July 23, 2012
Financial Sense

Bank turnaround effort draws FDIC attention

When Joseph Greco was tasked late last year with turning around the ailing Southern Connecticut Bancorp, he knew the job wouldn't be an easy one.

After years of losses from bad loans and a failed $18.2 million merger bid with a nearby rival, the parent company of the Bank of Southern Connecticut has faced a litany of challenges.

Now Greco's job is getting a bit tougher.

The Federal Deposit Insurance Corp. has issued a consent order against the bank raising red flags about the community lenders banking practices relating to management, capital, earnings, and asset quality.

A consent order is basically an agreement that requires banks to comply with certain changes in order to meet regulatory safety and soundness requirements.

Greco said major steps taken by the bank in late 2011 to clean up its balance sheet — including writing down bad loans and buffering its reserve levels — caused the bank's tier 1 capital level to fall below 8 percent, which raised concerns from regulators. Tier 1 capital is a key measure of a bank's financial performance that includes equity capital and reserves.

The FDIC's consent order demands that the bank take several steps to sure up its financial position including revising its assessment of senior management; maintaining minimum specified capital levels and developing and submitting a capital plan; formulating and submitting a profit and budget plan consisting of goals and strategies consistent with sound banking practices; and reviewing and improving loan and credit risk management policies and procedures.

Greco said the bank is making efforts to comply with the FDIC's consent order, but also remains well capitalized despite the regulatory concerns.

"The situation here is by no means dire," Greco said. "These consent agreements have become commonplace in the last few years. It's a sign of the times."

Connecticut's community banking industry withstood the economic doldrums of the past four years fairly well. While earnings at many small lenders took a beating in the immediate aftermath of the 2008 financial meltdown, there have been no bank failures in the state and profits have steadily rebounded since then.

But the industry still faces considerable challenges, including a slew of new regulations, a low interest rate environment, slow economic recovery and uneven loan demand.

The Bank of Southern Connecticut has been struggling financially for years as it has had to work through a troubled loan portfolio. It hasn't reported a full year profit since 2008.

Greco was hired by the bank last October to help turnaround the bank and he said his first priority was to clean up the bank's balance sheet. He said his team took a conservative view of its loan portfolio and wrote down loans and built up a strong reserve to deal with any bets that may go bad in the future.

That contributed to the bank's $2.7 million loss in 2011.

But Greco said the bank is seeing better results recently. In the first quarter the bank's losses totaled about $58,000 compared to a $636,555 loss in the year ago period.

Greco said the bank is taking other steps to sure up its financial position including reducing its net interest and non-interest expenses, boosting its net interest margin, inputting lending controls and tightening underwriting standards.

Greco said he has also brought in some new bankers to help handle loan workouts and credit quality issues.

"We have a good strategic business plan for the next couple of years," Greco said. "We feel like we have addressed many of the issues in the order already."

• • •

Retailer raises capital

Expansion minded retailer Bob's Discount Furniture could be setting its sights on even more aggressive growth.

The Connecticut-based furniture retail giant, which has steadily opened new locations up and down the eastern seaboard over the past few years, recently raised $10 million in equity and debt investments, according to a regulatory filing the company issued with the U.S. Securities and Exchange Commission.

The privately held company raised the funds last month, but is not disclosing what it intends to use the money for, according to a company spokesperson. Private companies typically aren't required to disclose business dealings with the SEC, however, under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Under what's called Regulation D companies must file a "Form D" notice after they first sell their securities.

A Form D includes names and addresses of company executives and stock promoters, but little other information about the company or its intentions.

But Bob's Discount Furniture has been in expansion mode in recent years and could be using its newly raised cash to spur future growth. The company now has more than 40 stores located in nine states along the East Coast from Maine to Virginia.

In the past two years, more than a half dozen Bob's Discount Furniture stores have opened, including three in New York City.

Greg Bordonaro writes the Financial Sense column every other week. Reach him at gbordonaro@HartfordBusiness.com.

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