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Annapolis-based Severn Bancorp Inc., the parent company of its namesake bank, said Tuesday that it has agreed with federal regulators to take steps to shore up its operations hurt by the collapse of the real estate market.

Under "supervisory agreements" with the Office of Thrift Supervision, Severn must revise its policies regarding its problem assets, change its allowance for loan and lease losses and loan modification policy, as well as develop a program for managing risks related to credit and provide quarterly reports of its progress, among other actions.

The move by the OTS comes after the federal regulator completed its examination of the bank in March, Severn said.

Like many savings and loans institutions, Severn has seen an increase in delinquent loans amid the slowdown in the financial and real estate markets. The bank is also experiencing a decline in demand for certain products, including mortgages and construction and land loans.

Several other Baltimore-area banks are operating under more intense federal scrutiny, including 1st Mariner Bank. So far this year, two Maryland banks have failed: Bradford Bank of Towson in August and Suburban Federal Savings Bank of Crofton in January.

Thomas G. Bevivino, Severn's chief financial officer and executive vice president, said in an interview that the bank had been focusing on addressing issues outlined by the OTS. A majority of its problem loans are mortgages secured by real estate, Bevivino said.

Bevivino noted that the number of problem loans leveled off in September after increasing rapidly from the end of 2008 to June 30.

"We're cautiously optimistic that we've reached the low point and perhaps we could start seeing improvements in the quarter," he said.

Severn reported a net loss of $4.4 million, or 48 cents per share, in the three months ending Sept. 30. That's compared with a profit of $600,000, or 6 cents per share, in the corresponding period last year. Much of the loss in the recent third quarter was due to an increase in its loan loss reserve of $8.9 million.

Severn, which has four branches in Anne Arundel County, had $995 million in assets as of Sept. 30.

"These agreements should not impact our day-to-day operations or our relationship with our customers or employees," Severn President and Chief Executive Officer Alan J. Hyatt said in a statement. "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."

Severn said the bank's regulatory capital ratios exceed the federal levels required to be considered "well-capitalized."

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