**EXHIBIT
10.2**
 SEVERN
BANCORP, INC.
 STOCK
OPTION AND INCENTIVE PLAN
 
 1.  Purpose
of the Plan.
 
 The
purpose of this Severn Bancorp, Inc. Stock Option and Incentive Plan (the
"Plan") is to advance the interests of the Company through providing select key
Employees and Directors of the Bank, the Company, and their Affiliates with the
opportunity to acquire Shares. By encouraging such stock ownership, the Company
seeks to attract, retain and motivate the best available personnel for positions
of substantial responsibility and to provide additional incentive to **** Directors
and key Employees of the Company or any Affiliate to promote the success of the
business.
 
 2.  Definitions.
 
 As used
herein, the following definitions shall apply.
 
 (a)
"Affiliate" shall mean any "parent corporation" or "subsidiary corporation" of
the Company, as such terms are defined in Section 424 (c) and (f), respectively,
of the Code, and any other subsidiary corporations of a parent corporation of
the Company.
 
 (b)
"Agreement" shall mean a written agreement entered into in accordance with
Section 5(c).
 
 (c)
"Bank" shall mean Severn Savings Bank, FSB.
 
 (d)
"Board" shall mean the Board of Directors of the Company.
 
 (e)  "Code"
shall mean the Internal Revenue Code of 1986, as amended.
 
 (f)
"Committee" shall mean the Stock Option Committee appointed by the Board in
accordance with Section 5(a) hereof.
 
 (g)
"Common Stock" shall mean the common stock, par value $.01 per share, of the
Company.
 
 (h)
"Company" shall mean Severn Bancorp, Inc.
      
 
 (i)
"Continuous Service" shall mean the absence of any interruption or termination
of service as an Employee or Director of the Company or an Affiliate. Continuous
Service shall not be considered interrupted in the case of sick leave, military
leave, or any other leave of absence approved by the Company or in the case of
transfers between payroll locations of the Company or between the Company, an
Affiliate, or a successor.
 
 (j)
"Control" shall mean the ownership, control, or power to vote ten percent (10%)
or more of the voting stock of the Company or **** otherwise
control in any manner the election or appointment **** of a
majority of the Board. "Change in Control" shall mean: (i) the sale of all, or a
material portion, of the assets of the Company **;** (ii) a
merger or recapitalization in the Company whereby the Company is not the
surviving entity; (iii) an Acquisition by which a person becomes a Controlling ** Shareholder
within the meaning of 12 C.F.R. Part 574 or as otherwise defined by the Office
of Thrift Supervision, or any successor agency or regulation thereto; or (vi)
the acquisition, directly or indirectly, of the beneficial ownership (within the meaning ** of that
term as it is used in Section 13(d) of the Securities Exchange Act of 1934 and
the rules and regulations promulgated thereunder) of ten percent (10%) or more
of the outstanding ** voting
securities of the Company by any person, entity, or group; provided, however,
that a change in Control of the Company shall not include the acquisition or
disposition of securities of the Company by any person in Control of the Company
at the time of the adoption of this Plan and shall not include any subsequent
acquisition or disposition of the securities of the Company by any person owned
or Controlled by, or under common Control with, a person in Control of the
Company at the time of the adoption of this Plan. This definition shall not
apply to the purchase of Shares by underwriters in connection with a public
offering of securities of the Company, or the purchase of shares of up to 25% of
any class of securities of the Company by a tax-qualified employee stock benefit
plan as defined in 12 C.F.R. §563b.2(a)(39). The term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, sole proprietorship, unincorporated organization, ** syndicate,
or any other form of entity not listed. The decision of the Committee as to
whether a change in Control has occurred shall be conclusive and
binding.
 
 (k)
"Director" shall mean any member of the Board, and any member of the board of
directors of any Affiliate that the Board has by resolution designated as being
eligible for participation in this Plan.
      
  
 (l)  "Disinterested
Person" shall mean any member of the Board who, at the time discretion under the
Plan is exercised, is a "disinterested person" within the meaning ** of Rule
16b-3 promulgated pursuant to the Exchange Act.
 
 (m)
"Effective Date" shall mean the date specified in Section 14
hereof.
 
 (n)
"Employee" shall mean any person employed by the Company, the Bank, or an
Affiliate who is an employee for federal tax purposes.
 
 (o)
"Exercise Price" shall mean the price per Optioned Share at which an option may
be exercised.
 
 (p)  "ISO"
means an option to purchase Common Stock that meets the requirements set forth
in the Plan, and which is intended to be and is identified as an "incentive
stock option" within the meaning of section 422 of the Code.
 
 (q)
"Market Value" shall mean the fair market value of the Common Stock, as
determined under Section 7(b) hereof.
 
 (r)
"Non-ISO" means an option to purchase Common Stock that meets the requirements
set forth in the Plan but which is not intended to be and is not identified as
an ISO.
 
 (s)
"Option" means an ISO and/or a Non-ISO.
 
 (t)
"Optioned Shares" shall mean Shares subject to an Option granted pursuant to
this Plan.
 
 (u)
"Participant" shall mean any key Employee or other person who receives an Option
pursuant to the Plan.
 
 (v)
"Plan" shall mean this Severn Bancorp, Inc., Stock Option and Incentive
Plan.
 
 (w) "Rule
16b-3"" shall mean Rule 16b-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended, or any successor regulation
thereto.
 
 (x)
"Share" shall mean one share of Common Stock.
      
 
 3.  Term of
the Plan and Options.
 
 (a) Term
of the Plan. The Plan shall continue in effect for a term of 10 years from the
Effective Date or the date the Plan is adopted by the Board (whichever period
ends earlier), unless sooner terminated pursuant to Section 16 hereof. No Option
shall be granted under the Plan after such 10 year term.
 
 (b) Term
of Options. The term of each Option granted under the Plan shall be established
by the Committee, but shall not exceed 10 years; provided, however, that in the
case of an Employee who owns Shares representing more than 10% of the
outstanding Common Stock at the time an ISO is granted, the term of such ISO
shall not exceed five years, subject to the provisions of Section 8(c)
hereof.
 
 4.  Shares
Subject to the Plan.
 
 Except as
otherwise required by the provisions of Section 11 hereof, the aggregate number
of shares deliverable pursuant to Options shall not exceed 75,000 Shares. Such
Shares may either be authorized but unissued Shares or Shares held in treasury.
If any Options should expire, become unexercisable, or be forfeited for any
reason without having been exercised or becoming vested in full, the optioned
Shares shall, unless the Plan shall have been terminated, be available for the
grant o£ additional Options under the Plan.
 
 5.  Administration
of the Plan.
 
 (a)
Composition of the Committee. The Plan shall be administered by the Committee,
which shall consist of not less than 3 members of the Board who are
Disinterested Persons. Members of the Committee shall serve at the pleasure of
the Board. In the absence at any time of a duly appointed committee, the Plan
shall be administered by those members o£ the Board who are Disinterested
Persons.
 
 (b)
Powers of the Committee. Except as limited by the express provisions of the Plan
or by resolutions adopted by the Board, the Committee shall have sole and
complete authority and discretion, subject to compliance with applicable
regulations (i) to select Participants and grant Options, (ii) to determine the
form and content of Options to be issued in the form of Agreements under the
Plan **,** (iii) to
interpret the Plan, (iv) to prescribe, amend and rescind rules and regulations
relating to the Plan, and (v) to make other determinations necessary or
advisable for the administration of the Plan. The Committee shall have and may
exercise such other power and authority as may be delegated to it by the Board
from time to time. A majority of the entire Committee shall constitute a quorum
and the actions of a majority of the members present at any meeting at which a
quorum is present, or acts approved in writing by a majority of the Committee
without a meeting, shall be deemed the action of the Committee.
     
 
 (c)
Agreement. Each Option shall be evidenced by a written agreement containing such
provisions as may be approved by the Committee. Each such Agreement shall
constitute a binding contract between the Company and the Participant, and every
Participant, upon acceptance of such Agreement, shall be bound by the terms and
restrictions of the Plan and of such Agreement. The terms of each such Agreement
shall be in accordance with the Plan, but each Agreement may include such
additional provisions and restrictions determined by the Committee, in its
discretion, subject to compliance with applicable regulations, provided that
such additional provisions and restrictions are not inconsistent with the terms
of the Plan. In particular, the Committee shall set forth in each Agreement (i)
the Exercise Price of an option, (ii) the number of Shares subject to, and the
expiration date of, the Option, (iii) the manner, time, and rate (cumulative or
otherwise) of exercise or vesting of such Option, (iv) the restrictions, if to
be placed upon such option, or upon Shares which may be issued upon exercise of
such option, and (v) whether the Option is ended to be an ISO or a
Non-ISO.
 
 The
Chairman of the Committee and such other Directors and officers as shall be
designated by the Committee are hereby authorized to execute Agreements on
behalf of the Company and to cause them to be delivered to the recipients of
Options.
 
 (d)
Effect of the Committee’s Decisions. All decisions, determinations and
interpretations of the Committee shall be final persons affected
thereby.
 
 (e)
Indemnification. In addition to such other rights of indemnification as they may
have, the members Of the Committee shall be indemnified by the Company in
connection with any claim, action, suit, or proceeding relating to any action
taken or failure to act under or in connection, with the Plan or any Option,
granted hereunder to the full extent provided for under the Company's Articles
of Incorporation and Bylaws with respect to the indemnification of
Directors.
     
 
 6.  Grant of
Options.
  (a)
General Rule. On and after the Effective Date, key Employees and Non-Employee
Directors shall be eligible to receive discretionary grants of Options (or other
Options) pursuant to the Plan; provided that such grant shall not be made to an
Employee or Non-Employee Director whose Continuous Service terminates on or
before the date of grant.
 
 (b) The
Option granted to the optionee hereunder (i) shall become vested and exercisable
in accordance with the Agreement regarding such option, (ii) shall have a
term **** of not
more than 10 years from the date of the option, and (iii) shall be subject to
the general rule set forth in Section 8(c) with respect to the effect of an
optionee's termination of Continuous Service on the Optionee's right to exercise
his or her options.
 
 (c)
Special Rules for ISOs.
 
 (1)  The
option granted to the optionee hereunder (i) shall become vested and
exercisable, on a cumulative basis, with respect to 20% of the Optioned Shares
upon each **** of the
first five anniversary dates of the date of grant, provided that vesting shall
not occur on a particular date if the Optionee's Continuous Service has
terminated on or before such date and (ii) shall have a term not to exceed 10
years from the date of the option.
 
 (2)  The
aggregate Market Value, as of the date the Option is grated, of the Shares with
respect to which ISOs are exercisable for the first time by an Employee during
any calendar year (under all incentive stock option plans, as defined in Section
422 of the Code, of the Company or any present or future Parent or Subsidiary of
the Company) shall not exceed $100,000. Notwithstanding the foregoing, the
Committee may grant Options in excess of
the foregoing limitations, in which case such options granted in excess of such
limitation shall be options which are Non-ISOs.
 
 7.  Exercise
Price for Options.
 
 (a)  Limits on
Committee Discretion. The Exercise Price as to any particular option shall not
be less than 100% of the Market Value of the Optioned Shares on the date of
grant without taking into account any restrictions **** on the
optioned Shares. In the case of an Employee who owns Shares representing more
than 10% of the Company's outstanding Shares of Common Stock at the time an ISO
is granted, the Exercise Price shall not be less than 110% of the Market Value
of the Optioned Shares at the time the ISO is granted.
     
 
 (b)  Standards
for Determining Exercise Price. If the Common Stock is listed on a national
securities exchange (including the Nasdaq National Market or Small Cap System)
on the date in question, then the Market Value per Share shall be the average of
the highest and lowest selling price on such exchange on such date, or if there
were no sales on such date, then the Exercise Price shall be the mean between
the bid and asked price on such date. If the Common Stock is traded otherwise
than on a national securities exchange on the date in question, then the market
value per Share shall be the mean between the bid and asked price on such date,
or, if there is no bid and asked price on such date, then on the next prior
business day on which there was a bid and asked price. If no such bid and asked
price is available, then the Market Value per Share shall be its fair market
value as determined by the Committee, in its sole and absolute
discretion.
 
 8.  Exercise
of Options.
 
 (a)  Generally.
Subject to (e) below, any option granted hereunder shall be exercisable at such
times and under such conditions as shall be permissible under the terms of the
Plan and of the Agreement granted to a Participant. An Option may not be
exercised for a fractional Share.
 
 (b)  Procedure
for Exercise. A Participant may exercise options, subject to provisions relative
to its termination and limitations on its exercise, only by (1) written notice
of intent to exercise the Option with respect to a specified number of Shares,
and (2) payment to the Company (contemporaneously with delivery of such notice)
in cash, in Common Stock, or a combination of cash and Common Stock, of the
amount of the Exercise Price for the number of Shares with respect to which the
Option is then being exercised. Each such notice (and payment where required)
shall be delivered, or mailed by prepaid registered or certified mail, addressed
to the Treasurer of the Company at the Company's executive offices. Common Stock
utilized in full or partial payment of the Exercise Price for options shall be
valued at its Market value at the date of exercise.
 
 (c)
Period of Exercisability. Except to the extent, otherwise provided in more
restrictive terms of an Agreement, an option may be exercised by a Participant
only with respect to the vested portion of such option and only while a
Participant is an Employee or Director that has maintained Continuous Service
from the date of the grant of the Option, or within 3 months after
termination **** of such
Continuous Service (but not later than the date on which the Option would
otherwise expire), except if the Employee's or Director's Continuous Service
terminates by reason of:
     
   (1) "Just
Cause" which for purposes hereof shall have the meaning set forth in any
unexpired employment agreement between the Participant and the Bank and/or the
Company (and, in the absence of any such agreement, shall mean termination
because of the Employee's or Director's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or final cease
and desist order, then the Participant's **** rights to
exercise such Option shall expire on the date of such termination;
 
 (2)
death, then all Options of the deceased Participant shall become immediately
exercisable and may be exercised within 2 years from the date of his death (but
not later than the date on which the option would otherwise expire) by the
personal representatives of his estate or person or persons to whom his rights
under such Option shall have passed by will or by laws of descent and
distribution.
 
 (3)  Permanent
and Total Disability (as such term is defined in Section 22(e)(3) of the Code),
then all Options of the disabled participant shall become immediately
exercisable and may be exercised within 1 year from the date of such Permanent
and Total Disability, but not later than the date on which the option would
otherwise expire.
 
 (d)
Effect of the Committee's Decisions. The Committee's determination whether a
Participant’s Continuous Service has ceased, and the effective date thereof, and
conclusive on all persons affected thereby.
 
 (e)  Vesting
of all options shall cease immediately upon the termination of employment or
directorship of an optionee. The vesting schedule for ISOs set forth in Section
6(c)(1) of this Plan is the most rapid vesting permitted under the Plan for
ISOs, except in the case of death or disability (which shall be governed by
Sections 8(c)(2) and (3) above) or a change in Control (which shall be
governed by Section 10).
     
 
 9.  Grants of
Options to Non-Employee Directors
 
 (a)
Automatic Grants. Notwithstanding any other provisions of this Plan, each
Director who is not an employee but is a Director on the Effective Date shall
receive, on said date, Non-ISOs to purchase 4,000 Shares. Such Non-ISOs shall
have an Exercise Price per Share equal to the market value of a Share on the
date of grant.
 
 Each
Director who joins the Board after the
Effective Date and who is not then an Employee shall be eligible to receive, on
the date of joining the Board, a discretionary grant of Non-ISOs in accordance
with Section 6 of the Plan, at an Exercise Price per Share equal to the market
Value on the date of grant.
 
 (b) Terms
of Exercise. Options received under the provisions of this Section may be
exercised in accordance with Section 8 above.
 
 10.
Change in Control.
 
 All
outstanding options shall become immediately exercisable in the event of a
change in Control of the Company, as determined by the Committee in its sole
discretion. In the event of a change in Control, the Committee and the Board of
Directors, at their discretion, will take one or a combination of the following
actions to be effective as of the date of such change in Control:
 
 (1)
provide that such options shall be assumed, or equivalent options shall be
substituted ("Substitute options") by the acquiring or succeeding corporation
(or an Affiliate thereof), provided that (a) any such Substitute Option
exchanged for ISOs shall meet the requirements of Section 424(a) of the Code,
and (b) the shares of stock issuable upon the exercise of such Substitute option
shall constitute securities registered in accordance with the Securities Act of
1933, as amended ("Securities Act"), or such securities shall be exempt from
such registration in accordance with Sections 3(a)(2) or 3(a)(5) of the
Securities Act, or
 
 (2)  provide
that the Participants will receive upon the consummation of the change in
Control transaction a cash payment for each option surrendered equal to the
difference between (1) the Market Value of the consideration to be received for
each share of common Stock in the change in Control transaction times the number
of Shares subject to a surrendered Option, and (2) the aggregate exercise price
of such surrendered Options. Options to which the Committee or the Board has
determined to provide a cash payment in lieu of the option pursuant to this
section shall be and become, upon the change in Control the right to receive the
cash payment only and shall cease to be an Option.
   
 
 The
individual agreements concerning options under this Plan or other
agreements **** between
Participants and the Company, the Bank, or any Affiliate thereof, may provide
restrictions on options in the case of a change in Control in order to avoid
adverse tax results under Section 280G and/or Section 4999 of the
Code.
 
 11.
Effect of Changes in Common Stock Subject to the Plan.
 
 (a)
Recapitalization Stock Splits, Etc. The number and kind of Shares reserved for
issuance under the Plan, and the number and kind of shares subject to
outstanding options, and the Exercise Price thereof, shall be proportionately
adjusted for any increase, decrease, change, or exchange of Shares for a
different number or kind of shares or other securities of the Company which
results from a merger, consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of shares, or similar
event in which the number or kind of Shares is changed without the receipt or
payment of consideration by the Company.
 
 (b)  Special
Rule for ISOs. Any adjustment made pursuant to subsection (a) hereof shall be
made in such a manner as not to constitute a modification, within the meaning of
Section 424(h) of the Code, of outstanding ISOs.
 
 (c)
Conditions and Restrictions on New, Additional, or Different Shares or
Securities. If, by reason of any adjustment made pursuant to this Section, a
Participant becomes entitled to new, additional, or different shares of stock or
securities, such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions that were
applicable to the Shares pursuant to the option before the adjustment was
made.
 
 (d) Other
Issuances. Except as expressly provided in this Section, the issuance by the
Company or an Affiliate of shares of stock of any class, or of securities
convertible into Shares or stock of another class, for cash or property or for
labor or services either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, shall not affect, and no adjustment shall be
made with respect to, the number, class or Exercise Price of Shares then subject
to Options or reserved for issuance under the Plan.
     
   12.
Non-Transferability of Options.
 
 Options
may not be sold, pledged, assigned, hypothecated, transferred or disposed of in
any manner other than by will or by the laws of descent and distribution, or
pursuant to the terms of a "qualified domestic relations order" (within the
meaning of Section 414(p) of the Code and the regulations and rulings thereunder).
An option may be exercised only by a Participant, the Participant's personal
representative, or a permitted transferee.
 
 13. Time
of Granting Options.
 
 The date
of grant of an option shall, for all purposes, be the later of the date on which
the Committee makes the determination of granting such option, and the Effective
Date. Notice of the determination shall be given to each Participant to whom an
option is so granted within a reasonable time after the date of such
grant.
 
 14.
Effective Date.
 
 The Plan
shall become effective immediately upon its approval by the Board;
provided, **** however,
that the plan shall be approved by a favorable **** vote of
stockholders owning at least a majority of the Shares cast at a meeting duly
held in accordance with the applicable laws within 12 months of the adoption of
the Plan by the Board. If such approval of stockholders is not obtained within
12 months of the adoption of the Plan, the Plan shall continue in existence,
however, all ISOs granted pursuant to the Plan shall become
Non-ISOs.
 
 15.
Modification of Options.
 
 At any
time, and from time to time, the board may authorize the Committee to direct
execution of an instrument providing for the modification of any outstanding
option, provided no such modification shall confer on the holder of said Option
any right or benefit which could not be conferred on such person by the grant of
a new Option at such time, or impair the option without the consent of the
holder of the option.
     
 
 16.
Amendment and Termination of the Plan.
 
 The Board
may from time to time amend the terms of the Plan, subject to compliance with
applicable regulations, and, with respect to any Shares at the time not subject
to options, suspend or terminate the Plan; provided that the provisions of
Section 9 may not be amended more than once every six months (other than to
comport with changes in the Code, the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder).
 
 Shareholder
approval must be obtained for any amendment of the Plan that would change the
number of Shares subject to the Plan (except in accordance with Section 12
above), change the category of persons eligible to be Participants, or
materially increase the benefits under the Plan.
 
 No
amendment, suspension or termination of the Plan shall, without the consent of
any affected holders of an option, alter or any rights or obligations under any
option theretofore granted.
 
 17.
Conditions upon Issuance of Shares.
 
 (a)
Compliance with Securities Laws. Shares of Common Stock shall not be issued with
respect to any option unless the issuance and delivery of such Shares shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities law, and the requirements of any
stock exchange upon which the Shares may then be listed. The Plan is intended to
comply with Rule 16b-3, and any provision of the Plan which the Committee
determines in its sole and absolute discretion to be inconsistent with said Rule
shall, to the extent of such inconsistency **,** be
inoperative and null and void, and shall not affect the validity of the
remaining provisions of the Plan.
 
 (b)  Special
Circumstances. The inability of the Company to obtain approval from any
regulatory body or authority deemed by the Company's counsel to be necessary to
the lawful issuance and sale of any Shares hereunder shall relieve the Company
of any liability in respect of the non-issuance or sale of such Shares. As a
condition to the exercise of an option the Company may require the person
exercising the option to make such representations and warranties as may be
necessary to assure the availability of an exemption from the registration
requirements of federal or state securities law.
     
 
 (c)  Committee
Discretion. The Committee shall have the discretionary authority, subject to
compliance with applicable regulations, to impose in Agreements such
restrictions on Shares as it may deem appropriate or desirable, including but
not limited to the authority to impose a right of first refusal or to establish
repurchase rights or both of these restrictions.
 
 18.
Reservation of Shares.
 
 The
Company, during the term of the Plan, will reserve and keep available a number
of Shares sufficient to satisfy the requirements of the Plan.
 
 19.
Withholding Tax.
 
 The
Company's obligation to deliver Shares upon exercise of options shall be subject
to the Participant's satisfaction of all applicable federal, state, and local
income and employment tax withholding obligations. The Committee, in its
discretion, may permit the Participant to satisfy the obligation, in whole or in
part, by irrevocably electing to have the company withhold Shares, or to deliver
to the Company Shares that the Participant already owns, having a value equal to
the amount required to be withheld. The value of Shares to be withheld, or
delivered to the Company, shall be based on the Market Value of the Shares on
the date the amount of tax to be **** withheld
is to be determined. As an alternative, the Company may retain, or sell without
notice, a number of such Shares sufficient to cover the amount required to be
withheld.
 
 20. No
Employment or Other Rights.
 
 In no
event shall an Employee's or Director's eligibility to participate or
participation in the Plan create or be deemed to create any legal or equitable
right of the Employee, Director, or any other party to continue service with the
Company, the Bank, or any Affiliate of such corporations. Except to the extent
provided in Section 9(a), no Employee or Director shall have a right to be
granted an option or, having received an option the right to again be granted an
option. However, an Employee or Director who has been granted an Option may, if
otherwise eligible, be granted an additional option or Options.
     
 
 21.
Governing Law.
 
 The Plan
shall be governed by and construed in accordance with the laws of the State of
Maryland, except to the extent that federal law shall be deemed to
apply.