Severn Bancorp facing scrutiny 

Posted: 1:03 pm Tue, November 24, 2009
By Danielle Ulman
Daily Record Business Writer

One banking analyst said it is troubling that much of Severn’s loan portfolio is made up of construction, Severn Bancorp Inc. and Severn Savings Bank FSB entered into supervisory agreements with federal regulators Tuesday, the result of concerns over the companies’ operating results in a tough economic climate.

The agreements with the Office of Thrift Supervision, the regulator for the Annapolis-based bank and its parent company, outline steps that must be taken to address concerns about Severn’s “unsafe and unsound practices.” The agreement resulted from a review of the bank and holding company in March.

“These agreements should not impact our day-to-day operations or our relationship with our customers or employees,” said Alan J. Hyatt, Severn’s president and chief executive officer. “Many of the steps contained in the agreements are consistent with actions we identified as necessary and have already begun implementing to navigate this unprecedented economic disruption.”

Under the agreement, the bank is required to revise its policies regarding problem assets, allowance for loan and lease losses, loan modification and interest reserves. Severn must provide written quarterly progress reports to regulators.

About 5.5 percent of Severn’s loans are in non-accrual status, meaning that interest payments have not been paid for a sustained period. Reserves are usually set aside to cover those loan losses. Severn also recorded 4.03 percent of loans between 30 and 89 days past due for payment.

Bert Ely, a Virginia banking analyst, said it troubled him that so much of the bank’s loan portfolio was made up of construction, commercial real estate and land loans, areas that have been hard hit.

“That’s more than half their loan book in those three categories,” he said. “I’m wondering to what extent regulators are concerned about what’s coming down the road.”

Still, the bank remains well capitalized, and Ely said he’s seen banks that are “in much worse shape” that are not under regulatory scrutiny.

OTS has issued cease and desist orders to four Maryland banks this year — Eastern Savings Bank, Waterfield Bank, Colombo Bank and Bradford Bank, which regulators shut down in August after the bank could not comply with the order or find a merger partner. Regulators also closed Suburban Federal Savings Bank earlier this year.

“What we’re seeing overall is much more enforcement which shows the deterioration of many institutions as well as the continuing impact of the credit cycle on banks especially where there’s exposure to commercial loans,” Ely said.

An OTS spokesman said supervisory agreements are formal enforcement actions that are similar in strictness to cease and desist orders. It is unclear why one bank might receive a cease and desist order while another would enter into a supervisory agreement.

“The terminology varies among the agencies,” Ely said. “To me a cease and desist is a little more severe than a supervisory agreement. But a supervisory agreement is no laughing matter.”

As of Sept. 30, Severn had $990 million in assets and four branches in Annapolis, Edgewater and Glen Burnie, according to data from the Federal Deposit Insurance Corp. The bank lost $4.05 million for the third quarter, compared to earnings of $770,000 during the corresponding quarter in 2008.