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Is a Shareholder-Activist Storm Headed for Naugatuck Valley?

Things seemed to be looking up at Naugatuck Valley Financial under William C. Calderara.

He had made progress turning around the Connecticut bank in two years at the helm. Asset quality is significantly improved, capital ratios are stronger, and Naugatuck Valley's most recent quarter was its most profitable since late 2008.

Yet suddenly the question is, will Calderara get the chance to finish the job?

The future for the $489.1 million-asset Naugatuck Valley grew a lot cloudier Nov. 24 after it announced the appointment of two new members to its board of directors: Lawrence B. Seidman and Robert M. Bolton. Seidman is a well-known activist investor. Bolton represents Joseph Stilwell, another prominent shareholder activist.

Seidman's term runs until the company's 2015 annual meeting. Bolton will serve through the 2016 annual meeting. (Those meeting dates have not been announced yet, but Naugatuck Valley held its 2014 annual meeting May 20.)

Despite the positive turn of events under Calderara's management, the close involvement of Seidman and Stilwell in the company's affairs will almost certainly prompt speculation that Naugatuck Valley, parent of Naugatuck Valley Savings and Loan, will be put up for sale to another bank.

Stilwell, who owns a 9.7% stake in Naugatuck Valley, went on record in filings with the Securities and Exchange Commission in December 2013, and again in February, advocating a sale of the company as the best means to maximize shareholder value.

Mr. Seidman, who owns 2.2% of Naugatuck Valley's 7.02 million outstanding shares, would not say whether he wants the company to be sold. He said Tuesday his goal as a director was "to create value for the shareholders in whatever form that may take. That is what a board member is supposed to do."

Typically, Seidman pushes underperforming community banks to sell. Indeed, in a document filed with the SEC last week, Seidman disclosed he had urged management of the $299 million-asset Polonia Bancorp in Huntingdon Valley, Pa., to sell it.

When asked for his reaction to the board additions, Stilwell said only that he was pleased by Bolton's appointment.

Seidman and Stilwell must stop any public criticism of Naugatuck Valley as a condition of the appointments, but they are free to advocate any course of action inside the boardroom.

Calderara downplayed the distraction that might arise from having two board members who likely believe the company should be sold. Rather, he said he expected the appointment of Seidman and Bolton to result in a net positive for Naugatuck Valley.

"I think they'll bring a different level of perspective and more resources for me to draw on for ideas," Calderara said.

David Abshier, managing director with the Berkeley Research Group in Emeryville, Calif., said having directors with differing views — even those who advocate strategic options a majority of the board might not favor — can work to a company's advantage.

"Regulators like to see different ideas and opinions represented on a board," said Abshier, who has more than 25 years of experience as a bank officer, regulator and consultant. But the parties must work together in a constructive way, he said.

"I've seen it go both ways. In some cases it has had a positive impact," he said. "In others, it's turned into a confrontational situation."

Naugatuck Valley agreed in March to add Seidman and Bolton to the board, but the appointments were delayed while the company sought regulatory approval. Naugatuck Valley is operating under a formal agreement with the Office of the Comptroller of the Currency and a memorandum of understanding with the Federal Reserve Bank of Boston.

Abshier said there was nothing unusual about the delay. Regulators typically take their time and do a very thorough job vetting candidates for bank director positions, he said.

News of the board appointments broke two weeks after Naugatuck Valley reported earnings of $1.1 million for the quarter ending Sept. 30. The company's ratio of nonperforming loans to total loans fell to 1.48%, down from 3.6% at the end of 2013 and 5.6% in October 2012, when Mr. Calderara took over as CEO.

Naugatuck Valley was founded as a mutual thrift in April 1922. It became a stock company in 2004.

With its asset quality roughly in line with its peers, Naugatuck Valley has reached a point where it can focus on growing the bank, Calderara said. That process began in the third quarter, when the company streamlined its checking account product line and introduced mobile banking and a person-to-person payment option, he said.

"We've gotten back to the fun point of banking, working with customers and growing the institution," Calderara said.

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