A Rochester-based private equity firm has agreed to invest $3 million in Waterford Village Bank as part of the bank's newest effort to raise money, aimed at boosting overall capital by $6 million and getting back into compliance with regulatory standards.
Under the "agreement in principal" with the Clarence-based start-up bank, Trillium Group will receive Series A non-cumulative perpetual preferred stock in exchange for its cash injection.
That's a matching investment, however, conditioned upon the bank receiving another $3 million in new capital in a private placement from members of the bank's board, other current shareholders and new investors, who will also get preferred shares.
"The bank's board of directors is very pleased that one of upstate New York's leading private equity firms has agreed to make this significant investment," said Waterford President and CEO Orrin D. Tobbe in a statement. "This new capital will provide the financial strength and flexibility necessary for us to continue to institute our new strategic and tactical business plan for growth."
Waterford has been trying for several months to raise additional capital, as heavy losses because of high operating expenses have drained its capital base. The bank lost $2 million in 2008, on top of previous losses in its first year, and its "Tier 1" capital ratio fell to 2.6 percent at year-end, below the mandated minimum of 3 percent.
On Thursday night, state and federal banking regulators imposed a "formal agreement" on the bank, mandating that it raise its capital levels back above requirements immediately. The agreement also instructed the bank to submit a strategic plan and profitability plan to regulators, and to strengthen its reporting.
The new money from Trillium and others would qualify as "Tier 1" capital for regulatory purposes, bringing the capital ratio up to 9.5 percent, well above federal requirements as a "well-capitalized" institution. The proposed agreement with Trillium has been submitted for approval to the New York State Department of Banking and the Federal Deposit Insurance Corp., the bank's two regulators.
Founded in 1997, Trillium specializes in managing early stage venture capital and growth equity funds. Its partners are also experienced managers, having served as CEOs, presidents and directors of a range of start-ups, joint ventures and even Fortune 100 multinationals.
The investment firm first approached Waterford in November through a third party, Anthony Manullo of Niagara International Capital Ltd. The parties went through several versions of the agreement before finalizing a deal, but all versions included the matching capital-raise to ensure commitment from the bank.
The sale will be conducted in two stages, with the first $4.7 million closing in April, consisting of $2.5 million from Trilliam and $2.2 million by others. If successful, a second $1.3 million will come in the second quarter, including $500,000 from Trillium.
Tobbe said Waterford already has enough commitments that "I'm highly confident we will raise the $2.2 million by March."
The bank then needs to collect another $800,000 by June, first through the existing shareholders. "The interest in this has been very, very strong," Tobbe said.
The offering price hasn't been approved by regulators yet, but Tobbe said he expects some answer as of Monday. The minimum investment amount will likely be $10,000.
Trillium's investment comes as Waterford and its executives are under fire in a lawsuit by Kathleen Kiesel Flemming, the bank's founder and former CEO. Among other things, Flemming accuses the bank of fraudulently entering into an agreement with her in October to pay her $60,000 if the capital campaign she had undertaken at the time was successful in raising as much as $10 million.
The lawsuit indicated she even provided contacts for potential investors, but alleges the bank had no intention of following through, and instead abandoned her plan in favor of the Trillium investment, which doesn't require any payment to her. She is seeking $60,000 in lost compensation as part of the larger suit.
But Tobbe doesn't think the lawsuit will impede the offering. "We haven't had any reaction by customers, shareholders, anybody about the lawsuit," he said. "I don't expect one, but who knows? Someone may raise it as an issue. Here's the plan going forward and we're going to be very well-capitalized, growth-oriented bank. You'll judge on our plan."