| SEVERN BANCORP INC Item 1A Risk Factors Unless the context indicates otherwise, all references to “we,” “us,” “our” in this subsection “Risk Factors” refer to the Bancorp and its subsidiaries |
| You should carefully consider the risks described below as well as elsewhere in this Annual Report on Form 10-K If any of the risks actually occur, our business, financial condition or results of future operations could be materially adversely affected |
| This Annual Report on Form 10-K contains forward-looking statements that involve risk 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 could 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, could have a material adverse impact on our ability to remain profitable |
| 29 _________________________________________________________________ Changes in interest rates could adversely affect our financial condition and results of operations |
| The operations of financial institutions, such as us, 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, by the fiscal and monetary policies of the federal government and by 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 US Government and 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 financial institutions |
| If there is a downturn in our real estate market, these borrowers may default on their loans and we may not be able to fully recover our loans |
| A downturn in the real estate market could hurt our business because most of our loans are secured by real estate |
| Substantially all of our real property collateral is located in the states of Maryland, Virginia and Delaware |
| As of December 31, 2005, approximately 95prca of the book value of our loan portfolio consisted of loans collateralized by various types of real estate |
| 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 |
| If real estate prices decline, the value of real estate collateral securing our loans could be reduced |
| Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans |
| Any such downturn could have a material adverse effect on our business, financial condition and results of operations |
| In addition, approximately 68prca 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 |
| 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 adversely affected |
| 30 _________________________________________________________________ Our operations are located in Anne Arundel County, Maryland, which makes our business highly susceptible to local economic conditions, and an economic downturn or recession in that area may adversely affect our ability to operate profitably |
| Unlike larger banking organizations that are more geographically diversified, our operations are currently concentrated in Anne Arundel County, Maryland |
| In addition, almost 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 this market area |
| A deterioration or recession in economic conditions in this market could result in one or more of the following: · 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 the customers’ borrowing power |
| 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 Federal Reserve Board |
| 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 Federal Reserve Board 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 Federal Reserve Board to implement its objectives are changes in the discount rate charged on bank borrowings and changes in the reserve requirements on bank deposits |
| It is not possible to predict what changes, if any, will be made to the monetary polices of the Federal Reserve Board or to existing federal and state legislation or the effect that such changes may have on our future business and earnings prospects We have established an allowance for loan losses based on our managementapstas estimate |
| Actual losses could differ significantly from those estimates |
| We have established an allowance for loan losses which management believes to be adequate to offset probable losses on our existing loans |
| However, there is no precise method of estimating loan losses and our ongoing analysis may cause this estimate to change in the future and actual losses may differ materially from this estimate |
| In addition, there can be no assurance that any future declines in real estate market conditions, general economic conditions or changes in regulatory policies will not require us to increase our allowance for loan losses |
| Any increase in the allowance for loan losses will reduce our earnings and may adversely affect the price of our common stock |
| We compete with a number of local, regional and national financial institutions for customers |
| We face strong competition from other thrifts, banks, savings institutions 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 we do |
| In addition, many of our competitors have higher legal lending limits than we do |
| Particularly intense competition exists for sources of funds including savings and retail time deposits and for loans, deposits and other services that we offer |
| 31 _________________________________________________________________ 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 money market 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 |
| Our information systems may experience an interruption or breach in security, which could result in a loss of business |
| We relay heavily on communications and information systems to conduct our business |
| Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems |
| [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, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations |
| We depend on third-party providers for many of our systems and if these 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 create 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 |
| There can no assurance that we will continue to pay dividends in the future |
| Although we expects to continue ours policy of regular quarterly dividend payments, this dividend policy will be reviewed periodically in light of future earnings, regulatory restrictions and other considerations |
| No assurance can be given, therefore, that cash dividends on common stock will be paid in the future at the same rate or at all |
| An investment in our common stock is not insured against loss |
| Investments in the shares of our common stock are not deposits insured against loss by the FDIC or any other entity |
| As a result, you may lose some or all of your investment |
| 32 _________________________________________________________________ Our success depends on our senior management team and if we are not able to retain them, it could have a materially adverse effect on us |
| We are highly dependent upon the continued services and experience of our senior management team, including Alan J Hyatt, our 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 client relationships |
| “Anti-takeover” provisions may make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to shareholders |
| Our charter presently contains certain provisions which may be deemed to be "e anti-takeover "e and "e anti-greenmail "e 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, our charter provides that our board of directors may issue up to 1cmam000cmam000 shares of preferred stock without shareholder approval |
| 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 "e anti-takeover "e and "e anti-greenmail "e provisions may be to discourage, make more costly or more difficult, or prevent a future takeover offer, prevent shareholders 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 the our board of directors |
| 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 shareholders may lose confidence in our financial reporting and disclosure required under the Securities Exchange Act of 1934, which could adversely affect our business and we could be subject to regulatory scrutiny |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we will be required to include in our Annual Reports on Form 10-K, our management’s report on internal control over financial reporting and our registered public accounting firm’s attestation report on our management’s assessment of our internal control over financial reporting |
| We are in the process of preparing an internal plan of action for compliance with the requirements of Section 404 |
| As a result, we cannot guarantee that we will not have any “significant deficiencies” or “material weaknesses” reported by our independent registered public accounting firm in the future |
| Compliance with the requirements of Section 404 is expected to be expensive and time-consuming |
| If we fail to complete this evaluation in a timely manner, or if 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 establish an effective system of disclosure controls and procedures could cause our current and potential shareholders 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 |
| Terrorist attacks and threats or actual war may impact all aspects of our operations, revenues, costs and stock price in unpredictable ways |
| Recent 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 United States 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 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 |