Federal and state regulators have cracked down on Waterford Village Bank, blasting the bank's board and management for inadequate supervision and oversight, and demanding new strategic and profit plans to restore the bank's soundness.
The state Banking Department and the Federal Deposit Insurance Corp. on Monday released the strict "cease-and-desist" order they imposed on the Clarence-based start-up bank on Feb. 12, in response to its deteriorating capital position.
In particular, the bank was ordered to raise capital above minimum requirements within 60 days, so that its measure of "Tier 1" regulatory capital to total assets exceeds 8 percent. It had first fallen below that threshold last June, and as of the end of the year, it had dropped to 2.6 percent -- dangerously close to a level at which regulators would be required to seize the bank.
The bank has already announced plans for a two-step, $6 million capital-raising initiative, with Trillium Group of Rochester contributing half of the total, and the rest coming from directors and existing shareholders. That plan has already been reviewed by regulators, and the first stage is expected to close in April for $4.7 million. Trillium was already aware of the regulatory order.
But the regulatory order goes far beyond just capital, illustrating the degree to which the bank had gotten into trouble. In the order, regulators cited "unsafe and unsound" banking practices, and said they were "concerned" the bank was not taking steps to operate "in a safe, prudent and lawful manner."
The order said the board "failed to provide adequate supervision over, and direction to, the management of the bank." It cited that failure and "inadequate management supervision" for allowing the bank to violate "certain written conditions" imposed by regulators when they first approved the new bank's charter in 2007, including falling below capital minimums.
Regulators also criticized management because its "policies and practices are detrimental to the bank and jeopardize the safety of its deposits." They cited "unsatisfactory earnings" and operating losses, and said the bank was operating without a current, comprehensive written business plan.
But President and CEO Orrin Tobbe, who took over in August after the former CEO was fired by the board, said the problems laid out in the order are not new to management or the board, which has been expecting the order. Bank officials have previously blamed the bank's woes on former CEO Kathleen Kiesel Flemming, accusing her of recklessly overspending and tearing through the bank's capital.
Tobbe and Chief Financial Officer Kim S. Destro also defended the board, saying directors have been aware since last February that the bank needed to raise capital in general, but were caught off guard in July when they learned how much capital the bank had burned through in the first half of the year.
"They were focused on capital-raising and did not realize how much capital had been gone through in a short period of time," Tobbe said.
That changed after directors began investigating the expenses, leading to Flemming's dismissal.
"The board has been very involved since Aug. 18 about asking questions," Tobbe said. "We've been very involved in running through the financials every week. They ask very good questions, and management has been very forthright with them, and with the regulators."
The bank has been working with regulators for several months, and 90 percent of the issues have already been resolved.
"The order is just about a moot point," Destro said.
Officials even sought to convince regulators to go easy and use a less formal "memorandum of understanding," but the agencies refused because of the capital issue, Tobbe said.
Besides raising capital, the agencies ordered the bank to:
*Assess its management's ability to strengthen the bank and comply with the order and regulations.
*Develop and maintain a written "management policy" analyzing and detailing the bank's staffing needs, job requirements and salaries, and evaluating current management against it.
*Develop a comprehensive three-year strategic business plan within 60 days, including short-term goals and specifics on how the bank will comply with the order and correct its faults, as well as mid-term and long-term goals. The bank must compare its performance against the plan 15 days after the end of each quarter. Any revisions to the plan must be approved by regulators.
*Develop a written "profit plan" within 60 days, and within the first month of each new calendar year, identifying areas to improve and steps to take. In particular, the bank must improve its profit margin, increase net interest income from loans, reduce discretionary expenses, and boost earnings. The plan must also include a budget review process to evaluate and control costs at least monthly. And management has to compare performance against the plan within 15 days of the end of each month.
*Suspend any dividends.
*Form a three-member compliance committee. That has already been created, consisting of Chairwoman Lisa Wardynski and directors Kevin Sexton and Richard Humphrey.
*Send a copy of the order to all shareholders.
So far, Tobbe said, the bank has not had questions or concerns from either shareholders or customers, and he stressed that the bank is safe.
"We're a good bank to do business with. We've addressed all the issues, and people's money is insured up to $250,000," Tobbe said.