For Vineyard National Bancorp shareholders, the long-running battle for control of the Corona, Calif., company's board boils down to this question: Is now the time for Vineyard — deemed a "troubled" institution by regulators — to be aggressively going after new business, or should it focus on reducing assets and building its capital base?
The $2.4 billion-asset Vineyard is set to hold its annual meeting Tuesday, with shareholders to choose among 14 nominees vying for seven open board seats. How they vote will go a long way toward determining the direction of a company reeling from the bursting of Southern California's housing bubble.
Vineyard's management team favors the conservative approach of shrinking assets — at least until losses in its real estate construction portfolio subside — and is urging shareholders to vote for its slate of seven nominees, which includes six existing directors.
The management slate is being challenged by a dissident group of seven other nominees, led by the company's former chief executive, Norman Morales, that has different ideas for making Vineyard profitable again. If elected, the dissidents promise to beef up Vineyard's commercial and industrial lending.
It is unclear which way shareholders are leaning, but three proxy firms are recommending that they vote for at least two of the dissidents.
Two of the firms, Institutional Shareholder Services Inc. of New York and Glass Lewis & Co. LLC of San Francisco, advise against electing Mr. Morales. A third, Proxy Governance Inc. of Vienna, Va., favors his reinstatement.
"He's the one who developed the dissident plan to begin with. Why bring in a new army but hold its general back?" said Chris Cernich, a senior research analyst at Proxy Governance.
Mr. Morales resigned as Vineyard's CEO in January, a week before the company reported a $41.3 million fourth-quarter loss. He was replaced on interim basis by James Le Sieur, Vineyard's chairman.
Mr. Le Sieur's tenure as CEO has been anything but smooth. Vineyard recorded a $26.9 million loan-loss provision in the first quarter, which resulted in a quarterly loss of $13.3 million. In May it revealed that its bank had been designated as troubled, and so far management's efforts to raise additional capital have failed.
On July 28 the Office of the Comptroller of the Currency issued a consent order for Vineyard Bank to find a permanent CEO and maintain minimum capital ratios.
Vineyard Bank's risked-based capital at March 31 was 11.8% and the holding company's ratio was at 9%. Aaron J. Deer, an analyst at Sandler O'Neill & Partners LLP, said the holding company's capital levels "could raise the eyebrows of regulators," because if problems worsen, it does not have a lot of capital to "downstream" to the bank.
Moreover, the company's tangible equity-to-asset ratio was 3.9%, and "most analysts have comfort if the ratio is above 6% or 7%," Mr. Deer said.
Mr. Morales, who began his campaign for control of the board in February, has stated in Securities and Exchange Commission filings that if the dissidents gained control of the board he would try to reclaim the CEO's chair. In an July 29 news release he called the OCC consent order "further proof to all the Vineyard shareholders as to why they need to vote in favor of our nominees."
Mr. Morales also said in the news release that the dissidents have been working with two investment banks to secure capital if they get control of the board. Mr. Le Sieur said in an interview Wednesday that the current board was willing to cede control over to the dissidents because that would reflect the will of the majority of shareholders who voted in April to amend the company's bylaws to enable a vote on the dissident slate. However, it would not support reinstating Mr. Morales as director or CEO, because it blames him for Vineyard's troubles.
Moreover, the board has serious concerns with Mr. Morales' plan to step up loan growth. "This concept of growth … everyone would love to have, but at this point in time, the focus has to be on raising capital and lowering the risk profile," Mr. Le Sieur said.
The proxy advisory firms have concluded that the dissidents' plan to pursue loan growth has merit.
In its July 24 report, Institutional Shareholder Services recommended that shareholders elect four of the seven dissidents proposed on the alternative slate but withhold votes for Mr. Morales and two others the firm considers too inexperienced.
"Mr. Morales cannot be held entirely responsible for the conditions leading up to the present state and responsibility must also be borne by the board loan oversight committee, but on balance...we believe Mr. Morales had primary responsibility for the company's policies and strategies," the firm wrote.
Glass Lewis' July 22 report recommended only two dissidents. Proxy Governance's July 25 report recommended five of the seven dissidents, including Mr. Morales.
Mr. Cernich said that since the board has not been able to carry out its plan this year, the dissidents should take control. "We recognize the dissidents' plan is risky, but the risk of moving forward without the dissidents' plan is even riskier," he said.
