Long-Troubled Thrift Loses Deadweight on Road to Recovery

A Connecticut company struggling to escape extra regulatory scrutiny has taken a big step along the road to recovery.

Naugatuck Valley Financial (NVSL) in Naugatuck sold more than $25 million of impaired loans during the second quarter, allowing the company to finally get a handle on long-standing credit issues.

Still, William Calderara, the company's president and chief executive, is reluctant to say that Naugatuck Valley has turned the corner. After all, the company still reported a second-quarter loss of nearly $5 million. "We're trying to deal with the issues facing us as quickly as possible," he says.

"We're approaching a transition point," Calderara adds. "People can see that efforts are being made and changes are taking place. We've got a little more to do, but what's left will be a whole lot easier to accomplish because of the sales."

The company is attempting the same transition that scores of other banks have completed in the last year, purging past mistakes in an effort to concentrate more on expansion.

If nothing else, Calderara says that the loan sales eliminate a sizeable chunk of nonperforming loans, allowing his team to refocus to credits that had, out of necessity, been left on the back burner.

Growth has also been an afterthought at Naugatuck Valley in recent years. Total loans at June 30 have decreased by 24% compared to three years earlier, to $390 million. Deposits are down 1% from mid-2010, at $399 million.

Naugatuck Valley took a haircut on the sale of the loans, most of which involved commercial real estate. The loans sold for about $16 million, or 24% below their book value. Still, the hit was far less than the marks banks took during the height of the financial crisis.

The sales dramatically improved the company's credit quality. Nonperforming loans made up 4.5% of total loans at June 30, declining from 6.3% at March 31 and falling below 5% for the first time in two years.

Naugatuck Valley had been grappling with asset quality at a time when most banks were reporting improvements. For all banks, noncurrent loans made up 3.4% of total loans at March 31, compared to 5.5% three years earlier, according to the most recent data from the Federal Deposit Insurance Corp.

Analysts at Raymond James wrote in a note to clients earlier this week that, as of June 30, nonperforming loans made up just 1.7% of total loans at the banks they cover.

It should take Naugatuck Valley "a few more quarters" to bring nonperforming loans down to an acceptable level, though Calderara says he is delighted by the results from the loan sales.

"It took a lot of hard work, but we're very happy with them," Calderara says. "The price we got was fantastic. I'm used to hearing 50 cents on the dollar, so this seemed great to me."

Naugatuck Valley, which became a mutual holding company in 2004, has endured a bumpy ride over the past four years. It revealed plans in early 2010 to complete a second-step conversion and to acquire Southern Connecticut Bancorp (SSE). The New Haven, Conn., company agreed earlier this year to sell to Liberty Bank in Middletown, Conn.

Soon after that announcement, management noticed a steady rise in problem loans. The company abandoned the Southern Connecticut deal in November 2010, attributing the decision to an inability to obtain regulatory approval. Around that time, nonperforming loans topped 3% of total loans.

The company still completed a second-step conversion in 2011, raising more than $30 million. The huge capital infusion could not stem the mounting credit problems and, in January 2012, Naugatuck Valley entered into an agreement with Office of the Comptroller of the Currency.

The agreement required the company to assess the qualifications of directors and senior executives, develop a three-year business plan and overhaul a slew of business operations such as lending and loan review. The document also required Naugatuck Valley to obtain regulatory approval before it issued dividends, hired senior executives or extended the contracts of existing managers.

In May, Naugatuck Valley entered into a memorandum of understanding with the Federal Reserve Board. The memorandum echoes many of the OCC's mandates, but it also bars the company from taking on new debt without Fed approval and requires quarterly cash-flow projections and progress reports.

The enforcement action with the OCC was longer and more detailed than many other actions taken in recent memory, says former Texas Banking Commissioner Cathy Ghiglieri, who spent 18 years at the OCC, including seven years as a field examiner.

"It's pretty long. There are some unusual things in there," says Ghiglieri, president of Ghiglieri & Co., an Austin, Texas, consulting firm. "There were a lot of standard procedures [Naugatuck Valley] should have had in place that they didn't."

Even so, Ghiglieri says the company's prospects seem far from bleak.

"This isn't the worst situation I have seen," she says. "A cease-and-desist order is the most severe step regulators can take. The fact that they did not go that far indicates to me this bank is not in that bad a shape."

Calderara reached a similar conclusion when he became CEO last September, succeeding John Roman, who had left a month earlier.

"I saw a banking company that was very well capitalized, had a great franchise and a strong net interest margin," he says. "All the key components [for a turnaround] were there."