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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549



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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934



|For the fiscal year ended December 31, 2001 | Commission File No. 0-20862
|------------------------------------------- | ---------------------------

VINEYARD NATIONAL BANCORP
(Exact Name of Registrant as Specified in its Charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 33-0309110                          
|(State of other jurisdiction of
incorporation or organization) |  | (IRS Employer
Identification Number)

|                                                                                              |  |                 
|--------------------------------------------------------------------------------------------- |  | ----------------
|9590 Foothill Boulevard
Rancho Cucamonga, California
(Address of principal executive offices) |  | 91730
(Zip Code)

Registrants telephone number, including area code: (909) 987-0177

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.   Yes  [X]  No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.   [X]

As of March 25, 2002, the aggregate market value of the voting shares
held by non-affiliates of the registrant was approximately $13,711,000.
Solely for the purposes of this calculation, shares held by directors,
executive officers, and each person owning more than 10% of the outstanding
Common Stock of the registrant have been excluded.

1,905792 shares of Common Stock of the registrant were outstanding at
March 25, 2002

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Definitive Proxy Statement for its 2002
Annual Meeting of shareholders, which will be filed on or before April 22,
2002, are incorporated by reference in Part III of this Form 10-K.



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TABLE OF CONTENTS



|           |                                                                                               |  |  |  |  |  |  | 
|---------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I    
|           | ITEM I. DESCRIPTION OF BUSINESS                                                              
|           | ITEM 2. PROPERTIES                                                                           
|           | ITEM 3. LEGAL PROCEEDINGS                                                                    
|           | ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS                                    
|PART II   
|           | ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS             
|           | ITEM 6. SELECTED FINANCIAL DATA                                                              
|           | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|SIGNATURES



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##### Table of Contents



TABLE OF CONTENTS

|         |  |                                                           |                                                                                       |    |     
|-------- |  | --------------------------------------------------------- | ------------------------------------------------------------------------------------- | -- | ----
|         |  |                                                           |                                                                                       |    | PAGE
|         |  |                                                           |                                                                                       |    |     
|        
|        
|        
|        
|PART I   |  |                                                           |                                                                                      
|        
|        
|        
|        
|         |  | ITEM 1.                                                   | Business                                                                              |    | 3   
|         |  | ITEM 2.                                                   | Properties                                                                            |    | 27  
|         |  | ITEM 3.                                                   | Legal Proceedings                                                                     |    | 27  
|         |  | ITEM 4.                                                   | Submission of Matters to a Vote of Security Holders                                   |    | 27  
|PART II  |  |                                                           |                                                                                      
|         |  | ITEM 5.                                                   | Market for Registrants Common Stock and Related Stockholder Matters                  |    | 28  
|         |  | ITEM 6.                                                   | Selected Financial Data                                                               |    | 29  
|         |  | ITEM 7.                                                   | Managements Discussion and Analysis of Financial Condition
and Results of Operations |    | 30  
|         |  | ITEM 8.                                                   | Signatures                                                                            |    | 39  
|        
|        
|        
|        
|PART III |  |                                                           |                                                                                      
|        
|        
|        
|        
|         |  | INDEPENDENT AUDITORS REPORT                              |                                                                                       | 42
|         |  | CONSOLIDATED STATEMENT OF FINANCIAL CONDITION             |                                                                                       | 43
|         |  | CONSOLIDATED STATEMENTS OF INCOME                         |                                                                                       | 44
|         |  | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY |                                                                                       | 45
|         |  | CONSOLIDATED STATEMENT OF CASH FLOWS                      |                                                                                       | 46
|         |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                |                                                                                       | 48

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements as referenced in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
inherently unreliable and actual results may vary. Factors which could cause
actual results to differ from these forward-looking statements include changes
in the competitive marketplace, changes in the interest rate environment,
economic conditions, outcome of pending litigation, risks associated with
credit quality and other factors discussed in the Companys filings with the
Securities and Exchange Commission. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.



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##### Table of Contents






PART I




ITEM I. DESCRIPTION OF BUSINESS

Vineyard National Bancorp (referred to herein on an unconsolidated basis
as VNB and on a consolidated basis as the Company) is a corporation that
was incorporated under the laws of the State of California on May 18, 1988 and
commenced business on December 16, 1988 when, pursuant to a reorganization, the
Bancorp acquired all of the voting stock of Vineyard Bank (the Bank). As a
bank holding company, the Company is registered under and subject to the Bank
Holding Company Act of 1956, as amended. The Companys principal asset is the
capital stock of Vineyard Bank, a $191 million (asset) commercial bank, and the
business of the Bank is carried on as a wholly-owned subsidiary of the Company.
The stock of the Company is publicly traded on NASDAQ Small Cap Stock Market
under the ticker symbol VNBC. The Company has approximately 552 shareholders
that own approximately 1,905,000 shares of the Companys common stock as of
March 2002.

VNBs principal business is to serve as a holding company for the Bank and
its subsidiaries and for other banking or banking-related subsidiaries which
the Company may establish or acquire. Although the Company may, in the future,
consider acquiring other businesses or engaging in other activities as
permitted under Federal Reserve Board regulations, the Company has no specific
plans to do so.

VNBs principal source of income is dividends from the Bank. Legal
limitations are imposed on the amount of dividends that may be paid and loans
that may be made by the Bank to VNB. (See Item. 1  Description of Business;
Supervision and Regulation; Restrictions of Dividends by the Company and
Transfers of Funds to the Company by the Bank)

As of December 31, 2001, the Company had total consolidated assets of
approximately $191.3 million, total consolidated net loans of approximately
$136.1 million, total consolidated deposits of approximately $159.4 million and
total stockholders equity of approximately $10.4 million.

The Bank

The Bank was organized as a national banking association under federal law
and commenced operations under the name Vineyard National Bank on September 10,
1981. In August 2001, the Bank changed charters and now operates under the
supervision of the California Department of Financial Institutions (DFI) and
the FDIC (FDIC). The Banks deposit accounts are insured by the FDIC up to
the maximum amount permitted by law. The Bank is a non-member of the Federal
Reserve System.

Vineyard Bank will continue to operate its six existing full-service
offices, which are located in each of the communities of Rancho Cucamonga,
Chino, Diamond Bar, La Verne, Crestline and Blue Jay, which are located between
30 to 70 miles east of Los Angeles. The Bank also operates a loan production
office in the city of Manhattan Beach, principally for the marketing and
origination of single-family construction lending. The Bank believes that
alternative delivery locations may augment this branching network beginning in
2003, which may be in the form of satellite (low overhead) branches, and remote
kiosks. The Bank will focus its new business generation efforts within these
communities, and augment these efforts with a business banking focus targeting
the lower range of middle-market and professional clientele.

Beginning in early 2001, the Bank embarked on a departure from its past,
and concentrated on a sales and service approach to community banking, with the
focus placed on customer needs fulfillment. The Bank selectively recruited
seasoned professionals with developed business banking skills, augmented credit
administration capabilities, and greatly expanded the marketing and branding of
the franchise. The Bank believes that expanding many of its existing
relationships will prove to be an effective source of new business
opportunities.

With regard to the expansion of the core deposit franchise, the Bank will
continue to introduce additional products and services intended to capture
money market and time deposits by bundling them with other consumer services.
Business deposits will be pursued with an expanded courier network, by
introduction of cash management products and by a specific targeting of
non-credit business clientele. The two offices within the mountain communities
were redirected toward capturing a larger market share of their community
deposits, which have isolated competition. The communities of La Verne and
Diamond Bar offer substantial growth in the consumer depository markets, while
Rancho Cucamonga and Chino offer the most opportunities for growth in the
business sectors.



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Vineyard Service Company, Inc.

The Bank owns 100% of the capital stock of Vineyard Service Company, Inc.,
which conducts operations out of the Banks office in Rancho Cucamonga,
California. The Company was formed to provide services to both customers of
the Bank and others, including life and disability insurance. At present, the
assets, revenues and earnings of Vineyard Service Company, Inc., are not
material in amount compared to the Bank.

Distribution of Assets, Liabilities and Stockholders Equity: Interest Rates
and Interest Differential

The following table sets forth the Companys condensed average balances
for each principal category of assets and liabilities and also for
stockholders equity for each of the past two years. Average balances are
based on daily averages for the Bank and Bancorp.

|                                     |                                        |                                            |       |                         |         |         |     |          |       |         |       |        |         |  |     |      |       | 
|------------------------------------ | -------------------------------------- | ------------------------------------------ | ----- | ----------------------- | ------- | ------- | --- | -------- | ----- | ------- | ----- | ------ | ------- |  | --- | ---- | ----- | 
|                                     |                                        |                                            |       | Year Ended December 31,
|                                     |                                        |                                            |       |                        
|                                     |                                        |                                            |       | 2001                    |         | 2000   
|                                     |                                        |                                            |       |                         |         |        
|                                     |                                        |                                            |       | Average                 |         | Percent |     | Average  |       | Percent
|(Dollars in Thousands)               |                                        | Balance                                    |       | of Total                |         | Balance |     | of Total
|                                     |                                        |                                            |       |                         |         |         |     |         
|Assets                               |                                        |                                            |       |                         |         |         |     |          |       |         |       |        |         |  |     |     
|                                     | Investment Securities
Taxable          |                                            | $     | 17,146                  |         |         |     | 11.8     |       |         | $     | 8,650  |         |  |     | 7.6  |      
|                                     | Federal funds sold                     |                                            |       | 13,790                  |         |         |     | 9.5      |       |         |       | 5,709  |         |  |     | 5.0  |      
|                                     | Due from banks-time deposits           |                                            |       | 99                      |         |         |     | 0.1      |       |         |       | 209    |         |  |     | 0.2  |      
|                                     | FRB & other stock                      |                                            |       | 193                     |         |         |     | 0.1      |       |         |       | 182    |         |  |     | 0.2  |      
|                                     | Loans                                  |                                            |       | 98,872                  |         |         |     | 67.8     |       |         |       | 82,436 |         |  |     | 72.8 |      
|                                     | Reserve for loan and lease losses      |                                            |       | (999                    | )       |         |     | (0.7     | )     |         |       | (735   | )       |  |     | (0.6 | )    
|                                     |                                        |                                            |       |                         |         |         |     |          |       |         |       |        |         |  |     |     
|                                     |                                        | Net loans and eases                        |       |                         | 97,873  |         |     |          | 67.1  |         |       |        | 81,701  |  |     |      | 72.2  | 
|                                     |                                        |                                            |       |                         |         |         |     |          |       |         |       |        |         |  |     |     
|                                     |                                        | Total Interest-Earning Assets              |       |                         | 129,101 |         |     |          | 88.5  |         |       |        | 96,451  |  |     |      | 85.2  | 
|                                     | Cash and non-interest earning deposits |                                            |       | 7,801                   |         |         |     | 5.3      |       |         |       | 7,265  |         |  |     | 6.4  |      
|                                     | Net premises, furniture and equipment  |                                            |       | 5,475                   |         |         |     | 3.8      |       |         |       | 5,773  |         |  |     | 5.1  |      
|                                     | Other assets                           |                                            |       | 3,543                   |         |         |     | 2.4      |       |         |       | 3,676  |         |  |     | 3.3  |      
|                                     |                                        |                                            |       |                         |         |         |     |          |       |         |       |        |         |  |     |     
|                                     |                                        | Total Assets                               |       | $                       | 145,920 |         |     |          | 100.0 |         |       | $      | 113,165 |  |     |      | 100.0 | 
|                                     |                                        |                                            |       |                         |         |         |     |          |       |         |       |        |         |  |     |     
|Liabilities and Stockholders Equity |                                        |                                            |       |                         |         |         |     |          |       |         |       |        |         |  |     |     
|                                     | Savings deposits1                      |                                            |       | 41,504                  |         |         |     | 28.4     |       |         |       | 37,046 |         |  |     | 32.7 |      
|                                     | Time deposits                          |                                            |       | 48,229                  |         |         |     | 33.1     |       |         |       | 27,719 |         |  |     | 24.5 |      
|                                     | Convertible Debentures                 |                                            |       | 2,187                   |         |         |     |          |       |         |       | 0      |         |  |     | 0.0  |      
|                                     | Trust Preferred Securities             |                                            |       | 427                     |         |         |     |          |       |         |       | 0      |         |  |     | 0.0  |      
|                                     | Short-term borrowings                  |                                            |       | 228                     |         |         |     | 0.2      |       |         |       | 18     |         |  |     | 0.0  |      
|                                     |                                        |                                            |       |                         |         |         |     |          |       |         |       |        |         |  |     |     
|                                     |                                        | Total Interest-bearing Liabilities         |       |                         | 92,575  |         |     |          | 63.4  |         |       |        | 64,783  |  |     |      | 57.2  | 
|                                     | Demand deposits                        |                                            |       | 41,020                  |         |         |     | 28.1     |       |         |       | 37,097 |         |  |     | 32.8 |      
|                                     | Other liabilities                      |                                            |       | 2,419                   |         |         |     | 1.7      |       |         |       | 2,372  |         |  |     | 2.1  |      
|                                     |                                        |                                            |       |                         |         |         |     |          |       |         |       |        |         |  |     |     
|                                     |                                        | Total Liabilities                          |       |                         | 136,014 |         |     |          | 93.2  |         |       |        | 104,252 |  |     |      | 92.1  | 
|Stockholders Equity                 |                                        |                                            | 9,906 |                         |         |         | 6.8 |          |       |         | 8,913 |        |         |  | 7.9 |     
|                                     |                                        |                                            |       |                         |         |         |     |          |       |         |       |        |         |  |     |     
|                                     |                                        | Total Liabilities and Stockholders Equity |       | $                       | 145,920 |         |     |          | 100.0 |         |       | $      | 113,165 |  |     |      | 100.0 | 
|                                     |                                        |                                            |       |                         |         |         |     |          |       |         |       |        |         |  |     |     



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|1 |  | Includes savings, NOW, super NOW, and money market accounts.
|- |  | ------------------------------------------------------------



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Interest Rates and Differentials

The Companys earnings depend primarily upon the difference between the
income it receives from its loan portfolio and investment securities and its
cost of funds, principally interest paid on savings and time deposits.
Interest rates charged on the Companys loans are affected principally by the
demand for loans, the supply of money available for lending purposes, and
competitive factors. In turn, these factors are influenced by general economic
conditions and other constraints beyond the Companys control, such as Federal
economic and tax policies, general supply of money in the economy, governmental
budgetary actions, and the actions of the Federal Reserve Board (see Effects
of Governmental Monetary Policies and Recent Legislation).

Information concerning average interest-earning assets and
interest-bearing liabilities, along with the average interest rates earned and
paid thereon is set forth in the following table. Average balances are based
on daily averages for the Company.

|                             |                                      |                               |                                    |          |         |         |      |         |       |          |         |       |         |     |   |        |        |        |         |       |       |       |  |     |     |     |  
|---------------------------- | ------------------------------------ | ----------------------------- | ---------------------------------- | -------- | ------- | ------- | ---- | ------- | ----- | -------- | ------- | ----- | ------- | --- | - | ------ | ------ | ------ | ------- | ----- | ----- | ----- |  | --- | --- | --- | -
|                             |                                      |                               |                                    |          | 2001    |         | 2000
|                             |                                      |                               |                                    |          |         |         |     
|                             |                                      |                               |                                    |          | Average |         |      |         |       |          | Average |       | Average |     |   |        |        |        | Average
|(Dollars in Thousands)       |                                      | Balance                       |                                    | Interest |         | Yield   |      | Balance |       | Interest |         | Yield
|                             |                                      |                               |                                    |          |         |         |      |         |       |          |         |      
|Earning Assets               |                                      |                               |                                    |          |         |         |      |         |       |          |         |       |         |     |   |        |        |        |         |       |       |       |  |    
|                             | Investment Securities                |                               |                                    |          |         |         |      |         |       |          |         |       |         |     |   |        |        |        |         |       |       |       |  |     |    
|                             | U.S. Government agencies2            |                               |                                    | 17,146   |         |         |      | 925     |       |          |         | 5.4   | %       |     |   | 8,706  |        |        |         | 495   |       |       |  | 5.7 | %  
|                             |                                      |                               |                                    |          |         |         |      |         |       |          |         |       |         |     |   |        |        |        |         |       |       |       |  |    
|                             |                                      |                               | Total Investment Securities        |          |         | 17,146  |      |         |       | 925      |         |       |         | 5.4 | % |        |        | 8,706  |         |       |       | 495   |  |     |     | 5.7 | %
|                             | Federal funds sold                   |                               |                                    | 13,790   |         |         |      | 592     |       |          |         | 4.3   | %       |     |   | 5,709  |        |        |         | 365   |       |       |  | 6.4 | %  
|                             | Due from banks  time deposits       |                               |                                    | 99       |         |         |      | 6       |       |          |         | 6.1   | %       |     |   | 209    |        |        |         | 14    |       |       |  | 6.7 | %  
|                             | FRB & Other Stock                    |                               |                                    | 193      |         |         |      | 11      |       |          |         | 5.2   | %       |     |   | 182    |        |        |         | 9     |       |       |  | 4.9 | %  
|                             | Loans1                               |                               |                                    | 97,873   |         |         |      | 10,068  |       |          |         | 10.3  | %       |     |   | 82,436 |        |        |         | 8,082 |       |       |  | 9.8 | %  
|                             |                                      |                               |                                    |          |         |         |      |         |       |          |         |       |         |     |   |        |        |        |         |       |       |       |  |    
|                             |                                      |                               | Total Interest Earning Assets      |          | $       | 129,101 |      |         | $     | 11,602   |         |       |         | 9.0 | % |        | $      | 97,242 |         |       | $     | 8,965 |  |     |     | 9.2 | %
|                             |                                      |                               |                                    |          |         |         |      |         |       |          |         |       |         |     |   |        |        |        |         |       |       |       |  |    
|Interest Bearing Liabilities |                                      |                               |                                    |          |         |         |      |         |       |          |         |       |         |     |   |        |        |        |         |       |       |       |  |    
|                             | Domestic Deposits and Borrowed Funds |                               |                                    |          |         |         |      |         |       |          |         |       |         |     |   |        |        |        |         |       |       |       |  |     |    
|                             | Savings deposits3                    |                               |                                    | 41,504   |         |         |      | 733     |       |          |         | 1.8   | %       |     |   | 37,046 |        |        |         | 622   |       |       |  | 1.7 | %  
|                             |                                      | Time deposits                 |                                    |          | 48,229  |         |      |         | 2,554 |          |         |       | 5.3     | %   |   |        | 27,719 |        |         |       | 1,426 |       |  |     | 5.1 | %  
|                             |                                      | Debentures & Trust Securities |                                    |          | 2,614   |         |      |         | 294   |          |         |       | 11.2    | %   |   |        |        |        |         |       |       |       |  |     |     |    
|                             |                                      | Short-term borrowings         |                                    |          | 228     |         |      |         | 5     |          |         |       | 2.2     | %   |   |        | 18     |        |         |       | 1     |       |  |     | 5.6 | %  
|                             |                                      |                               |                                    |          |         |         |      |         |       |          |         |       |         |     |   |        |        |        |         |       |       |       |  |    
|                             |                                      |                               | Total Interest Bearing
Liabilities |          | $       | 92,575  |      |         |       | 3,586    |         |       |         | 3.9 | % |        | $      | 64,783 |         |       | $     | 2,049 |  |     |     | 3.2 | %
|                             |                                      |                               |                                    |          |         |         |      |         |       |          |         |       |         |     |   |        |        |        |         |       |       |       |  |    

The table below shows the net interest earnings and the net yield on average
earning assets (net of the allowance for loan losses)

|                                                           |  |      |         |      |  |   |        |  
|---------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------ | -
|(Dollars in Thousands)                                     |  | 2001 |         | 2000
|                                                           |  |      |         |     
|Total interest income1                                     |  | $    | 11,602  |      |  | $ | 8,965  |  
|Total interest expense4                                    |  | $    | 3,586   |      |  | $ | 2,049  |  
|Total interest earnings1                                   |  | $    | 8,016   |      |  | $ | 6,916  |  
|Total average earning assets                               |  | $    | 129,101 |      |  | $ | 97,238 |  
|Net yield on average earning assets1                       |  |      | 6.2     | %    |  |   | 7.1    | %
|Net yield on average earning assets (excluding loan fees)1 |  |      | 4.9     | %    |  |   | 6.6    | %



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|1 |  | Loans are reflected net of unearned income and include non-accrual loans
(if any), but do not reflect average allowance for loan and lease losses
of $1,037,000 in 2001 and $735,000 in 2000. Loan fees of $1,647,000 in
2001 and $463,000 in 2000, are included in loan interest income. There
are no non-accruing loans at December 31, 2001 but there were three
non-accruing loans totaling approximately $307,000 at December 31, 2000.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| 
| 
| 
|2 |  | The yield for securities that are classified as available-for-sale is based on historical amortized cost balances.                                                                                                                                                                                                                                                                                                                          
| 
| 
| 
| 
|3 |  | Savings deposits include savings, NOW, super NOW, and money market deposit accounts.                                                                                                                                                                                                                                                                                                                                                        
| 
| 
| 
| 
|4 |  | Includes savings, NOW, super NOW, and money market deposit accounts, Time Deposits and Federal Funds Purchased.
Convertible debentures and Trust Preferred Securities were issued in
2001. This category includes interest expense on that debt.                                                                                                                                                                                            



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##### Table of Contents



The following table sets forth the changes in interest earned, including
loan fees and interest paid. The net increase/(decrease) is segmented into the
change attributable to variations in volume and variations in interest rates.
Changes in the interest earned and interest paid due to both the rate and
volume have been allocated to the change due to volume and the change due to
rate in proportion to the relationship of the absolute dollar amounts of the
changes in each.

|                       |                             |                |                         |      |            |       |         |       |     |          |  |       |       |       |      |   |    |    |   |   |     |     |   |   |       |       |  
|---------------------- | --------------------------- | -------------- | ----------------------- | ---- | ---------- | ----- | ------- | ----- | --- | -------- |  | ----- | ----- | ----- | ---- | - | -- | -- | - | - | --- | --- | - | - | ----- | ----- | -
|                       |                             |                |                         |      | Investment |       | Federal |       |     |          |  |       | FRB & |       |      |   |    |    |   |   |    
|                       |                             |                |                         |      | Securities |       | Funds   |       |     |          |  |       | Other |       | Time |   |    |    |  
|(Dollars in Thousands) |                             | Taxable        |                         | Sold |            | Loans |         | Stock |     | Deposits |  | Total
|                       |                             |                |                         |      |            |       |         |       |     |          |  |      
|Interest Earned On:    |                             |                |                         |      |            |       |         |       |     |          |  |       |       |       |      |   |    |    |   |   |     |     |   |  
|2001 compared to 2000  |                             |                |                         |      |            |       |         |       |     |          |  |       |       |       |      |   |    |    |   |   |     |     |   |  
|                       | Increase/(decrease) due to: |                |                         |      |            |       |         |       |     |          |  |       |       |       |      |   |    |    |   |   |     |     |   |   |      
|                       |                             | Volume changes |                         | $    | 454        |       |         | $     | 222 |          |  | $     | 1,647 |       |      | $ | 1  |    |   | $ | (6  | )   |   | $ | 2,318 |      
|                       |                             | Rate changes   |                         |      | (24        | )     |         |       | 5   |          |  |       | 339   |       |      |   | 1  |    |   |   | (2  | )   |   |   | 319   |      
|                       |                             |                |                         |      |            |       |         |       |     |          |  |       |       |       |      |   |    |    |   |   |     |     |   |  
|                       |                             |                | Net Increase/(Decrease) |      | $          | 430   |         |       | $   | 227      |  |       | $     | 1,986 |      |   | $  | 2  |   |   | $   | (8  | ) |   | $     | 2,637 |  
|                       |                             |                |                         |      |            |       |         |       |     |          |  |       |       |       |      |   |    |    |   |   |     |     |   |  
|Interest Earned On:    |                             |                |                         |      |            |       |         |       |     |          |  |       |       |       |      |   |    |    |   |   |     |     |   |  
|2000 compared to 1999  |                             |                |                         |      |            |       |         |       |     |          |  |       |       |       |      |   |    |    |   |   |     |     |   |  
|                       | Increase/(decrease) due to: |                |                         |      |            |       |         |       |     |          |  |       |       |       |      |   |    |    |   |   |     |     |   |   |      
|                       |                             | Volume changes |                         | $    | (30        | )     |         | $     | (24 | )        |  | $     | (247  | )     |      | $ |   |    |   | $ | (44 | )   |   | $ | (345  | )    
|                       |                             | Rate changes   |                         |      | 22         |       |         |       | 88  |          |  |       | 193   |       |      |   | (1 | )  |   |   | 13  |     |   |   | 315   |      
|                       |                             |                |                         |      |            |       |         |       |     |          |  |       |       |       |      |   |    |    |   |   |     |     |   |  
|                       |                             |                | Net Increase/(Decrease) |      | $          | (8    | )       |       | $   | 64       |  |       | $     | (54   | )    |   | $  | (1 | ) |   | $   | (31 | ) |   | $     | (30   | )
|                       |                             |                |                         |      |            |       |         |       |     |          |  |       |       |       |      |   |    |    |   |   |     |     |   |  

|                      |                             |                |                         |   |           |     |          |   |             |       |             |   |       |   |  |   |     |     |  |   |       |       |  
|--------------------- | --------------------------- | -------------- | ----------------------- | - | --------- | --- | -------- | - | ----------- | ----- | ----------- | - | ----- | - |  | - | --- | --- |  | - | ----- | ----- | -
|                      |                             |                |                         |   | Savings   |     | Time     |   |             |       |             |   | Trust |   |  |   |    
|                      |                             |                |                         |   | Deposits5 |     | Deposits |   | Borrowings6 |       | Securities7 |   | Total
|                      |                             |                |                         |   |           |     |          |   |             |       |             |   |      
|Interest Paid On:     |                             |                |                         |   |           |     |          |   |             |       |             |   |       |   |  |   |     |     |  |  
|2001 compared to 2000 |                             |                |                         |   |           |     |          |   |             |       |             |   |       |   |  |   |     |     |  |  
|                      | Increase/(decrease) due to: |                |                         |   |           |     |          |   |             |       |             |   |       |   |  |   |     |     |  |   |      
|                      |                             | Volume changes |                         | $ | 70        |     |          | $ | 1,072       |       |             | $ | 7     |   |  | $ | 294 |     |  | $ | 1,149 |      
|                      |                             | Rate changes   |                         |   | 41        |     |          |   | 56          |       |             |   | (3    | ) |  |   | 0   |     |  |   | 94    |      
|                      |                             |                |                         |   |           |     |          |   |             |       |             |   |       |   |  |   |     |     |  |  
|                      |                             |                | Net Increase/(Decrease) |   | $         | 111 |          |   | $           | 1,128 |             |   | $     | 4 |  |   | $   | 294 |  |   | $     | 1,537 |  
|                      |                             |                |                         |   |           |     |          |   |             |       |             |   |       |   |  |   |     |     |  |  
|Interest Paid On:     |                             |                |                         |   |           |     |          |   |             |       |             |   |       |   |  |   |     |     |  |  
|2000 compared to 1999 |                             |                |                         |   |           |     |          |   |             |       |             |   |       |   |  |   |     |     |  |  
|                      | Increase/(decrease) due to: |                |                         |   |           |     |          |   |             |       |             |   |       |   |  |   |     |     |  |   |      
|                      |                             | Volume changes |                         | $ | (36       | )   |          | $ | (340        | )     |             | $ | 1     |   |  | $ | 0   |     |  | $ | (375  | )    
|                      |                             | Rate changes   |                         |   | (4        | )   |          |   | 223         |       |             |   | 0     |   |  |   | 0   |     |  |   | 219   |      
|                      |                             |                |                         |   |           |     |          |   |             |       |             |   |       |   |  |   |     |     |  |  
|                      |                             |                | Net Increase/(Decrease) |   | $         | (40 | )        |   | $           | (117  | )           |   | $     | 1 |  |   | $   | 0   |  |   | $     | (156  | )
|                      |                             |                |                         |   |           |     |          |   |             |       |             |   |       |   |  |   |     |     |  |  



---

|1 |  | Savings deposits include savings, NOW, super NOW, and money
market deposit accounts.                                           
|- |  | -------------------------------------------------------------------------------------------------------------------------------
| 
| 
| 
| 
|2 |  | Short term borrowings consist of Federal Funds Purchased                                                                       
| 
| 
| 
| 
|3 |  | In 2001 the Company issued Convertible Debentures and Trust Preferred
Securities. This reflects the interest paid on that debt.



6



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##### Table of Contents



Investment Portfolio

The following table shows the book value of the portfolio of investment
securities at the end of each of the past two years. The Company accounts for
investments in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, which addresses the accounting for
investments in equity securities that have readily determinable fair values and
for investments in all debt securities. Securities are classified in three
categories and accounted for as follows: Debt and equity securities that the
Company has the positive intent and ability to hold to maturity are classified
as held-to-maturity and are measured at amortized cost; debt and equity
securities bought and held principally for the purpose of selling in the near
term are classified as trading securities and are measured at fair value, with
unrealized gains and losses included in earnings; debt and equity securities
not classified as either held-to-maturity or trading securities are deemed as
available-for-sale and are measured at fair value, with unrealized gains and
losses, net of applicable taxes, reported in a separate component of
stockholders equity.

|                           |                  |   |                    |        |                    |   |       |       | 
|-------------------------- | ---------------- | - | ------------------ | ------ | ------------------ | - | ----- | ----- | 
|                           |                  |   | 2001               |        | 2000              
|                           |                  |   | Available-for-Sale |        | Available-for-Sale
|                           |                  |   |                    |        |                   
|U.S. Agency securities     |                  | $ | 8,547              |        |                    | $ | 5,520 |      
|Mortgage backed securities |                  |   | 22,003             |        |                    |   |       |      
|Other securities8          |                  |   | 177                |        |                    |   | 7     |      
|                           |                  |   |                    |        |                    |   |       |      
|                           | Total Securities |   | $                  | 30,727 |                    |   | $     | 5,527 | 
|                           |                  |   |                    |        |                    |   |       |      

The following table shows the maturities of investment securities at December
31, 2001, and the weighted average yields of such securities.

|                           |                  |        |                    |       |                    |        |                    |       |                    |        |       |       |  |        |      |       |   |   |       |       |  |  |      |      |   |   |        |        |  |  |      |      |  
|-------------------------- | ---------------- | ------ | ------------------ | ----- | ------------------ | ------ | ------------------ | ----- | ------------------ | ------ | ----- | ----- |  | ------ | ---- | ----- | - | - | ----- | ----- |  |  | ---- | ---- | - | - | ------ | ------ |  |  | ---- | ---- | -
|                           |                  |        | Due In             |       | Due After One But  |        | Due After Five But |       | Due After Ten     
|                           |                  |        | One Year or Less   |       | Within Five Years  |        | Within Ten Years   |       | Years             
|                           |                  |        |                    |       |                    |        |                    |       |                   
|                           |                  |        | Available-for-Sale |       | Available-for-Sale |        | Available-for-Sale |       | Available-for-Sale
|                           |                  |        |                    |       |                    |        |                    |       |                   
|(Dollars in Thousands)     |                  | Amount |                    | Yield |                    | Amount |                    | Yield |                    | Amount |       | Yield |  | Amount |      | Yield
|                           |                  |        |                    |       |                    |        |                    |       |                    |        |       |       |  |        |      |      
|U.S. Agency securities     |                  | $      | 505                |       |                    |        | 5.25               | %     |                    | $      | 3,006 |       |  |        | 5.38 | %     |   | $ | 5,036 |       |  |  | 5.47 | %    |   | $ | 0      |        |  |  | 0.00 | %   
|Mortgage backed securities |                  |        | 0                  |       |                    |        | 0                  |       |                    |        | 0     |       |  |        | 0    |       |   |   | 0     |       |  |  | 0    |      |   |   | 22,003 |        |  |  | 4.92 | %   
|Other securities1          |                  |        | 0                  |       |                    |        | 0                  |       |                    |        | 0     |       |  |        | 0    |       |   |   | 0     |       |  |  | 0    |      |   |   | 177    |        |  |  | 5.60 | %   
|                           |                  |        |                    |       |                    |        |                    |       |                    |        |       |       |  |        |      |       |   |   |       |       |  |  |      |      |   |   |        |        |  |  |      |     
|                           | Total Securities |        | $                  | 505   |                    |        |                    | 5.25  | %                  |        | $     | 3,006 |  |        |      | 5.38  | % |   | $     | 5,036 |  |  |      | 5.47 | % |   | $      | 22,180 |  |  |      | 4.92 | %



---

|1 |  | Other securities do not have a predetermined maturity date.
|- |  | -----------------------------------------------------------



7



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##### Table of Contents



Loan Portfolio

The following table sets forth the amount of loans outstanding for each of the
past two years.

|                       |                                        |                                     |                 |        |              |         |        |        |        |        | 
|---------------------- | -------------------------------------- | ----------------------------------- | --------------- | ------ | ------------ | ------- | ------ | ------ | ------ | ------ | 
|                       |                                        |                                     |                 |        | December 31,
|                       |                                        |                                     |                 |        |             
|(Dollars in Thousands) |                                        | 2001                                |                 | 2000  
|                       |                                        |                                     |                 |       
|Types of Loans         |                                        |                                     |                 |        |              |         |        |       
|                       | Domestic                               |                                     |                 |        |              |         |        |        |       
|                       | Commercial, financial and agricultural |                                     | $               | 20,219 |              |         | $      | 10,665 |       
|                       | Real estate construction               |                                     |                 | 33,254 |              |         |        | 5,588  |       
|                       | Real estate mortgage                   |                                     |                 |        |              |         |        |        |       
|                       |                                        | Commercial                          |                 |        | 52,458       |         |        |        | 40,099 |       
|                       |                                        | Residential                         |                 |        | 19,063       |         |        |        | 11,192 |       
|                       | Installment loans to individuals       |                                     |                 | 8,318  |              |         |        | 12,049 |       
|                       | Loans held for sale                    |                                     |                 | 4,471  |              |         |        | 235    |       
|                       | All other loans (including overdrafts) |                                     |                 | 184    |              |         |        | 180    |       
|                       |                                        |                                     |                 |        |              |         |        |       
|                       |                                        |                                     | 137,967         |        |              |         | 80,008 |       
|                       | Less:                                  |                                     |                 |        |              |         |        |        |       
|                       |                                        | Unearned income                     |                 |        | (389         | )       |        |        | (484   | )     
|                       |                                        | Allowance for loan and lease losses |                 |        | (1,450       | )       |        |        | (784   | )     
|                       |                                        |                                     |                 |        |              |         |        |       
|                       |                                        |                                     | Total Net Loans |        | $            | 136,128 |        |        | $      | 78,740 | 
|                       |                                        |                                     |                 |        |              |         |        |       

All areas of the Companys commercial and real estate portfolios
experienced growth in 2001. The Companys business development efforts in
2001 were focused on the expansion of commercial real estate and commercial
business lending, with the introduction of higher-end market single-family,
construction lending. Loans to commercial business customers exhibited strong
growth in 2001. Traditional commercial loan financing for equipment financing,
lines of credit and working capital, almost doubled in 2001 over 2000. These
types of loans are shorter term in nature with approximately 69% maturing
within 1 year, 27% maturing from 1 to 5 years, and 4% over 5 years.

Within the real estate mortgage portfolio, the predominant concentration
is on commercial real estate which typically represents long-term financing for
commercial buildings. Of these commercial real estate loans, approximately 17%
mature within one year, 43% from one to five years, and 40% in five to ten
years, on average.

The Company also provides 1-4 family residential real estate financing for
shorter duration than traditional mortgage loans. This category includes
equity lines of credit, first trust deed, and junior lien loans with maturities
averaging 43% within one year, 25% from 1 to 5 years, and 32% over 5 years.

The Company concentrates its commercial and real estate lending in its
immediate market area when economic conditions are trends are closely
monitored.

Residential real estate loans held for sale represent a loans sold either
immediately or within a few weeks as a pass through to long term mortgage
lenders, resulting in fee income to the Company.

Installment loans declined by 31% as the Company moved away from indirect
and dealer loans beginning in 2000, concentrating on direct lending to its core
customer base. This portion of the portfolio continue to provide traditional
high fixed rate loans with a steady stream of regular income, with low risk,
due to many more loans in smaller denominations.



8



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##### Table of Contents



Maturities and Sensitivities to Interest Rates

The following table shows the maturities and sensitivities to changes in
interest rates on loans outstanding at December 31, 2001.

|                                                            |                                        |               |        |            |          |            |        |       |        |        |        |     |        |        |        |        |        |         | 
|----------------------------------------------------------- | -------------------------------------- | ------------- | ------ | ---------- | -------- | ---------- | ------ | ----- | ------ | ------ | ------ | --- | ------ | ------ | ------ | ------ | ------ | ------- | 
|                                                            |                                        |               |        |            | Maturing |            |        |       |       
|                                                            |                                        |               |        |            |          |            |        |       |       
|                                                            |                                        |               |        |            | Within   |            | One to |       | After  |        |        |     |       
|(Dollars in Thousands)                                      |                                        | One Year      |        | Five Years |          | Five Years |        | Total
|                                                            |                                        |               |        |            |          |            |        |      
|Domestic                                                    |                                        |               |        |            |          |            |        |       |        |        |        |     |        |        |        |       
|                                                            | Commercial, financial and agricultural |               | $      | 13,985     |          |            | $      | 5,526 |        |        | $      | 708 |        |        | $      | 20,219 |       
|                                                            | Real estate construction               |               |        | 33,254     |          |            |        | 0     |        |        |        | 0   |        |        |        | 33,254 |       
|                                                            | Real estate mortgage                   |               |        |            |          |            |        |       |        |        |        |     |        |        |        |        |       
|                                                            |                                        | Commercial    |        |            | 9,299    |            |        |       | 22,686 |        |        |     | 20,473 |        |        |        | 52,458 |        
|                                                            |                                        | Residential   |        |            | 8,232    |            |        |       | 4,698  |        |        |     | 6,133  |        |        |        | 19,063 |        
|                                                            |                                        | Held for sale |        |            | 0        |            |        |       | 0      |        |        |     | 4,471  |        |        |        | 4,471  |        
|                                                            | Installment loans to individuals       |               |        | 2,151      |          |            |        | 5,572 |        |        |        | 595 |        |        |        | 8,318  |       
|                                                            | All other loans                        |               |        | 184        |          |            |        | 0     |        |        |        | 0   |        |        |        | 184    |       
|                                                            |                                        |               |        |            |          |            |        |       |        |        |        |     |        |        |        |       
|                                                            |                                        |               | Total  |            | $        | 67,105     |        |       | $      | 38,482 |        |     | $      | 32,380 |        |        | $      | 137,967 | 
|                                                            |                                        |               |        |            |          |            |        |       |        |        |        |     |        |        |        |       
|Loans and leases with predetermined interest rates          |                                        |               | 46,141 |            |          |            | 18,543 |       |        |        | 27,709 |     |        |        | 92,393 |       
|Loans and leases with floating or adjustable
interest rates |                                        |               | 25,435 |            |          |            | 19,939 |       |        |        | 200    |     |        |        | 45,574 |       
|                                                            |                                        |               |        |            |          |            |        |       |        |        |        |     |        |        |        |       
|                                                            |                                        |               | Total  |            | $        | 67,105     |        |       | $      | 38,482 |        |     | $      | 32,380 |        |        | $      | 137,967 | 
|                                                            |                                        |               |        |            |          |            |        |       |        |        |        |     |        |        |        |       

Asset/Liability Management

The table below sets forth information concerning the interest rate
sensitivity of the Companys consolidated assets and liabilities as of December
31, 2001. Assets and liabilities are classified by the earliest possible
repricing date or maturity date, whichever comes first.

Generally, where rate-sensitive assets exceed rate-sensitive liabilities,
the net interest margin is expected to be positively impacted during periods of
increasing interest rates and negatively impacted during periods of decreasing
interest rates. When rate-sensitive liabilities exceed rate-sensitive assets
generally the net interest margin will be negatively affected during periods of
increasing interest rates and positively affected during periods of decreasing
interest rates. However, because interest rates for different asset and
liability products offered by depository institutions respond in a different
manner, both in terms of responsiveness as well as the extent of the
responsiveness to changes in the interest rate environment, the interest rate
sensitivity gap is only a general indicator of interest rate sensitivity.

The Company concentrates on a core customer base with enhanced
relationships crossing over multiple deposit and loan product lines. Within
the Companys average deposit portfolio, 32% of the deposits are in demand and
are non- interest-bearing, and 32% are in savings products that while they do
bear interest have proven to be less interest rate sensitive. The remaining
36% of the deposit portfolio is in time certificates of deposit. The Company
does not make variable rate certificates and all of these accounts have rates
fixed to maturity. The Company has, on average, 90% of all deposits classified
as core deposits and only 10% considered non-core. Non-core deposits are
defined by the Company as those in denominations over $100,000 for which the
customer has no other products or accounts with the Company. As a result, the
Company has been extremely successful in retaining time balances as they mature
and reprice into the current interest rate environment.

Within the Companys loan portfolio, variable rate loans are typically
structured with floor rates which protect the Company from interest rate risk
in a declining rate environment. Many of the loans have reached their floor
rates, and this feature, combined with the fixed rate portion of the portfolio
have allowed the Company to avoid the compression that traditionally
accompanies a declining interest rate scenario. The Company has maintained a
net interest margin in excess of 6% for the past four years in spite of a
dramatic reduction in market interest rates. Management believes that the
Companys net interest margin will continue to not be significantly impacted by
changes in interest rates.



9



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##### Table of Contents



RISK ELEMENTS

|                                         |                                                                    |                                            |        |           |        |            |         |            |        |         |        |              |        |   |        |        |        |   |         |        |        |   |        |         |         | 
|---------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------ | ------ | --------- | ------ | ---------- | ------- | ---------- | ------ | ------- | ------ | ------------ | ------ | - | ------ | ------ | ------ | - | ------- | ------ | ------ | - | ------ | ------- | ------- | 
|                                         |                                                                    |                                            |        | Three     |        | Over Three |         | Over One   |        |         |        |              |        |   |        |        |        |   |         |       
|                                         |                                                                    |                                            |        | Months    |        | Through    |         | Through    |        | Over    |        | Non-interest |        |   |        |       
|(Dollars in Thousands)                   |                                                                    | or Less                                    |        | 12 Months |        | Five Years |         | Five Years |        | Bearing |        | Total       
|                                         |                                                                    |                                            |        |           |        |            |         |            |        |         |        |             
|Assets                                   |                                                                    |                                            |        |           |        |            |         |            |        |         |        |              |        |   |        |        |        |   |         |        |        |   |        |        
|                                         | Interest-bearing deposits
in other financial institutions          |                                            |        | 0         |        |            |         | 0          |        |         |        | 0            |        |   |        | 0      |        |   |         | 0      |        |   |        | 0       |        
|                                         | Federal funds sold                                                 |                                            |        | 6,280     |        |            |         | 0          |        |         |        | 0            |        |   |        | 0      |        |   |         | 0      |        |   |        | 6,280   |        
|                                         | Investment securities                                              |                                            |        | 0         |        |            |         | 506        |        |         |        | 3,006        |        |   |        | 27,039 |        |   |         | 0      |        |   |        | 30,551  |        
|                                         | FRB & other stock                                                  |                                            |        | 0         |        |            |         | 0          |        |         |        | 0            |        |   |        | 176    |        |   |         | 0      |        |   |        | 176     |        
|                                         | Net loans and leases                                               |                                            |        | 63,105    |        |            |         | 13,283     |        |         |        | 41,117       |        |   |        | 20,462 |        |   |         | (1,839 | )      |   |        | 136,128 |        
|                                         | Non-interest-earning assets                                        |                                            |        |           |        |            |         |            |        |         |        |              |        |   |        |        |        |   |         | 18,151 |        |   |        | 18,151  |        
|                                         |                                                                    |                                            |        |           |        |            |         |            |        |         |        |              |        |   |        |        |        |   |         |        |        |   |        |        
|                                         |                                                                    | Total Assets                               |        | $         | 69,385 |            |         | $          | 13,789 |         |        | $            | 44,123 |   |        | $      | 47,677 |   |         | $      | 16,312 |   |        | $       | 191,286 | 
|                                         |                                                                    |                                            |        |           |        |            |         |            |        |         |        |              |        |   |        |        |        |   |         |        |        |   |        |        
|Liabilities and Stockholders Equity     |                                                                    |                                            |        |           |        |            |         |            |        |         |        |              |        |   |        |        |        |   |         |        |        |   |        |        
|                                         | Non interest-bearings deposits                                     |                                            |        | 0         |        |            |         | 0          |        |         |        | 0            |        |   |        | 0      |        |   |         | 45,951 |        |   |        | 45,951  |        
|                                         | Interest-bearing deposits                                          |                                            |        | 79,116    |        |            |         | 29,293     |        |         |        | 5,021        |        |   |        | 0      |        |   |         | 0      |        |   |        | 113,430 |        
|                                         | Federal Home Loan Bank Advances                                    |                                            |        | 0         |        |            |         | 3,000      |        |         |        | 0            |        |   |        | 0      |        |   |         | 0      |        |   |        | 3,000   |        
|                                         | Convertible Debentures                                             |                                            |        | 0         |        |            |         | 0          |        |         |        | 0            |        |   |        | 3,750  |        |   |         | 0      |        |   |        | 3,750   |        
|                                         | Company Obligated Preferred
Securities of subsidiary trust holding |                                            |        | 0         |        |            |         | 0          |        |         |        | 0            |        |   |        | 12,000 |        |   |         | 0      |        |   |        | 12,000  |        
|                                         | Other liabilities                                                  |                                            |        | 0         |        |            |         | 0          |        |         |        | 0            |        |   |        | 0      |        |   |         | 2,700  |        |   |        | 2,700   |        
|Stockholders Equity                     |                                                                    |                                            | 0      |           |        |            | 0       |            |        |         | 0      |              |        |   | 0      |        |        |   | 10,455  |        |        |   | 10,455 |        
|                                         |                                                                    |                                            |        |           |        |            |         |            |        |         |        |              |        |   |        |        |        |   |         |        |        |   |        |        
|                                         |                                                                    | Total Liabilities and
Stockholders Equity |        | $         | 79,116 |            |         | $          | 32,293 |         |        | $            | 5,021  |   |        | $      | 15,750 |   |         | $      | 59,106 |   |        | $       | 191,286 | 
|                                         |                                                                    |                                            |        |           |        |            |         |            |        |         |        |              |        |   |        |        |        |   |         |        |        |   |        |        
|Interest Rate Sensitivity Gap            |                                                                    | $                                          | (9,731 | )         |        | $          | (18,504 | )          |        | $       | 39,102 |              |        | $ | 31,927 |        |        | $ | (42,794 | )      |        | $ | 0      |        
|                                         |                                                                    |                                            |        |           |        |            |         |            |        |         |        |              |        |   |        |        |        |   |         |        |        |   |        |        
|Cumulative Interest Rate Sensitivity Gap |                                                                    | $                                          | (9,731 | )         |        | $          | (28,235 | )          |        | $       | 10,867 |              |        | $ | 42,794 |        |        | $ | 0       |        |        | $ | 0      |        
|                                         |                                                                    |                                            |        |           |        |            |         |            |        |         |        |              |        |   |        |        |        |   |         |        |        |   |        |        

The Company realizes income principally from the differential or spread
between the interest earned on loans, investments, other interest-earning
assets and the interest paid on deposits and borrowings. The Company, like
other financial institutions, is subject to interest rate risk (IRR) to the
degree that its interest-earning assets reprice differently than its
interest-bearing liabilities. The Companys primary objective in managing
interest rate risk is to minimize the adverse impact of changes in interest
rates on the Companys net interest income and capital, while maintaining an
asset-liability balance sheet mix that produces the most effective and
efficient returns.

A sudden and substantial increase or decrease in interest rates may
adversely impact the Companys income to the extent that the interest rates
associated with the assets and liabilities do not change at the same speed, to
the same extent, or on the same basis. The Company has adopted formal policies
and practices to monitor its interest rate risk exposure. As a part of its
risk management practices, the Company uses the net portfolio value (NPV)
methodology to gauge interest rate risk exposure.

The Company monitors interest rate sensitivity by estimating the change in
NPV over a range of interest rate scenarios utilizing an interest rate model.
The Sensitivity Measure is the decline in the NPV ratio, as a percentage,
caused by a 200 basis point increase or decrease in interest rates, whichever
produces the largest decline. The higher the institutions Sensitivity
Measure, the great is its exposure to IRR.



10



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##### Table of Contents



The following table reflects the Companys net interest income sensitivity
analysis as of December 31, 2001.

|                       |  |                    |  |                 |      |               |  |              |             |  |  |   |             |  |  | 
|---------------------- |  | ------------------ |  | --------------- | ---- | ------------- |  | ------------ | ----------- |  |  | - | ----------- |  |  | 
|                       |  |                    |  |                 |      | Estimated Net |  | Market Value
|                       |  | Simulated          |  | Interest Income |      |              
|(Dollars in Thousands) |  | Rate Changes       |  | Sensitivity     |      | Assets        |  | Liabilities 
|                       |  |                    |  |                 |      |               |  |             
|                       |  | +200 Basis Points  |  |                 | 4.18 | %             |  | $            | 185,542,095 |  |  | $ | 168,638,670 | 
|                       |  | -200  Basis Points |  |                 | 5.28 | %             |  | $            | 202,543,439 |  |  | $ | 169,213,081 | 

The estimated sensitivity does not necessarily represent a Company
forecast and the results may not be indicative of actual changes to the
Companys net interest income. These estimates are based upon a number of
assumptions including: the nature and timing of interest rate levels including
yield curve, prepayments on loans and securities, pricing strategies on loans
and deposits, replacement of asset and liability cashflows, and other
assumptions. While the assumptions used are based on current economic and
local market conditions, there is no assurance as to the predictive nature of
these conditions including how customer preferences or competitor influences
might change.

Non-Accrual, Past Due, and Restructured Loans

The following table sets forth information regarding the Companys
non-performing loans at year end 2001 and 2000.

|                                           |                        |                                        |                                        |      |              |   |   |   |     |     | 
|------------------------------------------ | ---------------------- | -------------------------------------- | -------------------------------------- | ---- | ------------ | - | - | - | --- | --- | 
|                                           |                        |                                        |                                        |      | December 31,
|                                           |                        |                                        |                                        |      |             
|(Dollars in Thousands)                     |                        | 2001                                   |                                        | 2000
|                                           |                        |                                        |                                        |     
|Accruing Loans More Than 90 Days Past Due1 |                        |                                        |                                        |      |              |   |   |  
|                                           | Aggregate Loan Amounts |                                        | $                                      | 0    |              |   | $ | 0 |    
|                                           |                        | Commercial, financial and agricultural |                                        |      | 0            |   |   |   | 0   |    
|                                           |                        | Real estate                            |                                        |      | 0            |   |   |   | 0   |    
|                                           |                        | Installment loans to individuals       |                                        |      | 0            |   |   |   | 25  |    
|                                           |                        |                                        |                                        |      |              |   |   |  
|                                           |                        |                                        | Total Loans Past Due More Than 90 Days |      |              | 0 |   |   |     | 25  | 
|                                           |                        |                                        |                                        |      |              |   |   |  
|Renegotiated loans2                        |                        |                                        | 0                                      |      |              |   | 0 |  
|                                           |                        |                                        |                                        |      |              |   |   |  
|Non-accrual loans3                         |                        |                                        |                                        |      |              |   |   |  
|                                           | Aggregate Loan Amounts |                                        |                                        | 0    |              |   |   | 0 |    
|                                           |                        | Commercial, financial and agricultural |                                        |      | 0            |   |   |   | 131 |    
|                                           |                        | Real estate                            |                                        |      | 0            |   |   |   | 176 |    
|                                           |                        | Installment loans to individuals       |                                        |      | 0            |   |   |   |     |    
|                                           |                        |                                        |                                        |      |              |   |   |  
|                                           |                        |                                        | Total Non-accrual Loans                |      |              | 0 |   |   |     | 307 | 
|                                           |                        |                                        |                                        |      |              |   |   |  
|                                           |                        |                                        | Total Non-performing Loans             |      | $            | 0 |   |   | $   | 332 | 
|                                           |                        |                                        |                                        |      |              |   |   |  

As of December 31, 2001, there were no loans past due more than 90 days,
no loans on non-accrual and no renegotiated loans. However, at December 31,
2000, there were three loans on non-accrual status totaling approximately
$307,000. The amount of interest income that would have been collected on
these loans, had the loans remained current in accordance with their original
loan terms.



---

|1 |  | Reflects loans for which there has been no payment of interest and/or
principal for 90 days or more. Ordinarily, loans are placed on
non-accrual status (accrual of interest is discontinued) when the Bank has
reason to believe that continued payment of interest and principal is
unlikely.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| 
| 
| 
|2 |  | Renegotiated loans are those which have been renegotiated to provide a
deferral of interest or principal.
The Company had no renegotiated loans during 2001 or 2000.                                                                                                                           



11



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##### Table of Contents



Potential Problem Loans

The policy of the Company is to review each loan in the portfolio to
identify problem credits. In addition, as an integral part of its regular
examination of the Company, the banking regulatory agencies also identifies
problem loans. There are three classifications for problem loans:
substandard, doubtful, and loss. Substandard loans have one or more
defined weaknesses and are characterized by the distinct possibility that the
Company will sustain some loss if the deficiencies are not corrected. Doubtful
loans have the weaknesses of substandard loans with the additional
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, questionable.

A loan classified loss is considered uncollectible and of such little
value that the continuance as an asset of the institution is not warranted.
Another category designated special mention is maintained for loans which do
not currently expose the Company to a sufficient degree of risk to warrant
classification as substandard, doubtful or loss but do possess credit
deficiencies for potential weaknesses deserving managements close attention.

As of December 31, 2001, the Companys classified loans consisted of $2.5
million as substandard. This current level represents an improvement of
approximately $1.2 million from the prior year reporting period.

Consumer loans which are 120 days or more delinquent and not insured or
guaranteed by the U.S. Government, are generally written off as losses, all
other loans are written off at such time the loan is classified as loss.
Losses are recognized in the period in which the asset is deemed uncollectible.

With the exception of these loans, management is not aware of any loans as
of December 31, 2001, where the known credit problems of the borrower would
cause it to have serious doubts as to the ability of such borrowers to comply
with their present loan repayment terms and which would result in such loans
being included in the non-accrual, past due and restructured loan table set
forth above at some future date. Management cannot, however, predict the
extent to which the current economic environment may persist or worsen or the
full impact such environment may have on the Companys loan portfolio.
Furthermore, management cannot predict the results of any subsequent
examinations of the Companys loan portfolio by the banking regulatory
agencies. Accordingly, there can be no assurance that other loans will not
become included in the table above in the future.

Foreign Outstandings

The Company did not have any loans, acceptances, interest-bearing deposits
or other monetary assets of any foreign country.

Loan Concentrations

The Company does not have loans made to borrowers who are engaged in
similar activities where the aggregate amount of the loans exceeds 10% of their
loan portfolio that are not broken out as a separate category in the loan
portfolio.

Other Interest-Earning Assets

The Company does not have any interest-earning assets for which management
believes that recovery of the interest on and principal thereof is at
significant risk.



12



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##### Table of Contents



Summary of Loan and Lease Loss Experience

In August, 2001, the Bank was approved for a change in banking charters
and converted from a national to state bank. The change was necessitated by
the Banks needs to meet the growing credit requirements of its customer base
as it implemented its newly adopted strategic plan. In conjunction with this
change in banking charters, the Banks primary banking regulators changed from
the Office of the Comptroller of the Currency (the OCC) to the California
Department of Financial Institutions (the DFI) and the Federal Deposit
Insurance Corporation (the FDIC). During this same period, the Federal
Financial Institution Examination Council (the FFEIC) issued an interagency
policy statement governing changes to acceptable methodologies in determining
the Allowance for Loan and Leases Losses (the ALLL) for financial
institutions.

Determination of Allowance for Loan Losses

In December 2001, the Company adopted a new methodology for determining
the adequacy of the ALLL as a result of an interagency policy statement issued
by the Federal Financial Institution Examination Council. This chosen method,
also known as the Percentage of Loan Grade Analysis, replaces the former
accepted methodology known as the Migration Analysis. Although the Company has
chosen the Percentage of Loan Grade Analysis as it demonstrates the most
accurate determination of reserve adequacy to risks in the loan portfolio, it
still must perform an analysis based upon three methodologies (the third is
also known as the Historical Loss Analysis).

The Percentage of Loan Grade Analysis separates the Companys loan
portfolio by loan grades into categories based upon product types, and further
separates each of these product types by sub-categories based on collateral,
loan-to-value, purpose, lien position, and occupancy status. For each of these
sub-categories, an estimate of possible loan losses reserves is determined and
assessed as a reserve factor. These reserve factors are estimates based upon
historical loss experience for similar product types by peer banks, and have
been supplemented by regulatory information to support these estimates.
Managements applies its own judgmental assessments of these factors as they
relate to other qualitative issues such as local economic and business trends,
changes in lending strategies and other items. Under this methodology, there
are no unallocated reserves.

The Companys ALLL methodology includes three major components which are
intended to reduce the differences between estimated and actual losses. The
first component is the percentage of loan grade analysis whereby the loans are
graded by product type, and a percentage or reserve factor is applied to
various loan groupings. Loans which have adverse credit characteristics are
reviewed separately and a determination of risk and loss exposure is completed,
with fixed general reserves added to those loans when necessary. The second
component is the historical loss methodology. This methodology analyzes the
quarterly net losses to average quarterly loan balances for predetermined loan
pools. Loans with fixed general reserves are added to the reserves determined
for each loan pool and a recommended allowance is quantified. The third
component is migration analysis. Migration analysis determines the rate of
loan and lease loss based on similarly graded or delinquent loans and leases.

The amount of any general allowance in excess of the amounts determined
from the migration and historical loss methodologies are based upon
managements determination of the amounts necessary for concentrations,
economic uncertainties and other subjective factors; as a result, the excess
general allowance to the total allowance may fluctuate from period to period.

The allowance for loan and lease losses should not be interpreted as an
indication that charge-offs will occur in these amounts or proportions, or that
the reserves indicate future charge-off trends. Furthermore, the portion
allocated to each loan category is not the total amount available for future
losses that might occur within such categories as the total reserve is a
general reserve applicable to the entire portfolio.

The Company relies on a loan risk rating system. The originating loan
officer assigns borrowers an initial risk rating, which is based primarily on a
thorough analysis of each borrowers financial capacity in conjunction with
industry and economic trends. Approvals are made based upon the amount of
inherent credit risk specific to the transaction and are reviewed for
appropriateness by credit administration personnel. Approved loans are
monitored by credit administration personnel for deterioration in a borrowers
financial condition, which would impact the ability of the borrower to perform
under the contract. Risk ratings are adjusted as necessary.



13



---



##### Table of Contents



Based on the risk rating system, fixed general allowances are established
in cases where management has identified significant conditions or
circumstances related to a credit that management believes indicates the
probability that a loss has been incurred in excess of the amount determined by
the application of the portfolio formula allowance.

Management performs a detailed analysis of these loans, including, but not
limited to, appraisals of the collateral, conditions of the marketplace for
liquidating the collateral and assessment of the guarantors. Management then
determines the loss potential and designates a portion of the allowance for
losses as a fixed general allowance for each of these loans.

The qualitative evaluation of the adequacy of the reserve factors is
subject to a higher degree of uncertainty because these factors are not
identified with specific problem credits or portfolio segments. This analysis
includes the evaluation of the following conditions that existed as of the
balance sheet date:



| |  |  | Changes in the lending policies and procedures        
| | - |  | ------------------------------------------------------
|
| |  |  | Changes in local economic and business conditions     
|
| |  |  | Changes in the nature and volume of the loan portfolio
|
| |  |  | Changes in Company management and lending staff       
|
| |  |  | Trends in past due loans and non-accrual loans        
|
| |  |  | Trends in criticized assets                           
|
| |  |  | Concentration of credit                               
|
| |  |  | Competition, legal and regulatory changes             
|
| |  |  | Bank regulatory examination results                   
|
| |  |  | Findings of the Companys internal credit examiners   



14



---



##### Table of Contents



The following table sets forth an analysis of the Companys loan and lease loss
experience, by category, for the past two years.

|                                                                                                              |             |          |                                        |                              |  |              |        |   |  |     |     | 
|------------------------------------------------------------------------------------------------------------- | ----------- | -------- | -------------------------------------- | ---------------------------- |  | ------------ | ------ | - |  | --- | --- | 
|                                                                                                              |             |          |                                        |                              |  | December 31,
|                                                                                                              |             |          |                                        |                              |  |             
|(Dollars in Thousands)                                                                                        |             | 2001     |                                        | 2000                        
|                                                                                                              |             |          |                                        |                             
|Loans and Leases Outstanding, Year-end1                                                                       |             | $        | 137,967                                |                              |  | $            | 79,524 |  
|                                                                                                              |             |          |                                        |                              |  |              |        |  
|Average Amount of Loans and Leases Outstanding1                                                               |             | $        | 98,872                                 |                              |  | $            | 82,436 |  
|                                                                                                              |             |          |                                        |                              |  |              |        |  
|Loans and Lease Loss Reserve Balance, Beginning of year                                                       |             | $        | 784                                    |                              |  | $            | 764    |  
|                                                                                                              |             |          |                                        |                              |  |              |        |  
|Allowance on Loans Acquired in Business Combination                                                           |             |          |                                        |                              |  |              |        |  
|                                                                                                              | Charge-offs |          |                                        | 0                            |  |              |        | 0 | 
|                                                                                                              |             | Domestic |                                        |                              |  |              |        |   |  |    
|                                                                                                              |             |          | Commercial, financial and agricultural |                              |  | 69           |        |   |  | 305 |    
|                                                                                                              |             |          | Real estate  construction             |                              |  | 0            |        |   |  | 0   |    
|                                                                                                              |             |          | Real estate  mortgage                 |                              |  | 0            |        |   |  | 0   |    
|                                                                                                              |             |          | Consumer loans                         |                              |  | 60           |        |   |  | 61  |    
|                                                                                                              |             |          |                                        |                              |  |              |        |  
|                                                                                                              |             |          | 129                                    |                              |  |              | 366    |  
|                                                                                                              |             |          |                                        |                              |  |              |        |  
|                                                                                                              | Recoveries  |          |                                        |                              |  |              |        |   | 
|                                                                                                              |             | Domestic |                                        |                              |  |              |        |   |  |    
|                                                                                                              |             |          | Commercial, financial and agricultural |                              |  | 3            |        |   |  | 110 |    
|                                                                                                              |             |          | Real estate  construction             |                              |  | 0            |        |   |  | 0   |    
|                                                                                                              |             |          | Real estate  mortgage                 |                              |  | 0            |        |   |  | 0   |    
|                                                                                                              |             |          | Consumer loans                         |                              |  | 19           |        |   |  | 20  |    
|                                                                                                              |             |          |                                        |                              |  |              |        |  
|                                                                                                              |             |          | 22                                     |                              |  |              | 130    |  
|                                                                                                              |             |          |                                        |                              |  |              |        |  
|                                                                                                              |             |          |                                        | Net Charge-offs/(recoveries) |  |              | 107    |   |  |     | 236 | 
|                                                                                                              |             |          |                                        |                              |  |              |        |  
|Additions/(Reductions) charged to operations                                                                  |             |          | 773                                    |                              |  |              | 256    |  
|                                                                                                              |             |          |                                        |                              |  |              |        |  
|Allowance for Loan and Lease Loss, End of year                                                                |             | $        | 1,450                                  |                              |  | $            | 784    |  
|                                                                                                              |             |          |                                        |                              |  |              |        |  
|Ratio of Net Charge-offs/(Recoveries) During the Year
to Average Loans and Leases Outstanding During the Year |             |          | 0.11                                   | %                            |  |              | 0.29   | %
|                                                                                                              |             |          |                                        |                              |  |              |        |  
|Ratio of Allowance for Loan and Lease Losses to Loans and Leases at Year-end                                  |             |          | 1.05                                   | %                            |  |              | 0.99   | %
|                                                                                                              |             |          |                                        |                              |  |              |        |  



---

|1 |  | Net of unearned income
|- |  | ----------------------



15



---



##### Table of Contents



Allowance for Loan and Lease Loss by Category

The allowance for loan and lease losses ending at $1,450,000 at December 31,
2001, represented approximately 1.05% of total loans at year end. Actual net
charge offs for the year 2001 were $107,000 representing only 0.11% of total
average loans and a decline of $129,000 or 55% over the year 2000. The
increase in the ALLL in 2001 was principally related to the expansion of the
Companys loan portfolio.

|                       |                                        |        |   |                         |       |             |   |             |       |             |     |     |     |            |   |      |       | 
|---------------------- | -------------------------------------- | ------ | - | ----------------------- | ----- | ----------- | - | ----------- | ----- | ----------- | --- | --- | --- | ---------- | - | ---- | ----- | 
|                       |                                        |        |   | Year Ended December 31,
|                       |                                        |        |   |                        
|                       |                                        |        |   | 2001                    |       | 2000       
|                       |                                        |        |   |                         |       |            
|                       |                                        |        |   |                         |       |             |   | Percent of  |       |             |     |     |     | Percent of
|                       |                                        |        |   |                         |       |             |   | Loans in    |       |             |     |     |     | Loans in  
|                       |                                        |        |   | Allowance               |       | Each        |   | Allowance   |       | Each       
|                       |                                        |        |   | for Loan                |       | Category to |   | for Loan    |       | Category to
|(Dollars in Thousands) |                                        | Losses |   | Total Loans             |       | Losses      |   | Total Loans
|                       |                                        |        |   |                         |       |             |   |            
|Domestic               |                                        |        |   |                         |       |             |   |             |       |             |     |     |     |            |   |     
|                       | Commercial, financial and agricultural |        | $ | 497                     |       |             |   | 34.3        |       |             | $   | 180 |     |            |   | 15.8 |      
|                       | Residential real estate construction   |        |   | 336                     |       |             |   | 23.2        |       |             |     | 145 |     |            |   | 66.0 |      
|                       | Residential 1-4 family                 |        |   | 126                     |       |             |   | 8.7         |       |             |     | 0   |     |            |   | 0    |      
|                       | Commercial real estate                 |        |   | 372                     |       |             |   | 28.4        |       |             |     | 0   |     |            |   | 0    |      
|                       | Installment loans to individuals       |        |   | 72                      |       |             |   | 5.4         |       |             |     | 0   |     |            |   | 0    |      
|Foreign                |                                        |        | 0 |                         |       |             | 0 |             |       |             | 0   |     |     |            | 0 |     
|Unallocated allowance  |                                        |        | 0 |                         |       |             | 0 |             |       |             | 435 |     |     |            | 0 |     
|                       |                                        |        |   |                         |       |             |   |             |       |             |     |     |     |            |   |     
|                       |                                        | Total  |   | $                       | 1,450 |             |   |             | 100.0 |             |     | $   | 784 |            |   |      | 100.0 | 
|                       |                                        |        |   |                         |       |             |   |             |       |             |     |     |     |            |   |     

Deposits

The average amount of and the average rate paid on deposits is summarized
below:

|                       |                                      |                |   |                         |         |         |  |         |     |         |   |        |         |  |  |     |     |  
|---------------------- | ------------------------------------ | -------------- | - | ----------------------- | ------- | ------- |  | ------- | --- | ------- | - | ------ | ------- |  |  | --- | --- | -
|                       |                                      |                |   | Year Ended December 31,
|                       |                                      |                |   |                        
|                       |                                      |                |   | 2001                    |         | 2000   
|                       |                                      |                |   |                         |         |        
|                       |                                      |                |   | Average                 |         | Average |  | Average |     | Average
|(Dollars in Thousands) |                                      | Balance        |   | Rate                    |         | Balance |  | Rate   
|                       |                                      |                |   |                         |         |         |  |        
|In Domestic Offices    |                                      |                |   |                         |         |         |  |         |     |         |   |        |         |  |  |    
|                       | Non-interest bearing demand deposits |                | $ | 41,020                  |         |         |  |         |     |         | $ | 37,096 |         |  |  |     |    
|                       | Savings deposits1                    |                |   | 41,504                  |         |         |  | 1.8     | %   |         |   | 37,046 |         |  |  | 1.7 | %  
|                       | Time deposits                        |                |   | 48,229                  |         |         |  | 5.3     | %   |         |   | 27,719 |         |  |  | 5.1 | %  
|                       |                                      |                |   |                         |         |         |  |         |     |         |   |        |         |  |  |    
|                       |                                      | Total Deposits |   | $                       | 130,753 |         |  |         | 2.5 | %       |   | $      | 101,861 |  |  |     | 2.0 | %
|                       |                                      |                |   |                         |         |         |  |         |     |         |   |        |         |  |  |    



---

|1 |  | Includes Savings, NOW, Super NOW, and Money Market deposit accounts.
|- |  | --------------------------------------------------------------------

Set forth below is a maturity schedule of domestic time certificates of deposit
of $100,000 or more:

|                             |  |              |        | 
|---------------------------- |  | ------------ | ------ | 
|                             |  | December 31,
|(Dollars In Thousands)       |  | 2001        
|                             |  |             
|Three months or less         |  | $            | 13,417 | 
|Over three through 12 months |  |              | 11,462 | 
|Over one through Five Years  |  |              | 2,214  | 
|                             |  |              |        | 
|                             |  | $            | 27,093 | 
|                             |  |              |        | 



16



---



##### Table of Contents



Return on Equity and Assets

The following table sets forth the Companys ratios of net income to average
total assets/(return on assets), net income to average equity/(return on
equity), dividends declared per share to net income per share/(dividend payout
ratio), and average equity to average total assets/(equity to asset ratio).

|                                    |  |      |       |      |  |  |      |  
|----------------------------------- |  | ---- | ----- | ---- |  |  | ---- | -
|                                    |  | 2001 |       | 2000
|                                    |  |      |       |     
|Return on assets                    |  |      | 0.79  | %    |  |  | 0.55 | %
|Return on equity                    |  |      | 11.67 | %    |  |  | 6.96 | %
|Dividend payout ratio               |  |      |      |      |  |  |     |  
|Stockholders Equity to asset ratio |  |      | 6.79  | %    |  |  | 7.88 | %

Competition

The Company faces substantial competition for deposits and loans
throughout its market areas. The primary factors in competing for deposits are
interest rates, personalized services, the quality and range of financial
services, convenience of office locations and office hours. Competition for
deposits comes primarily from other commercial banks, savings institutions,
credit unions, money market funds and other investment alternatives. The
primary factors in competing for loans are interest rates, loan origination
fees, the quality and range of lending services and personalized services.
Competition for loans comes primarily from other commercial banks, savings
institutions, mortgage banking firms, credit unions and other financial
intermediaries. The Company faces competition for deposits and loans
throughout its market areas not only from local institutions but also from
out-of-state financial intermediaries which have opened loan production offices
or which solicit deposits in its market areas. Many of the financial
intermediaries operating in the Companys market areas offer certain services,
such as trust, investment and international banking services, which the Company
does not offer directly. Additionally, banks with larger capitalization and
financial intermediaries not subject to bank regulatory restrictions have large
lending limits and are thereby able to serve the needs of larger customers.
Neither the deposits nor loans of any office of the Company exceed 1% of the
aggregate loans or deposits of all financial intermediaries located in the
counties in which such offices are located.

Effect of Governmental Policies and Recent Legislation

Banking is a business which depends largely on rate differentials. In
general, the difference between the interest rate paid by the Company on its
deposits and its other borrowings and the interest rate received by the Company
on loans extended to its customers and securities held in the Companys
portfolio comprise the major portion of the Companys earnings. These rates
are highly sensitive to many factors that are beyond the control of the
Company. Accordingly, the earnings and growth of the Company are subject to
the influence of domestic and foreign economic conditions, including inflation,
recession and unemployment.

The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial institutions subject to its
reserve requirements and by varying the discount rates applicable to borrowings
by depository institutions. The actions of the Federal Reserve Board in these
areas influence the growth of bank loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature and
impact of any future changes in monetary policies cannot be predicted.

From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other
financial institutions are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
See ITEM 1. BUSINESS  Supervision and Regulation.



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Supervision and Regulation

Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain
laws and regulations which relate to the regulation of the Company and the
Bank. The description does not purport to be a complete summary of all such
authority and is qualified in its entirety by reference to the applicable laws
and regulations.

The Company. The Company, as a registered bank holding company, is
subject to regulation under the Bank Holding Company Act of 1956, as amended
(the BHCA). The Company is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may
conduct examinations of the Company and its subsidiaries.

The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company
must file written notice and obtain approval from the Federal Reserve Board
prior to purchasing or redeeming its equity securities.

Under the BHCA and regulations adopted by the Federal Reserve Board, a
bank holding company and its non-banking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See ITEM 1. BUSINESS  Supervision and Regulation  Capital
Standards. The Company is required to obtain the prior approval of the
Federal Reserve Board for the acquisition of more than 5% of the outstanding
shares of any class of voting securities or substantially all of the assets of
any bank or bank holding company. Prior approval of the Federal Reserve Board
is also required for the merger or consolidation of the Company and another
bank holding company.

The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, the Company, subject to the prior
approval of the Federal Reserve Board, may engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making any such determination, the Federal Reserve
Board is required to consider whether the performance of such activities by the
Company or an affiliate can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board is also empowered to
differentiate between activities commenced de novo and activities commenced by
acquisition, in whole or in part, of a going concern.

Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Boards policy that in serving
as a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
companys failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Boards regulations or both. This doctrine has become known as the
source of strength doctrine. Although the United States Court of Appeals for
the Fifth Circuit found the Federal Reserve Boards source of strength doctrine
invalid in 1990, stating that the Federal Reserve Board had no authority to
assert the doctrine under the BHCA, the decision, which is not binding on
federal courts outside the Fifth Circuit, was recently reversed by the United
States Supreme Court on procedural grounds. The validity of the source of
strength doctrine is likely to continue to be the subject of litigation until
definitively resolved by the courts or by Congress.



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The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by, and may be required to file reports
with, the California State Banking Department.

Finally, the Company is subject to the periodic reporting requirements of
the Securities Exchange Act of 1934, as amended, including but not limited to,
filing annual, quarterly and other current reports with the Securities and
Exchange Commission.

The Bank. The Bank, as a state banking association, is subject to primary
supervision, examination and regulation by the California Department of
Financial Institutions (DFI) and the Federal Deposit Insurance Corporation
(FDIC). If, as a result of an examination of a Bank, the Regulatory agencies
should determine that the financial condition, capital resources, asset
quality, earnings prospects, management, liquidity or other aspects of the
Banks operations are unsatisfactory or that the Bank or its management is
violating or has violated any law or regulation, various remedies are available
to the DFI. Such remedies include the power to enjoin unsafe or unsound
practices, to require affirmative action to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct and increase in capital, to restrict the growth
of the Bank, to assess civil monetary penalties, and to remove officers and
directors. The FDIC has similar enforcement authority, in addition to its
authority to terminate a Banks deposit insurance in the absence of action by
the DFI and upon finding that a Bank is in an unsafe or unsound condition, is
engaging in unsafe or unsound activities, or that its conduct poses a risk to
the deposit insurance fund or make prejudice the interest of its depositors.

The deposits of the Bank are insured by the FDIC in the manner and to the
extent provided by law. For this protection, the Bank pays a semiannual
statutory assessment. See ITEM 1. BUSINESS  Supervision and Regulation
Premiums for Deposit Insurance. The Bank is also subject to certain
regulations of the Federal Reserve Board and applicable provisions of
California law, insofar as they do not conflict with or are not preempted by
federal banking law.

Various other requirements and restrictions under the laws of the United
States and the State of California affect the operations of the Bank. Federal
and California statutes and regulations relate to many aspects of the Banks
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends,
locations of branch offices, capital requirements and disclosure obligations to
depositors and borrowers. Further, the Bank is required to maintain certain
levels of capital. See ITEM 1. BUSINESS  Supervision and Regulation 
Capital Standards.

Restrictions on Dividends by the Company and Transfers of Funds to the
Company by the Bank. The Company is a legal entity separate and distinct from
the Bank. The Companys ability to pay cash dividends is limited by California
law. Under California law, shareholders of the Company may receive dividends
when and as declared by the Board of Directors out of funds legally available
for such purpose. With certain exceptions, a California corporation may not
pay a dividend to its shareholders unless (i) its retained earnings equal at
least the amount of the proposed dividend, or (ii) after giving effect to the
dividend, the corporations assets would equal at least 1.25 times its
liabilities and, for corporations with classified balance sheets, the current
assets of the corporation would be at least equal to its current liabilities
or, if the average of the earnings of the corporation before taxes on income
and before interest expense for the two preceding fiscal years was less than
the average of the interest expense of the corporation for those fiscal years,
at least equal to 1.25 times its current liabilities.

Federal Reserve Board policy prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowings or other
arrangements that might adversely affect the holding companys financial
position. The policy further declares that a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality and
overall financial condition. Other Federal Reserve Board policies forbid the
payment by bank subsidiaries to their parent companies of management fees which
are unreasonable in amount or exceed the fair market value of the services
rendered.

There are statutory and regulatory limitations on the amount of dividends
which may be paid to the Company by the Bank. The prior approval of the DFI is
required if the total of all dividends declared by a state bank in any calendar
year exceeds the banks net profits (as defined) for that year combined with
its retained net profits (as defined) for the preceding two years, less any
transfers to surplus.



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The DFI has authority to prohibit the Bank from engaging in activities
that, in the DFIs opinion, constitute unsafe or unsound practices in
conducting its business. It is possible, depending upon the financial
condition of the bank in question and other factors, that the DFI could assert
that the payment of dividends or other payments might, under some
circumstances, be such an unsafe or unsound practice. Further, the DFI and the
Federal Reserve Board have established guidelines with respect to the
maintenance of appropriate levels of capital by banks or bank holding companies
under their jurisdiction. Compliance with the standards set forth in such
guidelines and the restrictions that are or may be imposed under the prompt
corrective action provisions of federal law could limit the amount of dividends
which the Bank or the Company may pay. See ITEM 1. BUSINESS  Supervision and
Regulation  Prompt Corrective Regulatory Action and Other Enforcement
Mechanisms and  Capital Standards for a discussion of these additional
restrictions on capital distributions.

At present, substantially all of the Companys revenues, including funds
available for the payment of dividends and other operating expenses, is, and
will continue to be, primarily dividends paid by the Bank.

The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of or investments in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate is limited to 10% of the Banks capital
and surplus (as defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of the Banks capital and
surplus (as defined by federal regulations). California law also imposes
certain restrictions with respect to transactions involving the Company and
other controlling persons of the Bank. Additional restrictions on transactions
with affiliates may be imposed on the Bank under the prompt corrective action
provisions of federal law. See ITEM 1. BUSINESS  Supervision and Regulation
Prompt Corrective Regulatory Action and Other Enforcement Mechanisms.

Potential and Existing Enforcement Actions. Commercial banking
organizations, such as the Bank, and their institution-affiliated parties,
which include the Company, may be subject to potential enforcement actions by
the Federal Reserve Board, and the regulatory agencies for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease-and-desist order that can be
judicially enforced, the termination of insurance of deposits, the imposition
of civil money penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, the issuance of removal and
prohibition orders against institution-affiliated parties and the imposition of
restrictions and sanctions under the prompt corrective action provisions of the
FDIC Improvement Act of 1991. Additionally, a holding companys inability to
serve as a source of strength to its subsidiary banking organizations could
serve as an additional basis for a regulatory action against the holding
company.

Capital Standards. The Federal Reserve Board and the regulatory agencies
have adopted risk-based minimum capital guidelines intended to provide a
measure of capital that reflects the degree of risk associated with a banking
organizations operations for both transactions reported on the balance sheet
as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high
credit risk, such as business loans.

A banking organizations risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet
items, against both total qualifying capital (the sum of Tier 1 capital and
limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists
primarily of common stock, retained earnings, noncumulative perpetual preferred
stock (cumulative perpetual preferred stock for bank holding companies) and
minority interests in certain subsidiaries, less most intangible assets. Tier
2 capital may consist of a limited amount of the allowance for possible loan
and lease losses, cumulative preferred stock, long term preferred stock,
eligible term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital is
subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1
capital to risk-adjusted assets of 4%.



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In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all banking organizations not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis points above the 3%
minimum, or 4% to 5%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.

The federal banking regulators have issued a proposed rule to take account
of interest rate risk in calculating risk-based capital. The proposed rule
includes a supervisory model for taking account of interest rate risk. Under
that model, institutions would report their assets, liabilities and off balance
sheet positions in time bands based upon their remaining maturities. The
federal banking agencies would then calculate a net risk weighted interest rate
exposure. If that interest rate risk exposure was in excess of a certain
threshold (1% of assets), the institution could be required to hold additional
capital proportionate to that excess risk. Alternatively, the agencies have
proposed making interest rate risk exposure a subjective factor in considering
capital adequacy. Exposures would be measured in terms of the change in the
present value of an institutions assets minus the change in the present value
of its liabilities and off-balance sheet positions for an assumed 200 basis
point parallel shift in market interest rates. However, the federal banking
agencies have proposed to let banks use their own internal measurement of
interest rate risk if it is declared adequate by examiners.

Effective January 17, 1995, the federal banking agencies issued a final
rule relating to capital standards and the risks arising from the concentration
of credit and nontraditional activities. Institutions which have significant
amounts of their assets concentrated in high risk loans or nontraditional
banking activities and who fail to adequately manage these risks, will be
required to set aside capital in excess of the regulatory minimums. The
federal banking agencies have not imposed any quantitative assessment for
determining when these risks are significant, but have identified these issues
as important factors they will review in assessing an individual banks capital
adequacy.

In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to
classified assets. The benchmark set forth by such policy statement is the sum
of (i) assets classified loss; (ii) 50 percent of assets classified doubtful;
(iii) 15 percent of assets classified substandard; and (iv) estimated credit
losses on other assets over the upcoming 12 months.

Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with SFAS No. 109. See ITEM 1.
BUSINESS  Supervision and Regulation  Accounting Changes. The federal
banking agencies recently issued final rules governing banks and bank holding
companies, effective April 1, 1995, which limit the amount of deferred tax
assets that are allowable in computing an institutions regulatory capital.
This standard has been in effect since March 1993. Deferred tax assets that
can be realized for taxes paid in prior carryback years and from future
reversals of existing taxable temporary differences are generally not limited.
Deferred tax assets that can only be realized through future taxable earnings
are limited for regulatory capital purposes to the lesser of (i) the amount
that can be realized within one year of the quarter-end report date, or (ii)
10% of Tier 1 Capital. The amount of any deferred tax in excess of this limit
would be excluded from Tier 1 Capital and total assets and regulatory capital
calculations.

Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.



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The following table presents the amounts of regulatory capital and the capital
ratios for the Bank, compared to its minimum regulatory capital requirements,
as of December 31, 2001.

|                        |              |        |                   |        |         |             |  |       |   |  |  |     |  
|----------------------- | ------------ | ------ | ----------------- | ------ | ------- | ----------- |  | ----- | - |  |  | --- | -
|                        |              |        | December 31, 2001
|                        |              |        |                  
|                        |              |        | Actual            |        | Minimum
|                        |              |        |                   |        | Capital
|(Dollars in Thousands)  |              | Amount |                   | Ratio  |         | Requirement
|                        |              |        |                   |        |         |            
|Leverage ratio          |              |        |                   |        |         |             |  |       |   |  |  |    
|                        | Bank         |        | $                 | 21,570 |         |             |  | 12.53 | % |  |  | 4.0 | %
|                        | Consolidated |        | $                 | 13,807 |         |             |  | 8.02  | % |  |  |     |  
|Tier 1 risk-based ratio |              |        |                   |        |         |             |  |       |   |  |  |    
|                        | Bank         |        |                   | 21,570 |         |             |  | 15.08 | % |  |  | 4.0 | %
|                        | Consolidated |        |                   | 13,807 |         |             |  | 9.59  | % |  |  |     |  
|Total risk-based ratio  |              |        |                   |        |         |             |  |       |   |  |  |    
|                        | Bank         |        |                   | 23,020 |         |             |  | 16.10 | % |  |  | 8.0 | %
|                        | Consolidated |        |                   | 27,510 |         |             |  | 19.10 | % |  |  |     |  

Prompt Corrective Action and Other Enforcement Mechanisms. Federal law
requires each federal banking agency to take prompt corrective action to
resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more prescribed minimum capital ratios.
The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.

In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal
law. Under these regulations, an insured depository institution will be
classified in the following categories:



| |  |  | well capitalized if it (i) has total risk-based capital of
10% or greater, Tier I risk-based capital of 6% or greater and a
leverage ratio of 5% or greater, and (ii) is not subject to an
order, written agreement, capital directive or prompt corrective
action directive to meet and maintain a specific capital level for
any capital measure;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | adequately capitalized if it has total risk-based capital
of 8% or greater, Tier 1 risk-based capital of 4% or greater and a
leverage ratio of 4% or greater (or a leverage ratio of 3% or
greater if the institution is rated Composite I under the applicable
regulatory rating system in its most recent report of examination);                
|
| |  |  | undercapitalized if it has total risk-based capital that is
less than 8%, Tier 1 risk-based capital that is less than 4% or a
leverage ratio that is less than 4% (or a leverage ratio that is
less than 3% if the institution is rated Composite I under the
applicable regulatory rating system in its most recent report of
examination);       
|
| |  |  | significantly undercapitalized if it has total risk-based
capital that is less than 6%, Tier 1 risk-based capital that is less
than 3% or a leverage ratio that is less than 3%; and                                                                                                                                                               
|
| |  |  | critically undercapitalized if it has a ratio of tangible
equity to total assets that is equal to or less than 2%.                                                                                                                                                                                                                                 

An institution that, based upon its capital levels, is classified as
well capitalized, adequately capitalized or undercapitalized may be
treated as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured
depository institution is subject to more restrictions. The federal banking
agencies, however, may not treat an institution as critically
undercapitalized unless its capital ratio actually warrants such treatment.



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The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot
accept a capital plan unless, among other things, it determines that the plan
(i) specifies the steps the institution will take to become adequately
capitalized; (ii) is based on realistic assumptions; and (iii) is likely to
succeed in restoring the depository institutions capital. In addition, each
company controlling an undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the depository
institution has been adequately capitalized on an average basis during each of
four consecutive calendar quarters and must otherwise provide adequate
assurances of performance. The aggregate liability of such guarantee is
limited to the lesser of (a) an amount equal to 5% of the depository
institutions total assets at the time the institution became undercapitalized,
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution as of the time the
institution fails to comply with its capital restoration plan. Finally, the
appropriate federal banking agency may impose any of the additional
restrictions or sanctions that it may impose on significantly undercapitalized
institutions if it determines that such action will further the purpose of the
prompt correction action provisions.

An insured depository institution that is significantly undercapitalized,
or is undercapitalized and fails to submit, or in a material respect to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things (i) a forced
sale of voting shares to raise capital or, if grounds exist for appointment of
a receiver or conservator, a forced merger; (ii) restrictions on transactions
with affiliates; (iii) further limitations on interest rates paid on deposits;
(iv) further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by the
holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by the
appropriate federal banking agency. Although the appropriate federal banking
agency has discretion to determine which of the foregoing restrictions or
sanctions it will seek to impose, it is required to force a sale of voting
shares or merger, impose restrictions on affiliate transactions and impose
restrictions on rates paid on deposits unless it determines that such actions
would not further the purpose of the prompt corrective action provisions. In
addition, without the prior written approval of the appropriate federal banking
agency, a significantly undercapitalized institution may not pay any bonus to
its senior executive officers or provide compensation to any of them at a rate
that exceeds such officers average rate of base compensation during the 12
calendar months preceding the month in which the institution became
undercapitalized.

Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most
importantly, except under limited circumstances, the appropriate federal
banking agency, not later than 90 days after an insured depository institution
becomes critically undercapitalized, is required to appoint a conservator or
receiver for the institution. The board of directors of an insured depository
institution would not be liable to the institutions shareholders or creditors
for consenting in good faith to the appointment of a receiver or conservator or
to an acquisition or merger as required by the regulator.

In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices
in conducting their businesses or for violations of any law, rule, regulation
or any condition imposed in writing by the agency or any written agreement with
the agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted.



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Safety and Soundness Standards. On February 2, 1995, the federal banking
agencies adopted final safety and soundness standards for all insured
depository institutions. The standards, which were issued in the form of
guidelines rather than regulations, relate to internal controls, information
systems, internal audit systems, loan underwriting and documentation,
compensation and interest rate exposure. In general, the standards are
designed to assist the federal banking agencies in identifying and addressing
problems at insured depository institutions before capital becomes impaired.
If an institution fails to meet these standards, the appropriate federal
banking agency may require the institution to submit a compliance plan.
Failure to submit a compliance plan may result in enforcement proceedings.
Additional standards on earnings and classified assets are expected to be
issued in the near future.

In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address
loan portfolio management, underwriting standards and loan to value limits that
do not exceed the supervisory limits prescribed by the regulations.

Appraisals for real estate related financial transactions must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
complex 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with federally related transactions must now comply
with the agencies appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan
or investment, including mortgage-backed securities.

Premiums for Deposit Insurance. Federal law has established several
mechanisms to increase funds to protect deposits insured by the Bank Insurance
Fund (BIF) administered by the FDIC. The FDIC is authorized to borrow up to
$30 billion from the United States Treasury; up to 90% of the fair market value
of assets of institutions acquired by the FDIC as receiver from the Federal
Financing Bank; and from depository institutions that are members of the BIF.
Any borrowings not repaid by asset sales are to be repaid through insurance
premiums assessed to member institutions. Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance fund reserves of
$1.25 for each $100 of insured deposits. The result of these provisions is
that the assessment rate on deposits of BIF members could increase in the
future. The FDIC also has authority to impose special assessments against
insured deposits.

The FDIC has adopted final regulations implementing a risk-based premium
system required by federal law. On November 14, 1995, the FDIC issued
regulations that establish a new assessment rate schedule ranging from 0 cents
per $100 of deposit to 27 cents per $100 of deposits applicable to members of
BIF. To determine the risk-based assessment for each institution, the FDIC
will categorize an institution as well capitalized, adequately capitalized or
undercapitalized based on its capital ratios using the same standard used by
the FDIC for its prompt corrective action regulations. A well capitalized
institution is generally one that has at least a 10% total risk-based capital
ratio, a 6% Tier 1 risk-based capital ratio and a 5% Tier 1 leverage capital
ratio. An adequately capitalized institution will generally have at least an
8% total risk-based capital ratio, a 4% Tier 1 risk-based capital ratio and a
4% Tier 1 leverage capital ratio. An undercapitalized institution will
generally be one that does not meet either of the above definitions. The FDIC
will also assign each institution to one of three subgroups based upon reviews
by the institutions primary federal or state regulator, statistical analysis
of financial statements and other information relevant to evaluating the risk
posed by the institution. The three supervisory categories are: financially
sound with only a few minor weaknesses (Group A), demonstrates weaknesses that
could result in significant deterioration (Group B), and poses a substantial
probability of loss (Group C).

The BIF assessment rates are set forth below for institutions based on their
risk-based assessment categorization.

|                       |  |                                             |    |         |  |         |    |  |  |  |    | 
|---------------------- |  | ------------------------------------------- | -- | ------- |  | ------- | -- |  |  |  | -- | 
|                       |  | Assessment Rates Effective January 1, 1996*
|                       |  |                                            
|                       |  | Group A                                     |    | Group B |  | Group C
|                       |  |                                             |    |         |  |        
|Well capitalized       |  |                                             | 0  |         |  |         | 3  |  |  |  | 17 | 
|Adequately capitalized |  |                                             | 3  |         |  |         | 10 |  |  |  | 24 | 
|Undercapitalized       |  |                                             | 10 |         |  |         | 24 |  |  |  | 27 | 



---

|* |  | Assessment figures are expressed in terms of cents per $100 of deposits.
|- |  | ------------------------------------------------------------------------



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Interstate Banking and Branching. On September 29, 1994, the President
signed into law the Riegel-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the Interstate Act). Under the Interstate Act, beginning one year
after the date of enactment, a bank holding company that is adequately
capitalized and managed may obtain approval under the BHCA to acquire an
existing bank located in another state without regard to state law. A bank
holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of
deposits of insured depository institutions in the United States or (b) 30% or
more of the deposits in the state in which the bank is located. A state may
limit the percentage of total deposits that may be held in that state by any
one bank or bank holding company if application of such limitation does not
discriminate against out-of-state banks. An out-of-state bank holding company
may not acquire a state bank in existence for less than a minimum length of
time that may be prescribed by state law except that a state may not impose
more than a five year existence requirement.

The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
states banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the
laws of that state, subject to the same requirements and conditions as for a
merger transaction.

The Interstate Act is likely to increase competition in the Companys
market areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition will have on the Companys operations.

In 1986, California adopted an interstate banking law. The law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a reciprocal basis (i.e., provided the other
states laws permit California banking organizations to acquire banking
organizations in that state on substantially the same terms and conditions
applicable to banking organizations solely within that state). The law took
effect in two stages. The first stage allowed acquisitions on a reciprocal
basis within a region consisting of 11 western states. The second stage, which
became effective January 1, 1991, allows interstate acquisitions on a national
reciprocal basis. California has also adopted similar legislation applicable
to savings associations and their holding companies.

Financial Modernization Legislation. On November 12, 1999, the President
signed into law the Gramm-Leach-Bliley Act, or GLB Act, which significantly
changed the regulatory structure and oversight of the financial services
industry. The GLB Act revises the Bank Holding Company Act of 1956 and repeals
the affiliation provisions of the Glass-Steagall Act of 1933, prohibiting a
qualifying holding company, called a financial holding company, to engage in a
full range of financial activities, including banking, insurance, and
securities activities, as well as merchant banking and additional activities
that are financial in nature or complementary to such financial activities.
The GLB Act thus provides expanded financial affiliation opportunities for
existing bank holding companies and permits various non-bank financial services
providers to acquire banks by allowing bank holding companies to engage in
activities such as securities underwriting, and underwriting and brokering of
insurance products. The GLB Act also expands passive investments by financial
holding companies in any type of company, financial or non-financial, through
merchant banking and insurance company investments. In order for a bank
holding company to qualify as a financial holding company, its subsidiary
depository institutions must be well-capitalized and well-managed and have
at least a satisfactory Community Reinvestment Act rating.

The GLB Act also reforms the regulatory framework of the financial
services industry. Under the GLB Act, financial holding companies are subject
to primary supervision by the Federal Reserve Board while current federal and
state regulators of financial holding company regulated subsidiaries such as
insurers, broker-dealers, investment companies and banks generally retain their
jurisdiction and authority. In order to implement its underlying purposes, the
GLB Act preempts state laws restricting the establishment of financial
affiliations authorized or permitted under the GLB Act, subject to specified
exceptions for state insurance regulators. With regard to securities laws, the
GLB Act removes the current blanket exemption for banks from the broker-dealer
registration requirements under the Securities Exchange Act of 1934, amends the
Investment Company Act of 1940 with respect to bank common trust fund and
mutual fund activities, and amends the Investment Advisers Act of 1940 to
require registration of banks that act as investment advisers for mutual funds.



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The GLB Act also includes provisions concerning subsidiaries of national
banks, permitting a national bank to engage in most financial activities
through a financial subsidiary, provided that the bank and its depository
institution affiliates are well capitalized and well managed and meet
certain other qualification requirements relating to total assets, subordinated
debt, capital, risk management, and affiliate transactions. With respect to
subsidiaries of state banks, new activities as principal would be limited to
those permissible for a national bank financial subsidiary. The GLB Act
requires a state bank with a financial subsidiary permitted under the GLB Act
as well as its depository institution affiliates to be well capitalized, and
also subjects the bank to the same capital, risk management and affiliate
transaction rules as applicable to national banks. The provisions of the GLB
Act relating to financial holding companies become effective 120 days after its
enactment, or about March 15, 2000, excluding, the federal preemption
provisions, which became effective on the date of enactment.

The GLB Act will likely increase competition in the markets in which the
Company operates, although it is difficult to assess the impact that such
increased competition may have on the Companys operations.

The Company currently meets all the requirements for financial holding
company status. However, the Company does not expect to elect financial
holding company status unless and until it intends to engage in any of the
expanded activities under the GLB Act which require such status. Unless and
until it elects such status, the Company will only be permitted to engage in
non-banking activities that were permissible for bank holding companies as of
the date of the enactment of the GLB Act.

Community Reinvestment Act and Fair Lending Developments. The Bank is subject
to certain fair lending requirements and reporting obligations involving home
mortgage lending operations and Community Reinvestment Act (CRA) activities.
The CRA generally requires the federal banking agencies to evaluate the record
of a financial institution in meeting the credit needs of their local
communities, including low and moderate income neighborhoods. In addition to
substantial penalties and corrective measures that may be required for a
violation of certain fair lending laws, the federal banking agencies may take
compliance with such laws and CRA into account when regulating and supervising
other activities. In May 1995, the federal banking agencies issued final
regulations which change the manner in which they measure a banks compliance
with its CRA obligations. The final regulations adopt a performance-based
evaluation system which bases CRA ratings on an institutions actual lending
service and investment performance, rather than the extent to which the
institution conducts needs assessments, documents community outreach activities
or complies with other procedural requirements.

On March 8, 1994, the Federal Interagency Task Force on Fair Lending
issued a policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.

Accounting Changes

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133 Accounting for Derivative Instruments and Hedging Activities,(as
amended by SFAS 138 in 2000.) This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities.
This new standard was originally effective for 2000. In June 1999, the FASB
issued SFAS NO. 137,Accounting for Derivatives Instruments and Hedging
Activities  Deferral of the Effective Date of FASB Statement No. 133.This
Statement establishes the effective date of SFAS 133 for 2001. SFAS No. 133 is
not expected to have a material impact on the Companys financial statements.

Employees

At December 31, 2001, the Company had approximately 89 full-time
equivalent employees as compared to approximately 77 in 2000. The Company
believes that its employee relations are satisfactory.



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##### Table of Contents



Executive Officers of the Company

Set forth below is certain information regarding the executive officers of the
Company and the Bank:

|                  |  |                                       |  |                                                          
|----------------- |  | ------------------------------------- |  | ---------------------------------------------------------
|Name              |  | Position With Company                 |  | Position With Bank                                       
|                  |  |                                       |  |                                                          
|Norman A. Morales |  | President and
Chief Executive Officer |  | President and 
Chief Executive Officer                   
|                 
|                 
|                 
|                 
|Richard S. Hagan  |  |                                       |  | Executive Vice President/Chief
Credit Officer            
|                 
|                 
|                 
|                 
|George W. McManus |  |                                       |  | Executive Vice President/ Director
of Community Banking  
|                 
|                 
|                 
|                 
|Jill A. Pierce    |  | Secretary                             |  | Executive Vice President/Director
of Finance & Operations

All officers hold office at the pleasure of the Board of Directors.

Mr. Morales has served as President and Chief Executive of the Company
since October 2000. Mr. Morales has been President and Chief Executive Officer
of the Bank since October 2000.

Mr. Hagan was appointed Executive Vice President/Chief Credit Officer of
the Bank in March 2001, and has been with the Bank since December 2000.

Mr. McManus was appointed Executive Vice President/Director of Community
Banking Officer of the Bank in June 2001 and has been with the Bank since June
2001.

Ms. Pierce was appointed Executive Vice President/Director of Finance and
Operations Officer of the Bank in January 2002. Ms. Pierce has been appointed
Secretary of the Company in March 2002, and has been with the Bank since
January 2002.




ITEM 2. PROPERTIES

The Companys executive offices are located at the Banks main banking
office at 9590 Foothill Boulevard, Rancho Cucamonga, California, and this
property is owned by the Bank.

The Bank also owns the land and building where its Chino and Crestline
offices are located, and leases the facilities in which its Diamond Bar, Blue
Jay, and La Verne Offices as well as its Manhattan Beach loan production office
are located, under leases expiring in two to three years each. The Banks
total occupancy expense for 2001, excluding furniture and equipment expense,
approximated $682,000. Management believes that the Banks present facilities
are adequate for its present purposes.




ITEM 3. LEGAL PROCEEDINGS

On October 25, 1999, a jury rendered a verdict against the Bank in the amount
of approximately $3.5 million arising from a lawsuit by a borrower who also
leased to the Bank a branch office. The Bank foreclosed on the real property
securing its loan to the borrower. The borrower claimed that the foreclosure
was wrongful. On February 25, 2000, the trial judge found that the jury
verdict was excessive and ordered a new trial on damages if the borrower did
not agree to a reduction to $860,000. During 1999, the Bank accrued a loss of
$860,000 in recognition of the amount of liability determined by the court
which is included in litigation expense. During 2000, the lawsuit was settled.

The Company is involved in various other litigation. In the opinion of
Management and the Companys legal council, the disposition of all such other
litigation pending will not have a material effect on the Companys financial
statements.




ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None



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PART II




ITEM 5.MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Trading in the Companys common stock has been relatively active. The common
stock is listed on the NASDAQ small cap market under the ticker symbol VNBC.
The following table summarizes the high and low prices at which the shares of
the common stock of the Company have traded during the periods indicated, based
upon trades of which management of the Company has knowledge. Quoted prices
reflect inter-dealer prices, without retail mark-up, or commission and may not
necessarily represent actual transactions.

|     |                |  |                 |      |     |  |   |      | 
|---- | -------------- |  | --------------- | ---- | --- |  | - | ---- | 
|     |                |  | Sales Prices of
|     |                |  | Common Stock1  
|     |                |  |                
|     |                |  | High            |      | Low
|     |                |  |                 |      |    
|2000 |                |  |                 |      |     |  |   |     
|     | First Quarter  |  | $               | 6.25 |     |  | $ | 4.00 | 
|     | Second Quarter |  |                 | 6.00 |     |  |   | 3.50 | 
|     | Third Quarter  |  |                 | 4.50 |     |  |   | 2.75 | 
|     | Fourth Quarter |  |                 | 4.25 |     |  |   | 2.38 | 
|2001 |                |  |                 |      |     |  |   |     
|     | First Quarter  |  | $               | 4.50 |     |  | $ | 3.00 | 
|     | Second Quarter |  |                 | 5.25 |     |  |   | 3.81 | 
|     | Third Quarter  |  |                 | 6.00 |     |  |   | 4.75 | 
|     | Fourth Quarter |  |                 | 7.00 |     |  |   | 5.64 | 



---

|1 |  | There were no cash dividends paid during 2000 or 2001
|- |  | -----------------------------------------------------

The Company has approximately 552 shareholders that own approximately 1,905,792
shares of common stock as of March 25, 2002.



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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below for the fiscal years ended December
31, 2001, 2000, and 1999 are derived from the audited consolidated and Bank
financial statements of the Company examined by Vavrinek, Trine, Day & Co.,
LLP, Certified Public Accountants, included elsewhere in this Report and should
be read in conjunction with those consolidated financial statements. The
selected financial data for the fiscal years ended December 31, 1998 and 1997,
are derived from audited financial statements examined by Vavrinek, Trine, Day
& Co., LLP which are not included in this Report.

|                                             |         |                        |        |                         |         |      |        |           |        |      |        |           |         |   |        |           |         |   |        |           |         | 
|-------------------------------------------- | ------- | ---------------------- | ------ | ----------------------- | ------- | ---- | ------ | --------- | ------ | ---- | ------ | --------- | ------- | - | ------ | --------- | ------- | - | ------ | --------- | ------- | 
|                                             |         |                        |        | Year Ended December 31,
|                                             |         |                        |        |                        
|(Dollars in Thousands)                       |         | 2001                   |        | 2000                    |         | 1999 |        | 1998      |        | 1997
|                                             |         |                        |        |                         |         |      |        |           |        |     
|Interest Income                              |         | $                      | 11,602 |                         |         | $    | 8,965  |           |        | $    | 8,995  |           |         | $ | 9,178  |           |         | $ | 9,213  |          
|Interest Expense                             |         |                        | 3,586  |                         |         |      | 2,049  |           |        |      | 2,204  |           |         |   | 2,552  |           |         |   | 2,943  |          
|Net Interest Income                          |         |                        | 8,016  |                         |         |      | 6,917  |           |        |      | 6,790  |           |         |   | 6,626  |           |         |   | 6,271  |          
|(Provision)/Credit for Loan and Lease Losses |         |                        | (773   | )                       |         |      | (256   | )         |        |      | (166   | )         |         |   | (143   | )         |         |   | (144   | )        
|Other Income                                 |         |                        | 2,191  |                         |         |      | 1,582  |           |        |      | 1,903  |           |         |   | 1,916  |           |         |   | 1,742  |          
|Other Expenses                               |         |                        | 8,295  |                         |         |      | (7,174 | )         |        |      | (8,564 | )         |         |   | (7,649 | )         |         |   | (7,331 | )        
|                                             |         |                        |        |                         |         |      |        |           |        |      |        |           |         |   |        |           |         |   |        |          
|Income/(Loss) Before Taxes                   |         |                        | 1,139  |                         |         |      | 1,069  |           |        |      | (36    | )         |         |   | 750    |           |         |   | 538    |          
|Income Taxes                                 |         |                        | (17    | )                       |         |      | 449    |           |        |      | (12    | )         |         |   | 307    |           |         |   | 134    |          
|                                             |         |                        |        |                         |         |      |        |           |        |      |        |           |         |   |        |           |         |   |        |          
|Net Income/(Loss)                            |         | $                      | 1,156  |                         |         | $    | 620    |           |        | $    | (25    | )         |         | $ | 443    |           |         | $ | 404    |          
|                                             |         |                        |        |                         |         |      |        |           |        |      |        |           |         |   |        |           |         |   |        |          
|Earnings/(Loss) Per Share of Common Stock1   |         |                        |        |                         |         |      |        |           |        |      |        |           |         |   |        |           |         |   |        |          
|                                             | Basic   |                        | $      | 0.62                    |         |      | $      | 0.33      |        |      | $      | (0.01     | )       |   | $      | 0.24      |         |   | $      | 0.22      |        
|                                             | Diluted |                        | $      | 0.54                    |         |      | $      | 0.33      |        |      | $      | (0.01     | )       |   | $      | 0.22      |         |   | $      | 0.21      |        
|Weighted Average Number of Shares1           |         |                        |        |                         |         |      |        |           |        |      |        |           |         |   |        |           |         |   |        |          
|                                             | Basic   |                        |        | 1,868,257               |         |      |        | 1,864,170 |        |      |        | 1,862,776 |         |   |        | 1,862,776 |         |   |        | 1,862,776 |        
|                                             | Diluted |                        |        | 2,421,167               |         |      |        | 1,865,434 |        |      |        | 1,988,616 |         |   |        | 1,994,255 |         |   |        | 1,882,986 |        
|Stock Splits                                 |         |                        |        |                         |         |      |        |           |        |      |        |           |         |   |        |           |         |   |        |          
|Balance Sheet Data                           |         |                        |        |                         |         |      |        |           |        |      |        |           |         |   |        |           |         |   |        |          
|                                             |         | Assets                 |        | $                       | 191,286 |      |        | $         | 110,75 |      |        | $         | 116,228 |   |        | $         | 115,863 |   |        | $         | 111,511 | 
|                                             |         |                        |        |                         |         |      |        |           |        |      |        |           |         |   |        |           |         |   |        |          
|                                             |         | Deposits               |        | $                       | 159,381 |      |        | $         | 99,583 |      |        | $         | 104,523 |   |        | $         | 105,315 |   |        | $         | 101,741 | 
|                                             |         |                        |        |                         |         |      |        |           |        |      |        |           |         |   |        |           |         |   |        |          
|                                             |         | Loans and Leases/(Net) |        | $                       | 136,128 |      |        | $         | 78,740 |      |        | $         | 84,953  |   |        | $         | 87,247  |   |        | $         | 88,420  | 
|                                             |         |                        |        |                         |         |      |        |           |        |      |        |           |         |   |        |           |         |   |        |          
|                                             |         | Stockholders Equity   |        | $                       | 10,455  |      |        | $         | 9,295  |      |        | $         | 8,630   |   |        | $         | 8,728   |   |        | $         | 8,267   | 
|                                             |         |                        |        |                         |         |      |        |           |        |      |        |           |         |   |        |           |         |   |        |          

Note #1. Earnings Per Share

Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.



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##### Table of Contents






ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

Vineyard National Bancorp (the Company) is a one-bank holding company.
Its principal asset is the common stock of, and its principal operations are
those conducted by, Vineyard Bank, a state banking association (the Bank).
The Bank is a community bank located in the Inland Empire region of Southern
California. The Bank focuses on the needs of commercial businesses with annual
sales of less than $10 million, retail community businesses, single family
residence developers/builders, individuals and local public and private
organizations. The Bank operates six full-service branches located in Rancho
Cucamonga, Chino, Diamond Bar, La Verne, Crestline and Blue Jay, in addition to
a loan production office in Manhattan Beach. Shares of the Companys common
stock are traded on the NASDAQ SC under the ticker symbol VNBC.

Managements discussion and analysis of financial condition and results of
operations is intended to provide a better understanding of the significant
changes in trends relating to the Companys financial condition, results of
operations, liquidity and interest rate sensitivity. The following discussion
and analysis should be read in conjunction with the Consolidated Financial
Statements of the Company.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principals generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the report amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates including
those related to allowance for loan losses and the value of carried securities.
We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions of
condition.

Results of Operations

Net income for the period ending December 31, 2001, was $1,156,000, or
$0.54 per diluted share, compared with income of $620,000 or $0.33 per diluted
share for the same period in 2000. Basic earnings per share were $0.62 for
2001 compared to $.33 in 2000.

The Companys net interest income before its provision for credit losses,
increased by $1 million or 14% in 2001 as compared with the same period in
2000. Non-interest increased by $600,000 or 38% as compared to the same period
in 2000. Total net revenues (net interest income and non-interest income) for
the period ending December 31, 2001 increased by $1.7 million or 20% as
compared to the same period in 2000.

Total assets have increased $80.6 million or 73% to $191.3 million at
December 31, 2001 over year-end 2000 results. The Company continued to have
significant growth in the loan portfolio during 2001, bringing gross loans
outstanding to $136.1 million at December 31, 2001 an increase $57.4 million of
73% over year-end 2000s level of $78.7 million. The catalyst for the
Companys growth continues to be its efforts to attract stable, core deposits
from within the Banks community markets. Total deposits increased to $159.4
million at December 31, 2001, an increase of $59.8 million or 60% over year-end
2000.

During the year 2001, the national prime rate decreased by 475 basis
points, or 50% from its level at year end 2000. Despite this compression on
market rates, the lagging factor of repricing the Banks time deposits, and the
absolute growth in deposits, the Companys net interest margin decreased a
modest 0.9% during the year. The net interest margin at December 31, 2001 was
6.2% as compared with the year-end level of 7.1%

Total non-interest expenses for 2001 increased by $1.1 or 16% over the
same period in 2000. The Company has engaged business development personnel
and a cadre of seasoned managers to support the growth. This has, in turn,
increased the costs associated with salaries and benefits for the year 2001 by
$1 million or 30% as compared with the same period in 2000. The Companys
efficiency ratio, which is a measure of non-interest expense divided by net
interest income plus non-interest income, was 78% for the year 2001 as compared
to 89% for 2000.



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##### Table of Contents



The quality of the Companys loan portfolio continued to improve and
perform well as compared to peer group standards, sustaining only $107,000 in
net charge offs or 0.11% of total average loans. The Companys continued
growth of its loan portfolio necessitated an increase to the allowance for loan
losses in the amount of $773,000 for the year 2001, compared to $256,000 for
the year 2000. The increase in the allowance to 1.05% of gross loans
outstanding at December 31, 2001 compares to similar levels recorded at
December 31, 2000. At December 31, 2001, the Company reported no
non-performing loans or other real estate owned through foreclosure, with a
nominal amount of net charge-offs for the year principally associated with
consumer credit.

During 2001, the Company benefited from the release of a valuation reserve
associated with a deferred income tax asset which effectively eliminated the
income tax liability for the year. (Please see Note #13 of the Notes to
Consolidated Financial Statements).

In December 2001, the Company formed a Statutory Trust which issued and
sold $12 million in Trust Preferred Securities. The proceeds from the sale of
these securities allowed the Company to downstream $8 million to the Bank as
additional capital. At year end 2001, the Banks equity was $21.7 million and
the Companys equity was $10.4 million. As a result, the Bank is well beyond
the required capital levels to be considered well capitalized. Pursuant to
regulatory guidelines, a bank must have total risk-based capital of 8% or
greater and a leverage ratio of 4% or greater. At year end 2001, the Banks
total risk-based capital and leverage ratios were 16.10% and 12.53%
respectively.

Net Interest Income

The Companys earnings are derived predominately from net interest income,
which is the difference between the interest earned on loans and securities and
the interest paid on deposits and borrowings. The net interest margin is the
net interest income divided by the average interest earning assets. Net
interest income and net interest margin are affected by several factors
including (1) the level of, and the relationship between, the dollar amount of
interest earning assets and interest bearing liabilities, (2) the relationship
between repricing or maturity of the Companys variable rate and fixed rate
loans and securities, and its deposits and borrowings, and (3) the magnitude of
the Companys non-interest earning assets, including non-accrual loans and
other real estate loans (OREO)

Total interest income in 2001 was $11.6 million compared to $9.0 million
in 2000. Total interest expense in 2001 was $3.6 million compared to $2.0
million in 2000. Net interest income in 2001 was $8.0 million compared to $7.0
million in 2000. A portion of the difference in interest income and interest
expense was due to increases(decreases) in balances, while the remaining
portion was due to a change in interest rates.

Variances in interest income were due $2.3 million to increases in volumes
(balances), while $0.3 million was due to changes in rates. Weighted average
yield on interest earning assets was 8.9% in 2001 versus 9.2% in 2000.
Variances in interest expense were due $1.1 million to increases in volumes
(balances), while $0.1 was due to changes in rates. Weighted average rate on
interest bearing liabilities was 3.8% in 2001 versus 3.2% in 2000. In the year
2001, approximately 0.6% of the interest expense variance is actually related
to newly issued debentures and trust securities. Without that new debt
expense, the average rate would have been nearly identical. The net interest
margin for 2001 was 6.2% versus 7.1% for 2000.

The Company manages funding sources with funding uses matching rate
sensitive products for better interest rate risk management.

The deposit portfolio is well blended with 32% non-interest bearing, 32%
savings deposits which have traditionally not been vulnerable to rate
sensitivity, and 36% in time. Final terms of three years or less are
encouraged on all time deposits and as of December 31, 2001, only 3% of time
deposits were maturing in more than one year. This will continue to allow the
Company to reprice the higher rate time deposits into lower market rates,
thereby improving the net interest margin even more.

Non interest income totaled $2.2 million in 2001 compared to $1.6 million
in 2000, comprised primarily of service charges on deposit accounts. Non
interest expense totaled $8.3 million in 2001 compared to $7.2 million in 2000,
comprised primarily, and representing the full variance, of salaries and
benefits. The Companys growth and business plan required the infusion of new
and additional staffing to achieve the goals.

During the year 20001, the Federal Reserve Board initiated a series of
market rate decreases aimed at stimulating the general economy. In total,
market rates have been decreased by 475 basis points during this period, which
has caused compression on the Companys net interest margin due to the
immediate repricing of adjustable rate assets and the lag in liability
repricing principally associated with time certificates of deposit.



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Though the Company is asset-sensitive, its loan portfolio experienced a
shift in composition and complexity during the annual period, which helped it
weather the effects of the market rate decreases with only a modest net
interest margin compression during this period of time. A substantial portion
of the Companys immediately repricable loan portfolio have reached their floor
rates during the year. These loans did not continue to adjust downward as the
Federal Reserve Board lowered rates. The effect of this also contributed to
the minimal compression experienced. Loan fee income, which is included in
interest income, also stabilized interest income during a period of declining
interest rates. Loan fee income represented $1.6 million of the $10 million in
loan income, or 16% of total loan related income. Construction loans, real
estate loans held for sale and commercial real estate loans, generate the bulk
of all loan fee income. The Company continues its loan emphasis in commercial
and industrial lines of credit and term loans, while expanding single family
residential construction throughout the coastal communities of Los Angeles and
Orange County, as well as commercial real estate mortgage products.

The Companys net interest margin decreased from 7.1% at year end 2000 to 6.2%
at December 31, 2001, which includes the effect of the newly issued Debentures.

The following table presents the distribution of the Companys average assets,
liabilities, and stockholders equity in combination with the total dollar
amounts of interest income from average interest earning assets and the
resultant yields without giving effect for any tax exemption, and the dollar
amounts of interest expense and average interest bearing liabilities, expressed
both in dollars and rates. Loans include non-accrual loans where non-accrual
interest is excluded.

|                                             |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |     |  
|-------------------------------------------- | ----------------------------------------------------------- | ------- | ------- | -------- | ---- | ----- | ------ | ------- | ------- | -------- | ------- | ----- | - | - | ------- | ------- | ------- | - | ----- | ----- |  |  | --- | --- | -
|                                             |                                                             |         | 2001    |          | 2000
|                                             |                                                             |         |         |          |     
|                                             |                                                             |         | Average |          |      |       |        |         | Average |          | Average |       |   |   |         |         | Average
|(Dollars in Thousands)                       |                                                             | Balance |         | Interest |      | Yield |        | Balance |         | Interest |         | Yield
|                                             |                                                             |         |         |          |      |       |        |         |         |          |         |      
|Assets                                       |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |    
|                                             | Loans                                                       |         | $       | 98,872   |      |       | $      | 10,069  |         |          |         | 10.2  | % |   | $       | 82,436  |         |   | $     | 8,082 |  |  |     | 9.8 | %
|                                             | Investment securities3                                      |         |         | 17,146   |      |       |        | 925     |         |          |         | 5.4   | % |   |         | 8,650   |         |   |       | 495   |  |  |     | 5.7 | %
|                                             | Federal funds sold                                          |         |         | 13,790   |      |       |        | 592     |         |          |         | 4.3   | % |   |         | 5,709   |         |   |       | 365   |  |  |     | 6.4 | %
|                                             | Interest-earning deposits with
other financial institutions |         |         | 99       |      |       |        | 6       |         |          |         | 5.9   | % |   |         | 209     |         |   |       | 14    |  |  |     | 6.7 | %
|                                             | FRB & Other Stock                                           |         |         | 193      |      |       |        | 10      |         |          |         | 5.2   | % |   |         | 182     |         |   |       | 9     |  |  |     | 4.9 | %
|                                             |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |    
|Total Interest-earning Assets                |                                                             |         | 130,100 |          |      |       | 11,602 |         |         |          | 8.9     | %     |   |   | 97,186  |         |         |   | 8,965 |       |  |  | 9.2 | %  
|                                             |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |    
|Other Assets                                 |                                                             |         | 16,819  |          |      |       |        |         |         |          |         |       |   |   | 16,714  |         |         |   |       |       |  |  |     |    
|Less: Allowance for Loan Losses              |                                                             |         | (999    | )        |      |       |        |         |         |          |         |       |   |   | (735    | )       |         |   |       |       |  |  |     |    
|                                             |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |    
|Total Average Assets                         |                                                             | $       | 145,920 |          |      |       |        |         |         |          |         |       |   | $ | 113,165 |         |         |   |       |       |  |  |     |    
|                                             |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |    
|Liabilities and Shareholders Equity         |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |    
|                                             | Savings deposits                                            |         |         | 41,504   |      |       |        | 733     |         |          |         | 1.8   | % |   |         | 37,046  |         |   |       | 622   |  |  |     | 1.7 | %
|                                             | Time deposits                                               |         |         | 48,229   |      |       |        | 2,554   |         |          |         | 5.3   | % |   |         | 27,719  |         |   |       | 1,426 |  |  |     | 5.1 | %
|                                             | Debentures & Trust Securities                               |         |         | 2,614    |      |       |        | 294     |         |          |         | 11.2  | % |   |         |         |         |   |       |       |  |  |     |     |  
|                                             | Short Term Borrowings                                       |         |         | 228      |      |       |        | 5       |         |          |         | 2.2   | % |   |         | 18      |         |   |       | 1     |  |  |     | 0.0 | %
|                                             |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |    
|Total Interest-bearing Liabilities           |                                                             |         | 92,575  |          |      |       | 3,586  |         |         |          | 3.9     | %     |   |   | 64,783  |         |         |   | 2,049 |       |  |  | 3.2 | %  
|                                             |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |    
|                                             | Demand deposits                                             |         |         | 41,020   |      |       |        |         |         |          |         |       |   |   |         | 37,097  |         |   |       |       |  |  |     |     |  
|                                             | Other liabilities                                           |         |         | 2,419    |      |       |        |         |         |          |         |       |   |   |         | 2,372   |         |   |       |       |  |  |     |     |  
|Shareholders equity                         |                                                             |         | 9,906   |          |      |       |        |         |         |          |         |       |   |   | 8,913   |         |         |   |       |       |  |  |     |    
|                                             |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |    
|Total Average Liabilities                    |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |    
|                                             | Total Liabilities
& Shareholders Equity                    |         | $       | 145,920  |      |       |        |         |         |          |         |       |   |   | $       | 113,165 |         |   |       |       |  |  |     |     |  
|                                             |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |    
|Net Interest Spread1                         |                                                             |         |         |          |      |       |        |         |         |          | 5.0     | %     |   |   |         |         |         |   |       |       |  |  | 6.1 | %  
|                                             |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |    
|Net Interest Income and
Net Interest Margin2 |                                                             |         |         |          |      | $     | 8,016  |         |         |          | 6.2     | %     |   |   |         |         |         | $ | 6,916 |       |  |  | 7.1 | %  
|                                             |                                                             |         |         |          |      |       |        |         |         |          |         |       |   |   |         |         |         |   |       |       |  |  |     |    



32



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|                                             |                                                             |                                                    |        |          |         |       |       |       |       |         |     |     |     |  
|-------------------------------------------- | ----------------------------------------------------------- | -------------------------------------------------- | ------ | -------- | ------- | ----- | ----- | ----- | ----- | ------- | --- | --- | --- | -
|                                             |                                                             |                                                    |        | 1999    
|                                             |                                                             |                                                    |        |         
|                                             |                                                             |                                                    |        | Average  |         |       |       |       |       | Average
|(Dollars in Thousands)                       |                                                             | Balance                                            |        | Interest |         | Yield
|                                             |                                                             |                                                    |        |          |         |      
|Assets                                       |                                                             |                                                    |        |          |         |       |       |       |       |         |     |    
|                                             | Loans                                                       |                                                    | $      | 84,781   |         |       | $     | 8,137 |       |         |     | 9.6 | %  
|                                             | Investment securities3                                      |                                                    |        | 9,177    |         |       |       | 503   |       |         |     | 5.5 | %  
|                                             | Federal funds sold                                          |                                                    |        | 6,278    |         |       |       | 301   |       |         |     | 4.8 | %  
|                                             | Interest-earning deposits with
other financial institutions |                                                    |        | 865      |         |       |       | 45    |       |         |     | 5.2 | %  
|                                             | FRB & Other Stock                                           |                                                    |        | 177      |         |       |       | 9     |       |         |     | 5.1 | %  
|                                             |                                                             |                                                    |        |          |         |       |       |       |       |         |     |    
|                                             |                                                             | Total
Interest-earning
Assets                      |        |          | 101,278 |       |       |       | 8,995 |         |     |     | 8.9 | %
|                                             |                                                             |                                                    |        |          |         |       |       |       |       |         |     |    
|Other Assets                                 |                                                             |                                                    | 16,888 |          |         |       |       |       |       |         |     |    
|                                             |                                                             | Less: Allowance for
Loan Losses                    |        |          | (676    | )     |       |       |       |         |     |     |     |  
|                                             |                                                             |                                                    |        |          |         |       |       |       |       |         |     |    
|                                             |                                                             | Total Average Assets                               |        | $        | 117,490 |       |       |       |       |         |     |     |     |  
|                                             |                                                             |                                                    |        |          |         |       |       |       |       |         |     |    
|Liabilities and Shareholders Equity         |                                                             |                                                    |        |          |         |       |       |       |       |         |     |    
|                                             | Savings deposits                                            |                                                    |        | 39,173   |         |       |       | 661   |       |         |     | 1.7 | %  
|                                             | Time deposits                                               |                                                    |        | 33,279   |         |       |       | 1,543 |       |         |     | 4.6 | %  
|                                             | Other                                                       |                                                    |        | 0        |         |       |       | 0     |       |         |     | 0.0 | %  
|                                             |                                                             |                                                    |        |          |         |       |       |       |       |         |     |    
|                                             |                                                             | Total
Interest-bearing
Liabilities                 |        |          | 72,452  |       |       |       | 2,204 |         |     |     | 3.0 | %
|                                             |                                                             |                                                    |        |          |         |       |       |       |       |         |     |    
|                                             | Demand deposits                                             |                                                    |        | 34,134   |         |       |       |       |       |         |     |     |    
|                                             | Other liabilities                                           |                                                    |        | 1,909    |         |       |       |       |       |         |     |     |    
|Shareholders equity                         |                                                             |                                                    | 8,995  |          |         |       |       |       |       |         |     |    
|                                             |                                                             |                                                    |        |          |         |       |       |       |       |         |     |    
|                                             |                                                             | Total Average
Liabilities
and Shareholders
Equity |        | $        | 117,490 |       |       |       |       |         |     |     |     |  
|                                             |                                                             |                                                    |        |          |         |       |       |       |       |         |     |    
|Net Interest Spread1                         |                                                             |                                                    |        |          |         |       |       |       |       |         | 5.8 | %  
|                                             |                                                             |                                                    |        |          |         |       |       |       |       |         |     |    
|Net Interest Income and Net Interest
Margin2 |                                                             |                                                    |        |          |         | $     | 6,791 |       |       |         | 6.7 | %  
|                                             |                                                             |                                                    |        |          |         |       |       |       |       |         |     |    



---

|1 |  | Net interest spread represents the average yield earned on interest
earning assets less the average rate paid on interest bearing liabilities
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
| 
| 
| 
| 
|2 |  | Net interest margin is computed by dividing net interest income by total
average earning assets.                                             
| 
| 
| 
| 
|3 |  | The yield for securities that are classified as available-for-sale is
based on historical amortized cost balances.                           



33



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##### Table of Contents



The following table sets forth changes in interest income and interest expense
for each major category of interest earning asset and interest bearing
liability, and the amount of change attributable to volume and rate changes for
the year indicated. The changes due to volume and rate have been allocated in
proportion to the relationship between their absolute dollar amounts.

|                                        |                               |                                            |       |           |     |           |     |        |     |      |       |       |       |  |      |      |    |  |     |     |    |  |      |      |     | 
|--------------------------------------- | ----------------------------- | ------------------------------------------ | ----- | --------- | --- | --------- | --- | ------ | --- | ---- | ----- | ----- | ----- |  | ---- | ---- | -- |  | --- | --- | -- |  | ---- | ---- | --- | 
|                                        |                               |                                            |       | 2001-2000 |     | 2000-1999
|                                        |                               |                                            |       |           |     |          
|(Dollars in Thousands)                  |                               | Volume                                     |       | Rate      |     | Total     |     | Volume |     | Rate |       | Total
|                                        |                               |                                            |       |           |     |           |     |        |     |      |       |      
|Increase/(Decrease) In
Interest Income  |                               |                                            |       |           |     |           |     |        |     |      |       |       |       |  |      |      |    |  |     |     |    |  |      |     
|                                        | Loans1                        |                                            | $     | 1,647     |     |           | $   | 339    |     |      | $     | 1,986 |       |  | $    | (248 | )  |  | $   | 193 |    |  | $    | (55  | )  
|                                        | Investment securities         |                                            |       | 454       |     |           |     | (24    | )   |      |       | 430   |       |  |      | (30  | )  |  |     | 22  |    |  |      | (8   | )  
|                                        | Deposits                      |                                            |       | (6        | )   |           |     | (2     | )   |      |       | (8    | )     |  |      | (44  | )  |  |     | 13  |    |  |      | (31  | )  
|                                        | FRB & Other Stock             |                                            |       | 1         |     |           |     | 1      |     |      |       | 2     |       |  |      |      |    |  |     | 0   |    |  |      | 0    |    
|                                        | Federal funds sold            |                                            |       | 222       |     |           |     | 5      |     |      |       | 227   |       |  |      | (24  | )  |  |     | 88  |    |  |      | 64   |    
|                                        |                               |                                            |       |           |     |           |     |        |     |      |       |       |       |  |      |      |    |  |     |     |    |  |      |     
|                                        |                               |                                            | 2,318 |           |     |           | 319 |        |     |      | 2,637 |       |       |  | (346 | )    |    |  | 316 |     |    |  | (30  | )   
|                                        |                               |                                            |       |           |     |           |     |        |     |      |       |       |       |  |      |      |    |  |     |     |    |  |      |     
|Increase/(Decrease) In
Interest Expense |                               |                                            |       |           |     |           |     |        |     |      |       |       |       |  |      |      |    |  |     |     |    |  |      |     
|                                        | Savings deposits              |                                            |       | 70        |     |           |     | 41     |     |      |       | 111   |       |  |      | (35  | )  |  |     | (4  | )  |  |      | (39  | )  
|                                        | Time deposits                 |                                            |       | 1,072     |     |           |     | 56     |     |      |       | 1,128 |       |  |      | (340 | )  |  |     | 223 |    |  |      | (117 | )  
|                                        | Short-term borrowings         |                                            |       | 7         |     |           |     | (3     | )   |      |       | 4     |       |  |      | 1    |    |  |     |    |    |  |      |     |    
|                                        | Debentures & Trust Securities |                                            |       | 294       |     |           |     | 0      |     |      |       | 294   |       |  |      |     |    |  |     |    |    |  |      |     |    
|                                        |                               |                                            |       |           |     |           |     |        |     |      |       |       |       |  |      |      |    |  |     |     |    |  |      |     
|                                        |                               |                                            | 1,443 |           |     |           | 94  |        |     |      | 1,537 |       |       |  | (374 | )    |    |  | 219 |     |    |  | (155 | )   
|                                        |                               |                                            |       |           |     |           |     |        |     |      |       |       |       |  |      |      |    |  |     |     |    |  |      |     
|                                        |                               | Increase/(Decrease)
in Net Interest Income |       | $         | 875 |           |     | $      | 225 |      |       | $     | 1,100 |  |      | $    | 28 |  |     | $   | 97 |  |      | $    | 125 | 
|                                        |                               |                                            |       |           |     |           |     |        |     |      |       |       |       |  |      |      |    |  |     |     |    |  |      |     



---

|1 |  | Does not include interest income which would have been earned on
non-accrual loans. The amount that would have been collected on these
loans, had they remained current in accordance with their terms was $9,000
in the year 2000 and nothing in 2001 as there were no loans on
non-accrual.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Provision for Loan and Lease Losses

During the twelve month period ending December 31, 2001, a provision of
$773,000 was made as compared to $256,000 for the same period in 2000. Net loan
charge-offs were approximately $107,000 as compared to $236,000
for the same period in 2000.

The Companys allowance for possible loan losses increased to $1,450,000 or
1.05% of gross loans outstanding, compared with $784,000, or 0.99% at December
31, 2000. Additions to the reserve are effected through the provision for loan
losses, which is an operating expense of the Company.

Although the Company maintains an allowance for possible loan losses at a level
it considers to be adequate to provide for losses, based on presently known
conditions, there can be no assurance that such losses will not exceed the
estimated amounts, thereby adversely affecting future results of operations.
The calculation for the adequacy of the allowance for possible loan losses, and
therefore the requisite amount of the provision for possible loan losses, is
based on several factors, including underlying loan collateral, delinquency
trends, borrowers cash flow and historic loan loss experience. All of these
factors can change without notice based on market and economic conditions and
other factors.



34



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##### Table of Contents



Non-Interest Income

The Companys non-interest income increased by $0.6 million for the period
ending December 31, 2001, as compared to 2000. This increase was primarily due
to fees associated with mortgage loans originated for sale, and other income
associated with Visa check card fees and services charge.

The Companys efforts to increase its core deposit base during 2001 produced a
net increase of $4 million or 11% in demand deposit accounts over the year-end
2000 balances. These types of depository accounts generally are associated
with service charges, or in the situation with larger commercial relationships,
are placed on account analysis.

Other income consists of service charges and fees on deposit accounts, fee
income from various services offered, sales commissions, safe deposit rental,
fee income on loans held for sale, gain or loss on the sale of securities, and
sundry other income.

Non-Interest Expenses

The Companys non-interest expenses increased by $1.1 million or 16% to $8.3
million from $7.2 for the same period in 2000. Non-interest expenses, consist
primarily of (i) salaries and other employee expenses, (ii) occupancy expenses,
(iii) furniture and equipment expenses, and (iv) marketing, office supplies,
postage and telephone, insurance, data processing, professional fees and other
non-interest expense.

Beginning with the appointment of the Companys current Chief Executive Officer
in the fourth quarter of 2000, Management has implemented several structural
changes within the operations of the Company in order to support its strategic
plan initiatives. In each of the following areas, a seasoned and experienced
individual has been recruited during the past twelve months, from other local
financial institutions to head their respective area: credit administration,
loan operations and construction support, SFR construction business
development, marketing, information technology, community banking and human
resources. Additional personnel have been placed in business development
capacities for commercial and community banking. With the addition of these
individuals and the entire cadre of existing personnel, the Company has been
able to produce significant growth in deposits and loans in 2001, while
providing for the infrastructure to support longer-term growth. These changes
have increased the Companys expenses associated with salaries and other
benefits by $1 million or 30% as compared to the same period in 2000.

Expenses related to furniture and fixtures increased $59,000 or 10% as compared
to the same period in 2000. These expenses are primarily attributable to the
purchase and maintenance of bank automobiles utilized for a new personalized
courier service, which was previously outsourced. Therefore, a similar
decrease in other expenses was realized.

Other expenses increased $58,000 or 2% for 2001 as compared to the same period
in 2000. The Company has mitigated these increased costs by redeploying
resources previously spent in legal, professional and other costs into the
areas outlined above, as well as additional expenditures in marketing, product
development and advertising.



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##### Table of Contents



Income Tax

A valuation allowance against the deferred tax asset in the amount of
$475,000 was established in 1994 as a result of significant losses in 1994,
which approximated $1.5 million, this valuation allowance was attributable to
likely non-realization of timing differences, associated with the net operating
loss generated for income tax purposes.

The valuation allowance in the amount of $475,000 was established by
Company management and maintained intact for the years 1994 through 2000. The
Companys operations during this period were unstable and inconsistent, which
led to increased criticism by the Banks primary regulatory agency, the Office
of the Comptroller of the Currency (the OCC). Managements efforts to
implement a business plan that would increase its operating results were also
ineffective during this same time period. From year end 1996 through year end
2000, the Banks loan portfolio decreased approximately 20%, with a
corresponding decrease in the deposit base by approximately 7%.

Current management developed a three-year strategic plan that was designed
to aggressively grow the Bank through internal growth focused on commercial and
community-based lending, single-family construction lending, commercial real
estate and core deposit growth from the surrounding branching centers. The
plan required increased capital to sustain the anticipated growth in earning
assets, and significant investments in people and infrastructure to deliver
upon this plan. The implementation of the plan began in earnest in early 2001,
with the focus on core deposit growth and increased capital. The roll-out of
the lending activities began in the early second quarter of 2001. The
implementation of the strategic plan, in its first full year, produced the
Companys first significant increases in operations in almost a decade.

The release of the $475,000 in the income tax valuation allowance was
accomplished within the first and second quarters of 2001. After reviewing the
operating results of the first quarter, and the initial though modest increases
in earning assets and growth, management recorded a partial release of the
allowance in the approximate amount of 25% of the $475,000, or an amount that
equaled the Companys tax liability for the same period. After reviewing the
performance of the Company within the second quarter, and the significant
increases in the loan and deposit portfolios, management of the Company
determined that it was now appropriate to fully release the remaining valuation
allowance as it had become more likely than not that the Companys
performance could be sustained to the level that full recognition would be
warranted.

FINANCIAL CONDITION

Assets

Total consolidated assets increased $80,533,000 or 73% to $191,286,000 as
of December 31, 2001 from $110,753,000 as of December 31, 2000.

Investment Securities

The Companys investment portfolio consists primarily of U.S. Agencies and
Mortgage Backed Securities. As of December 31, 2001, the Company categorized
its investment securities as available-for-sale (which requires continual mark
to market adjustments to the Companys capital account, but no impact on the
income statement). The Company holds no securities that should be classified
as trading securities and has determined that since its securities may be sold
prior to maturity because of interest rate changes, to meet liquidity needs, or
to better match the repricing characteristics of funding sources, its entire
portfolio should be classified as available-for-sale. No securities are
classified as held-to-maturity.

In accordance with SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, which addresses the accounting for investments in
equity securities that have readily determinable fair values and for
investments in all debt securities, securities are classified in three
categories and accounted for as follows: debt and equity securities that the
Company has the positive intent and ability to hold to maturity are classified
as held-to-maturity and securities are measured at amortized cost; debt and
equity securities bought and held principally for the purpose of selling in the
near term are classified as trading securities and are measured at fair value,
with unrealized gains and losses included in earnings; debt and equity
securities not classified as either held-to-maturity or trading securities are
deemed as available-for-sale and are measured at fair value, with unrealized
gains and losses, reported as a separate component of stockholders equity.

As of December 31, 2001, the investment securities consisted of $8.5
million in U.S. Agencies and $22 million in Mortgage Backed Securities (MBS)
compared to $5.5 million in U.S. Agencies at December 31, 2000. The securities
are classified as available-for-sale and are carried at fair value.



36



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Sources of Funds

Deposits of Vineyard Bank

Deposits represent the Banks primary source of funds. As of December 31,
2001, the Bank had approximately 6071 demand deposit accounts representing
aggregate deposits of approximately $49.4 million with an average account
balance of $8,137, approximately 2718 accounts representing approximately $40
million in NOW, super NOW and money market checking accounts with an
average account balance of $14,716, approximately 3885 accounts representing
approximately $11.2 million in savings deposits with an average account balance
of $2,883 and approximately 1869 accounts representing approximately $62.2
million in time deposits (TCDs) with an average account balance of $33,280.
Of the total deposits at December 31, 2001, $27.1 million were in the form of
TCDs in denominations greater than $100,000 and $1.6 million were municipal
and other governmental deposits.

The Bank is not dependent on a single customer or a few customers for its
deposits. Most of the Banks deposits are obtained from individuals and
small-to-moderate size businesses. This results in relatively small average
deposit balances, but makes the Bank less subject to the adverse effects
resulting from the loss of a substantial depositor. At December 31, 2001, no
individual, corporate or public depositor accounted for more than approximately
1.5% of the Banks total deposits, and the five largest deposit accounts
collectively represented 5% of total deposits.

Liquidity

The Company relies on asset-liability management to assure adequate
liquidity and maintain an appropriate balance between interest sensitive
earning assets and interest-bearing liabilities. Liquidity management and
interest sensitivity management are key factors in asset-liability management.
Liquidity management involves the ability to meet the cash flow requirements of
customers. Typical demands on liquidity are deposit run-off from demand
deposits and savings accounts, maturing time deposits, which are not renewed,
and anticipated funding under credit commitments to customers. Interest rate
sensitivity management seeks to avoid fluctuating interest margins to enhance
consistent growth of net interest income through periods of changing interest
rates.

The Banks Asset-Liability Management Committee (ALCO) manages the
Companys liquidity position, the parameters of which are approved by the Board
of Directors. The liquidity position of the Bank is monitored daily. The
Banks loan to deposit ratio was 85% and 80% as of
December 31, 2001 and 2000,
respectively. The Banks policy is to strive for a loan to deposit ratio
between 70% and 90%.

Management believes the level of liquid assets it is sufficient to meet
current and anticipated funding needs. Liquid assets represent approximately
11.43% of total assets. The liquidity contingency process outlines authorities
and a reasonable course of action in case of unexpected liquidity needs. The
Bank has borrowing lines with four correspondent banks totaling $4.7 million as
well as an Advance Line with the Federal Home Loan Bank allowing the bank to
borrow up to 15% of its total assets. This advance line is collateralized by
investment securities.

Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Vineyard Bank intends to maintain
interest-earning assets, comprised primarily of both loans and investments, and
interest-bearing liabilities, comprised primarily of deposits, maturing or
repricing evenly in order to minimize or eliminate any impact from interest
rate changes.



37



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##### Table of Contents



Capital Resources

Neither the Company nor the Bank has any significant commitments for
capital expenditures. The Bank is subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Banks financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Banks assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Banks capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined).

The Bank will be categorized as well- capitalized based upon its year-end
ratios. To be categorized as well-capitalized, the Bank must maintain minimum
ratios as set forth in the table below. The following table also sets forth
the Banks actual capital amounts and ratios (dollar amounts in thousands):

|                        |                                        |  |        |        |                   |  |            |       |       |  |                |        |                   |  |  |     |   |  |                   |        |  |  |  |      |  
|----------------------- | -------------------------------------- |  | ------ | ------ | ----------------- |  | ---------- | ----- | ----- |  | -------------- | ------ | ----------------- |  |  | --- | - |  | ----------------- | ------ |  |  |  | ---- | -
|                        |                                        |  |        |        |                   |  |            |       |       |  | Capital Needed
|                        |                                        |  |        |        |                   |  |            |       |       |  |               
|                        |                                        |  |        |        |                   |  |            |       |       |  |                |        |                   |  |  |     |   |  | To Be Well       
|                        |                                        |  |        |        |                   |  |            |       |       |  |                |        |                   |  |  |     |   |  | Capitalized Under
|                        |                                        |  |        |        |                   |  |            |       |       |  | For Capital    |        | Prompt Corrective
|                        |                                        |  | Actual |        | Adequacy Purposes |  | Provisions
|                        |                                        |  |        |        |                   |  |           
|                        |                                        |  | Amount |        | Ratio             |  | Amount     |       | Ratio |  | Amount         |        | Ratio            
|                        |                                        |  |        |        |                   |  |            |       |       |  |                |        |                  
|As of December 31, 2001 |                                        |  |        |        |                   |  |            |       |       |  |                |        |                   |  |  |     |   |  |                   |        |  |  |  |     
|                        | Total capital to risk-weighted assets  |  | $      | 23,020 |                   |  |            | 16.10 | %     |  | $              | 11,439 |                   |  |  | 8.0 | % |  | $                 | 14,299 |  |  |  | 10.0 | %
|                        | Tier 1 capital to risk-weighted assets |  |        | 21,570 |                   |  |            | 15.08 | %     |  |                | 5,720  |                   |  |  | 4.0 | % |  |                   | 8,579  |  |  |  | 6.0  | %
|                        | Tier 1 capital to average assets       |  |        | 21,570 |                   |  |            | 12.53 | %     |  |                | 6,887  |                   |  |  | 4.0 | % |  |                   | 8,608  |  |  |  | 5.0  | %
|As of December 31, 2000 |                                        |  |        |        |                   |  |            |       |       |  |                |        |                   |  |  |     |   |  |                   |        |  |  |  |     
|                        | Total capital to risk-weighted assets  |  | $      | 10,065 |                   |  |            | 11.33 | %     |  | $              | 7,109  |                   |  |  | 8.0 | % |  | $                 | 8,886  |  |  |  | 10.0 | %
|                        | Tier 1 capital to risk-weighted assets |  |        | 9,281  |                   |  |            | 10.44 | %     |  |                | 3,554  |                   |  |  | 4.0 | % |  |                   | 5,331  |  |  |  | 6.0  | %
|                        | Tier 1 capital to average assets       |  |        | 9,281  |                   |  |            | 8.41  | %     |  |                | 4,412  |                   |  |  | 4.0 | % |  |                   | 5,515  |  |  |  | 5.0  | %

Economic Concerns

The Bank concentrates on marketing to, and serving the needs of, small and
medium-sized businesses, professionals and individuals located in San
Bernardino County and the Western portion of Los Angeles and Orange Counties of
Southern California. In February 2001, the Bank opened a loan production
office in Manhattan Beach to primarily service the single family residence
construction business line.

The financial condition of the Bank has been, and is expected to continue
to be, affected by the overall general economic conditions and the real estate
market in California. The future success of the Bank is dependent, in large
part, upon the quality of its assets. Although management of the Bank has
devoted substantial time and resources to the identification, collection and
workout of non-performing assets, the real estate markets and the overall
economy in California are likely to have a significant effect on the Banks
assets in future periods and, accordingly, the Companys financial condition
and results of operations.



38



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on this 29th day of March, 2002.

| |  |     |  |                                                                           
| |  | --- |  | --------------------------------------------------------------------------
| |  |     |  | VINEYARD NATIONAL BANCORP                                                 
|
| |  | By: |  | /s/ NORMAN MORALES                                                        
| |  |     |  |                                                                           
| |  |     |  | Norman Morales, Director and
President and Chief Executive Officer        
|
| |  | By: |  | /s/ JILL A. PIERCE                                                        
| |  |     |  |                                                                           
| |  |     |  | Jill A. Pierce
Executive Vice President
Director of Finance and Operations
|
| |  | By: |  | /s/ FRANK S. ALVAREZ                                                      
| |  |     |  |                                                                           
| |  |     |  | Chairman of the Board of Directors                                        
|
| |  | By: |  | /s/ CHARLES L. KEAGLE                                                     
| |  |     |  |                                                                           
| |  |     |  | Director                                                                  
|
| |  | By: |  | /s/ JOEL H. RAVITZ                                                        
| |  |     |  |                                                                           
| |  |     |  | Director                                                                  
|
| |  | By: |  | /s/ LESTER STROH, M.D.                                                    
| |  |     |  |                                                                           
| |  |     |  | Director                                                                  



39



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VINEYARD NATIONAL BANCORP
AND SUBSIDIARIES



---



FINANCIAL STATEMENTS
WITH
INDEPENDENT AUDITORS REPORT



---



DECEMBER 31, 2001, 2000 AND 1999



40



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##### Table of Contents



VINEYARD NATIONAL BANCORP AND SUBSIDIARIES

DECEMBER 31, 2001, 2000 AND 1999

Contents

|                                                   |                                                                                                                        |  |    |    |  | 
|-------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- |  | -- | -- |  | 
|Independent Auditors
        Report               |                                                                                                                        |  | 42 |   
|                                                   |                                                                                                                        |  |    |   
|Financial Statements                               |                                                                                                                        |  |    |   
|                                                   |                                                                                                                        |  |    |    | 
|                                                   | Consolidated Balance Sheets December 31,
        2001 and 2000                                                         |  |    | 43 | 
|                                                   |                                                                                                                        |  |    |    | 
|                                                   | Consolidated Statements of Income For the
        Years Ended December 31, 2001, 2000 and 1999                         |  |    | 44 | 
|                                                   |                                                                                                                        |  |    |    | 
|                                                   | Consolidated Statement of Changes in Stockholders
        Equity For the Years Ended December 31, 2001, 2000 and 1999 |  |    | 45 | 
|                                                   |                                                                                                                        |  |    |    | 
|                                                   | Consolidated Statements of Cash Flows For
        the Years Ended December 31, 2001, 2000 and 1999                     |  |    | 46 | 
|                                                   |                                                                                                                        |  |    |   
|Notes to Consolidated Financial
        Statements |                                                                                                                        |  | 48 |   

41



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##### Table of Contents



Independent Auditors Report

Board of Directors and Stockholders
Vineyard National Bancorp and Subsidiaries

We have audited the accompanying consolidated balance sheets of Vineyard
National Bancorp and Subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, changes in stockholders equity and
statements of cash flows for each of the three years in the period ended
December 31, 2001. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vineyard National
Bancorp and Subsidiaries as of December 31, 2001 and 2000, the results of their
operations, changes in stockholders equity and cash flows for each of the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.

Rancho Cucamonga, California
February 1, 2002

42



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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

ASSETS

|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |            |           |            |             |  
|------------------------------------ | --------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ----------- | ----------- | ---------- | --------- | ---------- | ----------- | -
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            | 2001        |             | 2000      
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |           
|                                     | Cash and due from banks                                   |                                                                                                                                     | $                                                                                                                                       | 8,429,919                                  |            |             | $           | 8,388,298  |          
|                                     | Federal funds sold                                        |                                                                                                                                     |                                                                                                                                         | 6,280,000                                  |            |             |             | 8,405,000  |          
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |           
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         | Total Cash and Cash Equivalents            |            |             | 14,709,919  |            |           |            | 16,793,298  |  
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |           
|                                     | Interest-bearing deposits in other financial institutions |                                                                                                                                     |                                                                                                                                         |                                           |            |             |             | 198,000    |          
|                                     | Investment securities                                     |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |            |          
|                                     |                                                           | Available-for-sale                                                                                                                  |                                                                                                                                         |                                            | 30,550,061 |             |             |            | 5,527,040 |           
|                                     | Loans, net of unearned income                             |                                                                                                                                     |                                                                                                                                         | 133,106,733                                |            |             |             | 79,288,364 |          
|                                     | Loans held for sale                                       |                                                                                                                                     |                                                                                                                                         | 4,471,286                                  |            |             |             | 235,300    |          
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |           
|                                     |                                                           |                                                                                                                                     | 137,578,019                                                                                                                             |                                            |            |             | 79,523,664  |           
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         | Less: Allowance for loan losses            |            |             | (1,450,057  | )          |           |            | (784,092    | )
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |           
|                                     |                                                           |                                                                                                                                     | 136,127,962                                                                                                                             |                                            |            |             | 78,739,572  |           
|                                     | Bank premises and equipment, net                          |                                                                                                                                     |                                                                                                                                         | 5,387,996                                  |            |             |             | 5,482,187  |          
|                                     | Accrued interest                                          |                                                                                                                                     |                                                                                                                                         | 900,890                                    |            |             |             | 570,089    |          
|                                     | Cash surrender value of life insurance                    |                                                                                                                                     |                                                                                                                                         | 21,183                                     |            |             |             | 2,381,047  |          
|                                     | Federal Reserve Bank and other stock at cost              |                                                                                                                                     |                                                                                                                                         | 176,500                                    |            |             |             | 177,200    |          
|                                     | Other assets                                              |                                                                                                                                     |                                                                                                                                         | 3,411,526                                  |            |             |             | 884,624    |          
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |           
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         | TOTAL ASSETS                               |            | $           | 191,286,037 |            |           | $          | 110,753,057 |  
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |           
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                     | Liabilities                                               |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |            |          
|                                     |                                                           | Deposits                                                                                                                            |                                                                                                                                         |                                            |            |             |             |            |           |           
|                                     |                                                           |                                                                                                                                     | Non-interest-bearing                                                                                                                    |                                            |            | 45,951,391  |             |            |           | 36,855,546 |            
|                                     |                                                           |                                                                                                                                     | Interest-bearing                                                                                                                        |                                            |            | 113,429,649 |             |            |           | 62,727,564 |            
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |           
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         | Total deposits                             |            |             | 159,381,040 |            |           |            | 99,583,110  |  
|                                     |                                                           | Federal Home Loan Bank advances                                                                                                     |                                                                                                                                         |                                            | 3,000,000  |             |             |            |          |           
|                                     |                                                           | Convertible debentures                                                                                                              |                                                                                                                                         |                                            | 3,750,000  |             |             |            |          |           
|                                     |                                                           | Company obligated preferred securities of subsidiary trust holding
floating rate junior subordinated deferrable interest debentures |                                                                                                                                         |                                            | 12,000,000 |             |             |            |          |           
|                                     |                                                           | Accrued interest and other liabilities                                                                                              |                                                                                                                                         |                                            | 2,700,048  |             |             |            | 1,874,914 |           
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |           
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         | TOTAL LIABILITIES                          |            |             | 180,831,088 |            |           |            | 101,458,024 |  
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |           
|                                     | COMMITMENTS AND CONTINGENCIES(Note #14)                   |                                                                                                                                     |                                                                                                                                         |                                           |            |             |             |           |          
|                                     | Stockholders Equity                                      |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |            |          
|                                     |                                                           | Contributed capital                                                                                                                 |                                                                                                                                         |                                            |            |             |             |            |           |           
|                                     |                                                           |                                                                                                                                     | Common stock  no par value, authorized 15,000,000 shares,
issued and outstanding 1,876,126 shares in 2001 and
1,864,826 shares in 2000 |                                            |            | 2,150,621   |             |            |           | 2,112,243  |            
|                                     |                                                           | Additional paid-in capital                                                                                                          |                                                                                                                                         |                                            | 3,306,684  |             |             |            | 3,306,684 |           
|                                     |                                                           | Retained earnings                                                                                                                   |                                                                                                                                         |                                            | 5,032,450  |             |             |            | 3,876,141 |           
|                                     |                                                           | Accumulated other comprehensive income                                                                                              |                                                                                                                                         |                                            | (34,806    | )           |             |            | (35       | )         
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |           
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         | TOTAL STOCKHOLDERS EQUITY                 |            |             | 10,454,949  |            |           |            | 9,295,033   |  
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |           
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |            | $           | 191,286,037 |            |           | $          | 110,753,057 |  
|                                     |                                                           |                                                                                                                                     |                                                                                                                                         |                                            |            |             |             |           

The accompanying notes are an integral part of these financial statements.

43



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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |       |           |           |  
|----------------------------------- | ------- | -------------------------------------------------------------- | ------------------------------------------------------------- | ---- | ---------- | ---------- | -------- | ---- | --------- | --------- | -------- | ----- | --------- | --------- | -
|                                    |         |                                                                |                                                               |      | 2001       |            | 2000     |      | 1999     
|                                    |         |                                                                |                                                               |      |            |            |          |      |          
|Interest Income                     |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    |         | Interest and fees on loans                                     |                                                               | $    | 10,068,492 |            |          | $    | 8,083,023 |           |          | $     | 8,136,750 |          
|                                    |         | Interest on Investment Securities  taxable                    |                                                               |      | 935,394    |            |          |      | 504,058   |           |          |       | 512,169   |          
|                                    |         | Interest on deposits in other financial institutions           |                                                               |      | 5,778      |            |          |      | 13,660    |           |          |       | 44,739    |          
|                                    |         | Interest on Federal funds sold                                 |                                                               |      | 592,216    |            |          |      | 364,500   |           |          |       | 300,845   |          
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    |         |                                                                | TOTAL INTEREST INCOME                                         |      |            | 11,601,880 |          |      |           | 8,965,241 |          |       |           | 8,994,503 |  
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    |         | Interest Expense                                               |                                                               |      |            |            |          |      |           |           |          |       |           |          
|                                    |         | Interest on savings deposits                                   |                                                               |      | 182,162    |            |          |      | 200,989   |           |          |       | 192,135   |          
|                                    |         | Interest on NOW and money market deposits                      |                                                               |      | 550,422    |            |          |      | 420,189   |           |          |       | 468,995   |          
|                                    |         | Interest on time deposits in denominations of $100,000 or more |                                                               |      | 997,624    |            |          |      | 426,463   |           |          |       | 370,207   |          
|                                    |         | Interest on other time deposits                                |                                                               |      | 1,556,270  |            |          |      | 999,331   |           |          |       | 1,172,368 |          
|                                    |         | Interest on convertible debentures                             |                                                               |      | 268,709    |            |          |      |          |           |          |       |          |          
|                                    |         | Interest on trust preferred securities                         |                                                               |      | 26,944     |            |          |      |          |           |          |       |          |          
|                                    |         | Interest on Federal funds purchased and other interest         |                                                               |      | 3,814      |            |          |      | 1,601     |           |          |       | 329       |          
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    |         |                                                                | TOTAL INTEREST EXPENSE                                        |      |            | 3,585,945  |          |      |           | 2,048,573 |          |       |           | 2,204,034 |  
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    |         |                                                                | NET INTEREST INCOME                                           |      |            | 8,015,935  |          |      |           | 6,916,668 |          |       |           | 6,790,469 |  
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|Provision for Loan and Lease Losses |         |                                                                | (773,000                                                      | )    |            |            | (256,000 | )    |           |           | (166,000 | )    
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    |         |                                                                | NET INTEREST INCOME AFTER
PROVISION FOR LOAN
AND LEASE LOSSES |      |            | 7,242,935  |          |      |           | 6,660,668 |          |       |           | 6,624,469 |  
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|Other Income                        |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    |         | Fees and service charges                                       |                                                               |      | 1,581,534  |            |          |      | 1,456,459 |           |          |       | 1,531,882 |          
|                                    |         | Gain on sale of loans                                          |                                                               |      | 337,632    |            |          |      | 106,623   |           |          |       | 184,999   |          
|                                    |         | Net gain / (loss) on sale of investment securities             |                                                               |      | 5,747      |            |          |      |          |           |          |       | (108      | )        
|                                    |         | Other income                                                   |                                                               |      | 266,245    |            |          |      | 18,826    |           |          |       | 186,668   |          
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    |         |                                                                | TOTAL OTHER INCOME                                            |      |            | 2,191,158  |          |      |           | 1,581,908 |          |       |           | 1,903,441 |  
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|Other Expenses                      |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    |         | Salaries and employee benefits                                 |                                                               |      | 4,331,371  |            |          |      | 3,324,910 |           |          |       | 3,766,182 |          
|                                    |         | Occupancy expense of premises                                  |                                                               |      | 681,875    |            |          |      | 622,220   |           |          |       | 616,437   |          
|                                    |         | Furniture and equipment expense                                |                                                               |      | 604,455    |            |          |      | 546,877   |           |          |       | 606,183   |          
|                                    |         | Litigation expense (Note #14)                                  |                                                               |      |           |            |          |      |          |           |          |       | 920,000   |          
|                                    |         | Other expenses                                                 |                                                               |      | 2,677,083  |            |          |      | 2,679,546 |           |          |       | 2,655,572 |          
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    |         |                                                                | TOTAL OTHER EXPENSES                                          |      |            | 8,294,784  |          |      |           | 7,173,553 |          |       |           | 8,564,374 |  
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    |         |                                                                | INCOME/(LOSS) BEFORE INCOME
TAXES                             |      |            | 1,139,309  |          |      |           | 1,069,023 |          |       |           | (36,464   | )
|                                    |         |                                                                | INCOME TAX (BENEFIT)/EXPENSE                                  |      |            | (17,000    | )        |      |           | 449,000   |          |       |           | (11,600   | )
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    |         |                                                                | NET INCOME/(LOSS)                                             |      | $          | 1,156,309  |          |      | $         | 620,023   |          |       | $         | (24,864   | )
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|EARNINGS/(LOSS) PER SHARE           |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    | BASIC   |                                                                | $                                                             | 0.62 |            |            | $        | 0.33 |           |           | $        | (0.01 | )        
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      
|                                    | DILUTED |                                                                | $                                                             | 0.54 |            |            | $        | 0.33 |           |           | $        | (0.01 | )        
|                                    |         |                                                                |                                                               |      |            |            |          |      |           |           |          |      

The accompanying notes are an integral part of these financial statements.

44



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##### Table of Contents



VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

|                           |                      |                            |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          |   |               |           |             |  |  |           |         |   |  |         |            |  |  |           |  
|-------------------------- | -------------------- | -------------------------- | --------------------------------------------------------------- |  | ------------ | ------ | ---------- |  | ------- | ------ | ------------- |  | ------------- |  | -------- | - | ------------- | --------- | ----------- |  |  | --------- | ------- | - |  | ------- | ---------- |  |  | --------- | -
|                           |                      |                            |                                                                 |  | Common Stock |        |            |  |         |        |               |  |               |  |          |   |               |           | Accumulated |  |  |           |        
|                           |                      |                            |                                                                 |  |              |        | Additional |  |         |        |               |  |               |  |          |   | Other         |           |             |  | 
|                           |                      |                            |                                                                 |  | Number of    |        |            |  |         |        | Paid-in       |  | Comprehensive |  | Retained |   | Comprehensive |           |             |  | 
|                           |                      |                            |                                                                 |  | Shares       |        | Amount     |  | Capital |        | Income/(Loss) |  | Earnings      |  | Income   |   | Total        
|                           |                      |                            |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          |   |              
|Balance, December 31, 1998 |                      |                            | 1,862,774                                                       |  |              | $      | 2,106,258  |  |         | $      | 3,306,684     |  |               |  |          |   |               | $         | 3,280,982   |  |  | $         | 34,235  |   |  | $       | 8,728,159  | 
|                           | Comprehensive loss   |                            |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          |   |               |           |             |  |  |           |         |   |  |         |            |  | 
|                           |                      |                            | Net loss                                                        |  |              |        |            |  |         |        |               |  |               |  |          |   | $             | (24,864   | )           |  |  | (24,864   | )       |   |  |         |            |  |  | (24,864   | )
|                           |                      |                            | Unrealized security
holding losses
(net of $52,887 tax)         |  |              |        |            |  |         |        |               |  |               |  |          |   |               | (73,123   | )           |  |  |           |         |   |  | (73,123 | )          |  |  | (73,123   | )
|                           |                      |                            | less reclassification
adjustments for losses
(net of $45 tax)   |  |              |        |            |  |         |        |               |  |               |  |          |   |               | 63        |             |  |  |           |         |   |  | 63      |            |  |  | 63        |  
|                           |                      |                            |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          |   |               |           |             |  |  |           |         |   |  |         |            | 
|                           |                      | Total Comprehensive loss   |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          | $ | (97,924       | )         |             |  |  |           |         |   |  |         |            |  |  |          
|                           |                      |                            |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          |   |               |           |             |  |  |           |         |   |  |         |            | 
|Balance, December 31, 1999 |                      |                            | 1,862,774                                                       |  |              |        | 2,106,258  |  |         |        | 3,306,684     |  |               |  |          |   |               |           | 3,256,118   |  |  |           | (38,825 | ) |  |         | 8,630,235  | 
|                           | Comprehensive income |                            |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          |   |               |           |             |  |  |           |         |   |  |         |            |  | 
|                           |                      |                            | Stock options exercised                                         |  |              | 2,052  |            |  |         | 5,985  |               |  |               |  |          |   |               |           |             |  |  |           |         |   |  |         |            |  |  | 5,985     |  
|                           |                      |                            | Net income                                                      |  |              |        |            |  |         |        |               |  |               |  |          |   |               | 620,023   |             |  |  | 620,023   |         |   |  |         |            |  |  | 620,023   |  
|                           |                      |                            | Unrealized security holding
gains (net of $28,025 tax)          |  |              |        |            |  |         |        |               |  |               |  |          |   |               | 38,790    |             |  |  |           |         |   |  | 38,790  |            |  |  | 38,790    |  
|                           |                      |                            |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          |   |               |           |             |  |  |           |         |   |  |         |            | 
|                           |                      | Total Comprehensive income |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          | $ | 658,813       |           |             |  |  |           |         |   |  |         |            |  |  |          
|                           |                      |                            |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          |   |               |           |             |  |  |           |         |   |  |         |            | 
|Balance, December 31, 2000 |                      |                            | 1,864,826                                                       |  |              |        | 2,112,243  |  |         |        | 3,306,684     |  |               |  |          |   |               |           | 3,876,141   |  |  |           | (35     | ) |  |         | 9,295,033  | 
|                           | Comprehensive income |                            |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          |   |               |           |             |  |  |           |         |   |  |         |            |  | 
|                           |                      |                            | Stock options exercised                                         |  |              | 11,300 |            |  |         | 38,378 |               |  |               |  |          |   |               |           |             |  |  |           |         |   |  |         |            |  |  | 38,378    |  
|                           |                      |                            | Net income                                                      |  |              |        |            |  |         |        |               |  |               |  |          |   |               | 1,156,309 |             |  |  | 1,156,309 |         |   |  |         |            |  |  | 1,156,309 |  
|                           |                      |                            | Unrealized security holding
losses (net of $28,025 tax)         |  |              |        |            |  |         |        |               |  |               |  |          |   |               | (38,104   | )           |  |  |           |         |   |  | (38,104 | )          |  |  | (38,104   | )
|                           |                      |                            | less reclassification
adjustments for gains
(net of $2,414 tax) |  |              |        |            |  |         |        |               |  |               |  |          |   |               | 3,333     |             |  |  |           |         |   |  | 3,333   |            |  |  | 3,333     |  
|                           |                      |                            |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          |   |               |           |             |  |  |           |         |   |  |         |            | 
|                           |                      | Total Comprehensive income |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          | $ | 1,121,538     |           |             |  |  |           |         |   |  |         |            |  |  |          
|                           |                      |                            |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          |   |               |           |             |  |  |           |         |   |  |         |            | 
|Balance, December 31, 2001 |                      |                            | 1,876,126                                                       |  |              | $      | 2,150,621  |  |         | $      | 3,306,684     |  |               |  |          |   |               | $         | 5,032,450   |  |  | $         | (34,806 | ) |  | $       | 10,454,949 | 
|                           |                      |                            |                                                                 |  |              |        |            |  |         |        |               |  |               |  |          |   |               |           |             |  |  |           |         |   |  |         |            | 

The accompanying notes are an integral part of these financial statements.

45



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##### Table of Contents



VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

|                                                                           |  |                                                                                                      |                                                     |   |             |             |            |   |            |            |            |   |            |            |  
|-------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- | --------------------------------------------------- | - | ----------- | ----------- | ---------- | - | ---------- | ---------- | ---------- | - | ---------- | ---------- | -
|                                                                           |  |                                                                                                      |                                                     |   | 2001        |             | 2000       |   | 1999      
|                                                                           |  |                                                                                                      |                                                     |   |             |             |            |   |           
|Cash Flows from Operating Activities                                       |  |                                                                                                      |                                                     |   |             |             |            |   |            |            |            |  
|                                                                           |  | Interest and fees received                                                                           |                                                     | $ | 11,317,071  |             |            | $ | 8,638,637  |            |            | $ | 8,332,313  |           
|                                                                           |  | Service fees and other income received                                                               |                                                     |   | 2,185,411   |             |            |   | 1,594,051  |            |            |   | 1,897,087  |           
|                                                                           |  | Interest paid                                                                                        |                                                     |   | (2,911,916  | )           |            |   | (2,001,257 | )          |            |   | (2,286,942 | )         
|                                                                           |  | Cash paid to suppliers and employees                                                                 |                                                     |   | (9,020,669  | )           |            |   | (7,957,524 | )          |            |   | (6,930,145 | )         
|                                                                           |  | Decrease/(increase) in loans held for sale                                                           |                                                     |   | (4,235,986  | )           |            |   | 600,023    |            |            |   | 1,342,369  |           
|                                                                           |  | Income taxes paid                                                                                    |                                                     |   | (944,000    | )           |            |   | (582,594   | )          |            |   | (517,929   | )         
|                                                                           |  |                                                                                                      |                                                     |   |             |             |            |   |            |            |            |  
|                                                                           |  |                                                                                                      | Net Cash (Used In)/Provided By
Operating Activities |   |             | (3,610,089  | )          |   |            | 291,336    |            |   |            | 1,836,753  |  
|                                                                           |  |                                                                                                      |                                                     |   |             |             |            |   |            |            |            |  
|Cash Flows From Investing Activities                                       |  |                                                                                                      |                                                     |   |             |             |            |   |            |            |            |  
|                                                                           |  | Proceeds from maturities of investment securities,
available-for-sale                                |                                                     |   | 25,035,000  |             |            |   | 5,000,000  |            |            |   | 4,000,000  |           
|                                                                           |  | Proceeds from sales of investment securities,
available-for-sale                                     |                                                     |   | 7,087       |             |            |   |           |            |            |   | 1,008,492  |           
|                                                                           |  | Purchase of investment securities available-for-sale                                                 |                                                     |   | (27,997,442 | )           |            |   | (1,000,170 | )          |            |   | (8,467,993 | )         
|                                                                           |  | Purchase of mortgage-backed securities available-for-sale                                            |                                                     |   | (24,569,181 | )           |            |   |           |            |            |   |           |           
|                                                                           |  | Proceeds from principal reductions and maturities
of mortgage-backed securities available-for-sale   |                                                     |   | 2,306,506   |             |            |   |           |            |            |   |           |           
|                                                                           |  | Net decrease in deposits in other
financial institutions                                             |                                                     |   | 198,000     |             |            |   | 297,000    |            |            |   | 198,000    |           
|                                                                           |  | Purchase of Federal Home Loan Bank stock                                                             |                                                     |   | (176,500    | )           |            |   |           |            |            |   |           |           
|                                                                           |  | Proceeds from sale of Federal Reserve Bank stock                                                     |                                                     |   | 177,200     |             |            |   |           |            |            |   |           |           
|                                                                           |  | Recoveries on loans previously written off                                                           |                                                     |   | 22,463      |             |            |   | 130,167    |            |            |   | 108,877    |           
|                                                                           |  | Net loans made to customers and principal
collections of loans                                       |                                                     |   | (53,853,051 | )           |            |   | 5,525,643  |            |            |   | 1,226,495  |           
|                                                                           |  | Purchase of life insurance policies                                                                  |                                                     |   | (255,584    | )           |            |   |           |            |            |   |           |           
|                                                                           |  | Proceeds from disposal of life insurance policies                                                    |                                                     |   | 2,527,679   |             |            |   |           |            |            |   |           |           
|                                                                           |  | Capital expenditures                                                                                 |                                                     |   | (481,775    | )           |            |   |           |            |            |   | (274,784   | )         
|                                                                           |  | Proceeds from sale of property, plant and equipment                                                  |                                                     |   |            |             |            |   | 21,025     |            |            |   | 79,400     |           
|                                                                           |  | Proceeds from sale of OREO                                                                           |                                                     |   |            |             |            |   | 218,891    |            |            |   | 31,102     |           
|                                                                           |  |                                                                                                      |                                                     |   |             |             |            |   |            |            |            |  
|                                                                           |  |                                                                                                      | Net Cash (Used In)/Provided By
Investing Activities |   |             | (77,059,598 | )          |   |            | 10,192,556 |            |   |            | (2,090,411 | )
|                                                                           |  |                                                                                                      |                                                     |   |             |             |            |   |            |            |            |  
|Cash Flows From Financing Activities                                       |  |                                                                                                      |                                                     |   |             |             |            |   |            |            |            |  
|                                                                           |  | Net (decrease)/increase in demand deposits, NOW
accounts savings accounts, and money market deposits |                                                     |   | 24,533,486  |             |            |   | (2,024,798 | )          |            |   | 6,008,535  |           
|                                                                           |  | Net (decrease)/increase in certificates of deposits                                                  |                                                     |   | 35,264,444  |             |            |   | (2,915,270 | )          |            |   | (6,800,347 | )         
|                                                                           |  | Proceeds from issuance of trust preferred securities                                                 |                                                     |   | 12,000,000  |             |            |   |           |            |            |   |           |           
|                                                                           |  | Proceeds from issuance of convertible debentures                                                     |                                                     |   | 3,750,000   |             |            |   |           |            |            |   |           |           
|                                                                           |  | Net change in Federal Home Loan Bank advances                                                        |                                                     |   | 3,000,000   |             |            |   |           |            |            |   |           |           
|                                                                           |  | Stock options exercised                                                                              |                                                     |   | 38,378      |             |            |   | 5,985      |            |            |   |           |           
|                                                                           |  |                                                                                                      |                                                     |   |             |             |            |   |            |            |            |  
|                                                                           |  |                                                                                                      | Net Cash Provided By/(Used In)
Financing Activities |   |             | 78,586,308  |            |   |            | (4,934,083 | )          |   |            | (791,812   | )
|                                                                           |  |                                                                                                      |                                                     |   |             |             |            |   |            |            |            |  
|Net (Decrease)/Increase in Cash and Cash Equivalents                       |  |                                                                                                      | (2,083,379                                          | ) |             |             | 5,549,809  |   |            |            | (1,045,470 | )
|Cash and Cash Equivalents,Beginning of year                                |  |                                                                                                      | 16,793,298                                          |   |             |             | 11,243,489 |   |            |            | 12,288,959 |  
|                                                                           |  |                                                                                                      |                                                     |   |             |             |            |   |            |            |            |  
|Cash and Cash Equivalents,End of year                                      |  | $                                                                                                    | 14,709,919                                          |   |             | $           | 16,793,298 |   |            | $          | 11,243,489 |  
|                                                                           |  |                                                                                                      |                                                     |   |             |             |            |   |            |            |            |  
|The accompanying notes are an integral part of these financial statements.

46



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##### Table of Contents



VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

|                                                                           |                                                                                                      |                                                   |                                                     |           |            |            |      |         |            |          |   |         |           |           | 
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------------------------- | --------- | ---------- | ---------- | ---- | ------- | ---------- | -------- | - | ------- | --------- | --------- | 
|                                                                           |                                                                                                      |                                                   |                                                     |           | 2001       |            | 2000 |         | 1999      
|                                                                           |                                                                                                      |                                                   |                                                     |           |            |            |      |         |           
|Reconciliation of Net Income to Net Cash                                   |                                                                                                      |                                                   |                                                     |           |            |            |      |         |            |          |   |        
|                                                                           | Net Income/(loss)                                                                                    |                                                   | $                                                   | 1,156,309 |            |            | $    | 620,023 |            |          | $ | (24,864 | )        
|                                                                           |                                                                                                      |                                                   |                                                     |           |            |            |      |         |            |          |   |        
|                                                                           | Adjustments to Reconcile Net Income/(Loss)
to Net Cash Provided by Operating Activities
Depreciation |                                                   |                                                     | 534,223   |            |            |      | 548,376 |            |          |   | 581,142 |          
|                                                                           |                                                                                                      | Investment securities accretion/amortization      |                                                     |           | 140,808    |            |      |         | (31,758    | )        |   |         | (34,818   | )        
|                                                                           |                                                                                                      | Provision for loan and lease losses               |                                                     |           | 773,000    |            |      |         | 256,000    |          |   |         | 166,000   |          
|                                                                           |                                                                                                      | Provision for OREO losses                         |                                                     |           |           |            |      |         | 31,680     |          |   |         |          |          
|                                                                           |                                                                                                      | (Gain)/loss on sale of equipment                  |                                                     |           | 41,743     |            |      |         |           |          |   |         | (734      | )        
|                                                                           |                                                                                                      | Decrease in taxes payable                         |                                                     |           | (486,000   | )          |      |         | (146,594   | )        |   |         | (49,000   | )        
|                                                                           |                                                                                                      | (Increase) / decrease in deferred taxes           |                                                     |           | (474,945   | )          |      |         | 13,000     |          |   |         | (55,129   | )        
|                                                                           |                                                                                                      | Increase in other assets                          |                                                     |           | (1,560,162 | )          |      |         | (244,542   | )        |   |         | (866,317  | )        
|                                                                           |                                                                                                      | Decrease/(increase) in loans held for sale        |                                                     |           | (4,235,986 | )          |      |         | 600,023    |          |   |         | 1,342,369 |          
|                                                                           |                                                                                                      | Decrease in unearned loan fees                    |                                                     |           | (94,816    | )          |      |         | (297,946   | )        |   |         | (550,278  | )        
|                                                                           |                                                                                                      | Decrease/(increase) in interest receivable        |                                                     |           | (330,801   | )          |      |         | 3,100      |          |   |         | (77,094   | )        
|                                                                           |                                                                                                      | Increase/(decrease) in interest payable           |                                                     |           | 674,029    |            |      |         | 47,316     |          |   |         | (82,908   | )        
|                                                                           |                                                                                                      | Increase in accrued expense and other liabilities |                                                     |           | 258,256    |            |      |         | (1,119,485 | )        |   |         | 1,494,738 |          
|                                                                           |                                                                                                      | (Gain)/loss on sale of investment securities, net |                                                     |           | (5,747     | )          |      |         |           |          |   |         | 108       |          
|                                                                           |                                                                                                      | (Gain)/loss on sale of OREO                       |                                                     |           |           |            |      |         | 12,143     |          |   |         | (6,462    | )        
|                                                                           |                                                                                                      |                                                   |                                                     |           |            |            |      |         |            |          |   |        
|                                                                           |                                                                                                      |                                                   | Total Adjustments                                   |           |            | (4,766,398 | )    |         |            | (328,687 | ) |         |           | 1,861,617 | 
|                                                                           |                                                                                                      |                                                   |                                                     |           |            |            |      |         |            |          |   |        
|                                                                           |                                                                                                      |                                                   | Net Cash Provided By/(Used In)
Operating Activities |           | $          | (3,610,089 | )    |         | $          | 291,336  |   |         | $         | 1,836,753 | 
|                                                                           |                                                                                                      |                                                   |                                                     |           |            |            |      |         |            |          |   |        
|Supplementary Information                                                  |                                                                                                      |                                                   |                                                     |           |            |            |      |         |            |          |   |        
|                                                                           | Change in valuation allowance
for investment securities                                              |                                                   | $                                                   | (34,771   | )          |            | $    | 66,815  |            |          | $ | (73,060 | )        
|                                                                           |                                                                                                      |                                                   |                                                     |           |            |            |      |         |            |          |   |        
|                                                                          
|The accompanying notes are an integral part of these financial statements.

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #1  Summary of Significant Accounting Policies

The accounting and reporting policies of Vineyard National Bancorp (the
Company) and Subsidiaries conform to accounting principles generally accepted
in the United States of America and to general practices within the banking
industry. A summary of the Companys significant accounting and reporting
policies consistently applied in the preparation of the accompanying financial
statements follows:

Principles of Consolidation

The consolidated financial statements include the Company and its wholly owned
subsidiaries, Vineyard Bank (the Bank) and Vineyard Statutory Trust I.
Intercompany balances and transactions have been eliminated.

Nature of Operations

The Company has been organized as a single reporting segment and operates six
branches within San Bernardino and Los Angeles Counties. The Company provides
a variety of financial services to individuals and small-to-medium sized
businesses and offers a full range of commercial banking services including the
acceptance of checking and savings deposits, and the making of various types of
installment, commercial and real estate loans.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

Estimates that are particularly susceptible to significant change relate to the
determination of the allowance for losses on loans and the valuation of real
estate acquired in connection with foreclosures or in satisfaction of loans.

While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Banks allowances for losses on loans and foreclosed real estate. Such
agencies may require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and foreclosed real estate may change.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash,
due from banks and federal funds sold. Generally, federal funds are sold for
one-day periods.

Cash and Due From Banks

Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the Federal Reserve Bank. The
Bank complied with the reserve requirements as of December 31, 2001.

The Bank maintains amounts due from banks that exceed federally insured limits.
The Bank has not experienced any losses in such accounts.

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #1  Summary of Significant Accounting Policies, Continued

Investment Securities

In accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities,which
addresses the accounting for investments in equity securities that have readily
determinable fair values and for investments in all debt securities, securities
are classified in three categories and accounted for as follows: debt
securities that the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and are measured at amortized cost;
debt and equity securities bought and held principally for the purpose of
selling in the near term are classified as trading securities and are measured
at fair value, with unrealized gains and losses included in earnings; debt and
equity securities deemed as available-for-sale are measured at fair value, with
unrealized gains and losses reported in a separate component of stockholders
equity. Gains or losses on sales of investment securities are determined on
the specific identification method. Premiums and discounts on investment
securities are amortized or accreted using the interest method over the
expected lives of the related securities.

Loans and Interest on Loans

Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding unpaid principal balances reduced by any charge-offs or specific
valuation accounts and net of any deferred fees or costs on originated loans.

Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.

Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. The accrual of interest on loans is discontinued when
principal or interest is past due 90 days or when, in the opinion of
management, there is reasonable doubt as to collectibility. When loans are
placed on nonaccrual status, all interest previously accrued but not collected
is reversed against current period interest income. Income on nonaccrual loans
is subsequently recognized only to the extent that cash is received and the
loans principal balance is deemed collectible. Interest accruals are resumed
on such loans only when they are brought fully current with respect to interest
and principal and when, in the judgment of management, the loans are estimated
to be fully collectible as to both principal and interest.

The Bank considers a loan to be impaired when it is probable that the Bank will
be unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Measurement of impairment is based on
the expected future cash flows of an impaired loan which are to be discounted
at the loans effective interest rate, or measured by reference to an
observable market value, if one exists, or the fair value of the collateral for
a collateral-dependent loan. The Bank selects the measurement method on a
loan-by-loan basis except that collateral-dependent loans for which foreclosure
is probable are measured at the fair value of the collateral. The Bank
recognizes interest income on impaired loans based on its existing methods of
recognizing interest income on nonaccrual and troubled debt restructured loans.

Loans Held for Sale

Mortgage loans held for sale in the secondary market are carried at the lower
of cost or estimated market value in the aggregate market. Net unrealized
losses are recognized through a valuation allowance by charges to income.
Gains or losses realized on the sales are recognized at the time of sale and
are determined by the difference between the net proceeds and the carrying
value of the loans sold. Gains and losses on sales of loans are included in
noninterest income.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is maintained at a level which, in
managements judgment, is adequate to absorb credit losses inherent in the loan
and lease portfolio. The amount of the allowance is based on managements
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions. The allowance is increased
by a provision for loan and lease losses, which is charged to expense and
reduced by charge-offs, net of recoveries.

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #1  Summary of Significant Accounting Policies, Continued

Premises and Equipment

Land is carried at cost. Bank premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives, which ranges from three
to ten years for furniture and fixtures and forty years for buildings.
Leasehold improvements are amortized using the straight-line method over the
estimated useful lives of the improvements or the remaining lease term,
whichever is shorter. Expenditures for betterments or major repairs are
capitalized and those for ordinary repairs and maintenance are charged to
operations as incurred. Total depreciation expense for the reporting periods
ending December 31, 2001, 2000 and 1999, was approximately $534,000, $548,000,
and $581,000, respectively.

Other Real Estate Owned

Other real estate owned, which represents real estate acquired through
foreclosure, is stated at the lower of the carrying value of the loan or the
estimated fair value less estimated selling costs of the related real estate.
Loan balances in excess of the fair value of the real estate acquired at the
date of acquisition are charged against the allowance for loan losses. Any
subsequent declines in estimated fair value less selling costs, operating
expenses or income and gains or losses on disposition of such properties are
charged to current operations.

Accounting for Vineyard Statutory Trust I

Vineyard Statutory Trust I is a statutory business trust created for the
exclusive propose of issuing and selling Trust Securities and using the
proceeds to acquire the Floating Rate Junior Subordinated Deferrable Interest
debentures issued by the Company.

For financial reporting purposes, Vineyard Statutory Trust I is treated as a
subsidiary of Vineyard National Bancorp and, accordingly, the accounts are
included in the consolidated financial statements of the Company. The Trust
Securities are presented as a separate line item in the consolidated balance
sheet under the caption Company Obligated Floating Rate Junior Subordinated
Deferrable Interest Debentures. For financial reporting purposes, the Company
records the dividend distributions payable on the Trust Securities as interest
expense in the consolidated statement of income.

Income Taxes

Provisions for income taxes are based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) and include deferred taxes on temporary differences in
the recognition of income and expense for tax and financial statement purposes.
Deferred taxes are computed on the liability method as prescribed in SFAS No.
109, Accounting for Income Taxes.

Earnings Per Share (EPS)

Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.

Stock-Based Compensation

SFAS No. 123, Accounting for Stock-Based Compensation,encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue
to account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees,and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Companys stock at the date of the grant over the
amount an employee must pay to acquire the stock. The pro forma effects of
adoption are disclosed in Note #20.

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #1  Summary of Significant Accounting Policies, Continued

Comprehensive Income

Beginning in 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, which requires the disclosure of comprehensive income and its
components. Changes in unrealized gains/(losses) on available-for-sale
securities, net of income taxes, is the only component of accumulated other
comprehensive income for the Company.

Reclassifications

Certain reclassifications have been made to the 2000 and 1999 financial
statements to conform to 2001 classifications.

Current Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 142, Accounting for
Goodwill and Other Intangible Assets, effective starting with fiscal years
beginning after December 15, 2001. This standard establishes new accounting
standards for goodwill and continues to require the recognition of goodwill as
an asset but does not permit amortization of goodwill as previously required by
the Accounting Principles Board Opinion (APB) Opinion No. 17. The standard
also establishes a new method of testing goodwill for impairment. It requires
goodwill to be separately tested for impairment at a reporting unit level. The
amount of goodwill determined to be impaired would be expensed to current
operations. Management believes that the adoption of the statement will not
have a material effect on the Companys financial statements. No amortization
expense was charged to operations for 2001, 2000, and 1999.

Note #2  Investment Securities

At December 31, 2001 and 2000, the investment securities portfolio was
comprised of securities classified as available-for-sale. In accordance with
SFAS No. 115, investment securities available-for-sale are carried at fair
value and adjusted for amortization of premiums and accretions of discounts.

The amortized cost and fair values of investment securities available-for-sale
at December 31, 2001, were:

|                           |       |   |            |            |            |   |            |         |            |   |          |          |   |   |            |            | 
|-------------------------- | ----- | - | ---------- | ---------- | ---------- | - | ---------- | ------- | ---------- | - | -------- | -------- | - | - | ---------- | ---------- | 
|                           |       |   |            |            |            |   | Gross      |         | Gross      |   |          |          |  
|                           |       |   | Amortized  |            | Unrealized |   | Unrealized |         |            |   |         
|                           |       |   | Cost       |            | Gains      |   | Losses     |         | Fair Value
|                           |       |   |            |            |            |   |            |         |           
|U.S. Agency securities     |       | $ | 8,498,990  |            |            | $ | 48,311     |         |            | $ |         |          |   | $ | 8,547,301  |           
|Mortgage-backed securities |       |   | 22,111,081 |            |            |   | 53,769     |         |            |   | (162,090 | )        |   |   | 22,002,760 |           
|                           |       |   |            |            |            |   |            |         |            |   |          |          |   |   |            |           
|                           | Total |   | $          | 30,610,071 |            |   | $          | 102,080 |            |   | $        | (162,090 | ) |   | $          | 30,550,061 | 
|                           |       |   |            |            |            |   |            |         |            |   |          |          |   |   |            |           

The amortized cost and fair values of investment securities available-for-sale
at December 31, 2000, were:

|                       |       |   |           |           |            |   |            |       |            |   |        |        |   |   |           |           | 
|---------------------- | ----- | - | --------- | --------- | ---------- | - | ---------- | ----- | ---------- | - | ------ | ------ | - | - | --------- | --------- | 
|                       |       |   |           |           |            |   | Gross      |       | Gross      |   |        |        |  
|                       |       |   | Amortized |           | Unrealized |   | Unrealized |       |            |   |       
|                       |       |   | Cost      |           | Gains      |   | Losses     |       | Fair Value
|                       |       |   |           |           |            |   |            |       |           
|U.S. Agency securities |       | $ | 5,525,762 |           |            | $ | 706        |       |            | $ | (6,414 | )      |   | $ | 5,520,054 |          
|Other                  |       |   | 1,340     |           |            |   | 5,646      |       |            |   |       |        |   |   | 6,986     |          
|                       |       |   |           |           |            |   |            |       |            |   |        |        |   |   |           |          
|                       | Total |   | $         | 5,527,102 |            |   | $          | 6,352 |            |   | $      | (6,414 | ) |   | $         | 5,527,040 | 
|                       |       |   |           |           |            |   |            |       |            |   |        |        |   |   |           |          

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #2  Investment Securities,Continued

The amortized cost and fair values of investment securities available-for-sale
at December 31, 2001, by expected maturity are shown below. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.

|                                            |                  |   |                    |            |            |   |            |            | 
|------------------------------------------- | ---------------- | - | ------------------ | ---------- | ---------- | - | ---------- | ---------- | 
|                                            |                  |   | Securities        
|                                            |                  |   | Available-for-Sale
|                                            |                  |   |                   
|                                            |                  |   | Amortized          |            |            |   |           
|                                            |                  |   | Cost               |            | Fair Value
|                                            |                  |   |                    |            |           
|Due in one year or less                     |                  | $ | 498,990            |            |            | $ | 505,625    |           
|Due after one year but less than five years |                  |   | 3,000,000          |            |            |   | 3,005,726  |           
|Due after five years but less than 10 years |                  |   | 5,000,000          |            |            |   | 5,035,950  |           
|Mortgage-backed securities                  |                  |   | 22,111,081         |            |            |   | 22,002,760 |           
|                                            |                  |   |                    |            |            |   |            |           
|                                            | Total Securities |   | $                  | 30,610,071 |            |   | $          | 30,550,061 | 
|                                            |                  |   |                    |            |            |   |            |           

Included in shareholders equity at December 31, 2001, is $34,806 of net
unrealized losses (net of $25,204 estimated tax benefit) on investment
securities available-for-sale.

Proceeds from sales of investment securities available-for-sale during 2001
were $7,087. Gross gains on those sales were $5,747. Included in
shareholders equity at December 31, 2001 is $34,806 of net unrealized losses
(net of $25,204 estimated tax benefit) on investment securities
available-for-sale.

There were no investments sold during 2000. Included in shareholders equity
at December 31, 2000 is $35 of net unrealized losses (net of $27 estimated tax
benefit) on investment securities available-for-sale.

Proceeds from sales of investment securities available-for-sale during 1999
were $1,008,492. Gross losses on those sales were $108. There were no gains
during 1999. Included in shareholders equity at December 31, 1999 is $38,825
of net unrealized losses (net of $28,051 estimated tax benefit) on investment
securities available-for-sale.

Securities with a carrying value and fair value of $5,698,921 and $597,422 at
December 31, 2001 and 2000, respectively, were pledged to secure public monies
as required by law and Federal Home loan Bank advances.

Note #3  Loans

All the Banks loans, commitments, and commercial and standby letters of credit
have been granted to customers in the Companys market area, which includes the
Counties of San Bernardino, Los Angeles, and Orange. These loans are
collateralized in accordance with Company policy. The concentrations of credit
by type of loan are outlined as follows:

|                                       |             |                               |             |            |             |      |            |            |            | 
|-------------------------------------- | ----------- | ----------------------------- | ----------- | ---------- | ----------- | ---- | ---------- | ---------- | ---------- | 
|                                       |             |                               |             | 2001       |             | 2000
|                                       |             |                               |             |            |             |     
|Commercial, financial and agricultural |             | $                             | 20,219,039  |            |             | $    | 10,665,007 |           
|Real Estate  construction             |             |                               | 33,253,950  |            |             |      | 5,587,730  |           
|Real Estate  mortgage                 |             |                               |             |            |             |      |            |           
|                                       | Commercial  |                               |             | 52,458,057 |             |      |            | 40,099,693 |           
|                                       | Residential |                               |             | 19,063,005 |             |      |            | 9,337,249  |           
|Installment loans to individuals       |             |                               | 8,318,168   |            |             |      | 11,191,920 |           
|All other loans (including overdrafts) |             |                               | 184,377     |            |             |      | 179,903    |           
|                                       |             |                               |             |            |             |      |            |           
|                                       |             |                               | 133,496,596 |            |             |      | 79,773,043 |           
|Unearned income on installment loans   |             |                               | (117,502    | )          |             |      | (190,377   | )         
|Deferred loan fees                     |             |                               | (272,361    | )          |             |      | (294,302   | )         
|                                       |             |                               |             |            |             |      |            |           
|                                       |             | Loans, Net of Unearned Income |             | $          | 133,106,733 |      |            | $          | 79,288,364 | 
|                                       |             |                               |             |            |             |      |            |           
|Loans held for sale                    |             | $                             | 4,471,286   |            |             | $    | 235,300    |           
|                                       |             |                               |             |            |             |      |            |           

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #3  Loans, Continued

The following is a summary of information pertaining to impaired loans. There
were no impaired loans as of December 31, 2001.

|                                              |  |      |         | 
|--------------------------------------------- |  | ---- | ------- | 
|                                              |  | 2000
|                                              |  |     
|Impaired loans without a valuation allowance  |  | $    | 227,000 | 
|Impaired loans with a valuation allowance     |  |      | 80,000  | 
|                                              |  |      |         | 
|Total impaired loans                          |  | $    | 307,000 | 
|                                              |  |      |         | 
|Valuation allowance related to impaired loans |  | $    | 21,000  | 
|                                              |  |      |         | 

|                                                             |  |                          |        |      |  |      |         |  |  |   |         | 
|------------------------------------------------------------ |  | ------------------------ | ------ | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                                             |  | Years Ended December 31,
|                                                             |  |                         
|                                                             |  | 2001                     |        | 2000 |  | 1999
|                                                             |  |                          |        |      |  |     
|Average investment in impaired loans                         |  | $                        | 13,000 |      |  | $    | 245,000 |  |  | $ | 164,000 | 
|Interest income recognized on impaired loans                 |  |                          |       |      |  |      |        |  |  |   |        | 
|Interest income recognized on a cash
basis on impaired loans |  |                          |       |      |  |      |        |  |  |   | 5,000   | 

No additional funds were committed to be advanced in connection with impaired
loans.

The provisions of SFAS No. 114 and SFAS No. 118 permit the valuation allowance
reported above to be determined on a loan-by-loan basis or by aggregating loans
with similar risk characteristics. Because the loans currently identified as
impaired have unique risk characteristics, the valuation allowance was
determined on a loan-by-loan basis.

Nonaccruing loans totaled approximately $-0- and $307,000 at December 31, 2001
and 2000, respectively. As of December 31, 2001 and 2000, all loans on
nonaccrual were classified as impaired. If interest on nonaccrual loans had
been recognized at the original interest rates, interest income would have
increased approximately $-0-, $9,000, and $23,000 for the years ended 2001,
2000 and 1999, respectively.

At December 31, 2001 and 2000, the Company had approximately $-0- and $25,000,
respectively, in loans past due 90 days or more in interest or principal and
still accruing interest. These loans are well secured and in the process of
collection, or are secured by 1-4 single-family residences.

At December 31, 2001, no loans were classified as troubled debt restructurings.

Note #4  Allowance for Loan and Lease Losses

Transactions in the reserve for loan and lease losses are summarized as
follows:

|                                                |  |      |           |      |  |      |          |   |  |   |          |  
|----------------------------------------------- |  | ---- | --------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                |  | 2001 |           | 2000 |  | 1999
|                                                |  |      |           |      |  |     
|Balance, Beginning of year                      |  | $    | 784,092   |      |  | $    | 763,638  |   |  | $ | 686,016  |  
|Recoveries on loans previously charged off      |  |      | 22,463    |      |  |      | 130,167  |   |  |   | 108,877  |  
|Loans charged off                               |  |      | (129,498  | )    |  |      | (365,713 | ) |  |   | (197,255 | )
|Provision/(credit) charged to operating expense |  |      | 773,000   |      |  |      | 256,000  |   |  |   | 166,000  |  
|                                                |  |      |           |      |  |      |          |   |  |   |          |  
|Balance, End of year                            |  | $    | 1,450,057 |      |  | $    | 784,092  |   |  | $ | 763,638  |  
|                                                |  |      |           |      |  |      |          |   |  |   |          |  

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #5  Loans to Directors and Officers

In the ordinary course of business, the Company has granted loans to certain
Directors and Officers and the companies with which they are associated. All
such loans were made under the terms which are consistent with the Banks
normal lending policies. The outstanding loans to Directors and Officers at
December 31, 2001 and 2000, amounted to approximately $862,000 and $1,609,000,
respectively. Not included in the balances outstanding at December 31, 2001
and 2000, were undisbursed commitments to lend of approximately $214,000.
There were no non-accruing loans to Directors and Officers and loans classified
by the Companys regulatory agency or by the Company in 2001 and 2000.

Deposits from related parties held by the Bank at December 31, 2001 and 2000
amounted to approximately $692,000 and $704,000, respectively.

Note #6  Premises and Equipment

Major classifications of Company premises and equipment are summarized as
follows:

|                        |                                                 |       |           |            |           |      |           |            |           | 
|----------------------- | ----------------------------------------------- | ----- | --------- | ---------- | --------- | ---- | --------- | ---------- | --------- | 
|                        |                                                 |       |           | 2001       |           | 2000
|                        |                                                 |       |           |            |           |     
|Building                |                                                 | $     | 3,641,990 |            |           | $    | 3,641,990 |           
|Furniture and equipment |                                                 |       | 3,434,630 |            |           |      | 3,083,590 |           
|Leasehold improvements  |                                                 |       | 1,338,140 |            |           |      | 1,284,084 |           
|                        |                                                 |       |           |            |           |      |           |           
|                        |                                                 |       | 8,414,760 |            |           |      | 8,009,664 |           
|                        | Less: Accumulated depreciation and amortization |       |           | (4,311,764 | )         |      |           | (3,812,477 | )        
|Land                    |                                                 |       | 1,285,000 |            |           |      | 1,285,000 |           
|                        |                                                 |       |           |            |           |      |           |           
|                        |                                                 | Total |           | $          | 5,387,996 |      |           | $          | 5,482,187 | 
|                        |                                                 |       |           |            |           |      |           |           

The Company is obligated under leases for equipment and property. The original
terms of the leases range from three to ten years. The leases contain options
to extend for periods from twelve months to sixty-seven months. All options to
extend have been exercised and the related lease costs are included below. The
following is a schedule of future minimum lease payments based upon obligations
at year-end.

|             |  |   |         | 
|------------ |  | - | ------- | 
|Year Ending  |  |   |         | 
|December 31, |  |   |         | 
|             |  |   |         | 
|2002         |  | $ | 187,178 | 
|2003         |  |   | 134,908 | 
|2004         |  |   | 62,638  | 
|             |  |   |         | 
|Total        |  | $ | 384,724 | 
|             |  |   |         | 

Total property and equipment expenditures charged to leases for the years ended
December 31, 2001, 2000 and 1999, were approximately $144,000, $112,000, and
$110,000, respectively.

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #7  Other Real Estate Owned

As discussed in Note #1, Other Real Estate Owned is carried at the estimated
fair value of the real estate. An analysis of the transactions during 2000
were as follows. There were no Other Real Estate Owned transactions and
balances during 2001.

|                                |  |      |          |  
|------------------------------- |  | ---- | -------- | -
|                                |  | 2000
|                                |  |     
|Balance, Beginning of year      |  | $    | 262,714  |  
|Sales and other deletions       |  |      | (231,034 | )
|Valuation adjustments and other |  |      | (31,680  | )
|                                |  |      |          |  
|Balance, End of year            |  | $    |         |  
|                                |  |      |          |  

The balances are shown net of reserves.

Transactions in the reserve for other real estate owned are summarized for 2000
and 1999:

|                                   |  |      |         |      |  |   |         |  
|---------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                   |  | 2000 |         | 1999
|                                   |  |      |         |     
|Balance, Beginning of year         |  | $    | 35,213  |      |  | $ | 55,873  |  
|Provision charged to other expense |  |      | 31,680  |      |  |   |        |  
|Charge-offs and other reductions   |  |      | (66,893 | )    |  |   | (20,660 | )
|                                   |  |      |         |      |  |   |         |  
|Balance, End of year               |  | $    |        |      |  | $ | 35,213  |  
|                                   |  |      |         |      |  |   |         |  

Note #8  Time Deposit Liabilities

The aggregate amount of time certificates of deposit in denominations of
$100,000 or more at December 31, 2001 and 2000 was $27,092,538 and $6,526,308,
respectively. At December 31, 2001, the scheduled maturities of time
certificates of deposit are as follows:

|     |  |   |            | 
|---- |  | - | ---------- | 
|2002 |  | $ | 57,083,742 | 
|2003 |  |   | 5,102,520  | 
|     |  |   |            | 
|     |  | $ | 62,186,262 | 
|     |  |   |            | 

Note #9  Federal Home Loan Bank (FHLB) Advances and Other Borrowings

The Bank has borrowing lines with four correspondent banks totaling $4.7
million and another line at the Federal Home Loan Bank totaling $28 million as
of year-end.

Pursuant to collateral agreements with FHLB, advances are secured by all
capital stock in FHLB and certain investment securities. FHLB advances of
$3,000,000 at December 31, 2001 mature on January 2, 2002 and bears interest at
1.51%.

55



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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #10  Trust Preferred Securities

On December 18, 2001, Vineyard Statutory Trust I, a wholly owned subsidiary of
Vineyard National Bancorp, issued $12,000,000 of Floating Rate Trust
Securities. The trust invested the gross proceeds from the offering in
Floating Rate Junior Subordinated Deferrable Interest Debentures issued by
Vineyard National Bancorp. The subordinated debentures were issued concurrent
with the issuance of the Trust Securities. Vineyard National Bancorp will pay
the interest on the junior subordinated debentures to the Trust, which
represents the sole revenue and sole source of dividend distributions by the
trust to the holders of the Trust Securities. Vineyard National Bancorp has
guaranteed, on a subordinated basis, payment of the Trusts obligation.
Vineyard National Bancorp has the right, assuming no default has occurred, to
defer payments of interest on the junior subordinated debentures at any time
for a period not to exceed 20 consecutive quarters. The Trust Securities will
mature on December 18, 2031 but can be called at any time commencing in 2006 at
par.

Note #11  Convertible Debentures

On April 30, 2001, the Company issued $3,750,000 in 10% convertible debentures.
The debentures are convertible into shares of the Companys common stock at
any time before maturity or redemption, at a conversion price of $5.00 per
share. The debentures may be redeemed at the Companys option, in whole or in
part at any time after July 1, 2003. Unless redeemed or converted, the
debentures are due June 30, 2008. Interest on the debentures is due quarterly
at an annual rate of 10%. Total interest expense recorded for 2001 was
$268,709.

Note #12  Acquisition of Assets and Liabilities

During December 2001, the Bank acquired certain assets and liabilities of one
branch of Pacific Business Bank. Total assets acquired were $8,874,205, which
consisted of $17,430 in leasehold improvements and other fixed assets, $34,982
in other assets and $8,821,804 in cash. In addition, the Bank also assumed
$8,874,205 of deposits. No premium was paid in connection with the purchase.

Note #13  Income Taxes

|                                                                |                   |                           |          |                          |         |      |         |         |         |   |         |          |         |  
|--------------------------------------------------------------- | ----------------- | ------------------------- | -------- | ------------------------ | ------- | ---- | ------- | ------- | ------- | - | ------- | -------- | ------- | -
|                                                                |                   |                           |          | Year Ending December 31,
|                                                                |                   |                           |          |                         
|                                                                |                   |                           |          | 2001                     |         | 2000 |         | 1999   
|                                                                |                   |                           |          |                          |         |      |         |        
|Tax provision (credit) applicable to
income before income taxes |                   | $                         | (17,000  | )                        |         | $    | 449,000 |         |         | $ | (11,600 | )       
|                                                                |                   |                           |          |                          |         |      |         |         |         |   |         |         
|Federal Income Tax                                              |                   |                           |          |                          |         |      |         |         |         |   |         |         
|                                                                | Current           |                           |          | 709,000                  |         |      |         | 298,900 |         |   |         | 421,600  |        
|                                                                | Deferred (credit) |                           |          | (402,000                 | )       |      |         | 2,100   |         |   |         | (433,200 | )      
|                                                                |                   |                           |          |                          |         |      |         |         |         |   |         |         
|                                                                |                   | Total Federal Income Tax  |          |                          | 307,000 |      |         |         | 301,000 |   |         |          | (11,600 | )
|                                                                |                   |                           |          |                          |         |      |         |         |         |   |         |         
|State Franchise Tax                                             |                   |                           |          |                          |         |      |         |         |         |   |         |         
|                                                                | Current           |                           |          | 259,000                  |         |      |         | 107,200 |         |   |         | 144,200  |        
|                                                                | Deferred (credit) |                           |          | (108,000                 | )       |      |         | 40,800  |         |   |         | (144,200 | )      
|                                                                |                   |                           |          |                          |         |      |         |         |         |   |         |         
|                                                                |                   | Total State Franchise Tax |          |                          | 151,000 |      |         |         | 148,000 |   |         |          |        |  
|                                                                |                   |                           |          |                          |         |      |         |         |         |   |         |         
|Change in valuation allowance                                   |                   |                           | (475,000 | )                        |         |      |        |         |         |   |        |         
|                                                                |                   |                           |          |                          |         |      |         |         |         |   |         |         
|                                                                |                   | Total Income Taxes        |          | $                        | (17,000 | )    |         | $       | 449,000 |   |         | $        | (11,600 | )
|                                                                |                   |                           |          |                          |         |      |         |         |         |   |         |         

56



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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #13  Income Taxes,Continued

As a result of the following items, the total income tax expense/(credit) for
2001, 2000 and 1999, was different than the amount computed by applying the
statutory U.S. Federal income tax rate to income before taxes:

|                                                            |       |   |          |         |        |  |           |      |        |   |         |         |           |  |      |      |  |   |           |         |   |  |       |       |  
|----------------------------------------------------------- | ----- | - | -------- | ------- | ------ |  | --------- | ---- | ------ | - | ------- | ------- | --------- |  | ---- | ---- |  | - | --------- | ------- | - |  | ----- | ----- | -
|                                                            |       |   | 2001     |         | 2000   |  | 1999     
|                                                            |       |   |          |         |        |  |          
|                                                            |       |   |          |         |        |  | Percent   |      |        |   |         |         | Percent   |  |      |      |  |   | Percent  
|                                                            |       |   |          |         |        |  | of Pretax |      |        |   |         |         | of Pretax |  |      |      |  |   | of Pretax
|                                                            |       |   | Amount   |         | Income |  | Amount    |      | Income |   | Amount  |         | Income   
|                                                            |       |   |          |         |        |  |           |      |        |   |         |         |          
|Federal rate                                                |       | $ | 387,365  |         |        |  | 34.0      |      |        | $ | 363,468 |         |           |  | 34.0 |      |  | $ | (12,398   | )       |   |  | (34.0 | )    
|Changes due to State income
tax, net of Federal tax benefit |       |   | 80,891   |         |        |  | 7.1       |      |        |   | 75,901  |         |           |  | 7.1  |      |  |   | (2,609    | )       |   |  | (7.1  | )    
|Change in valuation allowance                               |       |   | (475,000 | )       |        |  | (41.7     | )    |        |   |        |         |           |  |     |      |  |   |          |         |   |  |      |      
|Other                                                       |       |   | (10,256  | )       |        |  | (0.9      | )    |        |   | 9,631   |         |           |  | 0.9  |      |  |   | 3,407     |         |   |  | 9.3   |      
|                                                            |       |   |          |         |        |  |           |      |        |   |         |         |           |  |      |      |  |   |           |         |   |  |       |      
|                                                            | Total |   | $        | (17,000 | )      |  |           | (1.5 | )      |   | $       | 449,000 |           |  |      | 42.0 |  |   | $         | (11,600 | ) |  |       | (31.8 | )
|                                                            |       |   |          |         |        |  |           |      |        |   |         |         |           |  |      |      |  |   |           |         |   |  |       |      

The deferred tax assets and liabilities of the Company are composed of the
following tax-affected cumulative timing differences.

|                                      |                                     |                             |           |         |           |      |          |         |          |  
|------------------------------------- | ----------------------------------- | --------------------------- | --------- | ------- | --------- | ---- | -------- | ------- | -------- | -
|                                      |                                     |                             |           | 2001    |           | 2000
|                                      |                                     |                             |           |         |           |     
|Deferred Tax Assets                   |                                     |                             |           |         |           |      |          |        
|                                      | Reserve for loan losses             |                             | $         | 460,000 |           |      | $        | 195,000 |         
|                                      | Deferred compensation               |                             |           | 310,000 |           |      |          | 275,000 |         
|                                      | Deferred fees                       |                             |           | 136,000 |           |      |          | 121,000 |         
|                                      | Non-deductible reserves             |                             |           | 419,000 |           |      |          | 374,000 |         
|                                      | Other assets                        |                             |           | 88,000  |           |      |          | 26,000  |         
|                                      | Other Unrealized Loss on Securities |                             |           | 25,000  |           |      |          |        |         
|                                      |                                     |                             |           |         |           |      |          |        
|                                      |                                     |                             | 1,438,000 |         |           |      | 991,000  |        
|                                      |                                     | Less: Valuation allowance 1 |           |         |          |      |          |         | (475,000 | )
|                                      |                                     |                             |           |         |           |      |          |        
|                                      |                                     |                             | 1,438,000 |         |           |      | 516,000  |        
|Deferred Tax Liabilities
Fixed assets |                                     |                             | (25,000   | )       |           |      | (113,000 | )      
|                                      |                                     |                             |           |         |           |      |          |        
|                                      |                                     | Net Deferred Tax Assets     |           | $       | 1,413,000 |      |          | $       | 403,000  |  
|                                      |                                     |                             |           |         |           |      |          |        



---

| |  | 1 The valuation allowance is managements estimate of amounts more likely than
not of being realized due to uncertainty regarding future income based on prior
results. The allowance was largely attributable to unused losses previously
incurred and overall limitations on other deferred tax assets. The allowance
was eliminated during 2001 because, in managements judgment, the deferred tax
assets would more likely than not be realized in future years.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note #14  Commitments and Contingencies

In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk. These financial instruments include
commitments to extend credit and standby letters of credit. To varying
degrees, these instruments involve elements of credit and interest rate risk in
excess of the amount recognized in the statement of financial position. The
Companys exposure to credit loss in the event of non-performance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those
instruments. At December 31, 2001 and 2000, the Company had commitments to
extend credit of approximately $39,582,000 and $9,112,000 and obligations under standby letters
of credit of approximately $172,000 and $151,000.

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #14  Commitments and Contingencies, Continued

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customers creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on managements credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, income-producing
commercial properties, residential properties and properties under
construction.

Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.

On October 25, 1999, a jury rendered a verdict against the Bank in the amount
of approximately $3.5 million arising from a lawsuit by a borrower who also
leased to the Bank a branch office. The Bank foreclosed on the real property
securing its loan to the borrower. The borrower claimed that the foreclosure
was wrongful. On February 25, 2000, the trial judge found that the jury
verdict was excessive and ordered a new trial on damages if the borrower did
not agree to a reduction to $860,000. During 1999, the Bank accrued a loss of
$860,000 in recognition of the amount of liability determined by the court
which is included in litigation expense. During 2000, the lawsuit was settled.

The Company is involved in various other litigation. In the opinion of
Management and the Companys legal council, the disposition of all such other
litigation pending will not have a material effect on the Companys financial
statements.

Note #15  Regulatory Matters

The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Companys and the Banks
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of the Companys
and the Banks assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Companys and the Banks
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December
31, 2001, that the Company and the Bank meets all capital adequacy requirements
to which it is subject.

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #15  Regulatory Matters, Continued

Although, as of the most recent formal notification from the Federal Deposit
Insurance Corporation, the Bank was categorized as adequately capitalized under
the regulatory framework for prompt corrective action; the Bank will be
categorized as well capitalized based upon its year-end ratios. To be
categorized as well-capitalized, the Bank must maintain minimum capital ratios
as set forth in the table below. The following table also sets forth the
Banks actual regulatory capital amounts and ratios (dollar amounts in
thousands):

|                                         |              |   |                   |        |                   |  |                   |       |         |   |                |        |                   |  |         |     |   |   |                   |        |  |  |      |      |  
|---------------------------------------- | ------------ | - | ----------------- | ------ | ----------------- |  | ----------------- | ----- | ------- | - | -------------- | ------ | ----------------- |  | ------- | --- | - | - | ----------------- | ------ |  |  | ---- | ---- | -
|                                         |              |   |                   |        |                   |  |                   |       |         |   | Capital Needed
|                                         |              |   |                   |        |                   |  |                   |       |         |   |               
|                                         |              |   |                   |        |                   |  |                   |       |         |   |                |        |                   |  |         |     |   |   | To Be Well       
|                                         |              |   |                   |        |                   |  |                   |       |         |   |                |        |                   |  |         |     |   |   | Capitalized Under
|                                         |              |   |                   |        |                   |  |                   |       |         |   | For Capital    |        | Prompt Corrective
|                                         |              |   | Actual Regulatory |        | Adequacy Purposes |  | Action Provisions
|                                         |              |   |                   |        |                   |  |                  
|                                         |              |   | Capital           |        |                   |  |                   |       | Capital |   |                |        |                   |  | Capital |     |   |   |                  
|                                         |              |   | Amount            |        | Ratio             |  | Amount            |       | Ratio   |   | Amount         |        | Ratio            
|                                         |              |   |                   |        |                   |  |                   |       |         |   |                |        |                  
|As of December 31, 2001                  |              |   |                   |        |                   |  |                   |       |         |   |                |        |                   |  |         |     |   |   |                   |        |  |  |      |     
|Total capital to risk-weighted assets:   |              |   |                   |        |                   |  |                   |       |         |   |                |        |                   |  |         |     |   |   |                   |        |  |  |      |     
|                                         | Bank         |   | $                 | 23,020 |                   |  |                   | 16.10 | %       |   | $              | 11,439 |                   |  |         | 8.0 | % |   | $                 | 14,299 |  |  |      | 10.0 | %
|                                         | Consolidated |   | $                 | 11,760 |                   |  |                   | 8.17  | %       |   | $              | 11,521 |                   |  |         | 8.0 | % |   |                   | N/A    |  |  |      | N/A  |  
|Tier 1 capital to risk-weighted assets:  |              |   |                   |        |                   |  |                   |       |         |   |                |        |                   |  |         |     |   |   |                   |        |  |  |      |     
|                                         | Bank         |   | $                 | 21,570 |                   |  |                   | 15.08 | %       |   | $              | 5,720  |                   |  |         | 4.0 | % |   | $                 | 8,579  |  |  |      | 6.0  | %
|                                         | Consolidated |   | $                 | 10,310 |                   |  |                   | 7.16  | %       |   | $              | 5,761  |                   |  |         | 4.0 | % |   |                   | N/A    |  |  |      | N/A  |  
|Tier 1 capital to average assets:        |              |   |                   |        |                   |  |                   |       |         |   |                |        |                   |  |         |     |   |   |                   |        |  |  |      |     
|                                         | Bank         |   | $                 | 21,570 |                   |  |                   | 12.53 | %       |   | $              | 6,887  |                   |  |         | 4.0 | % |   | $                 | 8,608  |  |  |      | 5.0  | %
|                                         | Consolidated |   | $                 | 10,310 |                   |  |                   | 5.99  | %       |   | $              | 6,887  |                   |  |         | 4.0 | % |   |                   | N/A    |  |  |      | N/A  |  
|As of December 31, 2000                  |              |   |                   |        |                   |  |                   |       |         |   |                |        |                   |  |         |     |   |   |                   |        |  |  |      |     
|Total capital to risk-weighted assets:*  |              | $ | 10,065            |        |                   |  | 11.33             | %     |         | $ | 7,109          |        |                   |  | 8.0     | %   |   | $ | 8,886             |        |  |  | 10.0 | %   
|Tier 1 capital to risk-weighted assets:* |              | $ | 9,281             |        |                   |  | 10.44             | %     |         | $ | 3,554          |        |                   |  | 4.0     | %   |   | $ | 5,331             |        |  |  | 6.0  | %   
|Tier 1 capital to average assets:*       |              | $ | 9,281             |        |                   |  | 8.41              | %     |         | $ | 4,412          |        |                   |  | 4.0     | %   |   | $ | 5,515             |        |  |  | 5.0  | %   



---

|* |  | At December 31, 2000, the Companys capital ratios were substantially the same as the Bank.
|- |  | -------------------------------------------------------------------------------------------

Note #16  Deferred Compensation Plan

The Company has a Nonqualifed Deferred Compensation Plan for certain key
management personnel (participants) whereby they may defer compensation which
will then provide for certain payments at the benefit distribution date. The
plan provides for payments commencing upon retirement, death, participant
termination or plan termination. The plan also permits hardship withdrawals.
Participants always have a fully vested right to benefits attributable to
deferrals and company contributions made under the plan. The Company may make
matching contributions of officers deferrals up to a maximum of 2.5% to 10% of
participants deferrals to a maximum of 10% of before-tax compensation. The
Companys contribution, in the aggregate, for all participants shall not exceed
4% of compensation of all Company employees. The deferred compensation expense
was $39,739, $11,488, and $23,787 for the years ended December 31, 2001, 2000
and 1999, respectively.

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #17  Defined Contribution Plan

The Company has a qualified defined contribution plan (401(k) Retirement
Savings Plan) for all eligible employees. Employees contribute from 1% to 15%
of their compensation with a maximum of $10,500 annually. The Companys
contribution to the plan is based upon an amount equal to 50% of each
participants eligible contribution for the plan year not to exceed 6% of the
employees compensation. The Companys matching contribution becomes vested
immediately. The expense was $35,909, $12,420, and $16,121 for the years ended
December 31, 2001, 2000 and 1999, respectively.

Note #18  Directors Deferred Compensation Plan

The Bank adopted a Directors Non-Qualified Deferred Compensation Plan
effective January 1, 1998, which provides retirement benefits to one or more
Directors of the Bank. The benefits to be paid were based upon the individual
directors years of service to the Bank and decision to defer director fees for
the respective years of participation. During 2001 and 2000, approximately
$58,000 and $42,000, respectively; were expensed for this plan. This plan was terminated during
2001.

The Company adopted a new Directors Deferred Compensation Plan effective
January 1, 2001. The plan allows directors to defer board of directors fees
and interest at a rate equal to national
bank prime (at the first day of each year) plus 2% fixed for the term of the
calendar year which will then provide for retirement benefits to be paid upon
retirement, resignation, death, disability or as provided and elected in the
directors deferral agreement. The company is under no obligation to make
matching contributions to the plan. During 2001, approximately $102,000
inclusive of deferred board fees and interest was expensed for this plan.

Note #19  Supplemental Executive Retirement Plan

The Company has a Supplemental Executive Retirement Plan, which will provide
retirement benefits for the former chief executive officer of the Bank.
Benefits under this plan are fully vested upon participation. During 2001 and
2000, approximately $43,000 and $244,000, respectively, were expensed for this
plan. The benefits to be paid amount to $75,000 per year for 15 years
commencing in the year 2003.

Note #20  Stock Option Plan

At December 31, 2001, the Company has one stock-based compensation plan, which
is described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for its incentive stock option plan. Had compensation cost
for the Companys stock option plan been determined on the fair value at the
grant dates for awards under the plan consistent with the method prescribed by
SFAS 123, the Companys net income and earnings per share would have been
adjusted to the pro forma amounts indicated below:

|                            |                   |             |           |   |           |      |      |   |         |      |      |   |         |       |   |  | 
|--------------------------- | ----------------- | ----------- | --------- | - | --------- | ---- | ---- | - | ------- | ---- | ---- | - | ------- | ----- | - |  | 
|                            |                   |             |           |   |           |      | 2001 |   | 2000    |      | 1999
|                            |                   |             |           |   |           |      |      |   |         |      |     
|Net income/(loss)           |                   | As reported |           | $ | 1,156,309 |      |      | $ | 620,023 |      |      | $ | (24,864 | )    
|                            |                   | Pro forma   |           | $ | 1,074,715 |      |      | $ | 618,042 |      |      | $ | (30,895 | )    
|Earnings/(loss) per share   |                   | As reported |           | $ | 0.62      |      |      | $ | 0.33    |      |      | $ | (0.01   | )    
|                            |                   | Pro forma   |           | $ | 0.58      |      |      | $ | 0.33    |      |      | $ | (0.02   | )    
|Earnings/(loss) per share  |                   | As reported |           | $ | 0.54      |      |      | $ | 0.33    |      |      | $ | (0.01   | )    
|                            | assuming dilution |             | Pro forma |   | $         | 0.44 |      |   | $       | 0.33 |      |   | $       | (0.02 | )

60



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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #20  Stock Option Plan, Continued

An incentive stock option plan was approved by the stockholders in 1987
covering an aggregate of 126,000 shares (after giving retroactive effect for
stock splits). The plan provides that options of the Companys unissued common
stock may be granted to officers and key employees at prices not less than the
fair market value of such shares at dates of grant. Options vest at a rate of
33.33% every two years with all options vesting at the end of the sixth year
after the date of grant. Options granted expire on such date as the Stock
Option Committee or Board of Directors may determine, but not later than the
sixth anniversary of the date on which the option is granted.

During 1996, the Board of Directors of Vineyard National Bancorp elected to
modify the existing incentive stock option plan. Under the new agreement the
options granted expire on such date as the Stock Option Committee or Board
shall determine, but not later than the seventh anniversary of the date on
which the option is granted.

During 1997, the Board of Directors and stockholders of Vineyard National
Bancorp elected to terminate the existing 1987 Incentive Stock Option Plan and
approve the 1997 Incentive Stock Option Plan. The new Plan authorizes an
additional 200,000 shares of the Bancorps authorized but unissued common stock
to be combined with the 53,316 shares which remain under the 1987 Plan for a
total of 253,316 shares. Directors of the Bancorp are eligible to participate
under the new Plan. Options vest at a rate determined by the Board of
Directors. Options granted expire on such date as the Option Committee or
Board of Directors may determine, but not later than the tenth anniversary date
on which the option is granted.

The fair value of each option granted during 2001, 2000 and 1999, respectively,
were estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions; risk-free rates of 5.13%, 5.26%, and
6.56%, dividend yield of -0-% for all years; volatility of 36%, 33%, and 30%,
expected life of 8 years for 2001, 10 years for 2000, and 7 years for 1999.

A summary of the status of the Companys incentive stock option plan as of
December 31, 2001, 2000 and 1999, respectively, and changes during the years
ending on those dates is presented below:

|                                                               |  |                  |          |             |  |       |         |                  |  |             |      |       |  |  |          |          |  |   |          |   |  |   |      | 
|-------------------------------------------------------------- |  | ---------------- | -------- | ----------- |  | ----- | ------- | ---------------- |  | ----------- | ---- | ----- |  |  | -------- | -------- |  | - | -------- | - |  | - | ---- | 
|                                                               |  | 2001             |          | 2000       
|                                                               |  |                  |          |            
|                                                               |  | Number of Shares |          |             |  |       |         | Number of Shares |  |             |      |      
|                                                               |  |                  |          | Weighted-   |  |       |         | Weighted-       
|                                                               |  | Available        |          |             |  |       |         | Average          |  | Available   |      |       |  |  |          | Average 
|                                                               |  | For              |          |             |  |       |         | Exercise         |  | For         |      |       |  |  |          | Exercise
|                                                               |  | Granting         |          | Outstanding |  | Price |         | Granting         |  | Outstanding |      | Price
|                                                               |  |                  |          |             |  |       |         |                  |  |             |      |      
|Outstanding at beginning of year                               |  |                  | 181,100  |             |  |       | 143,300 |                  |  | $           | 4.39 |       |  |  | 116,128  |          |  |   | 210,324  |   |  | $ | 5.25 | 
|Exercised                                                      |  |                  |         |             |  |       | (11,300 | )                |  | $           | 3.93 |       |  |  |         |          |  |   | (2,052   | ) |  | $ | 2.92 | 
|Cancelled                                                      |  |                  | 26,000   |             |  |       | (26,000 | )                |  | $           | 3.40 |       |  |  | 256,472  |          |  |   | (256,472 | ) |  | $ | 5.17 | 
|Granted                                                        |  |                  | (141,000 | )           |  |       | 141,000 |                  |  | $           | 4.92 |       |  |  | (191,500 | )        |  |   | 191,500  |   |  | $ | 4.47 | 
|                                                               |  |                  |          |             |  |       |         |                  |  |             |      |       |  |  |          |          |  |   |          |   |  |   |      | 
|Outstanding at end of year                                     |  |                  | 66,100   |             |  |       | 247,000 |                  |  | $           | 4.12 |       |  |  | 181,100  |          |  |   | 143,300  |   |  | $ | 4.39 | 
|                                                               |  |                  |          |             |  |       |         |                  |  |             |      |       |  |  |          |          |  |   |          |   |  |   |      | 
|Options exercisable at year-end                                |  |                  |          |             |  |       | 81,166  |                  |  |             |      |       |  |  |          |          |  |   | 10,666   |   |  |   |      | 
|Weighted-average fair value of
Options granted during the year |  |                  |          |             |  | $     | 2.03    |                  |  |             |      |       |  |  |          |          |  | $ | 2.49     |   |  |   |      | 

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #20  Stock Option Plan, Continued

|                                                               |  |                  |         |             |  |       |         |          |  |   |      | 
|-------------------------------------------------------------- |  | ---------------- | ------- | ----------- |  | ----- | ------- | -------- |  | - | ---- | 
|                                                               |  | 1999            
|                                                               |  |                 
|                                                               |  | Number of Shares |         |             |  |      
|                                                               |  |                  |         | Weighted-  
|                                                               |  | Available        |         |             |  |       |         | Average 
|                                                               |  | For              |         |             |  |       |         | Exercise
|                                                               |  | Granting         |         | Outstanding |  | Price
|                                                               |  |                  |         |             |  |      
|Outstanding at beginning of year                               |  |                  | 152,188 |             |  |       | 174,264 |          |  | $ | 5.23 | 
|Exercised                                                      | 
|Cancelled                                                      |  |                  | 8,940   |             |  |       | (8,940  | )        |  | $ | 5.51 | 
|Granted                                                        |  |                  | (45,000 | )           |  |       | 45,000  |          |  | $ | 5.75 | 
|                                                               |  |                  |         |             |  |       |         |          |  |   |      | 
|Outstanding at end of year                                     |  |                  | 116,128 |             |  |       | 210,324 |          |  | $ | 5.25 | 
|                                                               |  |                  |         |             |  |       |         |          |  |   |      | 
|Options exercisable at year-end                                |  |                  |         |             |  |       | 84,824  |          |  |   |      | 
|Weighted-average fair value of
Options granted during the year |  |                  |         |             |  | $     | 2.13    |          |  |   |      | 

The following table summarizes information about incentive stock options
outstanding at December 31, 2001:

|                    |  |                     |         |                  |  |           |      |             |  |          |      |  |  |           |        |  |  |   |      | 
|------------------- |  | ------------------- | ------- | ---------------- |  | --------- | ---- | ----------- |  | -------- | ---- |  |  | --------- | ------ |  |  | - | ---- | 
|Options Outstanding |  | Options Exercisable
|                    |  |                    
|                    |  |                     |         |                  |  | Weighted- |      | Weighted-   |  |          |      |  |  | Weighted-
|                    |  |                     |         |                  |  | Average   |      | Average     |  |          |      |  |  | Average  
|Exercise            |  | Number              |         | Remaining        |  | Exercise  |      | Number      |  | Exercise
|Price               |  | Outstanding         |         | Contractual Life |  | Price     |      | Exercisable |  | Price   
|                    |  |                     |         |                  |  |           |      |             |  |         
|$3.00 - $4.00       |  |                     | 215,000 |                  |  |           | 9.00 |             |  | $        | 3.91 |  |  |           | 75,000 |  |  | $ | 4.00 | 
|$5.00 - $7.00       |  |                     | 32,000  |                  |  |           | 8.02 |             |  | $        | 5.53 |  |  |           | 6,166  |  |  | $ | 5.92 | 
|                    |  |                     |         |                  |  |           |      |             |  |          |      |  |  |           |        |  |  |   |      | 
|                    |  |                     | 247,000 |                  |  |           | 8.87 |             |  | $        | 4.12 |  |  |           | 81,166 |  |  | $ | 4.15 | 
|                    |  |                     |         |                  |  |           |      |             |  |          |      |  |  |           |        |  |  |   |      | 

Note #21  Restriction on Transfers of Funds to Parent

There are legal limitations on the ability of the Bank to provide funds to the
Company. Dividends declared by the Bank may not exceed, in any calendar year,
without approval of the California Commissioner of financial institutions, net
income for the year and the retained net income for the preceding two years.
Section 23A of the Federal Reserve Act restricts the Bank from extending credit
to the Company and other affiliates amounting to more than 20 percent of its
contributed capital and retained earnings. At December 31, 2001, the maximum
combined amount of funds available from these two sources amounted to
approximately $6,306,000 or 29% of the Banks stockholders equity.

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #22  Other Expenses

The following is a breakdown of expenses for the years ended December 31, 2001,
2000 and 1999:

|               |                                        |       |   |         |           |      |   |         |           |  |   |         |           | 
|-------------- | -------------------------------------- | ----- | - | ------- | --------- | ---- | - | ------- | --------- |  | - | ------- | --------- | 
|               |                                        |       |   | 2001    |           | 2000 |   | 1999   
|               |                                        |       |   |         |           |      |   |        
|Other Expenses |                                        |       |   |         |           |      |   |         |           |  |   |        
|               | Data processing                        |       | $ | 686,383 |           |      | $ | 617,658 |           |  | $ | 668,228 |          
|               | Marketing expenses                     |       |   | 419,108 |           |      |   | 207,601 |           |  |   | 252,808 |          
|               | Professional expenses                  |       |   | 378,805 |           |      |   | 797,336 |           |  |   | 687,931 |          
|               | Office supplies, postage and telephone |       |   | 469,163 |           |      |   | 361,177 |           |  |   | 319,614 |          
|               | Insurance and assessment expense       |       |   | 196,487 |           |      |   | 139,310 |           |  |   | 160,149 |          
|               | Administrative expense                 |       |   | 220,229 |           |      |   | 381,291 |           |  |   | 315,354 |          
|               | Other                                  |       |   | 306,908 |           |      |   | 175,173 |           |  |   | 251,488 |          
|               |                                        |       |   |         |           |      |   |         |           |  |   |        
|               |                                        | Total |   | $       | 2,677,083 |      |   | $       | 2,679,546 |  |   | $       | 2,655,572 | 
|               |                                        |       |   |         |           |      |   |         |           |  |   |        

Note #23  Income/(Loss) Per Common and Common Equivalent Share

The following is a reconciliation of net income/(loss) and shares outstanding
to the income/(loss) and number of shares used to compute EPS:

|                                                     |  |        |           |        |  |        |           |        |  |      |         |        |  |  |           |   |  |   |         |   |  |  |           | 
|---------------------------------------------------- |  | ------ | --------- | ------ |  | ------ | --------- | ------ |  | ---- | ------- | ------ |  |  | --------- | - |  | - | ------- | - |  |  | --------- | 
|                                                     |  | 2001   |           | 2000   |  | 1999  
|                                                     |  |        |           |        |  |       
|                                                     |  | Income |           | Shares |  | Income |           | Shares |  | Loss |         | Shares
|                                                     |  |        |           |        |  |        |           |        |  |      |         |       
|Net income/(loss) as reported                        |  | $      | 1,156,309 |        |  |        |           |        |  | $    | 620,023 |        |  |  |           |   |  | $ | (24,864 | ) |  |  |           | 
|Shares outstanding at year-end                       |  |        |           |        |  |        | 1,876,126 |        |  |      |         |        |  |  | 1,864,826 |   |  |   |         |   |  |  | 1,862,776 | 
|Impact of weighting shares
purchased during the year |  |        |           |        |  |        | (7,869    | )      |  |      |         |        |  |  | (656      | ) |  |   |         |   |  |  |          | 
|                                                     |  |        |           |        |  |        |           |        |  |      |         |        |  |  |           |   |  |   |         |   |  |  |           | 
|Used in Basic EPS                                    |  |        | 1,156,309 |        |  |        | 1,868,257 |        |  |      | 620,023 |        |  |  | 1,864,170 |   |  |   | (24,864 | ) |  |  | 1,862,776 | 
|Dilutive effect of outstanding
stock options         |  |        |           |        |  |        | 49,485    |        |  |      |         |        |  |  | 1,264     |   |  |   |         |   |  |  | 125,840   | 
|Dilutive effect of convertible
debentures            |  |        | 155,851   |        |  |        | 503,425   |        |  |      |        |        |  |  |          |   |  |   |        |   |  |  |          | 
|                                                     |  |        |           |        |  |        |           |        |  |      |         |        |  |  |           |   |  |   |         |   |  |  |           | 
|Used in Diluted EPS                                  |  | $      | 1,312,160 |        |  |        | 2,421,167 |        |  | $    | 620,023 |        |  |  | 1,865,434 |   |  | $ | (24,864 | ) |  |  | 1,988,616 | 
|                                                     |  |        |           |        |  |        |           |        |  |      |         |        |  |  |           |   |  |   |         |   |  |  |           | 

Note #24  Fair Value of Financial Instruments

SFAS No. 107, Disclosures About Fair Value of Financial Instruments,requires
disclosure of fair value information about financial instruments, whether or
not recognized in the statement of financial condition. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Bank.

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #24  Fair Value of Financial Instruments,Continued

The following table presents the carrying amounts and fair values of financial
instruments at December 31, 2001. SFAS No. 107, Disclosures about Fair Value
of Financial Instruments,defines the fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale.

|            |                                                           |  |                   |             |                   |  |        |             |            |  |   |            |  |  |   |            | 
|----------- | --------------------------------------------------------- |  | ----------------- | ----------- | ----------------- |  | ------ | ----------- | ---------- |  | - | ---------- |  |  | - | ---------- | 
|            |                                                           |  | December 31, 2001 |             | December 31, 2000
|            |                                                           |  |                   |             |                  
|            |                                                           |  | Carrying          |             |                   |  |        |             | Carrying   |  |   |            | 
|            |                                                           |  | Amount            |             | Fair Value        |  | Amount |             | Fair Value
|            |                                                           |  |                   |             |                   |  |        |             |           
|Assets      |                                                           |  |                   |             |                   |  |        |             |            |  |   |            |  |  |   |           
|            | Cash and cash equivalents                                 |  | $                 | 14,709,919  |                   |  | $      | 14,709,919  |            |  | $ | 16,793,298 |  |  | $ | 16,793,298 | 
|            | Interest-bearing deposits in other
financial institutions |  |                   |            |                   |  |        |            |            |  |   | 198,000    |  |  |   | 198,000    | 
|            | Investment securities                                     |  |                   | 30,550,061  |                   |  |        | 30,550,061  |            |  |   | 5,527,040  |  |  |   | 5,527,040  | 
|            | Loans receivable held for investment                      |  |                   | 131,656,676 |                   |  |        | 134,141,289 |            |  |   | 78,504,272 |  |  |   | 78,253,098 | 
|            | Loans held for sale                                       |  |                   | 4,471,286   |                   |  |        | 4,471,286   |            |  |   | 235,300    |  |  |   | 235,300    | 
|            | Accrued interest receivable                               |  |                   | 900,890     |                   |  |        | 900,890     |            |  |   | 570,089    |  |  |   | 570,089    | 
|Liabilities |                                                           |  |                   |             |                   |  |        |             |            |  |   |            |  |  |   |           
|            | Non-interest bearing deposits                             |  |                   | 45,951,391  |                   |  |        | 45,951,391  |            |  |   | 36,855,546 |  |  |   | 36,855,546 | 
|            | Interest bearing deposits                                 |  |                   | 113,429,649 |                   |  |        | 113,803,098 |            |  |   | 62,727,564 |  |  |   | 62,728,346 | 
|            | Accrued interest payable                                  |  |                   | 971,571     |                   |  |        | 971,571     |            |  |   | 323,676    |  |  |   | 323,676    | 

|                              |                                                            |  |          |            |              |  |          |         |              |  |   |           |  |  |   |        | 
|----------------------------- | ---------------------------------------------------------- |  | -------- | ---------- | ------------ |  | -------- | ------- | ------------ |  | - | --------- |  |  | - | ------ | 
|                              |                                                            |  | Notional |            | Cost to Cede |  | Notional |         | Cost to Cede
|                              |                                                            |  | Amount   |            | or Assume    |  | Amount   |         | or Assume   
|                              |                                                            |  |          |            |              |  |          |         |             
|Off-Balance Sheet Instruments |                                                            |  |          |            |              |  |          |         |              |  |   |           |  |  |   |       
|                              | Commitments to extend credit and
standby letters of credit |  | $        | 39,754,000 |              |  | $        | 397,540 |              |  | $ | 9,263,000 |  |  | $ | 92,630 | 

The following methods and assumptions were used by the Bank in estimating fair
value disclosures:



| |  | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets fair values due to the short-term
nature of the assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| 
| |  | Interest-bearing Deposits in Other Financial Institutions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| 
|  |  | Interest-bearing deposits in other financial institutions mature within
ninety days from the date of deposit and, therefore, the carrying amounts
approximate those assets fair values.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| 
| |  | Investment Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| 
|  |  | Fair values are based upon quoted market prices, where available.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| 
| |  | Loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| 
|  |  | For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values for other loans (for example, fixed rate commercial real estate and
rental property mortgage loans and commercial and industrial loans) are
estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality.
Loan fair value estimates include judgments regarding future expected loss
experience and risk characteristics. The carrying amount of accrued
interest receivable approximates its fair value.

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #24  Fair Value of Financial Instruments,Continued



| |  | Loans Held for Sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | Loans held for sale are recorded at the lower of cost or estimated fair
value and, therefore, the carrying amount approximates fair value.                                                                                                                                                                                                                                                                                                                                                                                                                        
| 
| |  | Deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| 
|  |  | The fair values disclosed for demand deposits (for example, interest-bearing
checking accounts and passbook accounts) are, by definition, equal to the
amount payable on demand at the reporting date (that is, their carrying
amounts). The fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities
on such time deposits. The carrying amount of accrued interest payable
approximates fair value.
| 
| |  | Off-Balance Sheet Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| 
|  |  | Fair values of loan commitments and financial guarantees are based upon fees
currently charged to enter similar agreements, taking into account the
remaining terms of the agreement and the counterparties credit standing.                                                                                                                                                                                                                                                                                                                                     

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #25  Condensed Financial Information of Vineyard National Bancorp (Parent Company)

Balance Sheets

|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |           |           |   |  | 
|-------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | - | ---------- | ---------- | ---- | - | --------- | --------- | ---- | - | --------- | --------- | - |  | 
|                     |                                                                                                                                     |                                                                       |   |            |            | 2001 |   | 2000      |           | 1999
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |     
|Assets               |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     | Cash in Vineyard Bank                                                                                                               |                                                                       | $ | 3,495,844  |            |      | $ | 14,128    |           |      | $ | 7,811     |          
|                     | Investment in Vineyard Bank                                                                                                         |                                                                       |   | 21,715,344 |            |      |   | 9,281,038 |           |      |   | 8,623,041 |          
|                     | Investment in Vineyard Statutory Trust I                                                                                            |                                                                       |   | 372,810    |            |      |   |          |           |      |   |          |          
|                     | Prepaid expenses                                                                                                                    |                                                                       |   | 671,528    |            |      |   |          |           |      |   | 269       |          
|                     | Other assets                                                                                                                        |                                                                       |   | 348,500    |            |      |   |          |           |      |   |          |          
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     |                                                                                                                                     | Total Assets                                                          |   | $          | 26,604,026 |      |   | $         | 9,295,166 |      |   | $         | 8,631,121 |  
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|Liabilities          |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     | Accrued interest and other liabilities                                                                                              |                                                                       |   | 27,077     |            |      |   | 133       |           |      |   | 886       |          
|                     | Convertible debentures payable                                                                                                      |                                                                       |   | 3,750,000  |            |      |   |          |           |      |   |          |          
|                     | Company obligated preferred securities of subsidiary trust holding
floating rate junior subordinated deferrable interest debentures |                                                                       |   | 12,372,000 |            |      |   |          |           |      |   |          |          
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     |                                                                                                                                     | Total Liabilities                                                     |   |            | 16,149,077 |      |   |           | 133       |      |   |           | 886       |  
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|Stockholders Equity |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     | Common stock                                                                                                                        |                                                                       |   | 2,150,621  |            |      |   | 2,112,243 |           |      |   | 2,106,258 |          
|                     | Additional paid-in capital                                                                                                          |                                                                       |   | 3,306,684  |            |      |   | 3,306,684 |           |      |   | 3,306,684 |          
|                     | Retained earnings                                                                                                                   |                                                                       |   | 4,997,644  |            |      |   | 3,876,106 |           |      |   | 3,217,293 |          
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     |                                                                                                                                     | Total Stockholders Equity                                            |   |            | 10,454,949 |      |   |           | 9,295,033 |      |   |           | 8,630,235 |  
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     |                                                                                                                                     | Total Liabilities and Stockholders Equity                            |   | $          | 26,604,026 |      |   | $         | 9,295,166 |      |   | $         | 8,631,121 |  
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                    
|Statements of Income
|Income               |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     | Interest                                                                                                                            |                                                                       | $ | 140        |            |      | $ | 998       |           |      | $ | 950       |          
|                     | Other income                                                                                                                        |                                                                       |   | 250,000    |            |      |   | 618       |           |      |   |          |          
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     |                                                                                                                                     | Total Income                                                          |   |            | 250,140    |      |   |           | 1,616     |      |   |           | 950       |  
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|Expenses             |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     | Interest on convertible debentures                                                                                                  |                                                                       |   | 268,709    |            |      |   |          |           |      |   |          |          
|                     | Interest on Trust Preferred Securities Payable                                                                                      |                                                                       |   | 26,944     |            |      |   |          |           |      |   |          |          
|                     | Salaries and benefits                                                                                                               |                                                                       |   | 42,036     |            |      |   |          |           |      |   |          |          
|                     | Other                                                                                                                               |                                                                       |   | 280,030    |            |      |   |          |           |      |   |          |          
|                     | Allocated tax benefit / income taxes                                                                                                |                                                                       |   | (154,000   | )          |      |   | 800       |           |      |   | 800       |          
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     |                                                                                                                                     | Total Expenses                                                        |   |            | 463,719    |      |   |           | 800       |      |   |           | 800       |  
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     |                                                                                                                                     | Income / (Loss) Before Equity In Undistributed
Income of Subsidiaries |   |            | (213,579   | )    |   |           | 816       |      |   |           | 150       |  
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     |                                                                                                                                     | Equity in Undistributed Income of Subsidiaries                        |   |            | 1,369,888  |      |   |           | 619,207   |      |   |           | (25,014   | )
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          
|                     |                                                                                                                                     | Net Income / (Loss)                                                   |   | $          | 1,156,309  |      |   | $         | 620,023   |      |   | $         | (24,864   | )
|                     |                                                                                                                                     |                                                                       |   |            |            |      |   |           |           |      |   |          

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##### Table of Contents



VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

Note #25  Condensed Financial
Information of Vineyard National Bancorp (Parent Company),Continued

|                                                                                      |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |         |        |     | 
|------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ----------------------------------------------- | ----------------------------------------------------- | ----------- | ---------- | ----------- | ------ | ------- | -------- | ----- | ----- | ------- | ------ | --- | 
|                                                                                      |                                                                                  |                                                 |                                                       |             | 2001       |             | 2000   |         | 1999    
|                                                                                      |                                                                                  |                                                 |                                                       |             |            |             |        |         |         
|Increase in Cash                                                                      |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|Cash Flows From Operating Activities                                                  |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|                                                                                      | Interest received                                                                |                                                 | $                                                     | 140         |            |             | $      | 198     |          |       | $     | 950     |       
|                                                                                      | Other income received                                                            |                                                 |                                                       |            |            |             |        | 134     |          |       |       |        |       
|                                                                                      | Interest paid                                                                    |                                                 |                                                       | (268,709    | )          |             |        |        |          |       |       |        |       
|                                                                                      | Cash paid to suppliers and employees                                             |                                                 |                                                       | (938,093    | )          |             |        |        |          |       |       |        |       
|                                                                                      | Income taxes paid                                                                |                                                 |                                                       |            |            |             |        |        |          |       |       | (800    | )     
|                                                                                      |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|                                                                                      |                                                                                  |                                                 | Net Cash Provided By / (Used In)
Operating Activities |             |            | (1,206,662  | )      |         |          | 332   |       |         |        | 150 | 
|                                                                                      |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|Cash Flows From Investing Activities                                                  |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|                                                                                      | Investment in Subsidiaries                                                       |                                                 |                                                       | (11,622,000 | )          |             |        |        |          |       |       |        |       
|                                                                                      | Dividends received from subsidiary                                               |                                                 |                                                       | 150,000     |            |             |        |        |          |       |       |        |       
|                                                                                      |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|                                                                                      |                                                                                  |                                                 | Net Cash Used In
Investing Activities                 |             |            | (11,472,000 | )      |         |          |      |       |         |        |    | 
|                                                                                      |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|Cash Flows From Financing Activities                                                  |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|                                                                                      | Proceeds from issuance of trust preferred securities                             |                                                 |                                                       | 12,372,000  |            |             |        |        |          |       |       |        |       
|                                                                                      | Proceeds from issuance of convertible debentures                                 |                                                 |                                                       | 3,750,000   |            |             |        |        |          |       |       |        |       
|                                                                                      | Stock options exercised                                                          |                                                 |                                                       | 38,378      |            |             |        | 5,985   |          |       |       |        |       
|                                                                                      |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|                                                                                      |                                                                                  |                                                 | Net Cash Provided
By Financing Activities             |             |            | 16,160,378  |        |         |          | 5,985 |       |         |        |    | 
|                                                                                      |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|Net Increase in Cash and Cash Equivalents                                             |                                                                                  |                                                 | 3,481,716                                             |             |            |             | 6,317  |         |          |       | 150   |        
|Cash, Beginning of year                                                               |                                                                                  |                                                 | 14,128                                                |             |            |             | 7,811  |         |          |       | 7,661 |        
|                                                                                      |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|Cash, End of year                                                                     |                                                                                  | $                                               | 3,495,844                                             |             |            | $           | 14,128 |         |          | $     | 7,811 |        
|                                                                                      |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|Reconciliation of Net Income to Net Cash
Provided by / (Used In) Operating Activities |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|                                                                                      | Net Income / (loss)                                                              |                                                 |                                                       | 1,156,309   |            |             |        | 620,023 |          |       |       | (24,864 | )     
|                                                                                      | Adjustments to Reconcile Net Income
to Net Cash Provided By Operating Activities |                                                 |                                                       |             |            |             |        |         |          |       |       | 0       |       
|                                                                                      |                                                                                  | Increase
/ decrease in other assets             |                                                       |             | (1,020,028 | )           |        |         | 269      |       |       |         | 220    |    
|                                                                                      |                                                                                  | Undistributed (earnings) / loss of subsidiaries |                                                       |             | (1,369,888 | )           |        |         | (619,207 | )     |       |         | 25,014 |    
|                                                                                      |                                                                                  | Increase / (decrease) in other liabilities      |                                                       |             | 26,944     |             |        |         | (753     | )     |       |         | (220   | )  
|                                                                                      |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        
|                                                                                      |                                                                                  |                                                 | Net Cash Provided By / (Used In)
Operating Activities |             | $          | (1,206,663  | )      |         | $        | 332   |       |         | $      | 150 | 
|                                                                                      |                                                                                  |                                                 |                                                       |             |            |             |        |         |          |       |       |        

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