Severn Bancorp (SVBI) in Annapolis, Md., swung to large quarterly loss as it worked to restructure its balance sheet by selling off bad loans.

The $815 million-asset company reported a loss of $20.5 million in the third quarter, following the sale of $33.2 million worth of troubled assets. The loss also included a $13 million charge related to the valuation allowance of its deferred-tax asset, it announced Monday. The quarterly loss compares to earnings of $674,000 a year earlier and $232,000 in the second quarter.

The troubled assets, which comprised $11.7 million in non-accrual loans, $14.9 million of classified loans and $6.6 million of restructured troubled debt, were sold at a discount and resulted in a $10 million charge. Severn also recorded a $1.8 million loss related to the management of nonperforming loans, it said.

The sale decreased Severn's nonperforming assets by 28%, to $36.6 million, compared with the end of the second quarter. It did not name the buyer.

"While we are not at all happy about the results for this quarter, we are very comfortable with our decision to take action to clean up our books," said Alan Hyatt, chief executive, in the news release. "The process of clean-up may continue into the fourth quarter to a lesser degree, but we will be ready to start 2014 as an energized and invigorated company."

Severn's net interest income dipped less than 1%, to $6 million, compared to the third quarter of 2012. Its net interest margin widened 12 basis points, to 3.21%, but its loan portfolio shrunk 10%, to $596 million.

Noninterest income rose 26%, to $1.3 million, and noninterest expense also rose 26%, to $7.5 million.

The Treasury Department auctioned the $23 million Troubled Asset Relief program stake it held in Severn last month.

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