Naugatuck Valley Financial (NVSL) in Connecticut swung to a loss in the quarter that ended March 31 following its discovery that it had been underpaying interest on certain customers’ certificate-of-deposit accounts.

The $572 million-asset parent of Naugatuck Valley Savings and Loan said Tuesday that earnings were also affected by weakening asset quality and an increase in chargeoffs stemming from its switch to a new regulator last summer.

For the quarter, the company reported a loss of $977,000, compared to a profit of $396,000 in the same period last year, despite gains in both net interest and noninterest income. The results were affected in large part by an $800,000 charge it took to cover interest owed to customers whose CDs had automatically renewed at a time when the company was offering promotional interest rates. Those CDS renewed at lower rates than the special rates the customers should have received.

Naugatuck announced it was taking the charge in early April and said then that it expects to complete a full accounting of the matter, which potentially dates to 2007, by the end of the second quarter.

The company also reported a 350% increase in its provision for loan losses due to an increase in problem loans and $2.8 million of chargeoffs. Included in the chargeoff amount was a $1.1 million write off against specific reserves, which the company said is a policy change required by its new regulator, the Office of the Comptroller of the Currency, from its prior regulator, the Office of Thrift Supervision.

Otherwise, net interest income climbed nearly 12% year over year, to $4.9 million, due largely to a decline in its interest expense, and its fee income rose 21%, to $1 million, due to increased mortgage activity.

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