So much for the niceties.
In trying to fend off an attempted coup by its former chief executive officer, Vineyard National Bancorp in Corona, Calif., is now holding him responsible for the mess it is in.
The $2.5 billion-asset company is publicly blaming Norman Morales for its mounting credit problems, saying that millions of dollars of residential construction loans that have gone bad were made on his watch.
Vineyard says it has been late in filing its annual report because Mr. Morales was lax in his oversight of its information technology policies. And it is telling shareholders that the candidates Mr. Morales has nominated for its board are not qualified to be directors and that his campaign for their election "is a transparent attempt" by him "to return to power with the help of his friends and associates."
Mr. Morales resigned as the CEO on Jan. 23, a week before Vineyard reported a $41.3 million loss for the fourth quarter, and he is waging an aggressive fight to regain control. Not content with the board's more conservative approach, he says his strategic plan for Vineyard includes beefing up its commercial and small-business lending to balance out its real estate and construction lending.
Proxy contests have become more common lately as bank earnings and share prices have plummeted, but observers say the battle at Vineyard is unusual because it is being led by a former CEO. Also, in most proxy challenges, the dissidents seek mainly to gain board representation, so they can have more say in the company's direction, but Mr. Morales has nominated six candidates, including himself, to replace the entire board.
The battle will not be resolved until the annual meeting — and one cannot be scheduled until Vineyard files its 10-K with the Securities and Exchange Commission.
Meanwhile, Vineyard's troubles continue to mount. Late Wednesday, Vineyard said a recent evaluation of its loan portfolio could result in higher losses than it previously reported. That announcement sent its shares tumbling 21.6% Thursday, to close at $6.35. The shares are off 75% from their 52-week high. (Vineyard also said it is in the process of finalizing its annual report.)
Donald Pelgrim, its chief administrative officer, said in an interview that the difference in opinion between the board and Mr. Morales hinges on how much risk Vineyard should take in a struggling economy.
The board ordered the company in late 2006 to start cutting back on its residential construction loans, and it has done so, though still took a $9.2 million provision for losses on those loans in the fourth quarter.
James LeSieur, Vineyard's chairman and interim CEO. said that Vineyard has been shrinking residential tract lending in particular. Those loans made up $300 million, or 16%, of its loans at the end of 2006, but a year later they made up 9.9%, and he said that percentage will continue to decline.
Vineyard also contends that Mr. Morales would continue his previous strategy of expanding into new markets, a strategy it says is unwise in the current economic climate.
"The board is focusing on the markets we already serve, directing Vineyard to focus more on building close relationships with customers," the company said in a letter to shareholders late last month.
Before shareholders can vote on Mr. Morales' slate of candidates, they must decide whether to approve several changes in the bylaws.
Mr. Morales is conducting a "consent solicitation" by mail in which he is asking shareholders to approve the changes. They would take effect immediately if 50% of the roughly 10 million shares were voted in favor before the April 25 deadline.
On Thursday, Mr. Morales and his allies said in a press release that they are "close" to receiving enough votes to amend the bylaws.
"We are very happy with the support we are getting from shareholders," said Jon Salmanson, a shareholder working with Mr. Morales. Together they own 4.1% of Vineyard's stock.
Mr. Salmanson would not discuss Vineyard's letter to shareholders, which said Mr. Morales is ultimately accountable for its deteriorating credit quality, the fourth-quarter loss, policy violations in information technology that require an audit committee investigation, and a delay in filing its quarterly and annual results.
However, Mr. Salmanson has said in press releases that he believes in Mr. Morales' strategic vision. He has called the former CEO a "strong and passionate" leader who has fueled investor confidence and made Vineyard into a regional community banking company.
Proxy Governance Inc., a Vienna, Va., independent proxy advisory firm, sided with Vineyard against Mr. Morales last week. Chris Cernich, a senior research analyst at Proxy, said it urged shareholders to withhold consent from the dissidents, because "we don't believe these proposals are really in their best interests."
Mr. LeSieur said the disagreement over Vineyard's strategy led to Mr. Morales' resignation.
At the time Vineyard seemed to part ways with Mr. Morales amicably, thanking him for "significant contributions and accomplishments." It also said he would continue to help the company achieve its strategic objectives.
But observers have since come to the conclusion that Mr. Morales was forced out, given his battle for board control.
Mr. Cernich agreed that the argument between the two sides centers on Vineyard's appetite for risk. "Mr. Morales says shareholders in the company bought into his strategic vision, and that may be true. But the question now is: Is it in the best interests of shareholders to continue with that vision, or is it in their best interests to try to preserve capital?"
Several analysts said they are more concerned about credit quality at Vineyard than they are about the prospect of a proxy battle.
"The company has some real challenges cut out for it, regardless of who's running it," said Aaron J. Deer, an analyst at Sandler O'Neill & Partners LP.
The bulk of the fourth-quarter loss resulted from a $40.8 million writedown of goodwill, but a nearly eightfold increase in its provision for loan losses also contributed.
Vineyard said in the letter to shareholders that it had about $39.6 million of nonaccruing loans at yearend, and that the loans were originated from 2005 to 2007 "under Mr. Morales' leadership."
Citing statistics from the Federal Deposit Insurance Corp., Vineyard said that it has taken on much more risk than other commercial banking companies with $1 billion to $3 billion of assets.
Mr. Salmanson and Mr. Morales said in a press release Thursday that they are "disappointed" in the board's behavior.
"Right now our efforts are focused on allowing the shareholders of Vineyard the right to choose the direction for their company," they said. "The current Vineyard board seems to be more interested in taking cheap shots at our intended nominees and reducing shareholder rights.
Mr. Cernich said such contentious — and public — disputes are rare. "It's unusual to have anybody on a management team publicly disagree with a board's position and then take up a proxy contest."
But he also said the sour economy is likely to spark more insider battles. "My guess is this will happen more as the market gets increasingly difficult and the choices become more stark, between 'Seize the opportunity now' and 'We need to preserve the company now.'"
