Due
in
one
year
or
less
Due
from
one
year
to
five
years
Due
from
five
years
to
ten
years
US
Government
sponsored
mortgage-backed
securities
F-17
Held
to
Maturity
(dollars
in
thousands)
Amortized
Cost
Estimated
Fair
Value
$
$
11,060
$
28,053
1,955
35,065
76,133
$
11,125
28,211
2,063
34,911
76,310
Table of Contents
Note 3 - Loans Receivable
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Loans
receivable,
including
unfunded
commitments
consist
of
the
following:
Residential mortgage, total
Individually
evaluated
for
impairment
Collectively
evaluated
for
impairment
Construction, land acquisition and development, total
Individually
evaluated
for
impairment
Collectively
evaluated
for
impairment
Land, total
Individually
evaluated
for
impairment
Collectively
evaluated
for
impairment
Lines of credit, total
Individually
evaluated
for
impairment
Collectively
evaluated
for
impairment
Commercial real estate, total
Individually
evaluated
for
impairment
Collectively
evaluated
for
impairment
Commercial non-real estate, total
Individually
evaluated
for
impairment
Collectively
evaluated
for
impairment
Home equity, total
Individually
evaluated
for
impairment
Collectively
evaluated
for
impairment
Consumer, total
Individually
evaluated
for
impairment
Collectively
evaluated
for
impairment
Total Loans
Less
Unfunded
commitments
included
above
Individually
evaluated
for
impairment
Collectively
evaluated
for
impairment
Allowance
for
loan
losses
Deferred
loan
origination
fees
and
costs,
net
Net Loans
December
31
2015
2014
(dollars
in
thousands)
285,930
$
26,087
259,843
309,461
28,535
280,926
$
77,478
309
77,169
28,677
1,608
27,069
20,188
299
19,889
84,325
917
83,408
30,426
2,039
28,387
19,251
454
18,797
174,912
6,321
168,591
198,539
6,309
192,230
9,296
122
9,174
24,529
2,285
22,244
1,224
10
1,214
10,167
274
9,893
28,750
3,551
25,199
1,040
12
1,028
622,234
681,959
(21,101)
601,133
37,041
564,092
601,133
(8,758)
(2,719)
589,656
$
(36,162)
645,797
42,091
603,706
645,797
(9,435)
(2,480)
633,882
$
F-18
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 3 – Loans Receivable - Continued
The
inherent
credit
risks
within
the
portfolio
vary
depending
upon
the
loan
class
as
follows:
Residential
mortgage
loans
are
secured
by
one
to
four
family
dwelling
units.
The
loans
have
limited
risk
as
they
are
secured
by
first
mortgages
on
the
unit,
which
are
generally
the
primary
residence
of
the
borrower,
at
a
loan
to
value
ratio
of
80%
or
less.
Construction,
land
acquisition
and
development
loans
are
underwritten
based
upon
a
financial
analysis
of
the
developers
and
property
owners
and
construction
cost
estimates,
in
addition
to
independent
appraisal
valuations.
These
loans
will
rely
on
the
value
associated
with
the
project
upon
completion.
These
cost
and
valuation
estimates
may
be
inaccurate.
Construction
loans
generally
involve
the
disbursement
of
substantial
funds
over
a
short
period
of
time
with
repayment
substantially
dependent
upon
the
success
of
the
completed
project
rather
than
the
ability
of
the
borrower
or
guarantor
to
repay
principal
and
interest.
If
the
Bank
is
forced
to
foreclose
on
a
project
prior
to
or
at
completion,
due
to
a
default,
there
can
be
no
assurance
that
the
Bank
will
be
able
to
recover
all
of
the
unpaid
balance
of
the
loan
as
well
as
related
foreclosure
and
holding
costs.
In
addition,
the
Bank
may
be
required
to
fund
additional
amounts
to
complete
the
project
and
may
have
to
hold
the
property
for
an
unspecified
period
of
time.
Sources
of
repayment
of
these
loans
typically
are
permanent
financing
expected
to
be
obtained
upon
completion
or
sales
of
developed
property.
These
loans
are
closely
monitored
by
onsite
inspections
and
are
considered
to
be
of
a
higher
risk
than
other
real
estate
loans
due
to
their
ultimate
repayment
being
sensitive
to
general
economic
conditions,
availability
of
long-term
financing,
interest
rate
sensitivity,
and
governmental
regulation
of
real
property.
Land
loans
are
underwritten
based
upon
the
independent
appraisal
valuations
as
well
as
the
estimated
value
associated
with
the
land
upon
completion
of
development.
These
cost
and
valuation
estimates
may
be
inaccurate.
These
loans
are
considered
to
be
of
a
higher
risk
than
other
real
estate
loans
due
to
their
ultimate
repayment
being
sensitive
to
general
economic
conditions,
availability
of
long-term
financing,
interest
rate
sensitivity,
and
governmental
regulation
of
real
property.
Line
of
credit
loans
are
subject
to
the
underwriting
standards
and
processes
similar
to
commercial
non-real
estate
loans,
in
addition
to
those
underwriting
standards
for
real
estate
loans.
These
loans
are
viewed
primarily
as
cash
flow
dependent
and
secondarily
as
loans
secured
by
real-
estate
and/or
other
assets.
Repayment
of
these
loans
is
generally
dependent
upon
the
successful
operation
of
the
property
securing
the
loan
or
the
principal
business
conducted
on
the
property
securing
the
loan.
Line
of
credit
loans
may
be
adversely
affected
by
conditions
in
the
real
estate
markets
or
the
economy
in
general.
Management
monitors
and
evaluates
line
of
credit
loans
based
on
collateral
and
risk-rating
criteria.
Commercial
real
estate
loans
are
subject
to
the
underwriting
standards
and
processes
similar
to
commercial
and
industrial
loans,
in
addition
to
those
underwriting
standards
for
real-estate
loans.
These
loans
are
viewed
primarily
as
cash
flow
dependent
and
secondarily
as
loans
secured
by
real
estate.
Repayment
of
these
loans
is
generally
dependent
upon
the
successful
operation
of
the
property
securing
the
loan
or
the
principal
business
conducted
on
the
property
securing
the
loan.
Commercial
real
estate
loans
may
be
adversely
affected
by
conditions
in
the
real
estate
markets
or
the
economy
in
general.
Management
monitors
and
evaluates
commercial
real
estate
loans
based
on
collateral
and
risk-rating
criteria.
The
Bank
also
utilizes
third-party
experts
to
provide
environmental
and
market
valuations.
The
nature
of
commercial
real
estate
loans
makes
them
more
difficult
to
monitor
and
evaluate.
F-19
Table of Contents
Note 3 – Loans Receivable - Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Commercial
non-real
estate
loans
are
underwritten
after
evaluating
historical
and
projected
profitability
and
cash
flow
to
determine
the
borrower's
ability
to
repay
their
obligation
as
agreed.
Commercial
and
industrial
loans
are
made
primarily
based
on
the
identified
cash
flow
of
the
borrower
and
secondarily
on
the
underlying
collateral
supporting
the
loan
facility.
Accordingly,
the
repayment
of
a
commercial
and
industrial
loan
depends
primarily
on
the
creditworthiness
of
the
borrower
(and
any
guarantors),
while
liquidation
of
collateral
is
a
secondary
and
often
insufficient
source
of
repayment.
Home
equity
loans
are
subject
to
the
underwriting
standards
and
processes
similar
to
residential
mortgages
and
are
secured
by
one
to
four
family
dwelling
units.
Home
equity
loans
have
greater
risk
than
residential
mortgages
as
a
result
of
the
Bank
being
in
a
second
lien
position
in
the
event
collateral
is
liquidated.
Consumer
loans
consist
of
loans
to
individuals
through
the
Bank's
retail
network
and
are
typically
unsecured
or
secured
by
personal
property.
Consumer
loans
have
a
greater
credit
risk
than
residential
loans
because
of
the
difference
in
the
underlying
collateral,
if
any.
The
application
of
various
federal
and
state
bankruptcy
and
insolvency
laws
may
limit
the
amount
that
can
be
recovered
on
such
loans.
The
loan
portfolio
segments
and
loan
classes
disclosed
above
are
the
same
because
this
is
the
level
of
detail
management
uses
when
the
original
loan
is
recorded
and
is
the
level
of
detail
used
by
management
to
assess
and
monitor
the
risk
and
performance
of
the
portfolio.
Management
has
determined
that
this
level
of
detail
is
adequate
to
understand
and
manage
the
inherent
risks
within
each
portfolio
segment
and
loan
class.
A
loan
is
considered
a
troubled
debt
restructuring
when
for
economic
or
legal
reasons
relating
to
the
borrowers
financial
difficulties
Bancorp
grants
a
concession
to
the
borrower
that
it
would
not
otherwise
consider.
Loan
modifications
made
with
terms
consistent
with
current
market
conditions
that
the
borrower
could
obtain
in
the
open
market
are
not
considered
troubled
debt
restructurings.
With
respect
to
all
loan
segments,
management
does
not
charge
off
a
loan,
or
a
portion
of
a
loan,
until
one
of
the
following
conditions
have
been
met:
·
The
loan
has
been
foreclosed
on.
Once
the
loan
has
been
transferred
from
the
Loans
Receivable
to
Foreclosed
Real
Estate,
a
charge
off
is
recorded
for
the
difference
between
the
recorded
amount
of
the
loan
and
the
net
value
of
the
underlying
collateral.
· An
agreement
to
accept
less
than
the
recorded
balance
of
the
loan
has
been
made
with
the
borrower.
Once
an
agreement
has
been
finalized,
and
any
proceeds
from
the
borrower
are
received,
a
charge
off
is
recorded
for
the
difference
between
the
recorded
amount
of
the
loan
and
the
net
value
of
the
underlying
collateral.
·
The
loan
is
considered
to
be
impaired
collateral
dependent
and
its
collateral
valuation
is
less
than
the
recorded
balance.
The
loan
is
written
down
for
accounting
purposes
by
the
amount
of
the
difference
between
the
recorded
balance
and
collateral
value.
F-20
Table of Contents
Note 3 – Loans Receivable - Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Prior
to
the
above
conditions,
a
loan
is
assessed
for
impairment
when:
(i)
a
loan
becomes
90
days
or
more
in
arrears
or
(ii)
based
on
current
information
and
events,
it
is
probable
that
the
borrower
will
be
unable
to
pay
all
amounts
due
according
to
the
contractual
terms
of
the
loan
agreement.
If
a
loan
is
considered
to
be
impaired,
it
is
then
determined
to
be
either
cash
flow
or
collateral
dependent.
For
a
cash
flow
dependent
loan,
if
based
on
management’s
calculation
of
discounted
cash
flows,
a
reserve
is
needed,
a
specific
reserve
is
recorded.
That
reserve
is
included
in
the
Allowance
for
Loan
Losses
in
the
Consolidated
Statement
of
Financial
Condition.
Bancorp
has
experienced
extension
requests
for
commercial
real
estate
and
construction
loans,
some
of
which
have
related
repayment
guarantees.
An
extension
may
be
granted
to
allow
for
the
completion
of
the
project,
marketing
or
sales
of
completed
units,
or
to
provide
for
permanent
financing,
and
is
based
on
a
re-underwriting
of
the
loan
and
management's
assessment
of
the
borrower's
ability
to
perform
according
to
the
agreed-
upon
terms.
Typically,
at
the
time
of
an
extension,
borrowers
are
performing
in
accordance
with
contractual
loan
terms.
Extension
terms
generally
do
not
exceed
12
to
18
months
and
typically
require
that
the
borrower
provide
additional
economic
support
in
the
form
of
partial
repayment,
additional
collateral
or
guarantees.
In
cases
where
the
fair
value
of
the
collateral
or
the
financial
resources
of
the
borrower
are
deemed
insufficient
to
repay
the
loan,
reliance
may
be
placed
on
the
support
of
a
guarantee,
if
applicable.
However,
such
guarantees
are
not
relied
on
when
evaluating
a
loan
for
impairment
and
never
considered
the
sole
source
of
repayment.
Bancorp
evaluates
the
financial
condition
of
guarantors
based
on
the
most
current
financial
information
available.
Most
often,
such
information
takes
the
form
of
(i)
personal
financial
statements
of
net
worth,
cash
flow
statements
and
tax
returns
(for
individual
guarantors)
and
(ii)
financial
and
operating
statements,
tax
returns
and
financial
projections
(for
legal
entity
guarantors).
Bancorp’s
evaluation
is
primarily
focused
on
various
key
financial
metrics,
including
net
worth,
leverage
ratios,
and
liquidity.
It
is
Bancorp's
policy
to
update
such
information
annually,
or
more
frequently
as
warranted,
over
the
life
of
the
loan.
While
Bancorp
does
not
specifically
track
the
frequency
with
which
it
has
pursued
guarantor
performance
under
a
guarantee,
its
underwriting
process,
both
at
origination
and
upon
extension,
as
applicable,
includes
an
assessment
of
the
guarantor's
reputation,
creditworthiness
and
willingness
to
perform.
Historically,
when
Bancorp
has
found
it
necessary
to
seek
performance
under
a
guarantee,
it
has
been
able
to
effectively
mitigate
its
losses.
As
stated
above,
Bancorp’s
ability
to
seek
performance
under
a
guarantee
is
directly
related
to
the
guarantor's
reputation,
creditworthiness
and
willingness
to
perform.
When
a
loan
becomes
impaired,
repayment
is
sought
from
both
the
underlying
collateral
and
the
guarantor
(as
applicable).
In
the
event
that
the
guarantor
is
unwilling
or
unable
to
perform,
a
legal
remedy
is
pursued.
Construction
loans
are
funded,
at
the
request
of
the
borrower,
typically
not
more
than
once
per
month,
based
on
the
extent
of
work
completed,
and
are
monitored,
throughout
the
life
of
the
project,
by
independent
professional
construction
inspectors
and
Bancorp's
commercial
real
estate
lending
department.
Interest
is
advanced
to
the
borrower,
upon
request,
based
upon
the
progress
of
the
project
toward
completion.
The
amount
of
interest
advanced
is
added
to
the
total
outstanding
principal
under
the
loan
commitment.
Should
the
project
not
progress
as
scheduled,
the
adequacy
of
the
interest
reserve
necessary
to
carry
the
project
through
to
completion
is
subject
to
close
monitoring
by
management.
Should
the
interest
reserve
be
deemed
to
be
inadequate,
the
borrower
is
required
to
fund
the
deficiency.
Similarly,
once
a
loan
is
fully
funded,
the
borrower
is
required
to
fund
all
interest
payments.
F-21
Table of Contents
Note 3 – Loans Receivable – Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Construction
loans
are
reviewed
for
extensions
upon
expiration
of
the
loan
term.
Provided
the
loan
is
performing
in
accordance
with
contractual
terms,
extensions
may
be
granted
to
allow
for
the
completion
of
the
project,
marketing
or
sales
of
completed
units,
or
to
provide
for
permanent
financing.
Extension
terms
generally
do
not
exceed
12
to
18
months.
In
general,
Bancorp's
construction
loans
are
used
to
finance
improvements
to
commercial,
industrial
or
residential
property.
Repayment
is
typically
derived
from
the
sale
of
the
property
as
a
whole,
the
sale
of
smaller
individual
units,
or
by
a
take-out
from
a
permanent
mortgage.
The
term
of
the
construction
period
generally
does
not
exceed
two
years.
Loan
commitments
are
based
on
established
construction
budgets
which
represent
an
estimate
of
total
costs
to
complete
the
proposed
project
including
both
hard
(direct)
costs
(building
materials,
labor,
etc.)
and
soft
(indirect)
costs
(legal
and
architectural
fees,
etc.).
In
addition,
project
costs
may
include
an
appropriate
level
of
interest
reserve
to
carry
the
project
through
to
completion.
If
established,
such
interest
reserves
are
determined
based
on
(i)
a
percentage
of
the
committed
loan
amount,
(ii)
the
loan
term,
and
(iii)
the
applicable
interest
rate.
Regardless
of
whether
a
loan
contains
an
interest
reserve,
the
total
project
cost
statement
serves
as
the
basis
for
underwriting
and
determining
which
items
will
be
funded
by
the
loan
and
which
items
will
be
funded
through
borrower
equity.
Bancorp
has
not
advanced
additional
interest
reserves
to
keep
a
loan
from
becoming
nonperforming.
F-22
Table of Contents
Note 3 - Loans Receivable – Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
The
following
is
a
summary
of
the
allowance
for
loan
losses
for
the
years
ended
December
31,
2015
and
December
31,
2014
(dollars
in
thousands):
Acquisition
and
Residential
Mortgage
$
Development
Land
4,664
$
(651)
(454)
629
4,188
646
$
(185)
-
49
510
362
84
-
-
446
$
$
$
Lines of
Credit
Commercial
Real Estate
12
$
(190)
-
235
57
2,504
368
(80)
-
2,792
$
$
$
Total
$ 9,435
$
(280)
(1,522)
1,125
$ 8,758
$
Commercial
Non-Real
Estate
Home
Equity
Consumer
4
$
(1)
-
-
3
963
236
(834)
163
528
$
$
280
59
(154)
49
234
$
2015
Beginning
Balance
Provision
Charge-offs
Recoveries
Ending
Balance
Allowance
on
loans
individually
evaluated
for
impairment
$ 2,282
$
1,838
$
-
$
78
$
30
$
328
$
5
$
2
$
Allowance
on
loans
collectively
evaluated
for
impairment
$ 6,476
$
2,350
$
446
$
432
$
27
$
2,464
$
229
$
526
$
1
2
Acquisition
and
Residential
Mortgage
Lines of
Credit
Commercial
Real Estate
$
Commercial
Non-Real
Estate
$
Total
$ 11,739
831
(3,994)
859
9,435
$
$
$ 1,346
Development
Land
$
6,291
(1,089)
(844)
306
4,664
414
11
(63)
-
362
-
349
646
$
(1,049)
$
$
$
36
1,285
(1,324)
15
12
$
$
2,512
59
(92)
25
2,504
$
Home
Equity
Consumer
2
$
(3)
-
5
4
$ 1,003
221
(261)
-
963
$
$
135
1,396
(1,410)
159
280
2014
Beginning
Balance
Provision
Charge-offs
Recoveries
Ending
Balance
Allowance
on
loans
individually
evaluated
for
impairment
$
2,777
$
2,113
$
-
$
53
$
-
$
224
$
15
$
370
$
Allowance
on
loans
collectively
evaluated
for
impairment
$
6,658
$
2,551
$
362
$
593
$
12
$
2,280
$
265
$
593
$
2
2
F-23
Table of Contents
Note 3 - Loans Receivable - Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
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
allowance
was
adequate
at
December
31,
2015,
changing
economic
and
market
conditions
may
require
future
adjustments
to
the
allowance
for
loan
losses.
For
such
loans
that
are
classified
as
impaired,
an
allowance
is
established
when
the
current
market
value
of
the
underlying
collateral
less
its
estimated
disposal
costs
is
lower
than
the
carrying
value
of
that
loan.
For
loans
that
are
not
solely
collateral
dependent,
an
allowance
is
established
when
the
present
value
of
the
expected
future
cash
flows
of
the
impaired
loan
is
lower
than
the
carrying
value
of
that
loan.
During
the
year
ended
December
31,
2015,
the
provision
for
loan
losses
was
($280,000)
compared
to
$831,000
for
the
year
ended
December
31,
2014.
This
decrease
of
$1,111,000
was
primarily
due
to
lower
total
loans
and
improved
asset
quality
at
December
31,
2015
compared
to
December
31,
2014
and
lower
net
charge-offs
taken
in
2015
compared
to
2014.
F-24
Table of Contents
Note 3 - Loans Receivable - Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
The
following
tables
summarize
impaired
loans
at
December
31,
2015
and
2014
(dollars
in
thousands):
December 31, 2015
Residential
mortgage
Construction,
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
Impaired
loans
December 31, 2014
Residential
mortgage
Construction,
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
Impaired
loans
Impaired
Loans
with
Specific
Allowance
Impaired
Loans
with
No
Specific
Allowance
Total
Impaired
Loans
Recorded
Investment
Related
Allowance
Recorded
Investment
Recorded
Investment
11,885
$
-
639
299
3,214
103
16
10
16,166
$
1,838
$
-
78
30
328
5
2
1
2,282
$
14,202
$
309
969
-
3,107
19
2,269
-
20,875
$
26,087
$
309
1,608
299
6,321
122
2,285
10
37,041
$
Unpaid
Principal
Balance
26,656
309
1,723
299
6,469
123
3,251
10
38,840
Impaired
Loans
with
Specific
Allowance
Impaired
Loans
with
No
Specific
Allowance
Total
Impaired
Loans
Recorded
Investment
Related
Allowance
Recorded
Investment
Recorded
Investment
2,113
$
-
53
-
224
15
370
2
2,777
$
14,441
$
917
1,684
454
3,780
-
2,079
-
23,355
$
28,535
$
917
2,039
454
6,309
274
3,551
12
42,091
$
14,094
$
-
355
-
2,529
274
1,472
12
18,736
$
F-25
Unpaid
Principal
Balance
29,487
917
2,157
545
6,533
274
4,274
12
44,199
$
$
$
$
Table of Contents
Note 3 - Loans Receivable - Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
The
following
tables
summarize
average
impaired
loans
for
the
years
ended
December
31,
2015
and
2014
(dollars
in
thousands):
Impaired
Loans
with
Specific
Allowance
Impaired
Loans
with
No
Specific
Allowance
Total
Impaired
Loans
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
December 31, 2015
Residential
mortgage
Construction,
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
Impaired
loans
$
$
12,645
$
114
822
25
2,933
213
337
11
17,100
$
540
$
1
21
1
134
5
8
-
710
$
13,886
$
573
1,035
321
2,179
10
2,520
414
20,938
$
564
$
29
72
18
166
13
115
3
980
$
26,531
$
687
1,857
346
5,112
223
2,857
425
38,038
1,104
30
93
19
300
18
123
3
1,690
Impaired
Loans
with
Specific
Allowance
Impaired
Loans
with
No
Specific
Allowance
Total
Impaired
Loans
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
December 31, 2014
Residential
mortgage
Construction,
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
Impaired
loans
$
$
14,222
$
-
359
599
2,556
258
1,460
13
19,467
$
17,342
$
1,831
1,774
616
4,515
406
2,174
-
28,658
$
648
$
54
89
41
230
23
65
-
1,150
$
31,564
$
1,831
2,133
1,215
7,071
664
3,634
13
48,125
1,240
54
102
56
350
28
65
-
1,895
592
$
-
13
15
120
5
-
-
745
$
F-26
Table of Contents
Note 3 - Loans Receivable - Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Included
in
the
above
impaired
loans
amount
at
December
31,
2015
is
$28,067,000
of
loans
that
are
not
in
non-accrual
status.
In
addition,
there
was
a
total
of
$26,087,000
of
residential
real
estate
loans
included
in
impaired
loans
at
December
31,
2015,
of
which
$20,378,000
were
to
consumers
and
$5,709,000
to
builders.
The
collateral
supporting
impaired
loans
is
individually
reviewed
by
management
to
determine
its
estimated
fair
market
value,
less
estimated
disposal
cost
and
a
charge-off
to
the
loan
is
made,
if
necessary,
for
the
difference
between
the
carrying
amount
of
any
loan
and
the
estimated
fair
value
of
the
collateral
less
estimated
disposal
cost.
A
specific
allowance
is
established
if
the
net
collateral
value
has
not
been
finalized,
but
management
determines
that
it
is
likely
that
the
net
collateral
value
of
the
loan
is
lower
than
the
carrying
value
of
the
loan.
The
following
tables
present
the
classes
of
the
loan
portfolio,
including
unfunded
commitments
summarized
by
the
aggregate
Pass
and
the
criticized
categories
of
Special
Mention,
Substandard
and
Doubtful
within
the
internal
risk
rating
system
as
of
December
31,
2015
and
2014
(dollars
in
thousands):
December 31, 2015
Residential
mortgage
Construction
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
loans
December 31, 2014
Residential
mortgage
Construction
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
loans
Pass
Special
Mention
Substandard
Doubtful
Total
268,583
$
77,168
26,845
19,521
155,766
9,151
22,018
1,224
580,276
$
12,457
$
71
1,268
368
13,208
125
588
-
28,085
$
4,890
$
239
564
299
5,938
20
1,923
-
13,873
$
-
$
-
-
-
-
-
-
-
-
$
285,930
77,478
28,677
20,188
174,912
9,296
24,529
1,224
622,234
Pass
Special
Mention
Substandard
Doubtful
Total
295,589
$
82,778
30,285
16,112
181,686
9,275
25,769
985
642,479
$
1,331
$
-
-
2,479
7,172
637
-
-
11,619
$
12,541
$
1,547
141
660
9,681
255
2,981
55
27,861
$
-
$
-
-
-
-
-
-
-
-
$
309,461
84,325
30,426
19,251
198,539
10,167
28,750
1,040
681,959
$
$
$
$
Included
in
the
Pass
column
were
$21,101,000
and
$36,162,000
in
unfunded
commitments
at
December
31,
2015
and
2014,
respectively.
F-27
Table of Contents
Note 3 - Loans Receivable - Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Management
further
monitors
the
performance
and
credit
quality
of
the
loan
portfolio
by
analyzing
the
age
of
the
portfolio
as
determined
by
the
length
of
time
a
recorded
payment
is
past
due.
There
were
no
loans
past
due
greater
than
90
days
and
still
accruing
as
of
December
31,
2015
and
2014.
Included
in
the
Current
column
were
$21,101,000
and
$36,162,000
in
unfunded
commitments
at
December
31,
2015
and
2014,
respectively.
The
following
table
presents
the
classes
of
the
loan
portfolio
summarized
by
the
aging
categories
of
performing
loans
and
nonaccrual
loans
as
of
December
31,
2015
and
2014
(dollars
in
thousands):
December 31, 2015
Residential
mortgage
Construction
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
loans
December 31, 2014
Residential
mortgage
Construction
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
loans
$
$
$
$
30-59
Days
Past
Due
60-89
Days
Past
Due
90+
Days
Past
Due
Total
Past
Due
Current
Total
Loans
Non-
Accrual
1,593
$
-
137
149
253
-
-
3
2,135
$
65
$
-
-
-
-
-
-
-
65
$
2,461
$
-
156
-
292
-
625
-
3,534
$
4,119
$
-
293
149
545
-
625
3
5,734
$
281,811
$
77,478
28,384
20,039
174,367
9,296
23,904
1,221
616,500
$
285,930
$
77,478
28,677
20,188
174,912
9,296
24,529
1,224
622,234
$
3,191
244
277
483
2,681
-
2,098
-
8,974
30-59
Days
Past
Due
60-89
Days
Past
Due
90+
Days
Past
Due
Total
Past
Due
Current
Total
Loans
Non-
Accrual
2,549
-
-
-
447
-
174
-
3,170
$
$
2,333
-
-
-
45
-
242
-
2,620
$
$
F-28
3,095
-
6
-
375
-
2,417
-
5,893
$
$
7,977
-
6
-
867
-
2,833
-
11,683
$
$
301,484
84,325
30,420
19,251
197,672
10,167
25,917
1,040
670,276
$
$
309,461
84,325
30,426
19,251
198,539
10,167
28,750
1,040
681,959
$
$
6,052
115
847
388
652
1,775
3,016
-
12,845
Table of Contents
Note 3 - Loans Receivable – Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
The
Bank
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
consolidated
statements
of
financial
condition.
The
contract
amounts
of
these
instruments
express
the
extent
of
involvement
the
Bank
has
in
each
class
of
financial
instruments.
The
Bank'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
Bank
uses
the
same
credit
policies
in
making
commitments
and
conditional
obligations
as
it
does
for
on-balance-sheet
instruments.
Unless
otherwise
noted,
the
Bank
requires
collateral
or
other
security
to
support
financial
instruments
with
off-balance-sheet
credit
risk.
Financial
Instruments
Whose
Contract
Amounts
Represent
Credit
Risk
Standby
letters
of
credit
Home
equity
lines
of
credit
Unadvanced
construction
commitments
Mortgage
loan
commitments
Lines
of
credit
Loans
sold
with
limited
repurchase
provisions
$
Contract
Amount
At
December
31,
2015
2014
(dollars
in
thousands)
5,937
$
7,467
21,101
3,233
27,189
65,107
7,357
8,571
36,162
2,120
23,844
38,247
Standby
letters
of
credit
are
conditional
commitments
issued
by
the
Bank
guaranteeing
performance
by
a
customer
to
various
municipalities.
These
guarantees
are
issued
primarily
to
support
performance
arrangements,
limited
to
real
estate
transactions.
The
majority
of
these
standby
letters
of
credit
expire
within
the
next
twelve
months.
The
credit
risk
involved
in
issuing
letters
of
credit
is
essentially
the
same
as
that
involved
in
extending
other
loan
commitments.
The
Bank
requires
collateral
supporting
these
letters
of
credit
as
deemed
necessary.
Management
believes,
except
for
certain
standby
letters
of
credit,
that
the
proceeds
obtained
through
a
liquidation
of
such
collateral
would
be
sufficient
to
cover
the
maximum
potential
amount
of
future
payments
required
under
the
corresponding
guarantees.
The
current
amount
of
the
liability
as
of
December
31,
2015
and
2014
for
guarantees
under
standby
letters
of
credit
issued
was
$115,000
and
$314,000,
respectively.
Home
equity
lines
of
credit
are
loan
commitments
to
individuals
as
long
as
there
is
no
violation
of
any
condition
established
in
the
contract.
Commitments
under
home
equity
lines
expire
ten
years
after
the
date
the
loan
closes
and
are
secured
by
real
estate.
The
Bank
evaluates
each
customer's
credit
worthiness
on
a
case-by-case
basis.
Unadvanced
construction
commitments
are
loan
commitments
made
to
borrowers
for
both
residential
and
commercial
projects
that
are
either
in
process
or
are
expected
to
begin
construction
shortly.
F-29
Table of Contents
Note 3 - Loans Receivable – Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Mortgage
loan
commitments
not
reflected
in
the
accompanying
statements
of
financial
condition
at
December
31,
2015
include
seven
loans
at
a
fixed
interest
rate
range
of
3.75%
to
8.00%
totaling
$3,233,000
and
two
at
floating
interest
rates
totaling
$0,
and
at
December
31,
2014
included
$2,120,000
at
a
fixed
rate
range
of
3.75%
to
4.50%
and
none
at
floating
interest
rates.
Lines
of
credit
are
loan
commitments
to
individuals
and
companies
as
long
as
there
is
no
violation
of
any
condition
established
in
the
contract.
Lines
of
credit
have
a
fixed
expiration
date.
The
Bank
evaluates
each
customer's
credit
worthiness
on
a
case-by-case
basis.
The
Bank
has
entered
into
several
agreements
to
sell
mortgage
loans
to
third
parties.
The
loans
sold
under
these
agreements
for
the
years
ended
December
31,
2015
and
2014
were
$163,150,000
and
$90,560,000,
respectively.
These
agreements
contain
limited
provisions
that
require
the
Bank
to
repurchase
a
loan
if
the
loan
becomes
delinquent
within
a
period
ranging
generally
from
120
to
180
days
after
the
sale
date
depending
on
the
investor’s
agreement.
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
consolidated
statement
of
financial
condition
at
December
31,
2015
and
2014
as
a
liability
for
credit
loss
related
to
these
loans.
The
Bank
repurchased
no
loans
under
these
agreements
in
2015
or
2014
.
Only
loans
originated
specifically
for
sale
are
recorded
as
held
for
sale
at
the
period
ended
December
31,
2015
and
December
31,
2014.
Except
for
the
liability
recorded
for
standby
letters
of
credit
of
$115,000
and
$314,000
at
December
31,
2015
and
2014,
respectively,
liabilities
for
credit
losses
associated
with
these
commitments
were
not
material
at
December
31,
2015
and
2014.
Bancorp
offers
a
variety
of
modifications
to
borrowers.
The
modification
categories
offered
can
generally
be
described
in
the
following
categories:
· Rate
Modification
–
A
modification
in
which
the
interest
rate
is
changed.
·
·
·
Term
Modification
–
A
modification
in
which
the
maturity
date,
timing
of
payments
or
frequency
of
payments
is
changed.
Interest
Only
Modification
–
A
modification
in
which
the
loan
is
converted
to
interest
only
payments
for
a
period
of
time.
Payment
Modification
–
A
modification
in
which
the
dollar
amount
of
the
payment
is
changed,
other
than
an
interest
only
modification
above.
Loan
Balance
Modification
–
A
modification
in
which
a
portion
of
the
outstanding
loan
balance
is
forgiven.
·
· Combination
Modification
–
Any
other
type
of
modification,
including
the
use
of
multiple
categories
above.
Bancorp
considers
a
modification
of
a
loan
term
a
TDR
if
Bancorp
for
economic
or
legal
reasons
related
to
the
borrower’s
financial
difficulties
grants
a
concession
to
the
debtor
that
it
would
not
otherwise
consider.
Prior
to
entering
into
a
loan
modification,
Bancorp
assesses
the
borrower’s
financial
condition
to
determine
if
the
borrower
has
the
means
to
meet
the
terms
of
the
modification.
This
includes
obtaining
a
credit
report
on
the
borrower
as
well
as
the
borrower’s
tax
returns
and
financial
statements.
F-30
Table of Contents
Note 3 - Loans Receivable - Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
The
following
tables
present
newly
restructured
loans
that
occurred
during
the
years
ended
December
31,
2015
and
2014
by
the
type
of
concession
(dollars
in
thousands):
Rate
Term
Modification
Contracts
Modifications
Contracts
Combination
Modifications
Contracts
Total
Total
Contracts
Year
ended
December
31,
2015
Pre-Modification
Outstanding
Recorded
Investment:
Residential
mortgage
$
Construction,
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
loans
$
Post-Modification
Outstanding
Recorded
Investment:
Residential
mortgage
$
Construction,
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
loans
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
91
-
-
-
-
-
-
-
91
91
-
-
-
-
-
-
-
91
-
$
-
-
-
-
-
-
-
-
$
-
$
-
-
-
-
-
-
-
-
$
F-31
1
$
-
-
-
-
-
-
-
1
$
1
$
-
-
-
-
-
-
-
1
$
-
-
61
-
-
-
-
-
61
109
-
31
-
-
-
-
-
140
1
$
-
1
-
-
-
-
-
2
$
1
$
-
1
-
-
-
-
-
2
$
91
-
61
-
-
-
-
-
152
200
-
31
-
-
-
-
-
231
2
-
1
-
-
-
-
-
3
2
-
1
-
-
-
-
-
3
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 3 - Loans Receivable – Continued
Rate
Modification
Contracts
Modifications
Contracts
Year
ended
December
31,
2014
Term
Combination
Modifications
Contracts
Total
Total
Contracts
Pre-Modification
Outstanding
Recorded
Investment:
Residential
mortgage
Construction,
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
loans
Post-Modification
Outstanding
Recorded
Investment:
Residential
mortgage
Construction,
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
loans
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
$
-
$
-
-
-
-
-
-
-
-
$
447
-
-
-
541
-
-
-
988
447
-
-
-
541
-
-
-
988
2
$
-
-
-
3
-
-
-
5
$
2
$
-
-
-
3
-
-
-
5
$
447
-
-
-
541
-
-
-
988
447
-
-
-
541
-
-
-
988
2
-
-
-
3
-
-
-
5
2
-
-
-
3
-
-
-
5
In
addition,
the
TDR
is
considered
an
impaired
loan.
A
determination
is
made
as
to
whether
an
impaired
TDR
is
cash
flows
or
collateral
dependent.
If
the
TDR
is
cash
flows
dependent,
an
allowance
for
loan
losses
specific
reserve
is
calculated
based
on
the
difference
in
net
present
value
of
future
cash
flows
between
the
original
and
modified
loan
terms.
If
the
TDR
is
collateral
dependent,
the
collateral
securing
the
TDR,
which
is
always
real
estate,
is
evaluated
for
impairment
based
on
an
appraisal.
If
a
TDR’s
collateral
valuation
is
less
than
its
current
loan
balance,
the
TDR
is
written
down
for
accounting
purposes
by
the
amount
of
the
difference
between
the
current
loan
balance
and
the
collateral.
If
the
borrower
performs
under
the
terms
of
the
modification,
generally
six
consecutive
months,
and
the
ultimate
collectability
of
all
amounts
contractually
due
under
the
modified
terms
is
not
in
doubt,
the
loan
is
returned
to
accrual
status
but
continues
to
be
an
impaired
loan.
There
are
no
loans
that
have
been
modified
due
to
the
financial
difficulties
of
the
borrower
that
are
not
considered
a
TDR.
F-32
Table of Contents
Note 3 - Loans Receivable – Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Interest
on
TDRs
was
accounted
for
under
the
following
methods
as
of
December
31,
2015
and
December
31,
2014
(dollars
in
thousands):
December 31, 2015
Residential
mortgage
Construction,
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
loans
December 31, 2014
Residential
mortgage
Construction,
acquisition
and
development
Land
Lines
of
credit
Commercial
real
estate
Commercial
non-real
estate
Home
equity
Consumer
Total
loans
Number
of
Contracts
Accrual
Status
Number
of
Contracts
55
$
20,831
1
6
-
4
4
-
1
71
$
71
907
-
2,464
103
-
10
24,386
57
$
22,154
2
5
-
6
5
-
1
76
$
803
982
-
3,623
150
-
12
27,724
Non-
Accrual
Status
Total
Number
of
Contracts
Total
Modifications
1,071
58
$
21,902
-
6
-
252
-
-
-
1,329
1
7
-
6
4
-
1
77
$
71
913
-
2,716
103
-
10
25,715
2,402
62
$
24,556
-
6
-
109
124
-
-
2,641
2
6
-
7
7
-
1
85
$
803
988
-
3,732
274
-
12
30,365
3
$
-
1
-
2
-
-
-
6
$
5
$
-
1
-
1
2
-
-
9
$
Management
does
not
charge
off
a
TDR,
or
a
portion
of
a
TDR,
until
one
of
the
following
conditions
has
been
met:
·
The
loan
has
been
foreclosed
on.
Once
the
loan
has
been
transferred
from
the
loans
receivable
to
foreclosed
real
estate,
a
charge
off
is
recorded
for
the
difference
between
the
recorded
amount
of
the
loan
and
the
net
value
of
the
underlying
collateral.
· An
agreement
to
accept
less
than
the
face
value
of
the
loan
has
been
made
with
the
borrower.
Once
an
agreement
has
been
finalized,
and
any
proceeds
from
the
borrower
are
received,
a
charge
off
is
recorded
for
the
difference
between
the
recorded
amount
of
the
loan
and
the
net
value
of
the
underlying
collateral.
Prior
to
either
of
the
above
conditions,
a
loan
is
assessed
for
impairment
when
a
loan
becomes
a
TDR.
If,
based
on
management’s
assessment
of
the
underlying
collateral
of
the
loan,
it
is
determined
that
the
TDR’s
collateral
valuation
is
less
than
its
current
loan
balance,
the
TDR
is
written
down
for
accounting
purposes
by
the
amount
of
the
difference
between
the
current
loan
balance
and
the
collateral.
F-33
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 4 - Premises and Equipment
Premises
and
equipment
are
summarized
by
major
classification
as
follows:
Land
Building
Leasehold
improvements
Furniture,
fixtures
and
equipment
Construction
in
process
Total
at
cost
Accumulated
depreciation
December
31,
2015
2014
Estimated
Useful
Lives
(dollars
in
thousands)
$
$
1,537
$
29,464
1,676
2,385
37
35,099
(10,809)
24,290
$
1,537
29,423
1,675
2,985
-
35,620
(10,461)
25,159
-
39
Years
15-27.5
Years
3-10
Years
Depreciation
expense
was
$1,137,000
and
$1,110,000
for
the
years
ended
December
31,
2015
and
2014,
respectively.
Bancorp
has
four
retail
branch
locations
in
Anne
Arundel
County,
Maryland,
of
which
it
owns
three
and
leases
the
fourth
from
a
third
party.
The
lease
term
expires
July
2020.
There
is
an
option
remaining
to
renew
the
lease
for
one
additional
five
year
term.
In
addition,
the
Bank
leases
office
space
in
Annapolis,
Maryland
from
a
third
party.
The
lease
expires
in
January
2020.
F-34
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 4 - Premises and Equipment - Continued
The
minimum
future
annual
rental
payments
on
leases
are
as
follows:
Years
Ended
December
31,
(in
thousands)
2016
2017
2018
2019
2020
$
152
152
134
134
94
Total
rent
expense
was
$131,000
and
$121,000
for
the
years
ended
December
31,
2015
and
2014,
respectively.
The
minimum
future
annual
rental
income
on
leases
is
as
follows:
Years
Ended
December
31,
(in
thousands)
2016
2017
2018
2019
$
974
674
455
217
H.S.
West,
LLC,
a
subsidiary
of
the
Bank,
leases
space
to
three
unrelated
companies
and
to
a
law
firm
of
which
the
President
of
Bancorp
and
the
Bank
is
a
partner.
Total
gross
rental
income
included
in
occupancy
expense
on
the
Consolidated
Statements
of
Operations
was
$970,000
and
$956,000
for
the
years
ended
December
31,
2015
and
2014,
respectively.
F-35
Table of Contents
Note 5 – Foreclosed Real Estate
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
As
of
December
31,
2015,
Bancorp
had
foreclosed
real
estate
consisting
of
seven
residential
properties
with
a
carrying
value
of
$1,419,000
and
three
land
parcels
with
a
carrying
value
of
$325,000.
During
the
year
ended
December
31,
2015,
Bancorp
sold
a
total
of
twelve
properties
previously
included
in
foreclosed
real
estate.
The
properties
sold
during
2015
had
a
combined
net
book
value
of
$2,379,000
after
total
write-
downs
taken
subsequent
to
their
transfer
from
loans
to
foreclosed
real
estate
of
$1,023,000,
and
were
sold
at
a
combined
net
gain
of
$49,000.
In
addition,
Bancorp
incurred
$1,526,000
in
costs
related
to
the
sale
of
the
properties.
The
following
table
summarizes
the
changes
in
foreclosed
real
estate
for
the
years
ended
December
31,
2015
and
2014
(dollars
in
thousands):
Foreclosed
real
estate
at
December
31,
2013
Transferred
from
impaired
loans,
net
of
specific
reserves
of
$3,303
Property
improvements
Additional
write
downs
Property
sold,
including
loss
on
sale
Foreclosed
real
estate
at
December
31,
2014
Transferred
from
impaired
loans,
net
of
specific
reserves
of
$2,282
Property
improvements
Additional
write
downs
Property
sold,
including
loss
on
sale
Foreclosed
real
estate
at
December
31,
2015
$
$
$
8,972
847
-
-
(7,872)
1,947
2,234
-
(58)
(2,379)
1,744
Total
foreclosed
real
estate
expense
for
2015
was
$230,000.
Net
gain
on
the
property
sales
was
$49,000,
property
write
downs
totaled
$58,000
and
operating
expense
was
$221,000.
Total
foreclosed
real
estate
expense
for
2014
was
$10,000.
Net
gain
on
the
property
sales
was
$302,000,
property
write
downs
totaled
$0
and
operating
expense
was
$312,000.
Consumer
mortgage
loans
secured
by
residential
real
estate
properties
for
which
formal
foreclosure
proceedings
were
in
process
according
to
local
requirements
of
the
applicable
jurisdiction
totaled
$1,487,000
as
of
December
31,
2015.
Note 6 - Investment in Federal Home Loan Bank of Atlanta Stock
The
Bank
is
required
to
maintain
an
investment
in
the
stock
of
the
FHLB
in
an
amount
equal
to
at
least
1%
of
the
unpaid
principal
balances
of
the
Bank's
residential
mortgage
loans
or
1/20
of
its
outstanding
advances
from
the
FHLB,
whichever
is
greater.
Purchases
and
sales
of
stock
are
made
directly
with
the
FHLB
at
par
value.
F-36
Table of Contents
Note 7 – Deposits
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Deposits
in
the
Bank
as
of
December
31,
2015
and
2014
consisted
of
the
following:
Category
NOW
accounts
Money
market
accounts
Passbooks
Certificates
of
deposit
Non-interest
bearing
accounts
Total
deposits
December
31,
2015
Amount
December
31,
2014
Amount
Percent
Percent
(dollars
in
thousands)
$
$
56,096
47,690
111,992
277,778
30,215
523,771
10.71%
$
9.11%
21.38%
53.03%
5.77%
100.00%
$
54,827
39,579
126,062
298,489
24,857
543,814
10.08%
7.28%
23.18%
54.89%
4.57%
100.00%
At
December
31,
2015
scheduled
maturities
of
certificates
of
deposit
are
as
follows:
One
year
or
less
More
than
1
year
to
2
years
More
than
2
years
to
3
years
More
than
3
years
to
4
years
More
than
4
years
to
5
years
Amount
(dollars
in
thousands)
169,298
56,335
21,899
5,936
24,310
277,778
$
$
The
aggregate
amount
of
jumbo
certificates
of
deposit
with
a
minimum
denomination
of
$250,000
was
$25,713,000
and
$30,702,000
at
December
31,
2015
and
2014,
respectively.
Note 8 – Long Term Borrowings
The
Bank's
total
credit
availability
under
the
FHLB’s
credit
availability
program
was
$192,672,000
and
$153,070,000
at
December
31,
2015
and
2014,
respectively.
The
Bank’s
credit
availability
is
based
on
the
level
of
collateral
pledged
up
to
25%
of
total
assets.
There
were
no
short-term
borrowings
with
the
FHLB
at
December
31,
2015
and
2014.
Long-term
advances
outstanding
were
$115,000,000
at
December
31,
2015
and
2014.
The
maturities
of
these
long-term
advances
at
December
31,
2015
are
as
follows
(dollars
in
thousands):
Rate
1.81%
to
1.83%
$
2.43%
to
4.05%
2.58%
to
3.43%
4.00%
$
Amount
15,000
70,000
15,000
15,000
115,000
Maturity
2016
2017
2018
2019
The
Bank's
stock
in
the
FHLB
is
pledged
as
security
for
the
advances
and
under
a
blanket
floating
lien
security
agreement
with
the
FHLB.
The
Bank
is
required
to
maintain
as
collateral
for
its
advances,
qualified
loans
in
varying
amounts
depending
on
the
loan
type.
Loans
with
an
approximate
fair
value
of
$274,783,000
are
pledged
as
collateral
at
December
31,
2015.
F-37
Table of Contents
Note 9 - Subordinated Debentures
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
As
of
December
31,
2015,
Bancorp
had
outstanding
approximately
$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
Bancorp
and
Wells
Fargo
Bank,
National
Association
as
Trustee.
The
2035
Debentures
pay
interest
quarterly
at
a
floating
rate
of
interest
of
3-month
LIBOR
(0.32%
December
31,
2015)
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
Bancorp,
as
defined
in
the
2035
Indenture.
The
2035
Debentures
became
redeemable,
in
whole
or
in
part,
by
Bancorp
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
Bancorp.
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.
Bancorp
has
entered
into
an
agreement
which,
taken
collectively,
fully
and
unconditionally
guarantees
the
Capital
Securities
subject
to
the
terms
of
the
guarantee.
$17,000,000
of
the
proceeds
from
Bancorp’s
issuance
of
the
debentures
was
contributed
to
the
Bank,
and
qualifies
as
Tier
1
capital
for
the
Bank
under
Federal
Reserve
Board
guidelines.
Under
the
terms
of
the
2035
Indenture,
Bancorp
is
permitted
to
defer
the
payment
of
interest
on
the
2035
Debentures
for
up
to
20
consecutive
quarterly
periods
provided
that
no
event
of
default
has
occurred
and
is
continuing.
As
of
December
31,
2015,
Bancorp
has
deferred
the
payment
of
fifteen
quarters
of
interest
and
the
cumulative
amount
of
interest
in
arrears
not
paid,
including
interest
on
unpaid
interest,
was
$1,863,000.
This
amount
is
included
in
the
accrued
interest
payable
and
other
liabilities
total
on
the
balance
sheet.
Under
the
terms
of
Bancorp’s
2035
Indenture,
if
Bancorp
has
deferred
payments
of
interest
on
the
2035
Debentures,
Bancorp
may
not,
among
other
things,
declare
or
pay
any
dividends
or
distributions
on,
or
redeem,
purchase,
acquire,
or
make
a
liquidation
payment
with
respect
to,
any
of
its
capital
stock,
including
common
stock
until
all
such
deferred
interest
has
been
paid.
Accordingly,
Bancorp
will
not
be
able
to
pay
dividends
on
its
common
stock
until
the
deferred
interest
on
the
2035
Debentures
has
been
paid
in
full.
On
November
15,
2008,
Bancorp
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
consisted
of
6,250
shares
of
Bancorp's
Series
A
preferred
stock
and
Bancorp's
Subordinated
Note
in
the
original
principal
amount
of
$50,000.
The
Subordinated
Notes
pay
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
Bancorp
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.
Interest
payments
on
the
Subordinated
Notes
are
current
as
of
December
31,
2015.
F-38
Table of Contents
Note 10 – Employee Benefit Plans
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
The
Bank
has
a
401(k)
Retirement
Savings
Plan.
Employees
may
contribute
a
percentage
of
their
salary
up
to
the
maximum
amount
allowed
by
law.
The
Bank
is
obligated
to
contribute
50%
of
the
employee's
contribution,
not
to
exceed
6%
of
the
employee's
annual
salary.
All
employees
who
have
completed
one
year
of
service
with
the
Bank
are
eligible
to
participate.
The
Bank's
contributions
to
this
plan
were
$217,000,
and
$198,000
for
the
years
ended
December
31,
2015
and
2014,
respectively.
The
Bank
has
an
Employee
Stock
Ownership
Plan
("ESOP")
for
the
exclusive
benefit
of
participating
employees.
The
Bank
recognized
ESOP
expense
of
$140,000
for
each
of
the
years
ended
December
31,
2015
and
2014,
and
had
unallocated
shares
to
participants
in
the
plan
totaling
10,000
shares
and
25,000
shares
as
of
December
31,
2015
and
2014,
respectively.
The
fair
value
of
the
unallocated
shares
at
December
31,
2015
was
approximately
$58,000.
Note 11 - Stockholders’ Equity
As
part
of
the
private
placement
offering
discussed
in
Note
9,
Bancorp
issued
a
total
of
437,500
shares
of
its
Series
A
8.0%
Non-Cumulative
Convertible
preferred
stock
(“Series
A
preferred
stock”).
The
liquidation
preference
is
$8.00
per
share.
Holders
of
Series
A
preferred
stock
will
not
be
entitled
to
any
further
liquidation
distribution
on
the
Series
A
preferred
stock.
Each
share
of
Series
A
preferred
stock
is
convertible
at
the
option
of
the
holder
into
one
share
of
Bancorp
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
Bancorp
common
stock.
At
the
option
of
Bancorp,
on
and
after
December
31,
2015,
at
any
time
and
from
time
to
time,
some
or
all
of
the
Series
A
preferred
stock
may
be
converted
into
shares
of
Bancorp
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
Bancorp'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
Bancorp
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
Bancorp's
board
of
directors
declare
any
dividends
on
the
Series
A
preferred
stock
and
any
unpaid
dividends
shall
not
be
cumulative.
Dividends
on
the
Series
A
preferred
stock
have
not
been
declared
since
the
first
quarter
of
2012.
On
November
21,
2008,
Bancorp
entered
into
an
agreement
with
the
United
States
Department
of
the
Treasury
(“Treasury”),
pursuant
to
which
Bancorp
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
Bancorp’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.
On
September
25,
2013,
the
Treasury
sold
all
of
its
23,393
shares
of
Series
B
preferred
stock
to
outside
investors
as
part
of
their
ongoing
efforts
to
wind
down
and
recover
its
remaining
investments
under
the
Troubled
Asset
Relief
Program
(“TARP’).
The
terms
of
the
Series
B
preferred
stock
remain
the
same.
The
Treasury
continues
to
hold
the
Warrant.
The
Series
B
preferred
stock
qualifies
as
Tier
1
capital
and
pays
cumulative
compounding
dividends
at
a
rate
of
9%
per
annum.
The
Series
B
preferred
stock
may
be
redeemed
by
Bancorp.
The
Series
B
preferred
stock
has
no
maturity
date
and
ranks
pari
passu
with
Bancorp’s
existing
Series
A
preferred
stock,
in
terms
of
dividend
payments
and
distributions
upon
liquidation,
dissolution
and
winding
up
of
Bancorp.
F-39
Table of Contents
Note 11 - Stockholders’ Equity - Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
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,
Bancorp’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
Bancorp’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.
In
connection
with
the
sale
by
the
Treasury
of
the
Series
B
preferred
stock,
the
Federal
Reserve
obtained
waivers
from
the
outside
investors
who
purchased
the
Series
B
preferred
stock
in
which
such
investors
agreed
not
to
exercise
their
right
to
elect
directors,
and
certain
other
voting
or
control
rights,
without
the
prior
approval
of
the
Federal
Reserve.
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.
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.
Bancorp’s
ability
to
declare
dividends
on
its
common
stock
are
limited
by
the
terms
of
Bancorp’s
Series
A
preferred
stock
and
Series
B
preferred
stock.
Bancorp
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,
Bancorp
may
not
declare
or
pay
dividend
or
distribution
on
its
common
stock,
and
Bancorp
may
not
purchase,
redeem
or
otherwise
acquire
for
consideration
any
of
its
common
stock,
unless
all
accrued
and
unpaid
dividends
for
all
past
dividend
periods,
including
the
latest
completed
dividend
period,
on
all
outstanding
shares
of
Series
B
preferred
stock
have
been
or
are
contemporaneously
declared
and
paid
in
full
(or
have
been
declared
and
a
sum
sufficient
for
the
payment
thereof
has
been
set
aside),
subject
to
certain
minor
exceptions.
As
of
December
31,
2015,
the
cumulative
amount
of
dividends
of
the
Series
B
preferred
stock
in
arrears
not
declared,
including
interest
on
unpaid
dividends
was
$7,033,000.
Accordingly,
Bancorp
will
not
be
able
to
pay
dividends
on
its
common
stock
until
the
dividend
arrearages
on
its
Series
B
preferred
stock
have
been
paid
in
full
and
until
Bancorp
declares
and
pays
a
dividend
on
its
Series
A
preferred
stock.
Additionally,
under
the
terms
of
Bancorp's
2035
Debentures,
if
(i)
there
has
occurred
and
is
continuing
an
event
of
default,
(ii)
Bancorp
is
in
default
with
respect
to
payment
of
any
obligations
under
the
related
guarantee
or
(iii)
Bancorp
has
given
notice
of
its
election
to
defer
payments
of
interest
on
the
2035
Debentures
by
extending
the
interest
distribution
period
as
provided
in
the
indenture
governing
the
2035
Debentures
and
such
period,
or
any
extension
thereof,
has
commenced
and
is
continuing,
then
Bancorp
may
not,
among
other
things,
declare
or
pay
any
dividends
or
distributions
on,
or
redeem,
purchase,
acquire,
or
make
a
liquidation
payment
with
respect
to,
any
of
its
capital
stock,
including
common
stock.
As
permitted
under
the
terms
of
the
2035
Debentures,
as
of
December
31,
2015,
Bancorp
has
deferred
the
payment
of
fifteen
quarters
of
interest
and
the
cumulative
amount
of
interest
in
arrears
not
paid,
including
interest
on
unpaid
interest,
was
$1,863,000.
Accordingly,
Bancorp
will
not
be
able
to
pay
dividends
on
its
common
stock
until
the
interest
deferrals
on
the
2035
Debentures
have
been
paid
in
full.
F-40
Table of Contents
Note 12- Stock-Based Compensation
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Bancorp
has
a
stock-based
compensation
plan
for
directors,
officers,
and
other
key
employees
of
Bancorp.
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
Bancorp’s
old
stock-
based
compensation
plan.
Under
the
terms
of
the
plan,
Bancorp
has
the
ability
to
grant
various
stock
compensation
incentives,
including
stock
options,
stock
appreciation
rights,
and
restricted
stock.
The
number
of
shares
available
to
grant
under
the
plan
was
260,501
at
December
31,
2015.
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
Bancorp
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.
Bancorp
follows
FASB
ASC
718,
Compensation
–
Stock
Compensation
(FASB
ASC
718)
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
included
in
the
consolidated
statements
of
operations
for
the
years
ended
December
31,
2015
and
2014
totaled
$120,000
and
$201,000,
respectively.
There
was
no
income
tax
benefit
recognized
in
the
consolidated
statements
of
operations
for
stock-based
compensation
for
the
years
ended
December
31,
2015
and
2014.
There
were
111,500
options
granted
in
2015
and
50,000
options
granted
in
2014.
F-41
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 12- Stock-Based Compensation – Continued
Information
regarding
Bancorp’s
stock
option
plan
as
of
and
for
the
years
ended
December
31,
2015
and
2014
is
as
follows:
Options
outstanding,
December
31,
2013
Options
granted
Options
exercised
Options
forfeited
Options
outstanding,
December
31,
2014
Options
granted
Options
exercised
Options
forfeited
Options
outstanding,
December
31,
2015
Options
exercisable,
December
31,
2015
Option
price
range
at
December
31,
2015
Weighted
Average
Exercise
Price
4.23
4.67
3.37
3.93
4.33
5.85
4.48
4.29
4.83
4.17
$3.37
to
$6.33
Shares
319,000
$
50,000
(700)
(40,100)
328,200
111,500
(21,500)
(78,400)
339,800
104,230
Weighted
Average
Remaining
Life
Aggregate
Intrinsic
Value
3.48
2.53
$322,714
$164,859
The
stock-based
compensation
expense
amounts
were
derived
using
the
Black-Scholes
option-pricing
model.
The
following
weighted
average
assumptions
were
used
to
value
options
granted
in
current
and
prior
periods
presented.
Expected
life
of
options
Risk-free
interest
rate
Expected
volatility
Expected
dividend
yield
Weighted
average
fair
value
of
options
granted
2015
5.5
years
2014
5.5
years
1.71%
61.84%
0.00%
$
3.16
1.76%
66.61%
0.00%
2.63
$
The
expected
life
of
options
amount
is
based
on
the
vesting
period
and
the
expiration
date
of
the
options
granted.
The
Risk-free
interest
rate
is
based
on
the
US
Treasury’s
five
year
Treasury
note
rate
at
the
time
of
the
option
grant.
The
expected
volatility
is
based
on
the
closing
common
stock
price
of
Bancorp
over
a
five
year
period.
The
expected
dividend
yield
is
based
on
Bancorp’s
current
policy
of
not
paying
a
common
stock
dividend.
In
addition,
option
valuation
models
require
the
input
of
highly
subjective
assumptions
including
the
expected
stock
price
volatility.
F-42
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 12- Stock-Based Compensation – Continued
The
following
table
summarizes
the
nonvested
options
in
Bancorp’s
stock
option
plan
as
of
December
31,
2015.
Nonvested
options
outstanding,
December
31,
2014
Nonvested
options
granted
Nonvested
options
vested
Nonvested
options
forfeited
Nonvested
options
outstanding,
December
31,
2015
Weighted
Average
Exercise
Price
4.44
5.85
4.31
4.55
5.13
Shares
198,505
$
111,500
(45,435)
(29,000)
235,570
$
As
of
December
31,
2015,
there
was
approximately
$690,000
of
total
unrecognized
stock-based
compensation
cost
related
to
non-vested
stock
options,
which
is
expected
to
be
recognized
over
a
period
of
fifty-eight
months.
Note 13- Regulatory Matters
As
of
December
31,
2015,
Bancorp’s
reservable
liability
was
below
the
threshold
established
by
the
Federal
Reserve
Bank
and
therefore,
Bancorp
was
not
required
to
maintain
reserves
(in
the
form
of
deposits
with
the
Federal
Reserve
Bank
or
a
correspondent
bank
on
behalf
of
the
Federal
Reserve
Bank.)
Federal
banking
agencies
have
adopted
proposals
that
have
substantially
amended
the
regulatory
capital
rules
applicable
to
Bancorp
and
the
Bank.
The
amendments
implement
the
“Basel
III”
regulatory
capital
reforms
and
changes
required
by
the
Dodd-Frank
Act.
The
amended
rules
establish
new
higher
capital
ratio
requirements,
narrow
the
definitions
of
capital,
impose
new
operating
restrictions
on
banking
organizations
with
insufficient
capital
buffers
and
increase
the
risk
weighting
of
certain
assets.
The
amended
rules
were
effective
with
respect
to
Bancorp
and
the
Bank
in
January
2015,
with
certain
requirements
to
be
phased
in
beginning
in
2016.
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.
Quantitative
measures
established
by
regulation
to
ensure
capital
adequacy
require
the
Bank
to
maintain
minimum
amounts
and
ratios
(set
forth
in
the
table
below)
of
total
and
Tier
1
capital
(as
defined
in
the
regulations)
to
risk-weighted
assets
(as
defined),
and
of
Tier
1
capital
(as
defined)
to
average
assets
(as
defined).
As
of
December
31,
2015,
the
most
recent
notification
from
the
regulators
categorized
the
Bank
as
well
capitalized
under
the
regulatory
framework
for
prompt
corrective
action.
To
be
categorized
as
well
capitalized
the
Bank
must
maintain
minimum
total
risk-based,
Tier
1
risk-based,
Common
Equity
Tier
1
and
Tier
1
leverage
ratios
as
set
forth
in
the
table.
There
are
no
conditions
or
events
since
that
notification
that
management
believes
have
changed
the
Bank’s
category.
The
Bank’s
actual
capital
amounts
and
ratios
are
also
presented
in
the
table.
F-43
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 13- Regulatory Matters – Continued
The
following
table
presents
the
Bank's
actual
capital
amounts
and
ratios
at
December
31,
2015
and
2014:
Actual
Amount
%
For
Capital
Adequacy
Purposes
Amount
(dollars
in
thousands)
$
$
112,959
112,959
112,959
112,959
120,193
106,916
106,916
106,916
113,848
14.8%
$
19.6%
19.6%
14.8%
20.8%
13.8%
$
19.4%
13.8%
20.6%
11,423
34,626
25,970
30,461
46,168
11,590
N/A
30,906
44,108
To
Be
Well
Capitalized
Under
Prompt
Corrective
Action
Provisions
Amount
N/A
46,168
37,512
38,076
57,710
N/A
33,081
38,633
55,135
%
N/A
8.00%
6.50%
5.00%
10.00%
N/A
6.00%
5.00%
10.00%
%
1.50%
6.00%
$
4.50%
$
4.00%
8.00%
1.50%
N/A
$
4.00%
8.00%
December
31,
2015
Tangible
(1)
Tier
1
capital
(2)
Common
Equity
Tier
1
(2)
Leverage
(1)
Total
(2)
December
31,
2014
Tangible
(1)
Tier
1
capital
(2)
Leverage
(1)
Total
(2)
(1)
To
adjusted
total
assets.
(2)
To
risk-weighted
assets.
On
November
23,
2009,
Bancorp
and
the
Bank
each
entered
into
a
supervisory
agreement
with
the
Office
of
Thrift
Supervision
(“OTS”).
As
a
result
of
the
Dodd-Frank
Wall
Street
Reform
and
Consumer
Protection
Act
(the
“Dodd-Frank
Act”),
effective
as
of
July
21,
2011,
the
OTS
was
abolished,
and
the
regulatory
oversight
functions
and
authority
of
the
OTS
related
to
the
Bank
were
transferred
to
the
Office
of
the
Comptroller
of
the
Currency
(“OCC”)
and
the
regulatory
oversight
functions
and
authority
of
the
OTS
related
to
Bancorp
were
transferred
to
the
Board
of
Governors
of
the
Federal
Reserve
System
(“Federal
Reserve”
or
“FRB”).
The
Bank’s
supervisory
agreement
was
replaced
by
a
formal
agreement
dated
April
23,
2013
with
the
OCC.
On
October
15,
2015,
the
Bank
was
notified
by
the
OCC
that
its
agreement
was
terminated.
Bancorp’s
supervisory
agreement
was
enforced
by
the
FRB.
On
January
21,
2016,
Bancorp
was
notified
by
FRB
that
its
agreement
was
terminated.
On
April
23,
2013,
the
Bank
was
notified
by
the
OCC
that
the
OCC
established
minimum
capital
ratios
for
the
Bank
requiring
it
to
immediately
maintain
a
Tier
1
Leverage
Capital
Ratio
to
Adjusted
Total
Assets
of
at
least
10%
and
a
Total
Risk-Based
Capital
to
Risk-Weighted
Assets
ratio
of
at
least
15%.
On
October
15,
2015
the
Bank
was
notified
by
the
OCC
that
these
additional
minimum
capital
ratios
were
no
longer
required.
F-44
Table of Contents
Note 14 - Income Taxes
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
The
income
tax
provision
consists
of
the
following
for
the
years
ended
December
31:
Current
Federal
State
Deferred
Federal
State
Valuation
allowance
Total
income
tax
provision
$
2015
2014
83
$
7
90
1,486
321
1,807
(1,807)
12
19
31
1,029
251
1,280
(1,280)
$
90
$
31
The
amount
computed
by
applying
the
statutory
federal
income
tax
rate
to
income
before
taxes
is
less
than
the
tax
provision
for
the
following
reasons
for
the
years
ended
December
31:
Statutory
Federal
income
tax
rate
State
tax
net
of
Federal
income
tax
benefit
Valuation
allowance
change
Other
adjustments
2015
2014
Amount
1,572
216
(1,807)
109
90
$
$
Percent
of
Pretax
Income
34.0%
$
4.7%
(39.1)%
2.4%
2.0%
$
Percent
of
Pretax
Income
34.0%
6.1%
(43.5)%
4.5%
1.1%
Amount
1,000
178
(1,280)
133
31
Bancorp
does
not
have
a
liability
related
to
tax
positions
at
December
31,
2015
or
2014.
The
tax
effects
of
temporary
differences
that
give
rise
to
significant
portions
of
the
deferred
tax
assets
and
deferred
tax
liabilities
at
December
31,
2015
and
2014
are
presented
below:
F-45
Table of Contents
Note 14 - Income Taxes - Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Deferred
Tax
Assets:
Allowance
for
loan
losses
Loan
charge-offs
Reserve
on
foreclosed
real
estate
Reserve
for
uncollected
interest
Reserve
for
contingent
liability
Federal
net
operating
loss
carryforwards
State
net
operating
loss
carryforwards
Charitable
contribution
carryforwards
Other
Total
deferred
tax
assets
Valuation
allowance
Total
deferred
tax
assets,
net
of
valuation
allowance
Deferred
Tax
Liabilities:
Federal
Home
Loan
Bank
stock
dividends
Loan
origination
costs
Accelerated
depreciation
Prepaid
expenses
Mortgage
servicing
rights
Other
Total
deferred
tax
liabilities
$
2015
2014
(dollars
in
thousands)
5,456
$
-
552
143
57
7,306
1,457
319
88
15,378
(12,485)
2,893
(84)
(733)
(1,544)
(278)
(252)
(2)
(2,893)
5,648
-
565
263
128
8,593
1,606
319
12
17,134
(14,292)
2,842
(84)
(627)
(1,599)
(265)
(265)
(2)
(2,842)
Net
deferred
tax
assets
$
-
$
-
At
December
31,
2015,
federal
net
operating
losses
totaled
$20,875,000
and
expire
in
2033
and
2034.
The
state
net
operating
losses
totaled
$27,173,000
and
expire
at
various
times
from
2023
through
2033.
In
assessing
the
realizability
of
federal
or
state
deferred
tax
assets
at
December
31,
2015,
management
considers
whether
it
is
more
likely
than
not
that
some
portion
or
all
of
the
deferred
tax
assets
will
not
be
realized.
The
ultimate
realization
of
deferred
tax
assets
is
dependent
upon
the
generation
of
future
taxable
income
during
periods
in
which
those
temporary
differences
become
deductible.
Management
considers
the
scheduled
reversal
of
deferred
tax
liabilities,
projected
future
taxable
income
and
prudent,
feasible
and
permissible
as
well
as
available
tax
planning
strategies
in
making
this
assessment.
Based
on
its
review
of
all
available
evidence,
and
after
consideration
of
the
losses
recorded
on
the
loan
sales
in
2013,
management
determined
it
was
more
likely
than
not
that
the
deferred
tax
assets
will
not
be
realized
and
accordingly
determined
that
a
valuation
allowance
should
be
recorded
as
of
December
31,
2015
and
2014.
The
deferred
tax
asset
valuation
may,
in
accordance
with
the
requirements
of
generally
accepted
accounting
principles,
be
reversed
in
future
periods,
depending
upon
Bancorp’s
financial
position
and
results
of
operations
in
the
future,
among
other
factors,
and,
in
such
event,
may
be
available
to
increase
future
earnings.
F-46
Table of Contents
Note 14 - Income Taxes - Continued
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Bancorp
will
continue
to
have
the
benefit
of
the
net
operating
loss
carryforward
relating
to
the
deferred
tax
asset,
and
will
have
the
ability
to
utilize
the
carryforward
against
future
federal
and
state
income
taxes.
The
statute
of
limitations
for
Internal
Revenue
Service
examination
of
Bancorp’s
federal
consolidated
tax
returns
remains
open
for
tax
years
2012
through
2015.
Note 15 - Related Party Transactions
During
the
years
ended
December
31,
2015
and
2014,
the
Bank
engaged
in
the
transactions
described
below
with
parties
that
are
deemed
affiliated.
During
January
2007,
a
law
firm,
in
which
the
President
of
Bancorp
and
the
Bank
is
a
partner,
entered
into
a
five
year
lease
agreement
with
a
subsidiary
of
Bancorp.
The
term
of
the
lease
is
five
years
with
the
option
to
renew
the
lease
for
three
additional
five
year
terms.
The
first
option
to
renew
was
exercised
in
January
2012.
The
total
payments
received
by
the
subsidiary,
which
includes
rent,
common
area
maintenance
and
utilities
were
$404,000
and
$385,000
for
the
years
ended
December
31,
2015
and
2014,
respectively.
In
addition,
the
law
firm
represents
Bancorp
and
the
Bank
in
certain
legal
matters.
The
fees
for
services
rendered
by
that
firm
were
$206,000,
and
$324,000
for
the
years
ended
December
31,
2015
and
2014
respectively.
Members
of
the
Board
of
Directors
of
Bancorp
had
loans
outstanding
totaling
$3,186,000
and
$3,340,000
at
December
31,
2015
and
2014,
respectively.
The
following
table
shows
loan
activity
for
the
year
ended
December
31,
2015:
Beginning
balance
as
of
December
31,
2014
Loan
funding
Loan
pay
off/payment
Ending
balance
as
of
December
31,
2015
Note 16 - Fair Value of Financial Instruments
2015
3,340,000
-
154,000
3,186,000
$
$
A
fair
value
hierarchy
that
prioritizes
the
inputs
to
valuation
methods
is
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
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:
Significant
other
observable
inputs
other
than
level
1
such
as
quoted
prices
for
similar
assets
or
liabilities;
quoted
prices
in
markets
that
are
not
active,
or
inputs
that
are
observable
either
directly
or
indirectly,
inputs
that
are
observable
or
can
be
corroborated
by
observable
market
data.
Level
3:
Significant
unobservable
inputs
that
reflect
a
company’s
own
assumptions
about
the
assumption
that
market
participants
would
use
in
pricing
an
asset
or
liability.
F-47
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 16 - Fair Value of Financial Instruments - Continued
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.
The
following
information
should
not
be
interpreted
as
an
estimate
of
the
fair
value
of
Bancorp
since
a
fair
value
calculation
is
only
provided
for
a
limited
portion
of
Bancorp’s
assets
and
liabilities.
Due
to
a
wide
range
of
valuation
techniques
and
the
degree
of
subjectivity
used
in
making
the
estimates,
comparisons
between
Bancorp’s
disclosures
and
those
of
other
companies
may
not
be
meaningful.
The
following
methods
and
assumptions
were
used
to
estimate
the
fair
values
of
Bancorp’s
financial
instruments
at
December
31,
2015
and
December
31,
2014.
Impaired Loans:
Impaired
loans
are
carried
at
the
lower
of
cost
or
the
present
value
of
expected
future
cash
flows
of
the
loan.
If
it
is
determined
that
the
repayment
of
the
loan
will
be
provided
solely
by
the
underlying
collateral,
and
there
are
no
other
available
and
reliable
sources
of
repayment,
the
loan
is
considered
collateral
dependent.
Impaired
loans
that
are
considered
collateral
dependent
are
carried
at
the
lower
of
cost
or
the
fair
value
of
the
underlying
collateral.
Collateral
may
be
in
the
form
of
real
estate
or
business
assets
including
equipment,
inventory
and
accounts
receivable.
The
use
of
independent
appraisals
and
management’s
best
judgment
are
significant
inputs
in
arriving
at
the
fair
value
measure
of
the
underlying
collateral
and
impaired
loans
are
therefore
classified
within
level
3
of
the
fair
value
hierarchy.
For
such
loans
that
are
classified
as
impaired,
an
allowance
is
established
when
the
present
value
of
the
expected
future
cash
flows
of
the
impaired
loan
is
lower
than
the
carrying
value
of
that
loan.
For
such
loans
that
are
classified
as
collateral
dependent
impaired
loans,
an
allowance
is
established
when
the
current
market
value
of
the
underlying
collateral
less
its
estimated
disposal
costs
has
not
been
finalized,
but
management
determines
that
it
is
likely
that
the
value
is
lower
than
the
carrying
value
of
that
loan.
Once
the
net
collateral
value
has
been
determined,
a
charge-
off
is
taken
for
the
difference
between
the
net
collateral
value
and
the
carrying
value
of
the
loan.
Impaired
loans
are
those
for
which
Bancorp
has
measured
impairment
based
on
the
present
value
of
expected
future
cash
flows
or
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
$16,166,000
and
$18,736,000
at
December
31,
2015
and
December
31,
2014,
respectively,
less
their
valuation
allowances
of
$2,282,000
and
$2,777,000
at
December
31,
2015
and
December
31,
2014,
respectively.
The
fair
value
of
seven
impaired
collateral-dependent
loans
that
were
partially
charged
off
during
the
year
ended
December
31,
2015
totaled
$3,219,000
net
of
charge-offs
of
$622,000.
The
fair
value
of
nine
impaired
collateral-dependent
loans
that
were
partially
charged
off
during
the
year
ended
December
31,
2014
totaled
$3,834,000
net
of
charge-offs
of
$477,000.
F-48
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 16 - Fair Value of Financial Instruments –
Continued
Foreclosed Real Estate:
Real
estate
acquired
through
foreclosure
is
included
in
the
following
disclosure
at
the
lower
of
carrying
value
or
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
a
specific
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.
The
following
table
sets
forth
financial
assets
that
were
accounted
for
at
fair
value
on
a
nonrecurring
and
recurring
basis
by
level
within
the
fair
value
hierarchy
as
of
December
31,
2015:
December
31,
2015
Fair
Value
Measurement
Using:
Quoted
Prices
in
Active
Markets
For
Identical
Assets
(Level
1)
Significant
Other
Observable
Inputs
(Level
2)
Significant
Unobservable
Inputs
(Level
3)
(dollars
in
thousands)
-
$
-
-
$
-
$
-
-
-
$
-
$
-
-
$
17,103
543
17,646
-
$
141
111
252
$
623
-
-
623
December
31,
2015
$
$
$
$
17,103
$
543
17,646
$
623
$
141
111
875
$
Nonrecurring
fair
value
measurements
Impaired
loans
Foreclosed
real
estate
Total
nonrecurring
fair
value
measurements
Recurring
fair
value
measurements
Mortgage
servicing
rights
Rate
lock
commitments
Mandatory
forward
contracts
Total
recurring
fair
value
measurements
The
following
table
sets
forth
financial
assets
that
were
accounted
for
at
fair
value
on
a
nonrecurring
and
recurring
basis
by
level
within
the
fair
value
hierarchy
as
of
December,
31,
2014:
F-49
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 16 - Fair Value of Financial Instruments –
Continued
December
31,
2014
Fair
Value
Measurement
Using:
Quoted
Prices
in
Active
Markets
For
Identical
Assets
(Level
1)
Significant
Other
Observable
Inputs
(Level
2)
Significant
Unobservable
Inputs
(Level
3)
(dollars
in
thousands)
-
$
-
-
$
-
$
-
-
-
$
-
$
-
-
$
15,959
1,947
17,906
-
$
139
(59)
80
$
658
-
-
658
December
31,
2014
$
$
$
$
15,959
$
1,947
17,906
$
658
$
139
(59)
738
$
Nonrecurring
fair
value
measurements
Impaired
loans
Foreclosed
real
estate
Total
nonrecurring
fair
value
measurements
Recurring
fair
value
measurements
Mortgage
servicing
rights
Rate
lock
commitments
Mandatory
forward
contracts
Total
recurring
fair
value
measurements
There
were
no
liabilities
that
were
required
to
be
re-measured
on
a
nonrecurring
basis
at
December
31,
2015
or
December
31,
2014.
All
appraisals
are
reviewed
by
the
credit
department;
however,
no
modifications
or
adjustments
are
made
to
the
appraisals
received.
F-50
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 16 - Fair Value of Financial Instruments –
Continued
The
following
table
presents
additional
quantitative
information
about
assets
measured
at
fair
value
on
a
nonrecurring
basis
and
for
which
Bancorp
has
utilized
Level
3
inputs
to
determine
fair
value:
December
31,
2015
Impaired
loans
Foreclosed
real
estate
December
31,
2014
Impaired
loans
Foreclosed
real
estate
$
$
$
$
$
$
Quantitative
Information
about
Level
3
Fair
Value
Measurements
Fair
Value
Estimate
Valuation
Techniques
Unobservable
Input
Range
(Weighted
Average)
13,884
3,219
PV
of
future
cash
flows
(1)
Appraisal
of
collateral
(2)
Discount
Rate
Liquidation
expenses
(3)
-6.00%
-6.00%
543
Appraisal
of
collateral
(2),(4)
Appraisal
adjustments
(3)
-6.12%
to
-7.31%
(-6.24%)
15,589
370
PV
of
future
cash
flows
(1)
Appraisal
of
collateral
(2)
Discount
Rate
Liquidation
expenses
(3)
-6.00%
-6.00%
1,947
Appraisal
of
collateral
(2),(4)
Appraisal
adjustments
(3)
-6.51%
to
-100%
(-13.94%)
(1) Cash
flow
which
generally
include
various
level
3
inputs
which
are
not
identifiable.
(2) Fair
value
is
generally
determined
through
independent
appraisals
for
the
underlying
collateral,
which
generally
include
various
level
3
inputs
which
are
not
identifiable.
(3) Appraisals
may
be
adjusted
by
management
for
qualitative
factors
such
as
economic
conditions
and
estimated
liquidation
expenses.
The
range
and
weighted
average
of
liquidation
expenses
and
other
appraisal
adjustments
are
presented
as
a
percent
of
the
appraisal.
Includes
qualitative
adjustments
by
management
and
estimated
liquidation
expenses.
(4)
F-51
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 16 - Fair Value of Financial Instruments –
Continued
The
estimated
fair
values
of
Bancorp's
financial
instruments
as
of
December
31,
2015
and
December
31,
2014
were
as
follows:
Fair
Value
Measurement
at
December
31,
2015
Quoted
Prices
in
Active
Markets
For
Identical
Assets
(Level
1)
Significant
Other
Observable
Inputs
(Level
2)
Significant
Unobservable
Inputs
(Level
3)
Carrying
Amount
Fair
Value
Financial
Assets
Cash
and
cash
equivalents
Investment
securities
(HTM)
Loans
held
for
sale
Loans
receivable,
net
FHLB
stock
Accrued
interest
receivable
Mortgage
servicing
rights
Rate
lock
commitments
Mandatory
forward
contracts
Financial
Liabilities
Deposits
FHLB
advances
Subordinated
debentures
Accrued
interest
payable
Off
Balance
Sheet
Commitments
Financial
Assets
Cash
and
cash
equivalents
Investment
securities
(HTM)
Loans
held
for
sale
Loans
receivable,
net
FHLB
stock
Accrued
interest
receivable
Mortgage
servicing
rights
Rate
lock
commitments
Financial
Liabilities
Deposits
FHLB
advances
Subordinated
debentures
Accrued
interest
payable
Mandatory
forward
contracts
$
$
$
$
$
43,591
$
76,133
13,203
589,656
5,626
2,218
623
141
111
523,771
$
115,000
24,119
3,137
43,591
$
76,310
13,295
593,742
5,626
2,218
623
141
111
(dollars
in
thousands)
43,591
$
-
-
-
-
-
-
-
-
524,458
110,759
24,119
3,137
-
-
-
-
-
$
-
$
-
$
Carrying
Amount
Fair
Value
33,335
$
59,616
7,165
633,882
5,936
2,297
658
139
543,814
$
115,000
24,119
2,136
59
33,335
60,123
7,211
636,696
5,936
2,297
658
139
544,751
108,859
24,119
2,136
59
Quoted
Prices
in
Active
Markets
For
Identical
Assets
(Level
1)
(dollars
in
thousands)
33,335
$
-
-
-
-
-
-
-
-
-
-
-
-
-
$
Off
Balance
Sheet
Commitments
$
-
$
-
F-52
-
$
76,310
13,295
-
5,626
2,218
-
141
111
524,458
110,759
-
3,137
-
-
-
593,742
-
-
623
-
-
-
-
24,119
-
-
$
-
Fair
Value
Measurement
at
December
31,
2014
Significant
Other
Observable
Inputs
(Level
2)
Significant
Unobservable
Inputs
(Level
3)
-
$
60,123
7,211
-
5,936
2,297
-
139
544,751
108,859
-
2,136
59
-
-
-
636,696
-
-
658
-
-
-
24,119
-
-
-
$
-
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 16 - Fair Value of Financial Instruments – Continued
The
foregoing
information
should
not
be
interpreted
as
an
estimate
of
the
fair
value
of
Bancorp
since
a
fair
value
calculation
is
only
provided
for
a
limited
portion
of
Bancorp’s
assets
and
liabilities.
Due
to
a
wide
range
of
valuation
techniques
and
the
degree
of
subjectivity
used
in
making
the
estimates,
comparisons
between
Bancorp’s
disclosures
and
those
of
other
companies
may
not
be
meaningful.
The
following
methods
and
assumptions
were
used
to
estimate
the
fair
values
of
Bancorp’s
financial
instruments
at
December
31,
2015
and
2014.
Cash and cash equivalents:
The
carrying
amounts
reported
in
the
consolidated
statements
of
financial
condition
for
cash
and
cash
equivalents
approximate
those
assets’
fair
values.
Investment Securities:
Bancorp
utilizes
a
third
party
source
to
determine
the
fair
value
of
its
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.
All
Bancorp’s
investments
are
considered
Level
2.
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
December
31,
2015
and
2014.
Loans held for sale:
The
fair
value
of
loans
held
for
sale
is
based
primarily
on
mandatory
contracts.
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.
These
rates
were
used
for
each
aggregated
category
of
loans
as
reported
on
the
OCC
Quarterly
Report.
Accrued interest receivable and payable:
The
carrying
amounts
of
accrued
interest
receivable
and
accrued
interest
payable
approximates
its
fair
value.
Derivative Instruments:
Mortgage
banking
derivatives
used
in
the
ordinary
course
of
business
primarily
consist
of
mandatory
forward
sales
contracts
(“forward
contract”)
and
rate
lock
commitments.
The
fair
value
of
Bancorp’s
derivative
instruments
is
primarily
measured
by
obtaining
pricing
from
broker-dealers
recognized
to
be
market
participants.
The
pricing
is
derived
from
observable
market
inputs
that
can
generally
be
verified
and
do
not
typically
involve
significant
judgment
by
Bancorp.
Forward
contracts
and
rate
lock
loan
commitments
are
classified
as
Level
2
in
the
fair
value
hierarchy.
Mortgage servicing rights:
The
fair
value
of
mortgage
servicing
rights
is
determined
using
a
valuation
model
administered
by
a
third
party
that
calculates
the
present
value
of
estimated
future
net
servicing
income.
The
model
incorporates
assumptions
that
market
participants
use
in
estimating
future
net
servicing
income,
including
estimates
of
prepayment
speeds,
discount
rate,
default
rates,
cost
to
service
(including
delinquency
and
foreclosure
costs),
escrow
account
earnings,
contractual
servicing
fee
income
and
other
ancillary
income
such
as
late
fees.
Management
reviews
all
significant
assumptions
on
a
monthly
basis.
Mortgage
loan
prepayment
speed,
a
key
assumption
in
the
model,
is
the
annual
rate
at
which
borrowers
are
forecasted
to
repay
their
mortgage
loan
principal.
The
discount
rate
used
to
determine
the
present
value
of
estimated
future
net
servicing
income,
another
key
assumption
in
the
model,
is
an
estimate
of
the
required
rate
of
return
investors
in
the
market
would
require
for
an
asset
with
similar
risk.
Both
assumptions
can,
and
generally
will,
change
as
market
conditions
and
interest
rates
change.
F-53
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
(UNAUDITED)
CONTINUED
Note 16 - Fair Values of Financial Instruments
–
Continued
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,
Bancorp
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,
Bancorp
has
disclosed
that
the
carrying
value
approximates
the
fair
value.
Off-balance sheet financial instruments:
Fair
values
for
Bancorp’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.
F-54
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 17 - Condensed Financial Information (Parent Company Only)
Information
as
to
the
financial
position
of
Severn
Bancorp,
Inc.
as
of
December
31,
2015
and
2014
and
results
of
operations
and
cash
flows
for
each
of
the
years
ended
December
31,
2015
and
2014
is
summarized
below.
Statements of Financial Condition
Cash
Equity
in
net
assets
of
subsidiaries:
Bank
Non-Bank
Loans,
net
of
allowance
for
loan
losses
Other
assets
Total
assets
Subordinated
debentures
Other
liabilities
Total
liabilities
Stockholders’
equity
December
31,
2015
2014
(dollars
in
thousands)
$
993
$
1,316
$
$
113,294
3,881
-
912
107,316
3,758
-
920
119,080
$
113,310
24,119
$
8,505
24,119
5,381
32,624
29,500
86,456
83,810
Total
liabilities
and
stockholders’
equity
$
119,080
$
113,310
Statements of Operations
Interest
income
Interest
expense
on
subordinated
debentures
Net
interest
expense
General
and
administrative
expenses
Provision
for
loan
losses
Loss
before
income
taxes
and
equity
in
undistributed
net
income
of
subsidiaries
Income
tax
expense
Equity
in
undistributed
net
income
of
subsidiaries
December
31,
2015
2014
$
-
$
1,322
34
1,086
(1,322)
(1,052)
243
-
(1,565)
-
6,100
242
(19)
(1,275)
(20)
4,204
Net
income
$
4,535
$
2,909
F-55
Table of Contents
SEVERN
BANCORP,
INC.
AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Note 17 - Condensed Financial Information (Parent Company Only) - Continued
Statements of Cash Flows
Cash
Flows
from
Operating
Activities:
Net
income
Adjustments
to
reconcile
net
income
to
net
cash
used
in
operating
activities:
Equity
in
undistributed
earnings
of
subsidiaries
Provision
for
loan
losses
Decrease
in
other
assets
Stock-based
compensation
expense
Increase
in
other
liabilities
Cash
used
in
operating
activities
Cash
Flows
from
Investing
Activities:
Net
decrease
in
loans
Cash
provided
by
investing
activities
Cash
Flows
from
Financing
Activities:
Proceeds
from
sale
of
foreclosed
real
estate
Proceeds
from
exercise
of
options
Cash
provided
by
financing
activities
(Decrease)
increase
in
cash
and
cash
equivalents
Cash
and
cash
equivalents
at
beginning
of
year
For
the
Years
Ended
December
31,
2015
2014
(dollars
in
thousands)
$
4,535
$
2,909
(6,100)
-
8
120
1,018
(419)
-
-
-
96
96
(323)
1,316
(4,204)
(19)
559
201
298
(256)
350
350
250
3
253
347
969
Cash
and
cash
equivalents
at
end
of
year
$
993
$
1,316
F-56
Subsidiaries of Severn Bancorp, Inc.
Exhibit 21.1
The
following
is
a
list
of
subsidiaries
of
Severn
Bancorp,
Inc.
at
December
31,
2015.
All
entities
listed
below
are
subsidiaries
of
Severn
Bancorp,
Inc.
and,
if
indented,
subsidiaries
of
the
entity
under
which
they
are
listed.
Entity
Severn
Savings
Bank,
FSB.
Louis
Hyatt,
Inc.
(d/b/a
Hyatt
Commercial)
HS
West,
LLC
Severn
Financial
Services
Corporation
SSB
Realty
Holdings,
LLC
SSB
Realty
Holdings
II,
LLC
Homeowners
Title
and
Escrow
Corporation
SBI
Mortgage
Company
Crownsville
Development
Corporation
(d/b/a
Annapolis
Equity
Group)
Crownsville
Holdings
I,
LLC
Jurisdiction of Formation
United
States
of
America
(federally
chartered
savings
association)
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Exhibit
21.1
--
Page
1
--
Consent
of
Independent
Registered
Public
Accounting
Firm
Exhibit 23.1
Severn
Bancorp,
Inc.
Annapolis,
Maryland
We
hereby
consent
to
the
incorporation
by
reference
in
the
Registration
Statements
on
Form
S-3
(No.
333-156343)
and
Forms
S-8
(No.
333-152657
and
No.
333-
133242)
of
Severn
Bancorp,
Inc.
of
our
report
dated
March
17,
2016,
relating
to
the
consolidated
financial
statements,
which
is
incorporated
by
reference
in
this
Annual
Report
on
Form
10-K.
/s/BDO
USA,
LLP
Harrisburg,
Pennsylvania
March
17,
2016
Exhibit
23.1
--
Page
1
--
Exhibit 31.1
I,
Alan
J.
Hyatt,
certify
that:
1)
I
have
reviewed
this
annual
report
on
Form
10-K
of
Severn
Bancorp,
Inc.;
Certification
of
Principal
Executive
Officer
2) Based
on
my
knowledge,
this
report
does
not
contain
any
untrue
statement
of
a
material
fact
or
omit
to
state
a
material
fact
necessary
to
make
the
statements
made,
in
light
of
the
circumstances
under
which
such
statements
were
made,
not
misleading
with
respect
to
the
period
covered
by
this
report;
3) Based
on
my
knowledge,
the
financial
statements,
and
other
financial
information
included
in
this
report,
fairly
present
in
all
material
respects
the
financial
condition,
results
of
operations
and
cash
flows
of
the
registrant
as
of,
and
for,
the
periods
presented
in
this
report;
4) The
registrant's
other
certifying
officer
and
I
are
responsible
for
establishing
and
maintaining
disclosure
controls
and
procedures
(as
defined
in
Exchange
Act
Rules
13a-15(e)
and
15d-15(e))
and
internal
control
over
financial
reporting
(as
defined
in
Exchange
Act
Rules
13a-15(f)
and
15d-15(f))
for
the
registrant
and
have:
a) Designed
such
disclosure
controls
and
procedures,
or
caused
such
disclosure
controls
and
procedures
to
be
designed
under
our
supervision,
to
ensure
that
material
information
relating
to
the
registrant,
including
its
consolidated
subsidiaries,
is
made
known
to
us
by
others
within
those
entities,
particularly
during
the
period
in
which
this
report
is
being
prepared;
b) Designed
such
internal
control
over
financial
reporting,
or
caused
such
internal
control
over
financial
reporting
to
be
designed
under
our
supervision,
to
provide
reasonable
assurance
regarding
the
reliability
of
financial
reporting
and
the
preparation
of
financial
statements
for
external
purposes
in
accordance
with
generally
accepted
accounting
principles;
c) Evaluated
the
effectiveness
of
the
registrant's
disclosure
controls
and
procedures
and
presented
in
this
report
our
conclusions
about
the
effectiveness
of
the
disclosure
controls
and
procedures,
as
of
the
end
of
the
period
covered
by
this
report
based
on
such
evaluation;
and
d) Disclosed
in
this
report
any
change
in
the
registrant’s
internal
control
over
financial
reporting
that
occurred
during
the
registrant’s
most
recent
fiscal
quarter
(the
registrant’s
fourth
fiscal
quarter
in
the
case
of
an
annual
report)
that
has
materially
affected,
or
is
reasonably
likely
to
materially
affect,
the
registrant’s
internal
control
over
financial
reporting;
and
5) The
registrant's
other
certifying
officer
and
I
have
disclosed,
based
on
our
most
recent
evaluation
of
internal
control
over
financial
reporting,
to
the
registrant's
auditors
and
the
audit
committee
of
the
registrant's
board
of
directors
(or
persons
performing
the
equivalent
functions):
a)
b)
all
significant
deficiencies
and
material
weaknesses
in
the
design
or
operation
of
internal
control
over
financial
reporting
which
are
reasonably
likely
to
adversely
affect
the
registrant's
ability
to
record,
process,
summarize
and
report
financial
information;
and
any
fraud,
whether
or
not
material,
that
involves
management
or
other
employees
who
have
a
significant
role
in
the
registrant's
internal
control
over
financial
reporting.
Date:
March
17,
2016
/s/
Alan
J.
Hyatt
President
and
Chief
Executive
Officer
(Principal
Executive
Officer)
Exhibit
31.1
--
Page
1
--
Exhibit 31.2
I,
Thomas
G.
Bevivino,
certify
that:
1)
I
have
reviewed
this
annual
report
on
Form
10-K
of
Severn
Bancorp,
Inc.;
Certification
of
Principal
Financial
Officer
2) Based
on
my
knowledge,
this
report
does
not
contain
any
untrue
statement
of
a
material
fact
or
omit
to
state
a
material
fact
necessary
to
make
the
statements
made,
in
light
of
the
circumstances
under
which
such
statements
were
made,
not
misleading
with
respect
to
the
period
covered
by
this
report;
3) Based
on
my
knowledge,
the
financial
statements,
and
other
financial
information
included
in
this
report,
fairly
present
in
all
material
respects
the
financial
condition,
results
of
operations
and
cash
flows
of
the
registrant
as
of,
and
for,
the
periods
presented
in
this
report;
4) The
registrant's
other
certifying
officer
and
I
are
responsible
for
establishing
and
maintaining
disclosure
controls
and
procedures
(as
defined
in
Exchange
Act
Rules
13a-15(e)
and
15d-15(e))
and
internal
control
over
financial
reporting
(as
defined
in
Exchange
Act
Rules
13a-15(f)
and
15d-15(f))
for
the
registrant
and
have:
a) Designed
such
disclosure
controls
and
procedures,
or
caused
such
disclosure
controls
and
procedures
to
be
designed
under
our
supervision,
to
ensure
that
material
information
relating
to
the
registrant,
including
its
consolidated
subsidiaries,
is
made
known
to
us
by
others
within
those
entities,
particularly
during
the
period
in
which
this
report
is
being
prepared;
b) Designed
such
internal
control
over
financial
reporting,
or
caused
such
internal
control
over
financial
reporting
to
be
designed
under
our
supervision,
to
provide
reasonable
assurance
regarding
the
reliability
of
financial
reporting
and
the
preparation
of
financial
statements
for
external
purposes
in
accordance
with
generally
accepted
accounting
principles;
c) Evaluated
the
effectiveness
of
the
registrant's
disclosure
controls
and
procedures
and
presented
in
this
report
our
conclusions
about
the
effectiveness
of
the
disclosure
controls
and
procedures,
as
of
the
end
of
the
period
covered
by
this
report
based
on
such
evaluation;
and
d) Disclosed
in
this
report
any
change
in
the
registrant’s
internal
control
over
financial
reporting
that
occurred
during
the
registrant’s
most
recent
fiscal
quarter
(the
registrant’s
fourth
fiscal
quarter
in
the
case
of
an
annual
report)
that
has
materially
affected,
or
is
reasonably
likely
to
materially
affect,
the
registrant’s
internal
control
over
financial
reporting;
and
5) The
registrant's
other
certifying
officer
and
I
have
disclosed,
based
on
our
most
recent
evaluation
of
internal
control
over
financial
reporting,
to
the
registrant's
auditors
and
the
audit
committee
of
the
registrant's
board
of
directors
(or
persons
performing
the
equivalent
functions):
a)
b)
all
significant
deficiencies
and
material
weaknesses
in
the
design
or
operation
of
internal
control
over
financial
reporting
which
are
reasonably
likely
to
adversely
affect
the
registrant's
ability
to
record,
process,
summarize
and
report
financial
information;
and
any
fraud,
whether
or
not
material,
that
involves
management
or
other
employees
who
have
a
significant
role
in
the
registrant's
internal
control
over
financial
reporting.
Date:
March
17,
2016
/s/
Thomas
G.
Bevivino
Executive
Vice
President
and
Chief
Financial
Officer
(Principal
Financial
Officer)
Exhibit
31.2
--
Page
1
--
CERTIFICATION
PURSUANT
TO
18
U.S.C.
SECTION
1350
AS
ADOPTED
PURSUANT
TO
SECTION
906
OF
THE
SARBANES-OXLEY
ACT
OF
2002
Exhibit 32
Pursuant
to
Section
906
of
the
Sarbanes-Oxley
Act
of
2002
(Section
1350
of
Chapter
63
of
Title
18
of
the
United
States
Code),
each
of
the
undersigned
officers
of
Severn
Bancorp,
Inc.
(“Bancorp”)
does
hereby
certify
with
respect
to
the
Annual
Report
of
Bancorp
on
Form
10-K
for
the
period
ended
December
31,
2015
(the
“Report”)
that:
(1)
(2)
The
Report
fully
complies
with
the
requirements
of
Section
13(a)
or
15(d)
of
the
Securities
Exchange
Act
of
1934;
and
The
information
contained
in
the
Report
fairly
presents,
in
all
material
respects,
the
financial
condition
and
results
of
operations
of
Bancorp.
Date:
March
17,
2016
Date:
March
17,
2016
SEVERN
BANCORP,
INC.
/s/
Alan
J.
Hyatt
Alan
J.
Hyatt,
President,
Chief
Executive
Officer
and
Chairman
of
the
Board
(Principal
Executive
Officer)
/s/
Thomas
G,
Bevivino
Thomas
G.
Bevivino,
Executive
Vice
President,
and
Chief
Financial
Officer
(Principal
Financial
Officer)
The
foregoing
certification
is
being
furnished
solely
pursuant
to
Section
906
of
the
Sarbanes-Oxley
Act
of
2002
(Section
1350
of
Chapter
63
of
Title
18
of
the
United
States
Code)
and
is
not
being
filed
as
part
of
the
Report
or
as
a
separate
disclosure
document.
Exhibit
32
--
Page
1
--