XNAS:SVBI Severn Bancorp Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)

 þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

or

 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                         to                                       .

Commission File Number 0-49731

SEVERN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland
52-1726127
(State or other jurisdiction of incorporation or organization)
(I.R.S. employer identification no.)
200 Westgate Circle, Suite 200
 Annapolis, Maryland
 
 
21401
(Address of principal executive offices)
(Zip Code)
410-260-2000
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and formal fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  þ   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o                                                                                                             Accelerated filer  o
 
Non- accelerated filer (Do not check if a smaller reporting company) o                          Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)Yes o  No þ
 
Number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of the close of business on May 9, 2012: 10,066,679 shares.
 

 
 

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Table of Contents


PART I – FINANCIAL INFORMATION
Page
Item 1.
Financial Statements (Unaudited)
 
     
 
Consolidated Statements of Financial Condition as of March 31, 2012 and December 31, 2011
 
1
 
Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011
 
2
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011
 
3
 
Notes to Consolidated Financial Statements
5
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
37
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
46
     
Item 4.
Controls and Procedures
46
     
PART II – OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
46
     
Item 1A.
Risk Factors
47
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
47
     
Item 3.
Defaults Upon Senior Securities
47
     
Item 4.
Mine Safety Disclosures
47
     
Item 5.
Other Information
47
     
Item 6.
Exhibits
47
     
 
SIGNATURES
 
48

 
i

 

PART I– FINANCIAL INFORMATION

Item 1.  Financial Statements

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(dollars in thousands, except per share amounts)
 
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
ASSETS
     
Cash and due from banks
  $ 35,223     $ 35,577  
Interest-bearing deposits in other banks
    40,559       40,610  
Federal funds sold
    29,399       11,203  
   Cash and cash equivalents
    105,181       87,390  
Investment securities held to maturity
    40,348       40,357  
Loans held for sale
    4,886       4,128  
Loans receivable, net of allowance for loan losses of
               
   $25,795 and $25,938, respectively
    675,801       693,303  
Premises and equipment, net
    26,946       27,218  
Foreclosed real estate
    19,853       19,932  
Federal Home Loan Bank stock at cost
    6,943       6,943  
Accrued interest receivable and other assets
    20,513       21,357  
                 
Total assets
  $ 900,471     $ 900,628  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Liabilities
               
Deposits
  $ 650,473     $ 652,757  
Long-term borrowings
    115,000       115,000  
Subordinated debentures
    24,119       24,119  
Accrued interest payable and other liabilities
    4,828       2,822  
                 
Total liabilities
    794,420       794,698  
                 
                 
Stockholders’ Equity
               
Preferred stock, $0.01 par value, 1,000,000 shares authorized;
               
      Preferred stock series “A”, 437,500 shares issued and outstanding
    4       4  
      Preferred stock series “B”,  23,393 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
    74,761       74,683  
Retained earnings
    31,185       31,142  
                 
Total stockholders' equity
    106,051       105,930  
                 
Total liabilities and stockholders' equity
  $ 900,471     $ 900,628  

The accompanying notes to consolidated financial statements are an integral part of these statements.

 
1

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in thousands, except per share data)
   
For the Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
Interest Income
           
   Loans, including fees
  $ 10,037     $ 11,529  
   Securities, taxable
    174       122  
   Other
    54       47  
      Total interest income
    10,265       11,698  
                 
Interest Expense
               
   Deposits
    2,250       2,838  
   Long-term borrowings and subordinated debentures
    1,302       1,288  
      Total interest expense
    3,552       4,126  
                 
      Net interest income
    6,713       7,572  
Provision for loan losses
    465       634  
      Net interest income after provision for loan losses
    6,248       6,938  
                 
Non-Interest Income
               
   Real estate commissions
    208       111  
   Real estate management fees
    144       142  
   Mortgage banking activities
    375       155  
   Other
    163       154  
      Total non-interest income
    890       562  
                 
Non-Interest Expenses
               
   Compensation and related expenses
    3,060       2,614  
   Occupancy
    175       255  
   Foreclosed real estate expenses, net
    1,217       1,945  
   Legal fees
    135       184  
   FDIC assessments and regulatory expense
    536       560  
   Other
    1,187       1,151  
      Total non-interest expenses
    6,310       6,709  
                 
Income before income tax provision
    828       791  
Income tax provision
    356       344  
      Net income
  $ 472     $ 447  
Amortization of discount on preferred stock
    (68 )     (68 )
Dividends on preferred stock
    (362 )     (362 )
      Net income available to common stockholders
  $ 42     $ 17  
Basic earnings per share
  $ .00     $ .00  
Diluted earnings per share
  $ .00     $ .00  
                 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 
2

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)

   
For the Three Months Ended
March 31,
 
   
2012
   
2011
 
             
Cash Flows from Operating Activities
           
             
Net income
  $ 472     $ 447  
Adjustments to reconcile net income to
               
 net cash provided by operating activities:
               
     Amortization of deferred loan fees
    (289 )     (450 )
     Net amortization of premiums and
               
          discounts
    49       37  
     Provision for loan losses
    465       634  
     Provision for depreciation
    275       314  
     Gain on sale of loans
    (375 )     (155 )
     (Gain) loss on sale of foreclosed real estate
    (329 )     521  
     Provision for foreclosed real estate losses
    1,209       1,059  
     Proceeds from loans sold to others
    25,257       8,813  
     Loans originated for sale
    (25,640 )     (5,574 )
     Stock-based compensation expense
    11       28  
     Decrease in net deferred tax asset
    355       227  
     Decrease in accrued interest receivable
               
          and other assets
    489       406  
     Increase in accrued interest payable and other
          liabilities
    2,006       1,558  
                 
Net cash provided by operating activities
    3,955       7,865  
                 
Cash Flows from Investing Activities
               
                 
     Purchase of investment securities held to maturity
    (1,045 )     (6,123 )
     Proceeds from maturing investment securities
    1,000       2,000  
     Principal collected on mortgage-backed securities
    5       149  
     Net decrease in loans
    12,726       23,685  
     Proceeds from sale of foreclosed real estate
    3,776       4,582  
     Investment in foreclosed real estate
    23       (197 )
     Investment in premises and equipment
    (3 )     (31 )
Net cash provided by investing activities
    16,482       24,065  



 
3

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) CONTINUED
(dollars in thousands)

   
For the Three Months Ended
March 31,
 
   
2012
   
2011
 
             
Cash Flows from Financing Activities
           
             
     Net increase (decrease) in deposits
    (2,284 )     3,522  
     Series “A” preferred stock dividend paid
    (70 )     (70 )
     Series “B” preferred stock dividend paid
    (292 )     (292 )
                 
Net cash (used in) provided by financing activities
    (2,646 )     3,160  

Increase in cash and cash equivalents
    17,791       35,090  
Cash and cash equivalents at beginning of year
    87,390       70,955  
                 
Cash and cash equivalents at end of period
  $ 105,181     $ 106,045  
                 
Supplemental disclosure of cash flows information:
               
     Cash paid during period for:
               
                 
          Interest
  $ 3,581     $ 4,142  
                 
          Income taxes
  $ 2     $ -  
                 
     Transfer of loans to foreclosed real estate
  $ 4,600     $ 3,908  

The accompanying notes to consolidated financial statements are an integral part of these statements.


 
4

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Principles of Consolidation

The unaudited consolidated financial statements include the accounts of Severn Bancorp, Inc. (“Bancorp”), and its wholly-owned subsidiaries, 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, Louis Hyatt, Inc., 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 consolidated financial statements.

Note 2 - Basis of Presentation

Bancorp follows accounting standards set by the Financial Accounting Standards Board, commonly referred to as the “FASB”.  The FASB sets generally accepted accounting principles in the United States (“GAAP”) that Bancorp follows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification or ASC.

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with the instructions to Form 10-Q.  Accordingly, they do not include all of the disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations for the interim periods presented have been made. Such adjustments were of a normal recurring nature.  The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012 or any other interim period.  The unaudited consolidated financial statements for the three months ended March 31, 2012 should be read in conjunction with the audited consolidated financial statements and related notes, which were included in Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.  These consolidated financial statements consider events that occurred through the date the consolidated financial statements were issued.

Note 3 - Cash Flow Presentation

In the statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, Federal Home Loan Bank of Atlanta (“FHLB Atlanta”) overnight deposits, and federal funds sold. Generally, federal funds are sold for one-day periods.
 
Note 4 – Reclassifications

Amounts in the prior year’s consolidated financial statements have been reclassified whenever necessary to conform to the current year’s presentation.  Such reclassifications had no impact on net income (loss).



 
5

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 5 - Earnings Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for each period.  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.

Not included in the diluted earnings per share calculation for the three month period ended March 31, 2012, because they were anti-dilutive, were 100,000 shares of common stock issuable upon exercise of outstanding stock options, 556,976 shares of common stock issuable upon the exercise of a warrant and 437,500 shares of common stock issuable upon conversion of Bancorp’s Series A Preferred Stock.  Not included in the diluted earnings per share calculation for the three month period ended March 31, 2011, because they were anti-dilutive, were 20,000 shares of common stock issuable upon the exercise of outstanding stock options, 556,976 shares of common stock issuable upon the exercise of a warrant and 437,500 shares of common stock issuable upon conversion of Bancorp’s Series A Preferred Stock.

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
Common shares – weighted average (basic)
    10,066,679       10,066,679  
Common share equivalents – weighted average
    -       3,245  
Common shares – diluted
    10,066,679       10,069,924  

Note 6 - Guarantees

Bancorp does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  See Note 10.


 
6

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED


Note 7 - Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on Bancorp’s consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The following table presents the Bank’s capital position:

   
Actual at
March 31 2012
   
Acutal
at December 31, 2011
   
To Be Well Capitalized Under Prompt Corrective Provisions
 
Tangible (1)
    13.1 %     13.0 %     N/A  
Tier I Capital (2)
    18.5 %     17.1 %     6.0 %
Core (1)
    13.1 %     13.0 %     5.0 %
Total Capital (2)
    19.8 %     18.4 %     10.0 %
 
 
(1) To adjusted total assets.
            (2) To risk-weighted assets.
 
Note 8 - Stock-Based Compensation
 
Bancorp has a stock-based compensation plan for directors, officers, and other key employees of Bancorp.  The aggregate number of shares of common stock that may be issued with respect to the awards granted under the plan is 500,000 plus any shares forfeited under Bancorp’s old stock-based compensation plan.  Under the terms of the stock-based compensation plan, Bancorp has the ability to grant various stock compensation incentives, including stock options, stock appreciation rights, and restricted stock.  The stock-based compensation is granted under terms and conditions determined by the Compensation Committee of the Board of Directors.  Under the stock-based compensation plan, stock options generally have a maximum term of ten years, and are granted with an exercise price at least equal to the fair market value of the common stock on the date the options are granted.  Generally, options granted to directors of Bancorp vest immediately, and options granted to officers and employees vest over a five-year period, although the Compensation Committee has the authority to provide for different vesting schedules.

Bancorp follows FASB ASC 718, “Compensation – Stock Compensation”, to account for stock-based compensation.  FASB ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the statement of operations at fair value.  FASB ASC 718 requires an entity to recognize the expense of employee services received in share-based payment transactions and measure the expense based on the grant date fair value of the award.  The expense is recognized over the period during which an employee is required to provide service in exchange for the award.

 
7

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 8 - Stock-Based Compensation - continued

On March 16, 2010, Bancorp granted 100,000 options to certain officers and employees to purchase shares of Bancorp’s stock at a price ranging from $4.13 to $4.54 per share.  The options vest over a five year period from the date of grant.

The grant-date fair value of options granted was $2.12.  The fair value of the options awarded under the option plan is estimated on the date of grant using the Black-Scholes valuation model, which is dependent upon certain assumptions as presented below:


Expected life of options (in years)
    5.00  
Risk-free interest rate
    2.37 %
Expected volatility
    58.78 %
Expected dividend yield
    0.00 %


The expected life of the options was estimated using the average vesting period of the options granted and represents the period of time that options granted are expected to be outstanding.  The risk-free interest rate is the U.S. Treasury rate commensurate with the expected life of the options on the grant date.  Volatility of Bancorp’s stock price was based on historical volatility.  Dividend yield was based on management’s projection of future dividends.

There were no options granted during the three months ended March 31, 2012.

Stock-based compensation expense for the three months ended March 31, 2012 and 2011 totaled $11,000 and $28,000, respectively. There were no options granted or exercised during the three months ended March 31, 2012 or the three months ended March 31, 2011.

Information regarding Bancorp’s stock-based compensation plan as of and for the three months ended March 31, 2012 is as follows:
 
   
2012
 
         
Weighted Average
 
   
Shares
   
Price
 
Options outstanding, December 31, 2011
    100,000     $ 4.21  
Options granted
    -       -  
Options exercised
    -       -  
Options forfeited
    8,500     $ 4.13  
Options outstanding, March 31, 2012
    91,500     $ 4.22  
Options exercisable, March 31, 2012
    37,363     $ 4.22  

The aggregate intrinsic value of the options outstanding as of March 31, 2012 and December 31, 2011 was $0.

 
8

 


SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 8 - Stock-Based Compensation - continued

The following table summarizes the stock options outstanding and exercisable as of March 31, 2012.

Options Outstanding and Exercisable
           
Weighted Average Remaining
   
Weighted Average
 
Range of Exercise Prices
   
Number Outstanding
   
Contractual Life
   
Exercise Price
 
                     
$ 4.13       29,196       2.96     $ 4.13  
$ 4.54       8,167       2.96     $ 4.54  
$ 4.13-$4.54       37,363       2.96     $ 4.22  


As of March 31, 2012, there was $126,000 of total unrecognized stock-based compensation expense related to non-vested stock options, which is expected to be recognized over a period of thirty-six months.

Note 9 - Investment Securities

The amortized cost and fair value of investment securities held to maturity are as follows (dollars in thousands):

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized Losses
   
Fair
Value
 
March 31, 2012:
                       
                         
US Treasury securities
  $ 34,512     $ 1,108     $ (25 )   $ 35,595  
US Agency securities
    5,189       57       (10 )     5,236  
US government sponsored
                               
  mortgage-backed securities
    647       51       -       698  
     Total
  $ 40,348     $ 1,216     $ (35 )   $ 41,529  
                                 
December 31, 2011:
                               
                                 
US Treasury securities
  $ 34,498     $ 1,285     $ (5 )   $ 35,778  
US Agency securities
    5,206       43       (4 )     5,245  
US Government sponsored
                               
  mortgage-backed securities
    653       48       -       701  
     Total
  $ 40,357     $ 1,376     $ (9 )   $ 41,724  

The amortized cost and estimated fair value of debt securities at March 31, 2012, by contractual maturity are shown in the following table.  Actual maturities may differ from contractual maturities, because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
9

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
 
Note 9 - Investment Securities - continued
   
Held to Maturity
 
   
(dollars in thousands)
 
   
Amortized
   
Estimated
 
   
Cost
   
Fair Value
 
             
  Due in one year or less
  $ 8,011     $ 8,055  
  Due from one year to five years
    26,616       27,363  
  Due from five years to ten years
    5,074       5,413  
  US Government sponsored
    Mortgage-backed securities
     647       698  
    $ 40,348     $ 41,529  

As of March 31, 2012 and December 31, 2011, there were $6,424,000 and $6,432,000, respectively, of US Treasury securities or mortgage-backed securities pledged by Bancorp as collateral for borrowers’ letters of credit with Anne Arundel County.

The following tables show fair value and unrealized losses, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position as of March 31, 2012 and December 31, 2011. Included in the table are three US Treasury Securities and one US Agency Security in 2012 and two US Treasury security and one US Agency security in 2011. Management believes that the unrealized losses are the result of interest rate levels differing from those existing at the time of purchase of the securities and actual and estimated prepayment speeds.  The Bank does not consider any of these securities to be other than temporarily impaired at March 31, 2012 and December 31, 2011, because the unrealized losses are related primarily to changes in market interest rates and widening of sector spreads and are not necessarily related to the credit quality of the issuers of the securities.

In addition, the Bank does not intend to sell, nor does it believe it will be more likely than not that it will be required to sell, any impaired securities prior to a recovery of amortized cost.
 
 
 
Less than 12 months
 
12 Months or More
 
Total
 
     
Unrealized
     
Unrealized
     
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
March 31, 2012:
(dollars in thousands)
 
                         
US Treasury securities
$ 3,068   $ (25 ) $ -   $ (- ) $ 3,068   $ (25 )
US Agency securities
  1,024     (10 )   -     (- )   1,024     (10 )
    Total
$ 4,092   $ (35 ) $ -   $ (- ) $ 4,092   $ (35 )
                                     
December 31, 2011:
                                   
                                     
US Treasury securities
$ 2,046   $ (5 ) $ -   $ (- ) $ 2,046   $ (5 )
US Agency securities
  1,032     (4 )   -     (- )   1,032     (4 )
    Total
$ 3,078   $ (9 ) $ -   $ (- ) $ 3,078   $ (9 )


 
10

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 10 - Loans Receivable

Loans receivable consist of the following:
 
March 31
   
December 31
 
   
2012
   
2011
 
   
(dollars in thousands)
 
             
Residential mortgage, total
  $ 285,823     $ 295,876  
  Individually evaluated for impairment
    51,132       51,007  
  Collectively evaluated for impairment
    234,691       244,869  
 
Construction, land acquisition and
               
   development, total
    94,323       99,122  
  Individually evaluated for impairment
    33,781       35,398  
  Collectively evaluated for impairment
    60,542       63,724  
 
Land, total
    58,218       59,649  
  Individually evaluated for impairment
    11,410       11,384  
  Collectively evaluated for impairment
    46,808       48,265  
 
Lines of credit, total
    33,216       34,278  
  Individually evaluated for impairment
    5,866       5,735  
  Collectively evaluated for impairment
    27,350       28,543  
 
Commercial real estate, total
    203,235       203,010  
  Individually evaluated for impairment
    24,243       24,354  
  Collectively evaluated for impairment
    178,992       178,656  
 
Commercial non-real estate, total
    5,308       5,599  
  Individually evaluated for impairment
    139       32  
  Collectively evaluated for impairment
    5,169       5,567  
 
Home equity, total
    41,003       41,309  
  Individually evaluated for impairment
    2,539       2,340  
  Collectively evaluated for impairment
    38,464       38,969  
 
Consumer, total
    753       897  
  Individually evaluated for impairment
    44       24  
  Collectively evaluated for impairment
    709       873  
 
Total Loans
    721,879       739,740  
  Individually evaluated for impairment
    129,154       130,274  
  Collectively evaluated for impairment
    592,725       609,466  
Less
               
     Loans in process
    (17,965 )     (18,014 )
     Allowance for loan losses
    (25,795 )     (25,938 )
     Deferred loan origination fees and costs, net
    (2,318 )     (2,485 )
    $ 675,801     $ 693,303  


 
11

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 10 – Loans Receivable - Continued

The inherent credit risks within the portfolio vary depending upon the loan class as follows:
 
Residential mortgage loans are secured by one to four family dwelling units. The loans have limited risk as they are secured by first mortgages on the unit, which are generally the primary residence of the borrower, at a loan to value ratio of 80% or less.

Construction, land acquisition and development loans are underwritten based upon a financial analysis of the developers and property owners and construction cost estimates, in addition to independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank is forced to foreclose on a project prior to or at completion, due to a default, there can be no assurance that the Bank will be able to recover all of the unpaid balance of the loan as well as related foreclosure and holding costs.  In addition, the Bank may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time. Sources of repayment of these loans typically are permanent financing expected to be obtained upon completion or sales of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.

Land loans are underwritten based upon the independent appraisal valuations as well as the estimated value associated with the land upon completion of development. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.

Commercial real estate loans are subject to the underwriting standards and processes similar to commercial and industrial loans, in addition to those underwriting standards for real-estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real estate. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates commercial real estate loans based on collateral and risk-rating criteria. The Bank also utilizes third-party experts to provide environmental and market valuations. The nature of commercial real estate loans makes them more difficult to monitor and evaluate.

Commercial non-real estate loans are underwritten after evaluating historical and projected profitability and cash flow to determine the borrower's ability to repay their obligation as agreed. Commercial and industrial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan facility. Accordingly, the repayment of a commercial and industrial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.
 
Home equity loans are subject to the underwriting standards and processes similar to residential mortgages and are secured by one to four family dwelling units. Home equity loans have greater risk than residential mortgages as a result of the Bank being in a second lien position in the event collateral is liquidated.
 

 
12

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 10 – Loans Receivable - Continued

Line of credit loans are subject to the underwriting standards and processes similar to commercial non-real estate loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real-estate and/or other assets. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. Line of credit loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates line of credit loans based on collateral and risk-rating criteria.
 
Consumer loans consist of loans to individuals through the Bank's retail network and are typically unsecured or secured by personal property. Consumer loans have a greater credit risk than residential loans because of the difference in the underlying collateral, if any. The application of various federal and state bankruptcy and insolvency laws may limit the amount that can be recovered on such loans.
 
The loan portfolio segments and loan classes disclosed above are the same because this is the level of detail management uses when the original loan is recorded and is the level of detail used by management to assess and monitor the risk and performance of the portfolio.  Management has determined that this level of detail is adequate to understand and manage the inherent risks within each portfolio segment and loan class.
 
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 GAAP. 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, periodically review the Bank's allowance for losses on loans as an integral part of their examination process.  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.  When a real estate secured loan becomes impaired, a decision is made as to whether an updated certified appraisal of the real estate is necessary.  This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property.  Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value.  The discounts also include estimated costs to sell the property.

For loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices.  Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

For such loans that are classified as impaired, an allowance is established when the current market value of the underlying collateral less its estimated disposal costs 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

 
13

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 10 – Loans Receivable - Continued

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 that are not considered impaired, as well as non-classified loans. The general reserve is based on historical loss experience adjusted for qualitative factors. These qualitative factors include:

·  
Levels and trends in delinquencies and nonaccruals;
·  
Inherent risk in the loan portfolio;
·  
Trends in volume and terms of the loan;
·  
Effects of any change in lending policies and procedures;
·  
Experience, ability and depth of management;
·  
National and local economic trends and conditions; and
·  
Effect of any changes in concentration of credit.

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); or
·  
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.

Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss.  Loans classified special mention have potential weaknesses that deserve management’s close attention.  If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.  Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses.  Loans not classified are rated pass.

A loan is considered a troubled debt restructuring when for economic or legal reasons relating to the borrowers financial difficulties grants a concession to the borrower that it would not otherwise consider.  Loan modifications made with terms consistent with current market conditions that the borrower could obtain in the open market are not considered troubled debt restructurings.

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 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.


 
14

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 10 – Loans Receivable - Continued

 
With respect to all loan segments, management does not charge off a loan, or a portion of a loan, until one of the following conditions have been met:
 
·  
The loan has been foreclosed on. Once the loan has been transferred from the Loans Receivable to Foreclosed Real Estate, a charge off is recorded for the difference between the recorded amount of the loan and the net value of the underlying collateral.
 
·  
An agreement to accept less than the recorded balance of the loan has been made with the borrower.  Once an agreement has been finalized, and any proceeds from the borrower are received, a charge off is recorded for the difference between the recorded amount of the loan and the net value of the underlying collateral.
 
Prior to either of the above conditions, a loan is assessed for impairment when: (i) a loan becomes 90 days or more in arrears or (ii) based on current information and events, it is probable that the borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement.  If, based on management’s assessment of the underlying collateral of the loan, it is determined that a reserve is needed, a specific reserve is recorded.  That reserve is included in the Allowance for Loan Losses in the Consolidated Statement of Financial Condition.

Bancorp has experienced an increase in the number of extension requests for commercial real estate and construction loans, some of which have related repayment guarantees. An extension may be granted to allow for the completion of the project, marketing or sales of completed units, or to provide for permanent financing, and is based on a re-underwriting of the loan and management's assessment of the borrower's ability to perform according to the agreed-upon terms. Typically, at the time of an extension, borrowers are performing in accordance with contractual loan terms. Extension terms generally do not exceed 12 to 18 months and typically require that the borrower provide additional economic support in the form of partial repayment, additional collateral or guarantees. In cases where the fair value of the collateral or the financial resources of the borrower are deemed insufficient to repay the loan, reliance may be placed on the support of a guarantee, if applicable. However, such guarantees are not relied on when evaluating a loan for impairment and never considered the sole source of repayment.

Bancorp evaluates the financial condition of guarantors based on the most current financial information available. Most often, such information takes the form of (i) personal financial statements of net worth, cash flow statements and tax returns (for individual guarantors) and (ii) financial and operating statements, tax returns and financial projections (for legal entity guarantors). Bancorp’s evaluation is primarily focused on various key financial metrics, including net worth, leverage ratios, and liquidity. It is Bancorp's policy to update such information annually, or more frequently as warranted, over the life of the loan.


 
15

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 10 – Loans Receivable – Continued

While Bancorp does not specifically track the frequency with which it has pursued guarantor performance under a guarantee, its underwriting process, both at origination and upon extension, as applicable, includes an assessment of the guarantor's reputation, creditworthiness and willingness to perform. Historically, when Bancorp has found it necessary to seek performance under a guarantee, it has been able to effectively mitigate its losses. As stated above, Bancorp’s ability to seek performance under a guarantee is directly related to the guarantor's reputation, creditworthiness and willingness to perform. When a loan becomes impaired, repayment is sought from both the underlying collateral and the guarantor (as applicable). In the event that the guarantor is unwilling or unable to perform, a legal remedy is pursued.

Construction loans are funded, at the request of the borrower, typically not more than once per month, based on the extent of work completed, and are monitored, throughout the life of the project, by independent professional construction inspectors and Bancorp's commercial real estate lending department. Interest is advanced to the borrower, upon request, based upon the progress of the project toward completion. The amount of interest advanced is added to the total outstanding principal under the loan commitment. Should the project not progress as scheduled, the adequacy of the interest reserve necessary to carry the project through to completion is subject to close monitoring by management. Should the interest reserve be deemed to be inadequate, the borrower is required to fund the deficiency. Similarly, once a loan is fully funded, the borrower is required to fund all interest payments.

Construction loans are reviewed for extensions upon expiration of the loan term. Provided the loan is performing in accordance with contractual terms, extensions may be granted to allow for the completion of the project, marketing or sales of completed units, or to provide for permanent financing. Extension terms generally do not exceed 12 to 18 months.
 
In general, Bancorp's construction loans are used to finance improvements to commercial, industrial or residential property. Repayment is typically derived from the sale of the property as a whole, the sale of smaller individual units, or by a take-out from a permanent mortgage. The term of the construction period generally does not exceed two years. Loan commitments are based on established construction budgets which represent an estimate of total costs to complete the proposed project including both hard (direct) costs (building materials, labor, etc.) and soft (indirect) costs (legal and architectural fees, etc.). In addition, project costs may include an appropriate level of interest reserve to carry the project through to completion. If established, such interest reserves are determined based on (i) a percentage of the committed loan amount, (ii) the loan term, and (iii) the applicable interest rate. Regardless of whether a loan contains an interest reserve, the total project cost statement serves as the basis for underwriting and determining which items will be funded by the loan and which items will be funded through borrower equity. Bancorp has not advanced additional interest reserves to keep a loan from becoming nonperforming.
 
Bancorp recognized $11,000 and $233,000 of interest income and capitalized interest in its loan portfolio from interest reserves during the three months ended March 31, 2012 and 2011, respectively.  None of the loans where interest reserves were recorded as capitalized interest were non-performing.



 
16

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
 Note 10 - Loans Receivable - Continued

The following is a summary of the allowance for loan losses for the three month periods ended March 31, 2012 and 2011 (dollars in thousands):

   
 
Total
   
Residential Mortgage
   
Acquisition and Development
   
 
Land
   
Lines of Credit
   
Commercial Real Estate
   
Commercial Non-Real Estate
   
Home Equity
   
 
Consumer
 
Three months March 2012
 
                                                     
Beginning Balance
  $ 25,938     $ 12,303     $ 3,916     $ 2,405     $ 725     $ 4,157     $ 169     $ 2,257     $ 6  
Provision
    465       (721 )     (287 )     1,125       (113 )     261       12       178       10  
Charge-offs
    (718 )     (154 )     (462 )     (40 )     -       (62 )     -       -       -  
Recoveries
    110       -       -       -       -       -       110       -       -  
Ending Balance
  $ 25,795     $ 11,428     $ 3,167     $ 3,490     $ 612     $ 4,356     $ 291     $ 2,435     $ 16  
 
Ending balance related to:
                                                                       
 
Loans individually evaluated for impairment
  $ 13,204     $ 5,409     $ 1,813     $ 2,438     $ 361     $ 913     $ 135     $ 2,125     $ 10  
Loans collectively evaluated for impairment
  $ 12,591     $ 6,019     $ 1,354     $ 1,052     $ 251     $ 3,443     $ 156     $ 310     $ 6  
                                                                         
Three months March 2011
                                                                       
                                                                         
Beginning Balance
  $ 29,871     $ 16,339     $ 3,997     $ 4,225     $ 458     $ 3,949     $ 131     $ 762     $ 10  
Provision
    634       (906 )     1,845       (1,101 )     (138 )     610       48       275       1  
Charge-offs
    (1,253 )     (668 )     (406 )     (166 )     -       -       -       (13 )     -  
Recoveries
    -       -       -       -       -       -       -       -       -  
Ending Balance
  $ 29,252     $ 14,765     $ 5,436     $ 2,958     $ 320     $ 4,559     $ 179     $ 1,024     $ 11  
                                                                         
Ending balance related to:                                                                        
 
Loans individually evaluated for impairment
  $ 14,290     $ 7,803     $  2,427     $ 1,803     $ 149     $ 1,488     $ -     $ 616     $ 4  
Loans collectively evaluated for impairment
  $ 14,962     $ 6,962     $ 3,009     $ 1,155     $ 171     $ 3,071     $ 179     $ 408     $ 7  


 
17

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

 Note 10 - Loans Receivable - Continued

The following table summarizes the amounts required for loans collectively evaluated for impairment as of December 31, 2011 (dollars in thousands):


   
 
Total
   
Residential Mortgage
   
Acquisition and Development
   
 
Land
   
Lines of Credit
   
Commercial Real Estate
   
Commercial Non-Real Estate
   
Home Equity
   
 
Consumer
 
 
December 2011
 
                                                     
Ending balance related to:                                                                        
 
Loans individually evaluated for impairment
  $ 12,994     $ 5,509     $  2,624     $ 1,365     $ 510     $ 960     $ 28     $ 1,998     $ -  
Loans collectively evaluated for impairment
  $ 12,944     $ 6,794     $ 1,292     $ 1,040     $ 215     $ 3,197     $ 141     $ 259     $ 6  


 
18

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 10 - Loans Receivable - Continued

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. Bancorp’s policy for recording payments received on non-accrual financing receivables is to record the payment towards principal and interest on a cash basis until such time as the loan is returned to accrual status.

The following table presents Bancorp’s non-performing assets as of March 31, 2012 and December 31, 2011 (dollars in thousands):
 
   
March 31,
 2012
   
Number
of loans
   
December 31, 2011
   
Number
of loans
 
   
 
   
 
             
Loans accounted for on a non-accrual basis:
                       
    Residential  mortgage
  $ 9,517       27     $ 8,912       25  
    Acquisition and development
    10,338       10       10,997       11  
    Land
    6,387       13       6,813       14  
    Lines of credit
    2,009       4       2,019       4  
    Commercial real estate
    804       3       2,140       5  
    Commercial non-real estate
    -       -       5       1  
    Home equity
    371       3       343       3  
    Consumer
    133       3       203       4  
Total non-accrual loans
  $ 29,559       63     $ 31,432       67  
Accruing loans greater than 90 days past due
  $ -             $ -          
Foreclosed real-estate
  $ 19,853             $ 19,932          
Total non-performing assets
  $ 49,412             $ 51,364          
Total troubled debt restructurings
  $ 62,896       126     $ 59,775       115  
Total non-accrual loans to net loans
    4.4 %             4.5 %        
Allowance for loan losses
  $ 25,795             $ 25,938          
Allowance to total loans
    3.7 %             3.6 %        
Allowance for loan losses to total non-performing loans,
                               
    including loans contractually past due 90 days or more
    87.3 %             82.5 %        
Total non-accrual and accruing loans greater than
                               
    90 days past due to total assets
    3.3 %             3.5 %        
Total non-performing assets to total assets
    5.5 %             5.7 %        


 
19

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 10 - Loans Receivable - Continued

The following tables summarize impaired loans at March 31, 2012 and December 31, 2011 (dollars in thousands):

   
 
Impaired Loans with
 Specific Allowance
   
Impaired Loans with No Specific Allowance
   
 
 
Total Impaired Loans
 
   
Recorded Investment
   
Related Allowance
   
Recorded Investment
   
Recorded Investment
   
Unpaid Principal Balance
 
March 31, 2012
                             
  Residential mortgage
  $ 27,088     $ 5,409     $ 24,044     $ 51,132     $ 53,161  
  Acquisition and development
    15,268       1,813       18,513       33,781       34,079  
  Land
    4,985       2,438       6,425       11,410       12,732  
  Lines of credit
    1,447       361       4,419       5,866       5,866  
  Commercial real estate
    3,958       913       20,285       24,243       24,243  
  Commercial non-real estate
    135       135       4       139       139  
  Home equity
    2,298       2,125       241       2,539       2,539  
  Consumer
    10       10       34       44       44  
     Total impaired loans
  $ 55,189     $ 13,204     $ 73,965     $ 129,154     $ 132,803  
                                         
   
 
Impaired Loans with
 Specific Allowance
   
Impaired Loans with No Specific Allowance
   
 
 
Total Impaired Loans
 
   
Recorded Investment
   
Related Allowance
   
Recorded Investment
   
Recorded Investment
   
Unpaid Principal Balance
 
December 31, 2011
                                       
  Residential mortgage
  $ 26,736     $ 5,509     $ 24,271     $ 51,007     $ 51,704  
  Acquisition and development
    18,023       2,624       17,375       35,398       36,261  
  Land
    2,850       1,365       8,534       11,384       12,819  
  Lines of credit
    1,548       510       4,187       5,735       5,735  
  Commercial real estate
    4,694       960       19,660       24,354       24,354  
  Commercial non-real estate
    28       28       4       32       32  
  Home equity
    2,170       1,998       170       2,340       2,340  
  Consumer
    -       -       24       24       24  
     Total impaired loans
  $ 56,049     $ 12,994     $ 74,225     $ 130,274     $ 133,269  


 
20

 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 10 - Loans Receivable - Continued

The following tables summarize impaired loans for the three month periods ending March 31, 2012 and 2011  (dollars in thousands):

   
Impaired Loans with
Specific Allowance
   
Impaired Loans with No
Specific Allowance
   
Total Impaired Loans
 
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
Three months March 31, 2012
                                   
  Residential mortgage
  $ 26,988     $ 351     $ 23,984     $ 260     $ 50,972     $ 611  
  Acquisition and development
    15,641       136       18,906       191       34,547       327  
  Land
    4,987       47       6,430       34       11,417       81  
  Lines of credit
    1,447       21       4,419       39       5,866       60  
  Commercial real estate
    3,962       51       20,323       215       24,285       266  
  Commercial non-real estate
    136       -       4       -       140       -  
  Home equity
    2,298       16       241       2       2,539       18  
  Consumer
    10       -       34       -       44       -  
    Total impaired loans
  $ 55,469     $ 622     $ 74,341     $ 741     $ 129,810     $ 1,363  
                                                 
                                                 
   
Impaired Loans with
Specific Allowance
   
Impaired Loans with No
Specific Allowance
   
Total Impaired Loans
 
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
                                                 
Three months March 31, 2011
                                               
  Residential mortgage
  $ 35,528     $ 303     $ 21,608     $ 259     $ 57,136     $ 562  
  Acquisition and development
    14,622       228       9,358       113       23,980       341  
  Land
    5,404       61       5,373       47       10,777       108  
  Lines of credit
    716       5       2,767       22       3,483       27  
  Commercial real estate
    5,732       71       17,880       265       23,612       336  
  Commercial non-real estate
    -       -       305       7       305       7  
  Home equity
    1,392       14       281       2       1,673       16  
  Consumer
    4       -       59       -       63       -  
    Total impaired loans
  $ 63,398     $ 682     $ 57,631     $ 715     $ 121,029     $ 1,397  



 
21

 


SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 10 - Loans Receivable - Continued

Changes in impaired loans during the three months ended March 31, 2012 and 2011 is as follows (dollars in thousands):

 
 
 
 
 
For the three
months ended
March 31, 2012
   
For the three
months ended
March 31, 2011
 
Impaired loans at beginning of period
   
$130,274
      $120,910  
     Added to impaired loans
    5,728       8,206  
     Gross loans transferred to foreclosed real estate
    (6,060 )     (4,700 )
     Paid off prior to foreclosure
    (788 )     (3,846 )
Impaired loans at March 31, 2012
  $ 129,154     $ 120,570  

Bancorp recognized $100,000 and $256,000 of interest income on impaired loans using a cash-basis method of accounting for the three months ended March 31, 2012 and 2011, respectively. Bancorp did not record any interest income attributable to the change in present value attributable to the passage of time.  Bancorp deems its loans to be collateral based, and therefore, assesses impairment based on the net value of the underlying collateral.

Included in the above impaired loans amount at March 31, 2012 was $99,595,000 of loans that are not in non-accrual status. In addition, there was a total of $51,132,000 of residential real estate loans included in impaired loans at March 31, 2012, of which $43,038,000 were to consumers and $8,094,000 to builders. The collateral supporting impaired loans is individually reviewed by management to determine its estimated fair market value, less estimated disposal cost and a specific allowance is established, if necessary, for the difference between the carrying amount of any loan and the estimated fair value of the collateral less estimated disposal cost.

Of the impaired loans, $58,333,000 and $56,049,000 had a specific valuation allowance of $13,204,000 and $12,994,000 at March 31, 2012 and December 31, 2011, respectively. Impaired loans averaged $129,810,000 and $121,029,000 for the three months ended March 31, 2012 and 2011,  respectively.


 
22

 


SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED

Note 10 - Loans Receivable - Continued

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of March 31, 2012 and December 31, 2011 (dollars in thousands):

   
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total
 
March 31, 2012
                             
  Residential mortgage
  $ 245,730     $ 10,468     $ 29,420     $ 205     $ 285,823  
  Acquisition and development
    59,774       5,619       28,930       -       94,323  
  Land
    42,512       5,630       10,076       -       58,218  
  Lines of credit
    26,006       1,708       5,502       -       33,216  
  Commercial real estate
    179,245       9,356       14,634       -       203,235  
  Commercial non-real estate
    5,169       -       112       27       5,308  
  Home equity
    37,815       <