TWST: We'd like to begin with a brief historical sketch of Vineyard and a picture of the things you are doing now.
Mr. Morales: Vineyard Bancorp was founded 26 years ago in the Inland Empire region of Southern California in a community known as Rancho Cucamonga in the Cucamonga Valley, a historical wine growing region. It's about 70 miles east of Los Angeles. Seven years ago, I found this very small community bank that had asset footings of $100 million, about 75 employees and five offices. Fortunately, I was able to bring a different business model to this company, and the model was formulated based on 20 years of my personal involvement in community banking in different sectors. I have been a CFO, Chief Operating Officer and Chief Credit Officer, so it allowed me a lot of creativity in starting from scratch, as this company had never performed well. Over the course of the last six and a half years, we've transformed Vineyard Bank into more of a regional community bank, with several disciplines of specialty lending and emerging specialties in cash management, commercial banking and not-for-profit businesses. As we have expanded out, we now reach into Orange County, along the coast up to the west side of Los Angeles, to Silicon Valley, Marin and south to San Diego. So our real vision here was to create a super regional community bank throughout California, focusing on growth markets, mature markets and wealth markets, always looking for the entrepreneur that operated within. Along the way, we've been able to attract almost 400 very talented employees that have helped make Vineyard Bank what it is today.
TWST: You mentioned that your strategic plan is still in operation. What do you expect to accomplish over the next two to three years?
Mr. Morales: We have been focused on the liability and deposit side. It was very important to build out our lending specialties and our knowledge and ability to produce on the revenue side, as it is very hard to grow a company without revenue. So in the first few years, we were focusing just on the lending specialties until we had critical mass, size, expertise and knowledge. In the last two years, we have been focusing on the deposit side. In order for us to continue to grow this company, we need moderate-cost funding and deposits. Since deposits are our cost of goods, we need to keep bringing down that component of our operations. We will spend the next two to three years on our product development and outreach. It will be liability and balance sheet driven, and it will be focused on deposits, commercial business, entrepreneurs and their operations. If I could fast forward three years from today, Vineyard would look like a better balanced company that had as many talented people in collecting deposits as we do in lending.
TWST: What about possible challenges or problems?
Mr. Morales: The biggest challenge here for us, both in our company and in Southern California, is acquiring deposits, which are our cost of goods. With the yield curve as flat as it is and more companies and individuals trying to maximize their return, it has increased the cost of funds to a level where we as an industry have to moderate two things. We are going to moderate our growth because growing with a narrow margin puts pressures on capital. We have to be much more efficient - originating assets, selling them, keeping pieces of them and being selective. So the funding of the company is probably our biggest challenge. Every quarter when I check our peers to see how they are doing, there are not a lot of success stories today on deposit collection. The second leading concern, which is a concern that I believe is correcting itself, is more of the regional impact of the public housing builders that saw such financial opportunities that they overbuilt their inventory levels to an uncomfortable level. They have now collectively reduced their production so that inventory levels are shrinking. We believe that inventory levels will be back in line with normal levels by the spring of 2008. This is a concern not from a credit risk perspective, but it has a ripple effect in terms of too much production, what it does to other builders and what it does to the housing sector. Those are the two concerns we look at here, at least with Vineyard Bank and Southern California.
TWST: What would be the two or three best reasons for the long-term investor to look closely at Vineyard National?
Mr. Morales: We operate in a very strong marketplace, and the strategies and plans put forth to date are very opportunistic. We look at certain markets and communities, but the opportunity is driven off our ability to attract and recruit people. Of the original 75 employees that I inherited, we have about 15 today. Our employee base today is closing in on 400, so that means we have gone out to the market with a strategy that has attracted over 350 employees very aggressively. We look for certain types of people, and the culture is very important. The compensation strategies are very aggressive. As a company, we are very fluid and opportunistic driven. We operate in Southern California principally, one of the strongest economies in the United States. So the investor needs to assess whether these three or four components are a good investment. I always ask the people who I talk to on the Street, "Why do you invest?" They look for management and opportunities, and we believe we provide both.
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