More Bad News for Small Banks - Vineyard National Bancorp Says it has Going Concern Issues

Well, the hits keep coming. Vineyard National Bancorp announced in its 10-Q that it is facing going concern issues.

No shit.

On May 5th, they were informed by the Office of the Comptroller of the Corrency (OCC) they they've been deemed to be in "troubled condition".

On May 20th, the Board of Governors of the Federal Reserve System told them the same thing.

On July 22nd, Vineyard "consented" (as if they had a choice) to a Consent Order from the OCC which basically tells Vineyard exactly what they have to do to not be taken over. They are also deemed to no longer be "well capitalized".

And check out this statement from the aforementioned 6/30/08 10-Q. The understated confidence is a thing of beauty:

On a consolidated basis, the minimum ratios that the Company must meet are total risk-based capital of 8.0%, Tier 1 capital of 4.0% and a leverage ratio of 4.0%. At June 30, 2008, the Company’s total risk-based capital, Tier 1 capital and leverage ratios were 2.5%, 1.3%, and 1.2%, respectively.

Wow.

I'm sure it has deteriorated since then, which is saying something.

Stunningly, despositors have not taken well to this set of news. Here is how depositors have reacted (and other liquidity problems) as stated directly from the 10-Q. Honestly, I cannot believe the FDIC allowed the brokered deposit game to continue as long as it did. My comments are in [brackets] and are italicized:

Negative publicity relating to our financial results and the financial results of other financial institutions, together with the seizure of IndyMac Bank by federal regulators in July 2008, has caused a significant amount of customer deposit withdrawals, thus affecting our liquidity and our ability to meet our obligations as they have come due [kind of lame to put any blame on IndyMac when Vineyard so clearly was mismanaged and decaying at an accelerating rate well prior to the IndyMac issue - see the timing of the news flow from above]. 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. [Please understand that this acceptance of brokered deposits (or any deposits for that matter) as a run on the bank is happening is 100% the result of FDIC insurance and thus is going to cost you and me - The American Taxpayer - dearly] As a result of the issuance of the Consent Order by the OCC on July 22, 2008, however, we can no longer accept, renew or rollover brokered deposits unless and until such time as we receive a waiver from the FDIC. The Bank has requested a waiver from the FDIC, but there can be no assurance that such a waiver will be granted [Lord willing, it won't be granted, my taxes are high enough already], granted on the terms requested, or granted in time for the Bank to effectively utilize brokered deposits as a source of required liquidity. If the Bank does not receive such a waiver, we will be unable to employ the use of readily available brokered deposits as a source of liquidity [bold emphasis added due to the incredibility of the fact that a bank this weak still has "readily available" access to deposits].

As of June 30, 2008, we were in default on our secured line of credit with a correspondent bank, as described in Note #10 [doh]. While we were able to negotiate a waiver of the events of default existing as of June 30, 2008, we have subsequently defaulted on the line of the credit as a result of the issuance of the Consent Order by the OCC on July 22, 2008 [double doh]. As a result, while the maturity date has been extended to August 29, 2008, the correspondent bank is entitled to declare the outstanding principal balance and all accrued but unpaid interest on the line of credit immediately due and payable and otherwise exercise its rights as a secured party against the collateral to collect, enforce or satisfy the obligations under the line of credit [triple doh]. Such rights may include foreclosing on the collateral and, subject to regulatory agency approval, acquiring 100% ownership of the Bank or selling the Bank to a third party. As a result of the regulatory restrictions discussed above, prior FRB approval will be required for VNB to make any payments on this line of credit.

Although effective April 21, 2008, the FHLB reduced the Bank’s borrowing capacity from 40% to 30% of the Bank’s total assets, the Bank’s borrowing availability was limited to the amount of eligible collateral that can be pledged to secure that borrowing facility. At June 30, 2008, based on its eligible pledged loan and investment collateral, that availability was $289.4 million of which $155.0 million was outstanding; therefore, the Bank had a remaining borrowing availability of $134.4 million. [emphasis added in bold to highlight how long ago regulators started cracking down on Vineyard]

On July 24, 2008, the Bank borrowed $126.0 million from the FHLB, consisting of four $31.5 million advances with terms ranging from 9 months to 1 year. As a result of these term borrowings, the Bank had a remaining borrowing availability of $2.2 million available against its loan and investment collateral pledged at the FHLB. The proceeds from the FHLB advances were invested in federal funds sold for liquidity needs. At July 24, 2008 the Bank had an aggregate of $178.0 million invested in federal funds sold.[emphasis added in bold: $2.2 million? I know one bank I'll be reading about some Friday in the not too distant future at about 5pm, for sure]

As of June 30, 2008, the Bank had no unsecured correspondent banking facilities with borrowing availability. However, on August 1, 2008, the Bank entered into an intercreditor agreement with the FHLB and Federal Reserve Bank of San Francisco (“FRB San Francisco”) whereby certain eligible loans pledged to the FRB San Francisco, and agreed to by the FHLB, may be utilized to support any advances from the FRB Discount Window. We have pledged loans with an aggregate principal balance of over $400 million which can be used by the FRB Discount Window in determining an available amount to us; however, the FRB Discount Window is not obligated to lend on any collateral deposited.

On July 31, 2008, the FRB notified VNB that VNB must serve as a source of financial strength to the Bank and as such, requested that management perform an analysis of the cash needs for VNB through October 31, 2008. The FRB has further requested that any amounts not required for VNB’s operations be contributed to the Bank to support its operational needs. Management is performing such an analysis at this time.

Going Concern

The conditions and events discussed above cast significant doubt on our ability to continue as a going concern. We have determined that significant additional sources of liquidity and capital will be required for us to continue operations through 2008 and beyond. We have engaged a financial advisor to explore strategic alternatives, including potential significant capital raises, to address our current and expected liquidity and capital deficiencies. However, there can be no assurance that we will be able to arrange for sufficient liquidity or to raise additional capital in time to satisfy regulatory requirements and meet our obligations as they come due. In addition, our regulators are continually monitoring our liquidity and capital adequacy. Based on their assessment of our ability to continue to operate in a safe and sound manner, our regulators may take other and further action, including assumption of control of the Bank, to protect the interests of depositors insured by the FDIC. Finally, there can be no assurance that our correspondent bank will not declare us in default or that the exploration of strategic alternatives will result in an infusion of sufficient additional capital.[bold emphasis added and, on a personal note, good luck!]

As is generally my practice, let's take a look at the losses the FDIC (ie, you and me) are going to have to eat: Vineyard is a $2.3 billion bank (by assets). If we apply the 15-28% loss rate to assets that recent failures resulted in, we are looking at a $345-644 million loss to the FDIC. Amazingly, this almost seems small with the rubble of IndyMac's $5+ billion loss still smoldering and the potential for several $10+ billion asset banks to go under (and really the potential for some $100+ billion banks to be aced).

I suppose that's the silver lining here: at least it isn't an unusually large bank.