California Bank Admits Liquidity Problems

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Vineyard National Bancorp (VNB) stated late Monday that it would need to raise capital and find new sources of liquidity to continue operating through 2008.

Shares were down 20% to $1.53 in midday trading Tuesday.

The $2.4 billion Rancho Cucamonga, Calif., holding company reported a net loss of $67.9 million for the second quarter, mainly resulting from a $40.5 million provision for loan losses, as nonaccruing tract construction loans mounted. This followed a first-quarter loss of $13.3 million.

Vineyard's main subsidiary is Vineyard Bank, NA, which had total assets of $2.3 billion as of June 30. According to its preliminary Federal Deposit Insurance Corporation call report for the second quarter, as provided by Highline Financial, on Aug. 12, the bank remained well-capitalized as of June 30, with a leverage ratio of 8.28% and a risk-based capital ratio of 10.03%.

However, according to Monday's second-quarter 10-Q filing by the holding company, the bank is no longer considered well-capitalized "as a result of the issuance of the Consent Order, among other things."

The bank entered into the consent order with its regulator, the Office of the Comptroller of the Currency, on July 22. The consent order established time frames for the hiring of new executives and included stipulations to preserve capital, such as only paying dividends with prior permission from the OCC and limiting loan growth. The consent order also required that the bank diversify its loan portfolio, improve its loan review and loss-mitigation capabilities and maintain sufficient liquidity "to sustain current operations and withstand anticipated or extraordinary demand."

Vineyard Bank, NA, reported nonperforming assets comprising a very high 9.37% of total assets as of June 30. The annualized ratio of net charge-offs to average loans for the first half of 2008 was 6.23%. Loan loss reserves covered 2.67% of total loans as of June 30. While this would normally be considered a high level of coverage, it's not enough to handle continued charge-offs at the same pace.

Liquidity
The holding company reported significant outflows of deposits during the second quarter, citing negative publicity and the failure of IndyMac Bank. According to the 10-Q, "During the second quarter of 2008, we obtained $266.3 million in brokered deposits to offset the $226.9 million in run-off of savings, NOW and money market deposit accounts."

Vineyard National Bancorp went on to point out that the OCC's consent order barred it from accepting additional deposits or renewing deposits from brokers, without a waiver of this restriction by the FDIC. The waiver had already been requested, but there was no assurance it would be granted.

It is unfortunate that the consent order serves to limit the bank's liquidity while simultaneously addressing the bank's need to maintain sufficient liquidity.

The holding company also stated that the bank had drawn on most of its available credit line with the Federal Home Loan Bank of San Francisco. With additional borrowings of $126 million on July 24, the bank's remaining borrowing FHLB potential was $2.2 million. With the July 24 borrowings invested in federal funds sold, liquidity was boosted. Total federal funds sold were $178 million as of July 24.

Vineyard also discussed a secured credit with another bank, totaling $48.3 million as of June 30. While the lender modified the credit line several times and extended the due date, the loan might be called in on Aug. 29. Of course, because this is a secured credit, the bank might be able to pledge the collateral to another lender for additional liquidity.

Finally, under an agreement with the FHLB, the bank has pledged over $400 million in loans to collateralize possible advances from the Federal Reserve Bank of San Francisco, but the amount of borrowing potential on the pledged collateral had not been determined, and the FRB Discount Window was under no obligation to lend on the collateral.

Capital
The holding company announced in May a "strategic initiative" to raise additional capital. These efforts have been unsuccessful so far.

While the bank's capital ratios were much higher according to the preliminary call report, the holding company's capital ratios did not meet the minimum ratios that were set under the consent order. These included a leverage ratio of at least 4% and a risk-based capital ratio of at least 8%. For the holding company, these ratios were 1.2% and 2.5% as of June 30.

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