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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company.  See definition of “large accelerated filer,”filer”, “accelerated filer”, “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐No ☐ No ☑

NumberIndicate the number of shares outstanding of each of the registrant’s issuer’s classes of common stock, as of the latest practicable date:

The unaudited 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.

The accompanying unaudited consolidatedpreparation of financial statements have been prepared in accordance with GAAP for interim financial informationrequires management to make estimates and in accordance withassumptions that affect the instructions to Form 10-Q.  Accordingly, they do not include allreported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentationdate of the results of operations for the interim periods presented have been made. Such adjustments were of a normal recurring nature.  The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016 or any other interim period.  The unaudited consolidated financial statements for the three and nine months ended September 30, 2016 should be read in conjunction with the audited consolidated financial statements, and affect the reported amounts of revenues earned and expenses incurred during the reporting period. Actual results could differ from those estimates. Estimates that could change significantly relate to the provision for loan losses and the related notes, which were included in Bancorp’s Annual Report on Form 10-Kallowance for loan losses (“Allowance”), determination of impaired loans and the fiscal year ended December 31, 2015.  These consolidated financial statements consider eventsrelated measurement of impairment, valuation of investment securities, valuation of real estate acquired through foreclosure, valuation of share-based compensation, the assessment that occurred througha liability should be recognized with respect to any matters under litigation, and the datecalculation of current and deferred income taxes and the consolidated financial statements were issued.realizability of deferred tax assets.

In the statementsFor purposes of reporting cash flows, cash and cash equivalents include cash on hand, amountsand due from banks, Federal Home Loan Bank of Atlanta (“FHLB Atlanta”) overnight deposits, and federal funds sold. Generally, federal funds are sold, for one-day periods.and interest-earning deposits with banks (items with stated original maturity of three months or less).

Amounts in the prior year’s consolidated financial statementsCertain reclassifications have been reclassified whenever necessarymade to amounts previously reported to conform to current period presentation.

In March 2016, the current year’s presentation.  Such reclassifications had no impactFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09,  Stock Compensation:  Improvements to Employee Share-Based Payment Accounting, the purpose of which is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, and classification on net income.the statement of cash flows.  ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is permitted. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operation, or cash flows. We have elected to account for stock option forfeitures when they occur.

 

Note 5 -In May 2014, FASB issued ASU No. 2014-09, Earnings Per ShareRevenue from Contracts with Customersthat provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to customers. The guidance also provides for a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. This standard may affect an entity’s financial statements, business processes and internal control over financial reporting. The standard is effective for interim and annual periods beginning after December 15, 2017. The standard must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. We are currently evaluating the impact of this standard on the Company’s financial position, results of operations, and cash flows.

Basic earnings per shareIn January 2016, FASB issued ASU No. 2016-01, Financial Instruments – Overall:  Recognition and Measurement of Financial Assets and Financial Liabilities, which requires entities to measure equity investments at fair value and recognize changes on fair value in net income. The guidance also provides a new measurement alternative for equity investments that do not have readily determinable fair values and don’t qualify for the net asset value practical expedient. Entities will have to record changes in instrument–specific credit risk for financial liabilities measured under the fair value option in other comprehensive income, except for certain financial liabilities of consolidated collateralized financing entities. Entities will also have to reassess the realizability of a deferred tax asset related to an available-for-sale (“AFS”) debt security in combination with their other deferred tax assets. For public entities, the guidance in this ASU is computedeffective for the first interim or annual period beginning after December 15, 2017. Early adoption by dividing net income availablepublic entities is permitted as of the beginning of the year of adoption for selected amendments by a cumulative effect adjustment to common stockholdersthe balance sheet. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.

In June 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses, which sets forth a current expected credit loss (“CECL”) model which requires the Company to measure all expected credit losses for each period.  Diluted earnings per share reflect additional common sharesfinancial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. While the Company is currently in the process of evaluating the impact of the amended guidance on its Consolidated Financial Statements, it currently expects the ALLL to increase upon adoption given that would have been outstanding if dilutive potential common shares had been issued.  Potential common shares that maythe Allowance will be issued by Bancorp relaterequired to outstanding stock options, warrants,cover the full remaining expected life of the portfolio upon adoption, rather than the incurred loss model under current U.S. GAAP. The extent of this increase is still being evaluated and convertible preferred stock,will depend on economic conditions and are determined using the treasury stock method.composition of the Company’s loan and lease portfolio at the time of adoption.

 

Gross unrealized losses and fair value by length of September 30, 2016,time that the most recent notification fromindividual HTM securities have been in an unrealized loss position at 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 below. Theredates indicated 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 below.following tables:

The gross unrealized loss in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitationsAFS securities portfolio is on the percentage$2.0 million fair value of earnings that can be paid out in dividends or usedAFS securities and has existed for stock repurchases or for the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over three years beginning in 2016. We have included the 0.625% increase for 2016 in our minimum capital adequacy ratios in the table below. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. Management believes that, as of September 30, 2016, the Bank meets all capital adequacy requirements under the Basel III Capital Rules, including the capital conservation buffer, on a fully phased-in basis as if all such requirements were currently in effect.less than twelve months.

 

 

The inherent credit risks within the loan portfolio vary depending upon the loan class as follows:

Residential mortgage loans are- secured by one to four family dwelling units. The loans have lowerlimited risk as they are secured by first mortgages on the unit, which are generally the primary residence of the borrower, at a loan to valueloan-to-value ratio (“LTV”) of 80% or less.

Construction, land acquisitionCommercial - underwritten in accordance with our policies and developmentinclude evaluating historical and projected profitability and cash flow to determine the borrower’s ability to repay the obligation as agreed. Commercial and industrial loans are underwrittenmade primarily 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 abilityidentified cash flow of the borrower or guarantor to repay principal and interest. Ifsecondarily on the Bank is forced to forecloseunderlying collateral supporting the loan. Accordingly, the repayment of a commercial and industrial loan depends primarily 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 allcreditworthiness of the unpaid balanceborrower (and any guarantors), while liquidation of the loan as well as related foreclosurecollateral is a secondary 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 periodoften insufficient source 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.