SEVERN BANCORP INC (Form: 10-K, Received: 03/11/2009 10:31:40)

the Conversion Rate in effect at the close of business on the Record Date

the Conversion Rate in effect immediately after the Record Date

the average of the VWAP of the capital stock of the Corporation or similar equity interests distributed to holders of Common Stock applicable to one share of Common Stock over each of the 10 consecutive Trading Days commencing on and including the third Trading Day after the date on which “ex-distribution trading” commences for such dividend or distribution on the NYSE or such other national or regional exchange or market on which Common Stock is then listed or quoted

the average of the VWAP of the Common Stock over each of the 10 consecutive Trading Days commencing on and including the third Trading Day after the date on which “ex-distribution trading” commences for such dividend or distribution on the NYSE or such other national or regional exchange or market on which Common Stock is then listed or quoted

D. Designation of Series A 8 .0% Non-Cumulative Convertible Preferred Stock .

Based on the authority set forth in Article V, Parts A and C of the Articles, the Board hereby establishes and designates a series of Preferred Stock from the Preferred Stock available for issuance under Article V, Part A of the Articles, to be known as “Series A 8.0% Non-Cumulative Convertible Preferred Stock” having the following terms:

Section 1. Designation.

The designation of the series of preferred stock shall be “Series A 8.0% Non-Cumulative Convertible Preferred Stock” (the “ Series A Preferred Stock ”). Each share of Series A Preferred Stock shall be identical in all respects to every other share of Series A Preferred Stock. Series A Preferred Stock will rank equally with Parity Stock, if any, will rank senior to Junior Stock and will rank junior to Senior Stock, if any, with respect to the payment of dividends and/or the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Section 2. Number of Shares.

The number of authorized shares of Series A Preferred Stock shall be 437,500. That number from time to time may be increased (but not in excess of the total number of authorized shares of preferred stock) or decreased (but not below the number of shares of Series A Preferred Stock then outstanding) by further resolution duly adopted by the Board of Directors or any other duly authorized committee thereof and by the filing of Articles of Amendment pursuant to the provisions of the General Corporation Law of the State of Maryland stating that such increase or reduction, as the case may be, has been so authorized. The Corporation shall have the authority to issue fractional shares of Series A Preferred Stock.

Section 3. Definitions. As used herein with respect to Series A Preferred Stock:

“ Affiliate ” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control” when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“ Board of Directors ” means the Board of Directors of the Corporation.

“ Business Day ” means any weekday that is not a legal holiday in New York, New York and is not a day on which banking institutions in New York, New York are authorized or required by law or regulation to be closed.

“ Closing Price ” of the Common Stock on any date of determination means the closing sale price or, if no closing sale price is reported, the last reported sale price of the shares of the Common Stock on the Nasdaq Capital Market on such date. If the Common Stock is not traded on the Nasdaq Capital Market on any date of determination, the Closing Price of the Common Stock on such date of determination means the closing sale price as reported in the composite transactions for the principal U.S. national or regional securities exchange on which the Common Stock is so listed or quoted, or, if no closing sale price is reported, the last reported sale price on the principal U.S. national or regional securities exchange on which the Common Stock is so listed or quoted, or if the Common Stock is not so listed or quoted on a U.S. national or regional securities exchange, the last quoted bid price for the Common Stock in the over-the-counter market as reported by Pink Sheets LLC or similar organization, or, if that bid price is not available, the market price of the Common Stock on that date as determined by a nationally recognized investment banking firm (unaffiliated with the Corporation) retained by the Corporation for this purpose.

Exhibit 3.1 – Page 9 --

“ Common Stock ” means the common stock of the Corporation, par value $0.01 per share, or any other shares of the capital stock of the Corporation into which such shares of common stock shall be reclassified or changed.

“ Constituent Person ” has the meaning set forth in Section 10(a).

“ Conversion Agent ” means the Transfer Agent acting in its capacity as conversion agent for the Series A Preferred Stock, and its successors and assigns.

“ Conversion at the Option of the Corporation Date ” has the meaning set forth in Section 8(c).

“ Conversion Date ” has the meaning set forth in Section 7(e).

“ Conversion Price ” at any time means, for each share of Series A Preferred Stock, a dollar amount equal to $8.00 divided by the Conversion Rate (initially $8.00 per share).

“ Conversion Rate ” means for each share of Series A Preferred Stock, one share of Common Stock, subject to adjustment as set forth herein.

“ Series A Preferred Stock ” shall have the meaning set forth in Section 1.

“ Current Market Price ” per share of Common Stock on any day means the average of the VWAP per share of Common Stock on each of the 10 consecutive Trading Days ending on the earlier of the day in question and the day before the Ex-date or other specified date with respect to the issuance or distribution requiring such computation, appropriately adjusted to take into account the occurrence during such period of any event described in Section 9.

“ Dividend Payment Date ” shall have the meaning set forth in Section 4(a).

“ Dividend Period ” shall have the meaning set forth in Section 4(a).

“ Dividend Record Date ” shall have the meaning set forth in Section 4(a).

“ Dividend Threshold Amount ” shall have the meaning set forth in Section 9(a)(i).

Exhibit 3.1 – Page 10 --

“ Ex-date ” when used with respect to any issuance or distribution, means the first date on which the shares of Common Stock or other securities trade without the right to receive an issuance or distribution.

“ Exchange Property ” has the meaning set forth in Section 10(a).

“ Holder ” means the Person in whose name the shares of the Series A Preferred Stock are registered, which may be treated by the Corporation, Transfer Agent, Registrar, paying agent and Conversion Agent as the absolute owner of the shares of Series A Preferred Stock for the purpose of making payment and settling the related conversions and for all other purposes.

“ Junior Stock ” means the Common Stock and any other class or series of stock of the Corporation now existing or hereafter authorized over which Series A Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the Corporation.

“ Market Disruption Event ” means any of the following events that has occurred:

(i) any suspension of, or limitation imposed on, trading by any exchange or quotation system on which the Closing Price is determined pursuant to the definition of the Trading Day (a “ Relevant Exchange ”) during the one-hour period prior to the close of trading for the regular trading session on the Relevant Exchange (or for purposes of determining the VWAP per share of Common Stock any period or periods aggregating one half-hour or longer during the regular trading session on the relevant day) and whether by reason of movements in price exceeding limits permitted by the Relevant Exchange, or otherwise relating to Common Stock or in futures or options contracts relating to the Common Stock on the Relevant Exchange;

(ii) any event (other than an event described in clause (iii)) that disrupts or impairs (as determined by the Corporation in its reasonable discretion) the ability of market participants during the one-hour period prior to the close of trading for the regular trading session on the Relevant Exchange (or for purposes of determining the VWAP per share of Common Stock any period or periods aggregating one half-hour or longer during the regular trading session on the relevant day) in general to effect transactions in, or obtain market values for, the Common Stock on the Relevant Exchange or to effect transactions in, or obtain market values for, futures or options contracts relating to the Common Stock on the Relevant Exchange; or

(iii) the failure to open of the Relevant Exchange on which futures or options contracts relating to the Common Stock, are traded or the closure of such exchange prior to its respective scheduled closing time for the regular trading session on such day (without regard to after hours or any other trading outside of the regular trading session hours) unless such earlier closing time is announced by such exchange at least one hour prior to the earlier of the actual closing time for the regular trading session on such day, and the submission deadline for orders to be entered into such exchange for execution at the actual closing time on such day.

“ Notice of Conversion at the Option of the Corporation ” has the meaning set forth in Section 8(c).

Exhibit 3.1 – Page 11 --

“ Officer ” means the President, Chief Executive Officer, the Chairman, any Vice Chairman, any Executive Vice President, the Chief Financial Officer, the Controller, the Chief Accounting Officer, the Treasurer, any Assistant Treasurer, the General Counsel and Corporate Secretary and any Assistant Secretary of the Corporation.

“ Officers’ Certificate ” means a certificate signed (i) by the President, Chief Executive Officer, the Chairman, any Vice Chairman, any Executive Vice President, the Chief Financial Officer, the Controller or the Chief Accounting Officer, and (ii) by the Treasurer, any Assistant Treasurer, the Corporate Secretary or any Assistant Secretary of the Corporation, and delivered to the Conversion Agent.

“ Parity Stock ” means any class or series of stock of the Corporation hereafter authorized that ranks equally with the Series A Preferred Stock in the payment of dividends and in the distribution of assets on any liquidation, dissolution or winding up of the Corporation.

“ Person ” means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint-stock company, limited liability company or trust.

“ Record Date ” has the meaning set forth in Section 9(d).

“ Registrar ” means the Transfer Agent acting in its capacity as registrar for the Series A Preferred Stock, and its successors and assigns.

“ Relevant Exchange ” has the meaning set forth above in the definition of Market Disruption Event.

“ Reorganization Event ” has the meaning set forth in Section 10(a).

“ Senior Stock ” means any class or series of stock of the Corporation now existing or hereafter authorized which has preference or priority over the Series A Preferred Stock as to the payment of dividends or in the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the Corporation.

“ Trading Day ” means, for purposes of determining a VWAP or Closing Price per share of Common Stock or a Closing Price, a Business Day on which the Relevant Exchange (as defined in the definition of Market Disruption Event) is scheduled to be open for business and on which there has not occurred or does not exist a Market Disruption Event.

“ Transfer Agent ” means the Corporation acting as Transfer Agent, Registrar, paying agent and Conversion Agent for the Series A Preferred Stock, and its successors and assigns.

“ VWAP ” per share of the Common Stock on any Trading Day means the per share volume-weighted average price as displayed under the heading Bloomberg VWAP on Bloomberg page C UN <equity> AQR (or its equivalent successor if such page is not available) in respect of the period from the open of trading on the relevant Trading Day until the close of trading on the relevant Trading Day (or if such volume-weighted average price is unavailable, the market price of one share of Common Stock on such Trading Days determined, using a volume-weighted average method, by a nationally recognized investment banking firm (unaffiliated with the Corporation) retained for this purpose by the Corporation).

Exhibit 3.1 – Page 12 --

Section 4. Dividends.

(a) Rate. Holders shall be entitled to receive, if, as and when declared by the Board of Directors, or any other duly authorized committee thereof, but only out of assets legally available therefor, non-cumulative cash dividends on the liquidation preference of $8.00 per share of Series A Preferred Stock, and no more, payable quarterly in arrears on the last day of each March, June, September and December; provided, however, if any such day is not a Business Day, then payment of any dividend otherwise payable on that date will be made on the next succeeding day that is a Business Day, unless that day falls in the next calendar year, in which case payment of such dividend will occur on the immediately preceding Business Day (in either case, without any interest or other payment in respect of such delay) (each such day on which dividends are payable a “ Dividend Payment Date ”). The period from and including the date of issuance of the Series A Preferred Stock or any Dividend Payment Date to, but excluding, the next Dividend Payment Date is a “ Dividend Period .” Dividends on each share of Series A Preferred Stock will accrue on the liquidation preference of $8.00 per share at a rate per annum equal to 8.0%. The record date for payment of dividends on the Series A Preferred Stock will be such record date fixed by the Board of Directors or any duly authorized committee thereof that is not more than 45 nor less than 10 days prior to such Dividend Payment Date (each, a “ Dividend Record Date ”). Any such day that is a Dividend Record Date will be a Dividend Record Date whether or not such day is a Business Day. The amount of dividends payable will be computed on the basis of a 360-day year of twelve 30-day months.

(b) Non-Cumulative Dividends. If the Board of Directors or any duly authorized committee thereof does not declare a dividend on the Series A Preferred Stock for any Dividend Period prior to the related Dividend Payment Date, that dividend will not accrue, and the Corporation will have no obligation to pay, and Holders shall have no right to receive, a dividend for that Dividend Period on the related Dividend Payment Date or at any future time, whether or not dividends on the Series A Preferred Stock or any other series of preferred stock or common stock are declared for any subsequent Dividend Period. References herein to the “accrual” of dividends refer only to the determination of the amount of such dividend and do not imply that any right to a dividend arises prior to the date on which a dividend is declared.

(c) Priority of Dividends. So long as any share of Series A Preferred Stock remains outstanding, unless as to a Dividend Payment Date full dividends on all outstanding shares of the Series A Preferred Stock have been declared and paid or declared and a sum sufficient for the payment of those dividends has been set aside for the Dividend Period then ending, the Corporation will not, during such Dividend Period, declare or pay any dividend on, make any distributions relating to, or redeem, purchase, acquire or make a liquidation payment relating to, any of Junior Stock, or make any guarantee payment with respect thereto, other than:

(i) purchases, redemptions or other acquisitions of shares of Junior Stock in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of employees, officers, directors or consultants;

Exhibit 3.1 – Page 13 --

(ii) purchases of shares of Common Stock pursuant to a contractually binding requirement to buy stock existing prior to the commencement of the then-current dividend period, including under a contractually binding stock repurchase plan;

(iii) as a result of an exchange or conversion of any class or series of Junior Stock for any other class or series of Junior Stock; or

(iv) the purchase of fractional interests in shares of Junior Stock pursuant to the conversion or exchange provisions of such Junior Stock or the security being converted or exchanged.

The foregoing restriction, however, will not apply to any Junior Stock dividends paid by the Corporation where the dividend stock being paid is the same stock as that on which the dividend is being paid.

Except as provided below, for so long as any share of Series A Preferred Stock remains outstanding, if dividends are not declared and paid in full upon the shares of Series A Preferred Stock and any Parity Stock, all dividends declared upon shares of Series A Preferred Stock and any Parity Stock will be declared on a proportional basis so that the amount of dividends declared per share will bear to each other the same ratio that accrued dividends for the then-current Dividend Period per share of Series A Preferred Stock and accrued dividends for the then-current Dividend Period per share of any Parity Stock (including, in the case of any such Parity Stock that bears cumulative dividends, all accrued and unpaid dividends) bear to each other.

Subject to the foregoing, and not otherwise, such dividends payable in cash, stock or otherwise, as may be determined by the Board of Directors or any duly authorized committee thereof, may be declared and paid on any Junior Stock and Parity Stock from time to time out of any assets legally available for such payment, and Holders will not be entitled to participate in those dividends.

(d) Conversion Following a Record Date. If a Conversion Date for any shares of Series A Preferred Stock is prior to the close of business on a Dividend Record Date for any declared dividend for the then-current Dividend Period, the Holder of such shares will not be entitled to any such dividend. If the Conversion Date for any shares of Series A Preferred Stock is after the close of business on a Dividend Record Date for any declared dividend for the then-current Dividend Period, but prior to the corresponding Dividend Payment Date, the Holder of such shares shall be entitled to receive such dividend, notwithstanding the conversion of such shares prior to the Dividend Payment Date. However, such shares, upon surrender for conversion, must be accompanied by funds equal to the dividend on such shares; provided that no such payment need be made if the Corporation has issued a notice of conversion at its option of the Series A Preferred Stock in accordance with the terms hereof.

Section 5. Liquidation Rights.

(a) Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, Holders shall be entitled, out of assets legally available therefor, before any distribution or payment out of the assets of the Corporation may be made to or set aside for the holders of any Junior Stock and subject to the rights of the holders of any class or series of securities ranking senior to or on parity with Series A Preferred Stock upon liquidation and the rights of the Corporation’s depositors and other creditors, to receive in full a liquidating distribution in the amount of the liquidation preference of $8.00 per share, plus any accrued dividends thereon from the last dividend payment date to, but excluding, the date of the liquidation, dissolution or winding up if and to the extent declared. Holders shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation other than what is expressly provided for in this Section 5.

Exhibit 3.1 – Page 14 --

(b) Partial Payment. If the assets of the Corporation are not sufficient to pay in full the liquidation preference plus any dividends which have been declared but not yet paid to all Holders and all holders of any Parity Stock, the amounts paid to the Holders and to the holders of all Parity Stock shall be pro rata in accordance with the respective aggregate liquidating distributions to which they would otherwise be entitled.

(c) Residual Distributions. If the respective aggregate liquidating distributions to which all Holders and all holders of any Parity Stock are entitled have been paid, the holders of Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.

(d) Merger, Consolidation and Sale of Assets Not Liquidation. For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation or other Reorganization Event shall not be deemed a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation.

Section 6. Right of the Holders to Convert.

Each Holder shall have the right, at such Holder’s option, to convert all or any portion of such Holder’s Series A Preferred Stock at any time into shares of Common Stock at the Conversion Rate per share of Series A Preferred Stock (subject to the conversion procedures of Section 7), plus cash in lieu of fractional shares.

Section 7. Conversion Procedures.

(a) Conversion Date. Effective immediately prior to the close of business on any applicable Conversion Date, dividends shall no longer be declared on any such converted shares of Series A Preferred Stock and such shares of Series A Preferred Stock shall cease to be outstanding, in each case, subject to the right of Holders to receive any declared and unpaid dividends on such shares and any other payments to which they are otherwise entitled pursuant to the terms hereof.

Exhibit 3.1 – Page 15 --

(b) Rights Prior to Conversion. Prior to the close of business on any applicable Conversion Date, shares of Common Stock issuable upon conversion of, or other securities issuable upon conversion of, any shares of Series A Preferred Stock shall not be deemed outstanding for any purpose, and Holders shall have no rights with respect to the Common Stock or other securities issuable upon conversion (including voting rights, rights to respond to tender offers for the Common Stock or other securities issuable upon conversion and rights to receive any dividends or other distributions on the Common Stock or other securities issuable upon conversion) by virtue of holding shares of Series A Preferred Stock.

(c) Reacquired Shares. Shares of Series A Preferred Stock duly converted in accordance with these Articles of Amendment, or otherwise reacquired by the Corporation, will resume the status of authorized and unissued preferred stock, undesignated as to series and available for future issuance. The Corporation may from time-to-time take such appropriate action as may be necessary to reduce the authorized number of shares of Series A Preferred Stock.

(d) Record Holder as of Conversion Date. The Person or Persons entitled to receive the Common Stock and/or cash, securities or other property issuable upon conversion of Series A Preferred Stock shall be treated for all purposes as the record holder(s) of such shares of Common Stock and/or securities as of the close of business on any applicable Conversion Date. In the event that a Holder shall not by written notice designate the name in which shares of Common Stock and/or cash, securities or other property (including payments of cash in lieu of fractional shares) to be issued or paid upon conversion of shares of Series A Preferred Stock should be registered or paid or the manner in which such shares should be delivered, the Corporation shall be entitled to register and deliver such shares, and make such payment, in the name of the Holder and in the manner shown on the records of the Corporation.

(e) Conversion Procedure. On the date of any conversion, if a Holder’s interest is in certificated form, a Holder must do each of the following in order to convert:

(i) complete and manually sign the conversion notice provided by the Conversion Agent, or a facsimile of the conversion notice, and deliver this irrevocable notice to the Conversion Agent;

(ii) surrender the shares of Series A Preferred Stock to the Conversion Agent;

(iii) if required, furnish appropriate endorsements and transfer documents;

(iv) if required, pay any stock transfer, documentary, stamp or similar taxes not payable by the Corporation pursuant to Section 20; and

(v) if required as provided in Section 4(d) above, pay funds equal to any declared and unpaid dividend payable on the next Dividend Payment Date to which such Holder is entitled.

The date on which a Holder complies with the procedures in this paragraph (e) is the “ Conversion Date .” The Conversion Agent shall, on a Holder’s behalf, convert the Series A Preferred Stock into shares of Common Stock, in accordance with the terms of the notice delivered by such Holder described in clause (i) above.

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Section 8. Conversion at the Option of the Corporation.

(a) Corporation Conversion Right. On or after December 31, 2013, the Corporation shall have the right, at its option, at any time or from time to time to cause some or all of the Series A Preferred Stock to be converted into shares of Common Stock at the then-applicable Conversion Rate.

(b) Partial Conversion. If the Corporation elects to cause less than all the shares of the Series A Preferred Stock to be converted under clause (a) above, the Conversion Agent shall select the Series A Preferred Stock to be converted on a pro rata basis, by lot or in such other manner as the Board of Directors or any other duly authorized committee thereof determines to be fair and equitable. If the Conversion Agent selects a portion of a Holder’s Series A Preferred Stock for partial conversion at the option of the Corporation and such Holder converts a portion of its shares of Series A Preferred Stock, the converted portion will be deemed to be from the portion selected for conversion at the option of the Corporation under this Section 8.

(c) Conversion Procedure. In order to exercise the conversion right described in this Section 8, the Corporation shall provide notice of such conversion to each Holder (such notice, a “ Notice of Conversion at the Option of the Corporation ”). The Conversion Date shall be a date selected by the Corporation (the “ Conversion at the Option of the Corporation Date ”) and shall be no more than 20 days after the date on which the Corporation provides such Notice of Conversion at the Option of the Corporation. In addition to any information required by applicable law or regulation, the Notice of Conversion at the Option of the Corporation shall state, as appropriate:

(i) the Conversion at the Option of the Corporation Date;

(ii) the number of shares of Common Stock to be issued upon conversion of each share of Series A Preferred Stock; and

(iii) the number of shares of Series A Preferred Stock to be converted.

Section 9. Anti-Dilution Adjustments.

(a) Adjustments. The Conversion Rate will be subject to adjustment, without duplication, under the following circumstances:

(i) the issuance of Common Stock as a dividend or distribution to all holders of Common Stock, or a subdivision or combination of Common Stock, in which event the Conversion Rate will be adjusted based on the following formula:

Exhibit 3.1 – Page 17 --

CR 1 = CR 0 x (OS 1 / OS 0 )

where,


CR 0	=	the Conversion Rate in effect at the close of business on the Record Date
CR 1	=	the Conversion Rate in effect immediately after the Record Date
OS 0	=	the number of shares of Common Stock outstanding at the close of business on the Record Date prior to giving effect to such event
OS 1	=	the number of shares of Common Stock that would be outstanding immediately after, and solely as a result of, such event

Notwithstanding the foregoing, no adjustment will be made for the issuance of Common Stock as a dividend or distribution to all holders of Common Stock that is made in lieu of a quarterly or annual cash dividend or distribution to such holders, to the extent such dividend or distribution does not exceed (i) $0.24 in any fiscal quarter in the case of a quarterly dividend or (ii) $0.96 in the prior twelve months in the case of an annual dividend (each such number, the “ Dividend Threshold Amount ”). The amount of any such dividend or distribution will equal the number of such shares being issued multiplied by the average of the VWAP of the Common Stock over each of the five consecutive Trading Days prior to the Ex-date for such dividend or distribution.

(ii) the issuance to all holders of Common Stock of certain rights or warrants entitling them for a period expiring 60 days or less from the date of issuance of such rights or warrants to purchase shares of Common Stock (or securities convertible into Common Stock) at less than (or having a conversion price per share less than) the Current Market Price as of the Record Date, in which event each Conversion Rate will be adjusted based on the following formula:

CR 1 = CR 0 x (OS 0 + X) / (OS 0 + Y)

where,


CR 0	=	the Conversion Rate in effect at the close of business on the Record Date
CR 1	=	the Conversion Rate in effect immediately after the Record Date
OS 0	=	the number of shares of Common Stock outstanding at the close of business on the Record Date
X	=	the total number of shares of Common Stock issuable pursuant to such rights (or upon conversion of such securities)
Y	=	the number of shares of Common Stock equal to the aggregate price payable to exercise such rights (or the conversion price for such securities paid upon conversion) divided by the average of the VWAP of the Common Stock over each of the ten consecutive Trading Days prior to the Business Day immediately preceding the announcement of the issuance of such rights

However, the Conversion Rate will be readjusted to the extent that any such rights or warrants are not exercised prior to their expiration.

(iii) the payment of a dividend or other distribution to all holders of Common Stock of shares of capital stock of the Corporation (other than common stock) or evidences of its indebtedness or its assets (excluding any dividend, distribution or issuance covered by clauses (i) or (ii) above and excluding cash dividends) in which event the Conversion Rate will be adjusted based on the following formula:

Exhibit 3.1 – Page 18 --

CR 1 = CR 0 x SP 0 / (SP 0 – FMV)

where,


CR 0	=	the Conversion Rate in effect at the close of business on the Record Date
CR 1	=	the Conversion Rate in effect immediately after the Record Date
SP 0	=	the Current Market Price as of the Record Date
FMV	=	the fair market value (as determined by the Board of Directors) on the Record Date of the shares of capital stock of the Corporation, evidences of indebtedness or assets so distributed, expressed as an amount per share of Common Stock

However, if the transaction that gives rise to an adjustment pursuant to this clause (iii) is one pursuant to which the payment of a dividend or other distribution on Common Stock consists of shares of capital stock of the Corporation of, or similar equity interests in, a subsidiary or other business unit of ours, (i.e., a spin-off) that are, or, when issued, will be, traded on a U.S. securities exchange or quoted on the Nasdaq Capital Market, then the Conversion Rate will instead be adjusted based on the following formula:

CR 1 = CR 0 x (FMV 0 + MP 0 ) / MP 0

where,

(b) Calculation of Adjustments. All adjustments to the Conversion Rate shall be calculated by the Corporation to the nearest 1/10,000th of one share of Common Stock (or if there is not a nearest 1/10,000th of a share, to the next lower 1/10,000th of a share). No adjustment to the Conversion Rate will be required unless such adjustment would require an increase or decrease of at least one percent; provided, however, that any such minor adjustments that are not required to be made will be carried forward and taken into account in any subsequent adjustment, and provided further that any such adjustment of less than one percent that has not been made will be made upon (x) the end of each fiscal year of the Corporation and (y) any Conversion Date.

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(i) Except as otherwise provided in this Section 9, the Conversion Rate will not be adjusted for the issuance of Common Stock or any securities convertible into or exchangeable for Common Stock or carrying the right to purchase any of the foregoing or for the repurchase of Common Stock.

(ii) No adjustment of the Conversion Rate need be made as a result of: (A) the issuance of rights; (B) the distribution of separate certificates representing rights; (C) the exercise or redemption of rights in accordance with any rights agreement; or (D) the termination or invalidation of rights, in each case, pursuant to any adopted stockholder rights plans hereafter adopted by the Corporation; provided, however, that to the extent that the Corporation has a stockholder rights plan in effect on a Conversion Date (including the Corporation’s rights plan, if any, existing on the date hereof), the Holder shall receive, in addition to the shares of Common Stock, the rights under such rights plan, unless, prior to any such Conversion Date, the rights have separated from the Common Stock, in which case the Conversion Rate will be adjusted at the time of separation as if the Corporation made a distribution to all holders of Common Stock of shares of capital stock of the Corporation or evidences of its indebtedness or its assets as described in Section 9.01(a)(iii), subject to readjustment in the event of the expiration, termination or redemption of the rights.

(iii) No adjustment to the Conversion Rate need be made:

(A) upon the issuance of any shares of Common Stock pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on securities of the Corporation and the investment of additional optional amounts in Common Stock under any plan;

(B) upon the issuance of any shares of Common Stock or options or rights to purchase those shares pursuant to any present or future employee, director or consultant benefit plan or program of or assumed by the Corporation or any of its subsidiaries; or

(C) upon the issuance of any shares of Common Stock pursuant to any option, warrant, right, or exercisable, exchangeable or convertible security outstanding as of the date the Series A Preferred Stock was first issued.

(iv) No adjustment to the Conversion Rate need be made for a transaction referred to in Section 9.01(a)(i), (ii) or (iii) if Holders may participate in the transaction on a basis and with notice that the Board of Directors determines to be fair and appropriate in light of the basis and notice on which holders of Common Stock participate in the transaction.

(v) No adjustment to the Conversion Rate need be made for a change in the par value or no par value of the Common Stock.

(vi) No adjustment to the Conversion Rate will be made to the extent that such adjustment would result in the Conversion Price being less than the par value of the Common Stock.

Exhibit 3.1 – Page 20 --

(vii) Anything in this Section 9 to the contrary notwithstanding, the Board of Directors shall have the right to adjust the application of the formulas set forth above if they determine that the application of any such formula is contrary to the intent of such formula or to the expectations of holders based upon the application of similar formulas contained in similar equity investments of other issuers.

(d) Record Date. For purposes of this Section 9, “ Record Date ” means, with respect to any dividend, distribution or other transaction or event in which the holders of the Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of holders of the Common Stock entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise).

(e) Successive Adjustments. After an adjustment to the Conversion Rate under this Section 9, any subsequent event requiring an adjustment under this Section 1 shall cause an adjustment to such Conversion Rate as so adjusted.

(f) Multiple Adjustments. For the avoidance of doubt, if an event occurs that would trigger an adjustment to the Conversion Rate pursuant to this Section 9 under more than one subsection hereof, such event, to the extent fully taken into account in a single adjustment, shall not result in multiple adjustments hereunder.

(g) Other Adjustments. The Corporation may, but shall not be required to, make such increases in the Conversion Rate, in addition to those required by this Section, as the Board of Directors considers to be advisable in order to avoid or diminish any income tax to any holders of shares of Common Stock resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes or for any other reason.

(h) Notice of Adjustments. Whenever a Conversion Rate is adjusted as provided under Section 9, the Corporation shall within 10 Business Days following the occurrence of an event that requires such adjustment (or if the Corporation is not aware of such occurrence, as soon as reasonably practicable after becoming so aware) or the date the Corporation makes an adjustment pursuant to Section 9(g):

(i) compute the adjusted applicable Conversion Rate in accordance with Section 9 and prepare and transmit to the Conversion Agent an Officers’ Certificate setting forth the applicable Conversion Rate, as the case may be, the method of calculation thereof in reasonable detail, and the facts requiring such adjustment and upon which such adjustment is based; and

(ii) provide a written notice to the Holders of the occurrence of such event and a statement in reasonable detail setting forth the method by which the adjustment to the applicable Conversion Rate was determined and setting forth the adjusted applicable Conversion Rate.

Exhibit 3.1 – Page 21 --

(i) Conversion Agent. The Conversion Agent shall not at any time be under any duty or responsibility to any Holder to determine whether any facts exist that may require any adjustment of the applicable Conversion Rate or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed in making the same. The Conversion Agent shall be fully authorized and protected in relying on any Officers’ Certificate delivered pursuant to Section 9(h) and any adjustment contained therein and the Conversion Agent shall not be deemed to have knowledge of any adjustment unless and until it has received such certificate. The Conversion Agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, that may at the time be issued or delivered with respect to any Series A Preferred Stock; and the Conversion Agent makes no representation with respect thereto. The Conversion Agent shall not be responsible for any failure of the Corporation to issue, transfer or deliver any shares of Common Stock pursuant to the conversion of Series A Preferred Stock or to comply with any of the duties, responsibilities or covenants of the Corporation contained in this Section 9.

(j) Fractional Shares. No fractional shares of Common Stock will be issued to holders of the Series A Preferred Stock upon conversion. In lieu of fractional shares otherwise issuable, holders will be entitled to receive an amount in cash equal to the fraction of a share of Common Stock, calculated on an aggregate basis in respect of the shares of Series A Preferred Stock being converted, multiplied by the Closing Price of the Common Stock on the Trading Day immediately preceding the applicable Conversion Date.

Section 10. Adjustment for Reorganization Events.

(a) Reorganization Events. In the event of:

(1) any consolidation or merger of the Corporation with or into another person (other than a merger or consolidation in which the Corporation is the continuing corporation and in which the shares of Common Stock outstanding immediately prior to the merger or consolidation are not exchanged for cash, securities or other property of the Corporation or another corporation);

(2) any sale, transfer, lease or conveyance to another person of all or substantially all the property and assets of the Corporation; or

(3) any statutory exchange of securities of the Corporation with another Person (other than in connection with a merger or acquisition) or any binding share exchange which reclassifies or changes its outstanding Common Stock;

each of which is referred to as a “ Reorganization Event ,” each share of the Series A Preferred Stock outstanding immediately prior to such Reorganization Event will, without the consent of the holders of the Series A Preferred Stock, become convertible into the kind and amount of securities, cash and other property (the “ Exchange Property ”) receivable in such Reorganization Event (without any interest thereon, and without any right to dividends or distribution thereon which have a record date that is prior to the applicable Conversion Date) per share of Common Stock by a holder of Common Stock that is not a Person with which the Corporation consolidated or into which the Corporation merged or which merged into the Corporation or to which such sale or transfer was made, as the case may be (any such Person, a “ Constituent Person ”), or an Affiliate of a Constituent Person to the extent such Reorganization Event provides for different treatment of Common Stock held by Affiliates of the Corporation and non-Affiliates; provided that if the kind or amount of securities, cash and other property receivable upon such Reorganization Event is not the same for each share of Common Stock held immediately prior to such Reorganization Event by a Person other than a Constituent Person or an Affiliate thereof, then for the purpose of this Section 10(a), the kind and amount of securities, cash and other property receivable upon such Reorganization Event will be deemed to be the weighted average of the types and amounts of consideration received by the holders of Common Stock that affirmatively make an election (or of all such holders if none make an election). On each Conversion Date following a Reorganization Event, the Conversion Rate then in effect will be applied to the value on such Conversion Date of such securities, cash or other property received per share of Common Stock, as determined in accordance with this Section 10.

Exhibit 3.1 – Page 22 --

(b) Exchange Property Election. In the event that holders of the shares of Common Stock have the opportunity to elect the form of consideration to be received in such transaction, the consideration that the Holders are entitled to receive shall be deemed to be the types and amounts of consideration received by the holders of the shares of Common Stock that affirmatively make an election (or of all such holders if none make an election). The amount of

Exchange Property receivable upon conversion of any Series A Preferred Stock in accordance with the terms hereof shall be determined based upon the Conversion Rate in effect on such Conversion Date.

(c) Successive Reorganization Events. The above provisions of this Section 10 shall similarly apply to successive Reorganization Events and the provisions of Section 9 shall apply to any shares of capital stock of the Corporation (or any successor) received by the holders of the Common Stock in any such Reorganization Event.

(d) Reorganization Event Notice. The Corporation (or any successor) shall, within 20 days of the occurrence of any Reorganization Event, provide written notice to the Holders of such occurrence of such event and of the kind and amount of the cash, securities or other property that constitutes the Exchange Property. Failure to deliver such notice shall not affect the operation of this Section 10.

Section 11. Voting Rights.

The Holders shall not be entitled to vote on any matter except as specifically set forth in Maryland law.

Section 12. Preemption.

The Holders shall not have any rights of preemption.

Section 13. Rank.

Notwithstanding anything set forth in the Articles of Incorporation or these Articles of Amendment to the contrary, the Board of Directors or any duly authorized committee thereof, without the vote of the Holders, may authorize and issue additional shares of Senior Stock, Junior Stock or Parity Stock.

Exhibit 3.1 – Page 23 --

Section 14. Repurchase.

Subject to the limitations imposed herein, the Corporation may purchase and sell Series A Preferred Stock from time to time to such extent, in such manner, and upon such terms as the Board of Directors or any other duly authorized committee thereof may determine; provided, however, that the Corporation shall not use any of its funds for any such purchase when there are reasonable grounds to believe that the Corporation is, or by such purchase would be, rendered insolvent. Notwithstanding anything set forth in the Articles of Incorporation or these Articles of Amendment to the contrary, the Corporation shall have no obligation to repurchase or redeem the Series A Preferred Stock.

Section 15. Unissued or Reacquired Shares.

Shares of Series A Preferred Stock not issued or which have been issued and converted, redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of preferred stock without designation as to series.

Section 16. No Sinking Fund.

Shares of Series A Preferred Stock are not subject to the operation of a sinking fund.

Section 17. Reservation of Common Stock.

(a) Sufficient Shares. The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock or shares acquired by the Corporation, solely for issuance upon the conversion of shares of Series A Preferred Stock as provided in these Articles of Amendment, free from any preemptive or other similar rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of Series A Preferred Stock then outstanding. For purposes of this Section 17(a), the number of shares of Common Stock that shall be deliverable upon the conversion of all outstanding shares of Series A Preferred Stock shall be computed as if at the time of computation all such outstanding shares were held by a single Holder.

(b) Use of Acquired Shares. Notwithstanding the foregoing, the Corporation shall be entitled to deliver upon conversion of shares of Series A Preferred Stock, as herein provided, shares of Common Stock acquired by the Corporation (in lieu of the issuance of authorized and unissued shares of Common Stock), so long as any such acquired shares are free and clear of all liens, charges, security interests or encumbrances (other than liens, charges, security interests and other encumbrances created by the Holders).

(c) Free and Clear Delivery. All shares of Common Stock delivered upon conversion of the Series A Preferred Stock shall be duly authorized, validly issued, fully paid and non-assessable, free and clear of all liens, claims, security interests and other encumbrances (other than liens, charges, security interests and other encumbrances created by the Holders).

Exhibit 3.1 – Page 24 --

(d) Compliance with Law. Prior to the delivery of any securities that the Corporation shall be obligated to deliver upon conversion of the Series A Preferred Stock, the Corporation shall use its reasonable best efforts to comply with all federal and state laws and regulations thereunder requiring the registration of such securities with, or any approval of or consent to the delivery thereof by, any governmental authority.

(e) Listing. The Corporation hereby covenants and agrees that, if at any time the Common Stock shall be listed on the Nasdaq Capital Market or any other national securities exchange or automated quotation system, the Corporation will, if permitted by the rules of such exchange or automated quotation system, list and keep listed, so long as the Common Stock shall be so listed on such exchange or automated quotation system, all the Common Stock issuable upon conversion of the Series A Preferred Stock; provided, however, that if the rules of such exchange or automated quotation system require the Corporation to defer the listing of such Common Stock until the first conversion of Series A Preferred Stock into Common Stock in accordance with the provisions hereof, the Corporation covenants to list such Common Stock issuable upon conversion of the Series A Preferred Stock in accordance with the requirements of such exchange or automated quotation system at such time.

Section 18. Transfer Agent, Conversion Agent, Registrar and Paying Agent.

The duly appointed Transfer Agent, Conversion Agent, Registrar and paying agent for the Series A Preferred Stock shall be the Corporation. The Corporation may, in its sole discretion, remove the Transfer Agent in accordance with the agreement between the Corporation and the Transfer Agent; provided that the Corporation shall appoint a successor transfer agent who shall accept such appointment prior to the effectiveness of such removal. Upon any such removal or appointment, the Corporation shall send notice thereof by first-class mail, postage prepaid, to the Holders.

Section 19. Replacement Certificates.

(a) Mutilated, Destroyed, Stolen and Lost Certificates. If physical certificates are issued, the Corporation shall replace any mutilated certificate at the Holder’s expense upon surrender of that certificate to the Transfer Agent. The Corporation shall replace certificates that become destroyed, stolen or lost at the Holder’s expense upon delivery to the Corporation and the Transfer Agent of satisfactory evidence that the certificate has been destroyed, stolen or lost, together with any indemnity that may be required by the Transfer Agent and the Corporation.

(b) Certificates Following Conversion. If physical certificates are issued, the Corporation shall not be required to issue any certificates representing the Series A Preferred Stock on or after the applicable Conversion Date. In place of the delivery of a replacement certificate following the applicable Conversion Date, the Transfer Agent, upon delivery of the evidence and indemnity described in clause (a) above, shall deliver the shares of Common Stock pursuant to the terms of the Series A Preferred Stock formerly evidenced by the certificate.

Exhibit 3.1 – Page 25 --

Section 20. Taxes.

(a) Transfer Taxes. The Corporation shall pay any and all stock transfer, documentary, stamp and similar taxes that may be payable in respect of any issuance or delivery of shares of Series A Preferred Stock or shares of Common Stock or other securities issued on account of Series A Preferred Stock pursuant hereto or certificates representing such shares or securities. The Corporation shall not, however, be required to pay any such tax that may be payable in respect of any transfer involved in the issuance or delivery of shares of Series A Preferred Stock, shares of Common Stock or other securities in a name other than that in which the shares of Series A Preferred Stock with respect to which such shares or other securities are issued or delivered were registered, or in respect of any payment to any Person other than a payment to the registered holder thereof, and shall not be required to make any such issuance, delivery or payment unless and until the Person otherwise entitled to such issuance, delivery or payment has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid or is not payable.

(b) Withholding . All payments and distributions (or deemed distributions) on the shares of Series A Preferred Stock (and on the shares of Common Stock received upon their conversion) shall be subject to withholding and backup withholding of tax to the extent required by law, subject to applicable exemptions, and amounts withheld, if any, shall be treated as received by Holders.

Section 21. Notices.

All notices referred to herein shall be in writing, and, unless otherwise specified herein, all notices hereunder shall be deemed to have been given upon the earlier of receipt thereof or three Business Days after the mailing thereof if sent by registered or certified mail (unless first class mail shall be specifically permitted for such notice under the terms of these Articles of Amendment) with postage prepaid, addressed: (i) if to the Corporation, to its office at 200 Westgate Circle, Annapolis, Maryland 21401 (Attention: Corporate Secretary), or other agent of the Corporation designated as permitted by these Articles of Amendment, or (ii) if to any Holder, to such Holder at the address of such Holder as listed in the stock record books of the Corporation (which may include the records of the Transfer Agent) or (iii) to such other address as the Corporation or any such Holder, as the case may be, shall have designated by notice similarly given.

Exhibit 3.1 – Page 26 --

Maryland	52-1726127
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

200 Westgate Circle, Suite 200, Annapolis, Maryland	21401
(Address of principal executive offices)	(Zip Code)

Title of each class	Name of each exchange on which registered

Common Stock, par value $.01 per share	Nasdaq Capital Market

Section		Page No.
PART I		1

Item 1	Business	1
Item 1A	Risk Factors	28
Item 1B	Unresolved Staff Comments	36
Item 2	Properties	36
Item 3	Legal Proceedings	36
Item 4	Submission of Matters to a Vote of Security Holders	36
Item 4.1	Executive Officers of the Registrant That Are Not Directors	36

PART II		37

Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	37
Item 6	Selected Financial Data	40
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	53
Item 8	Financial Statements and Supplementary Data	54
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	54
Item 9A	Controls and Procedures	54
Item 9B	Other Information	56

PART III		56

Item 10	Directors and Executive Officers of the Registrant and Corporate Governance	56
Item 11	Executive Compensation	56
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	57
Item 13	Certain Relationships and Related Transactions, and Director Independence	57
Item 14	Principal Accounting Fees and Services	57

PART IV		58

Item 15	Exhibits, Financial Statement Schedules	58

SIGNATURES		60


	2008						2007						2006						2005						2004
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(dollars in thousands)

Residential mortgage	$	355,909			36.55	%	$	320,303			32.45	%	$	249,448			26.15	%	$	219,988			23.71	%	$	215,767			27.30	%
Construction, land acquisition and
development		242,359			24.89	%		297,823			30.18	%		339,122			35.55	%		390,376			42.07	%		343,101			43.42	%
Land		82,642			8.49	%		93,717			9.50	%		90,747			9.51	%		77,319			8.33	%		33,419			4.23	%
Lines of credit		34,872			3.58	%		29,713			3.01	%		40,733			4.27	%		35,491			3.82	%		29,096			3.68	%
Commercial real estate		214,209			22.00	%		205,755			20.85	%		193,299			20.26	%		163,449			17.61	%		127,768			16.17	%
Commercial non-real estate		3,084			0.32	%		3,416			0.34	%		3,348			0.35	%		3,412			0.37	%		3,859			0.49	%
Home equity		39,040			4.01	%		32,748			3.32	%		32,758			3.44	%		32,974			3.55	%		28,101			3.56	%
Consumer		1,083			0.11	%		2,355			0.24	%		1,537			0.16	%		1,768			0.19	%		2,489			0.31	%
Loans held for sale		453			0.05	%		1,101			0.11	%		2,970			0.31	%		3,216			0.35	%		6,654			0.84	%

Total gross loans		973,651			100.00	%		986,931			100.00	%		953,962			100.00	%		927,993			100.00	%		790,254			100.00	%

Deferred loan origination fees and costs, net		(4,439	)					(4,898	)					(4,712	)					(4,916	)					(4,157	)

Loans in process		(57,940	)					(78,238	)					(104,747	)					(136,239	)					(123,195	)

Allowance for loan losses		(14,813	)					(10,781	)					(9,026	)					(7,505	)					(5,935	)

Total loans net	$	896,459					$	893,014					$	835,477					$	779,333					$	656,967

	For the Years ended December 31,
	2008			2007			2006
	(dollars in thousands)
Held for Sale:
Beginning balance	$	1,101		$	2,970		$	3,216
Originations		13,145			18,320			31,322
Net sales		(13,793	)		(20,189	)		(31,568	)

Ending balance	$	453		$	1,101		$	2,970


Held for investment:
Beginning balance	$	985,830		$	950,992		$	924,777
Originations and purchases		210,984			239,336			260,715
Repayments/payoffs		(223,616	)		(204,498	)		(234,500	)

Ending balance	$	973,198		$	985,830		$	950,992

Interest rate range		Percentage of Portfolio
Less than 5.00%		59.2%
5.01 – 6.00%		0.0%
6.01 – 7.00%		19.4%
7.01 – 8.00%		18.5%
Over 8.00%		2.9%
		100.0%

	Due		Due after
	Within one		1 through		Due after
	year or less		5 years		5 years		Total
	(dollars in thousands)
One to four family residential	$	42,063	$	53,471	$	317,851	$	413,385
Multifamily		1,450		2,180		7,513		11,143
Commercial and industrial real estate		19,181		72,667		118,752		210,600
Construction and land acquisition
and development loans		192,864		49,495		-		242,359
Land		46,140		31,795		9,311		87,246
Commercial, non-real estate		4,088		1,538		2,209		7,835
Consumer		180		730		173		1,083
Total	$	305,966	$	211,876	$	455,809	$	973,651

	Fixed		Floating		Total
	(dollars in thousands)
One to four family residential	$	195,217	$	176,105	$	371,322
Multifamily		1,634		8,059		9,693
Commercial and industrial real estate		87,218		104,201		191,419
Construction and land acquisition
and development loans		24,445		25,050		49,495
Land		25,309		15,797		41,106
Commercial, non-real estate		1,833		1,914		3,747
Consumer		866		37		903
Total	$	336,522	$	331,163	$	667,685

	At December 31,
	2008			2007			2006			2005			2004
	(dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family real estate	$	35,829		$	4,992		$	3,487		$	1,693		$	915
Home equity lines of credit		189			-			-			-			-
Commercial		3,047			336			98			-			-
Land		15,721			2,372			2,342			-			24
Non-mortgage loans:
Consumer		9			-			-			-			-
Commercial loans		-			-			-			-			-
Total non-accrual loans	$	54,795		$	7,700		$	5,927		$	1,693		$	939
Accruing loans greater than 90 days past due	$	-		$	-		$	-		$	-		$	-
Foreclosed real-estate	$	6,317		$	2,993		$	970		$	-		$	-
Total non-performing assets	$	61,112		$	10,693		$	6,897		$	1,693		$	939
Total non-accrual loans to net loans		6.1	%		0.9	%		0.7	%		0.2	%		0.1	%
Allowance for loan losses to total non-performing loans,
including loans contractually past due 90 days or more		27.0	%		140.0	%		152.3	%		443.3	%		632.1	%
Total non-accrual and accruing loans greater than
90 days past due to total assets		5.5	%		0.8	%		0.7	%		0.2	%		0.1	%
Total non-performing assets to total assets		6.2	%		1.1	%		0.8	%		0.2	%		0.1	%

	At or for the Year Ended
	December 31
	2008			2007			2006			2005			2004
	(dollars in thousands)
Average loans outstanding, net	$	893,030		$	858,305		$	819,038		$	738,028		$	600,030
Total gross loans outstanding at end of period	$	973,651		$	986,931		$	953,962		$	927,993		$	790,254
Total net loans outstanding at end of period	$	896,459		$	893,014		$	835,477		$	779,333		$	656,967
Allowance balance at beginning of period	$	10,781		$	9,026		$	7,505		$	5,935		$	4,832

Provision for loan losses		7,481			2,462			1,561			1,570			1,200
Actual charge-offs
1-4 family residential real estate		2,571			270			-			-			97
Other		878			449			40			-			-
Total charge-offs		3,449			719			40			-			97
Recoveries
Total recoveries		-			12			-			-			-
Net charge offs		3,449			707			40			-			97

Allowance balance at end of period	$	14,813		$	10,781		$	9,026		$	7,505		$	5,935
Net charge offs as a percent of average loans		0.39	%		0.08	%		0.00	%		0.00	%		0.02	%
Allowance for loan losses to total gross loans at end of period		1.52	%		1.09	%		0.95	%		0.81	%		0.75	%
Allowance for loan losses to net loans at end of period		1.65	%		1.21	%		1.08	%		0.96	%		0.90	%

	Jumbo Certificates
	of Deposit
Time Remaining Until Maturity	(dollars in thousands)
Less than three months	$	46,891
3 months to 6 months		57,719
6 months to 12 months		84,943
Greater than 12 months		42,106
Total	$	231,659

	Years ended December 31,
	2008			2007			2006
	(dollars in thousands)
Short term borrowings
Average balance outstanding during the period	$	1,667		$	10,417		$	8,250
Maximum amount outstanding at any month-end during
the period		10,000			25,000			26,000
Weighted average interest rate during the period		3.74	%		4.68	%		5.31	%
Total short term borrowings at period end		-			15,000			18,000
Weighted average interest rate at period end		-			4.40	%		5.41	%

	Actual					Required For Capital Adequacy Purposes					Required To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		%			Amount		%			Amount		%
	(dollars in thousands)
December 31, 2008
Tangible (1)	$	132,890		13.5	%	$	14,743		1.50	%		N/A		N/A
Tier I capital (2)		132,890		16.9	%		N/A		N/A		$	47,047		6.00	%
Core (1)		132,890		13.5	%		39,314		4.00	%		49,142		5.00	%
Total (2)		142,199		18.1	%		62,730		8.00	%		78,412		10.00	%

December 31, 2007
Tangible (1)	$	107,734		11.3	%	$	14,321		1.50	%		N/A		N/A
Tier I capital (2)		107,734		13.7	%		N/A		N/A		$	47,144		6.00	%
Core (1)		107,734		11.3	%		38,190		4.00	%		47,737		5.00	%
Total (2)		117,205		14.9	%		62,859		8.00	%		78,573		10.00	%

2008							2007
	Stock Price Range				Per Share			Stock Price Range				Per Share
Quarter	Low		High		Dividend		Quarter	Low		High		Dividend
1 st	$	7.80	$	12.00	$	.060	1 st	$	16.78	$	22.55	$	.060
2 nd		6.52		9.45		.060	2 nd		16.24		20.23		.060
3 rd		5.50		6.99		.060	3 rd		12.25		17.00		.060
4 th		3.70		6.54		.060	4 th		8.21		13.28		.060

		Period Ending
Index	12/31/03	12/31/04	12/31/05	12/31/06	12/31/07	12/31/08
Severn Bancorp, Inc.	100.00	152.76	124.80	137.39	77.56	35.49
NASDAQ Composite Index	100.00	108.59	110.08	120.56	132.39	78.72
SNL $500M-$1B Thrift Index	100.00	110.61	105.12	128.81	101.83	75.51

	At December 31,
	2008	2007		2006
	(dollars in thousands)

FHLB notes	$-	$1,000	$5,000
Mortgage-backed securities	1,345	1,383	2,271

Total Investment Securities Held to Maturity	$1,345	$2,383	$7,271

	2008		2007		2006
	(dollars in thousands)

NOW accounts	$	12,813	$	11,152	$	9,314
Money market accounts		44,012		87,688		89,120
Passbooks		53,319		14,891		18,526
Certificates of deposit		554,747		523,698		490,865
Non-interest bearing accounts		18,975		15,344		18,699

Total deposits	$	683,866	$	652,773	$	626,524

	For the Year Ended December 31,
	2008		2007		2006		2005		2004
	(dollars in thousands, except per share information)
Interest income	$	62,472	$	71,814	$	70,175	$	57,135	$	44,829
Interest expense		33,503		38,176		32,060		21,955		14,631
Net interest income		28,969		33,638		38,115		35,180		30,198
Provision for loan losses		7,481		2,462		1,561		1,570		1,200
Net interest income after provision for loan losses		21,488		31,176		36,554		33,610		28,998
Non-interest income		2,791		4,336		3,867		2,748		3,402
Non-interest expense		17,293		16,492		14,065		12,878		11,211
Income before income tax provision		6,986		19,020		26,356		23,480		21,189
Provision for income taxes		2,873		7,909		10,608		8,926		8,258
Net income	$	4,113	$	11,111	$	15,748	$	14,554	$	12,931

Per Share Data:
Basic earnings per share *	$	0.39	$	1.10	$	1.56	$	1.45	$	1.29
Diluted earnings per share *	$	0.39	$	1.10	$	1.56	$	1.45	$	1.29
Cash dividends declared per share*	$	.24	$	.24	$	.22	$	.20	$	.17
Weighted number of shares outstanding basic *		10,066,679		10,066,283		10,065,289		10,065,002		10,065,002
Weighted number of shares outstanding diluted *		10,066,679		10,066,283		10,069,056		10,065,002		10,065,002

	Year Ended December 31,
	2008				2007			2006
	Average				Average			Average
	Volume		Interest	Yield/Cost	Volume	Interest	Yield/Cost	Volume	Interest	Yield/Cost
	(dollars in thousands)
ASSETS
Loans (1)	$893,030	$61,703		6.91%	$858,305	$70,275	8.19%	$819,038	$68,610	8.38%
Investments (2)	-	-		-	3,333	121	3.63%	5,000	154	3.08%
Mortgage-backed securities	1,363	74		5.43%	1,957	96	4.91%	2,823	112	3.97%
Other interest-earning assets (3)	23,063	695		3.01%	20,357	1,322	6.49%	19,886	1,299	6.53%
Total interest-earning assets	917,456	62,472		6.81%	883,952	71,814	8.12%	846,747	70,175	8.29%
Non-interest earning assets	49,959				51,317			44,385
Total Assets	$967,415				$935,269			$891,132

LIABILITIES AND STOCKHOLDERS' EQUITY
Savings and checking deposits	$119,159	$2,018		1.69%	$132,604	$3,272	2.47%	$138,242	$2,728	1.97%
Certificates of deposits	552,689	23,932		4.33%	514,523	26,075	5.07%	483,524	20,977	4.34%
Borrowings	166,250	7,553		4.54%	170,417	8,829	5.18%	162,417	8,355	5.14%
Total interest-bearing liabilities	838,098	33,503		4.00%	817,544	38,176	4.67%	784,183	32,060	4.09%
Non-interest bearing liabilities	27,234				25,836			26,556
Stockholders' equity	102,083				91,889			80,393
Total liabilities and stockholders' equity	$967,415				$935,269			$891,132
Net interest income and Interest rate spread		$28,969		2.81%		$33,638	3.45%		$38,115	4.20%
Net interest margin				3.16%			3.81%			4.50%
Average interest-earning assets to
average interest-bearing liabilities				109.47%			108.12%			107.98%

(1) Non-accrual loans are included in the average balances and in the computation of yields.
(2) Bancorp does not have any tax-exempt securities.
(3) Other interest earning assets include interest bearing deposits in other banks, federal funds, and FHLB stock investments.


	Year ended December 31, 2008									Year ended December 31, 2007
	vs.									vs.
	Year ended December 31, 2007									Year ended December 31, 2006
	Total			Changes Due to						Total			Changes Due to
	Change			Volume (1)			Rate (1)			Change			Volume (1)			Rate (1)
	(dollars in thousands)
Interest-earning assets
Loans	$	(8,572	)	$	2,843		$	(11,415	)	$	1,665		$	3,289		$	(1,624	)
Investments		(121	)		(121	)		-			(33	)		(51	)		18
Mortgage-backed securities		(22	)		(29	)		7			(16	)		(34	)		18
Other interest-earning assets		(627	)		176			(803	)		23			31			(8	)
Total interest income	$	(9,342	)	$	2,869		$	(12,211	)	$	1,639		$	3,235		$	(1,596	)

Interest-bearing liabilities
Savings and checking deposits	$	(1,254	)	$	(332	)	$	(922	)	$	544		$	(111	)	$	655
Certificates of deposits		(2,143	)		1,934			(4,077	)		5,098			1,345			3,753
Borrowings		(1,276	)		(216	)		(1,060	)		474			412			62
Total interest expense	$	(4,673	)	$	1,386		$	(6,059	)	$	6,116		$	1,646		$	4,470

Net change in net interest income	$	(4,669	)	$	1,483		$	(6,152	)	$	(4,477	)	$	1,589		$	(6,066	)


(1) Changes in interest income/expense not arising from volume or rate variances are allocated proportionately to rate and volume.

Rate	Amount	Maturity
2.940% to 4.996%	$ 28,000	2009
5.000%	10,000	2010
-%	-	2011
-%	-	2012
-%	-	2013
1.693% to 4.340%	115,000	Thereafter
	$153,000

	Payments due by period (dollars in thousands)
			Less than						More than
	Total		1 year		1 to 3 years		3 to 5 years		5 years

Long term debt	$	153,000	$	28,000	$	10,000	$	-	$	115,000

Subordinated debentures		24,119		-		-		-		24,119

Operating lease obligations		131		94		37		-		-

Certificates of Deposit		554,747		441,274		83,056		30,417		-

Total	$	731,997	$	469,368	$	93,093	$	30,417	$	139,119

					Net Portfolio Value						NPV as % of PV of Assets
Change In Rates			$ Amount		$ Change			% Change			NPV Ratio			Change
(dollars are in thousands)
	+300	bp		123,807		(14,085	)		(10	%)		12.58	%		(95	bp)
	+200	bp		131,939		(5,952	)		(4	%)		13.23	%		(31	bp)
	+100	bp		136,762		(1,130	)		(1	%)		13.56	%		2	bp
	+50	bp		171,124		33,232			24	%		16.88	%		334	bp
	0	bp		137,892								13.53	%
	-50	bp		178,397		40,505			29	%		17.44	%		390	bp
	-100	bp		140,961		3,069			2	%		13.75	%		22	bp

/s/ Alan J. Hyatt		/s/ Thomas G. Bevivino
Alan J. Hyatt		Thomas G. Bevivino
President and Chief Executive Officer		Principal Financial Officer

	Number of		Number of
	securities to be		securities
	issued upon	Weighted-average	remaining available
	exercise of	exercise price of	for future issuance
	outstanding	outstanding	under equity
	options, warrants	options, warrants	compensation
Plan Category	and rights	and rights	plans
Equity compensation
plan approved by
security holders	114,950	$15.87	506,050
Equity compensation
plans not approved by
security holders	-	-	-
Total	114,950	$15.87	506,050

	December 31,
	2008		2007

ASSETS
Cash and due from banks	$	14,082	$	6,415
Interest bearing deposits in other banks		271		814
Federal funds sold		17,952		4,037
Cash and cash equivalents		32,305		11,266
Investment securities held to maturity		1,345		2,383
Loans held for sale		453		1,101
Loans receivable, net of allowance for loan losses of
$14,813 and $10,781, respectively		896,006		891,913
Premises and equipment, net		30,267		31,289
Federal Home Loan Bank stock at cost		8,694		10,172
Accrued interest receivable and other assets		18,581		14,110

Total assets	$	987,651	$	962,234

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits	$	683,866	$	652,773
Short-term borrowings		-		15,000
Long-term borrowings		153,000		175,000
Subordinated debentures		24,119		20,619
Accrued interest payable and other liabilities		2,999		3,566

Total liabilities		863,984		866,958


Stockholders’ Equity
Preferred stock, $0.01 par value, 1,000,000 shares authorized:
Preferred stock series “A”, 437,500 and 0 shares issued and outstanding		4		-
Preferred stock series “B”, 23,393 and 0 shares issued and outstanding		-		-
Common stock, $0.01 par value, 20,000,000 shares authorized;
10,066,679 shares issued and outstanding		101		101
Additional paid-in capital		73,522		46,768
Retained earnings		50,040		48,407

Total stockholders' equity		123,667		95,276

Total liabilities and stockholders' equity	$	987,651	$	962,234

	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings			Total Stockholders’ Equity

Balance - December 31, 2005	$	-	$	83	$	11,516	$	61,113		$	72,712

Comprehensive Income
Net income		-		-		-		15,748			15,748
10% Stock dividend (914,943 shares)		-		9		16,576		(16,585	)		-
Stock-based compensation		-		-		163		-			163
Dividends on common stock
($.22 per share)		-		-		-		(2,196	)		(2,196	)
Exercise of stock options (900 shares)		-		-		15		-			15

Balance - December 31, 2006		-		92		28,270		58,080			86,442

Comprehensive Income
Net income		-		-		-		11,111			11,111
10% Stock dividend (915,004 shares)		-		9		18,357		(18,366	)		-
Stock-based compensation		-		-		128		-			128
Dividends on common stock
($.24 per share)		-		-		-		(2,418	)		(2,418	)
Exercise of stock options (825 shares)		-		-		13		-			13

Balance - December 31, 2007		-		101		46,768		48,407			95,276

Comprehensive Income
Net income		-		-		-		4,113			4,113
Stock-based compensation		-		-		128		-			128
Dividends on common stock
($.24 per share)		-		-		-		(2,416	)		(2,416	)
Dividend declared on Series A
preferred stock ($.08 per share)		-		-		-		(35	)		(35	)
Series A preferred stock offering		4		-		3,249		-			3,253
Series B preferred stock offering		-		-		23,348		-			23,348
Amortized of discount on preferred stock		-		-		29		(29	)		-

Balance - December 31, 2008	$	4	$	101	$	73,522	$	50,040		$	123,667

A .	Principles of Consolidation - The consolidated financial statements include the accounts of Severn Bancorp, Inc. ("Bancorp"), and its wholly-owned subsidiaries, Louis Hyatt, Inc., 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, Homeowners Title and Escrow Corporation, Severn Financial Services Corporation, SSB Realty Holdings, LLC, SSB Realty Holdings II, LLC, and HS West, LLC. All intercompany accounts and transactions have been eliminated in the accompanying financial statements.

B.	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.

C.	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 and the fair value of foreclosed real estate.

D.	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) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

E.	Loans Held for Sale - Loans held for sale are carried at lower of cost or market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Mortgage loans held for sale are generally sold with the mortgage servicing rights released by the Bank. Gains and losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.

F.	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. 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.

	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 but not collected for loans that are placed on non-accrual or charged-off is reversed against interest income. 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.

G.	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. For such loans that are classified as impaired, an allowance is established when the current market value of the underlying collateral of the impaired loan 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. The general component relates to loans that are classified as doubtful, substandard or special mention, as well as non-classified loans. The general reserve is based on historical loss experience adjusted for qualitative factors.

	A loan is considered impaired if it meets either of the following two criteria: · Loans that are 90 days or more in arrears (nonaccrual loans) · 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. 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 the 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.

H.	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 an allowance to reduce real estate acquired through foreclosure to fair value less estimated disposal cost. Expenses incurred on foreclosed real estate prior to disposition are charged to expense. Gains or losses on the sale of foreclosed real estate are recognized upon disposition of the property. Foreclosed real estate totaled $6,317,000 and $2,993,000 as of December 31, 2008 and 2007, respectively and is included in other assets.

J.	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.

K.	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 amounts 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.

L.	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.

M.	Earnings Per Share - Basic earnings per share of common stock for the years ended December 31, 2008, 2007 and 2006 is computed by dividing net income available to common stockholders by 10,066,679, 10,066,283 and 10,065,289, respectively, 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. Diluted earnings per share of common stock for the years ended December 31, 2008, 2007 and 2006, is computed by dividing net income for each year by 10,066,679, 10,066,283 and 10,069,056, respectively, the weighted average number of diluted shares of common stock. The above amounts have been retroactively adjusted to give effect to two 10% stock dividends effective March 2007 and 2006.

N.	Employee Stock Ownership Plan - Bancorp accounts for its Employee Stock Ownership Plan ("ESOP") in accordance with Statement of Position 93-6 of the Accounting Standards Division of the American Institute of Certified Public Accountants. Bancorp records compensation expense equal to the cash contribution called for under the Plan. All ESOP shares are included in the weighted average shares outstanding for earnings per share computations. All dividends paid on ESOP shares are charged to retained earnings.

O.	Advertising Cost - Advertising cost is expensed as incurred and totaled $476,000, $460,000 and $287,000 for the years ended December 31, 2008, 2007, and 2006, respectively.

P.	Recent Accounting Pronouncements - FASB Statement No. 141 (R) “Business Combinations” was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. This Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This new pronouncement will impact the Company’s accounting for any business combinations beginning January 1, 2009.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
December 31, 2008:

Mortgage backed securities	$	1,345	$	11	$	27	$	1,329
December 31, 2007:

Federal Home Loan Bank
(“FHLB”) Notes	$	1,000	$	-	$	-	$	1,000
Mortgage backed securities		1,383		3		56		1,330
	$	2,383	$	3	$	56	$	2,330

December 31, 2008:	Less than 12 months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(dollars in thousands)

Mortgage backed securities	$	-	$	-	$	1,151	$	27	$	1,151	$	27

December 31, 2007:

Mortgage backed securities	$	-	$	-	$	1,150	$	56	$	1,150	$	56

	December 31, 2008		Number of loans		December 31, 2007		Number of loans

Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential - consumer	$	30,769		73	$	3,975		11
Residential - builder		20,970		45		3,389		6
Non-mortgage loans:
Consumer		9		2		336		2
Commercial loans		3,047		11		-		-
Total non-accrual loans	$	54,795		131	$	7,700		19
Accruing loans greater than 90 days past due	$	-			$	-
Foreclosed real-estate	$	6,317			$	2,993
Total non-performing assets	$	61,112			$	10,693

Impaired loans at December 31, 2007	$	17,960
Added to impaired loans		77,897
Gross loans transferred to foreclosed real estate		(15,258	)
Paid off prior to foreclosure		(10,763	)
Impaired loans at December 31, 2008	$	69,836

Foreclosed real estate at December 31, 2007	$	2,993
Transferred from impaired loans, net of specific reserves of $3,130		12,128
Property improvements		92
Additional write downs		(932	)
Property sold		(7,964	)
Foreclosed real estate at December 31, 2008	$	6,317