##### Table of Contents



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, 2002 |  | Commission File No. 0-20862

VINEYARD NATIONAL BANCORP

(Exact Name of Registrant as Specified in its Charter)


|                                                                          |  |                                                
|------------------------------------------------------------------------- |  | -----------------------------------------------
|California
(State of other jurisdiction of
incorporation or organization) |  | 33-0309110
(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 ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [    ] No [ x ]

The aggregate value of the 1,553,466 shares of Common Stock of the
registrant issued and outstanding, which excludes 372,326 shares held by all
directors and executive officers of the registrant as a group, was
approximately $14.0 million based on the last closing sales price on a
share of Common Stock of $9.00 as of June 28, 2002.

2,827,318 shares of Common Stock of the registrant were outstanding at
March 7, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive Proxy Statement for its 2003
Annual Meeting of Shareholders are incorporated by reference in Part III of
this Form 10-K.





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TABLE OF CONTENTS



|              |                                                                                                         |                                 |  |  |  |  |  | 
|------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------- |  |  |  |  |  | 
|PART I       
|              | ITEM 1. 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          
|              | ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.                                   
|              | ITEM 8. Financial Statements and Supplementary Data.                                                   
|              | ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III     
|              | ITEM 10. Directors and Executive Officer of the Registrant                                             
|              | ITEM 11. Executive Compensation                                                                        
|              | ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|              | ITEM 13. Certain Relationships and Related Transactions                                                
|              | ITEM 14. Controls and Procedures                                                                       
|              | ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES   
|EXHIBIT INDEX
|Exhibit 3.1  
|Exhibit 4.5  
|Exhibit 4.6  
|Exhibit 10.1 
|Exhibit 10.2 
|Exhibit 10.3 
|Exhibit 10.4 
|Exhibit 10.6 
|Exhibit 10.7 
|Exhibit 10.8 
|Exhibit 10.9 
|Exhibit 10.10
|EXHIBIT 23   



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TABLE OF CONTENTS

|         |  |          |  |                                                                                                |  |     
|-------- |  | -------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|         |  |          |  |                                                                                                |  | PAGE
|PART I   |  |          |  |                                                                                               
|         |  | ITEM 1.  |  | Business                                                                                       |  | 3   
|         |  | ITEM 2.  |  | Properties                                                                                     |  | 33  
|         |  | ITEM 3.  |  | Legal Proceedings                                                                              |  | 33  
|         |  | ITEM 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 34  
|PART II  |  |          |  |                                                                                                |  |     
|         |  | ITEM 5.  |  | Market for Registrants Common Stock and Related Stockholder Matters                           |  | 34  
|         |  | ITEM 6.  |  | Selected Financial Data                                                                        |  | 35  
|         |  | ITEM 7.  |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations          |  | 36  
|         |  | ITEM7A.  |  | Quantitative and Qualitative Disclosure About Market Risk                                      |  | 46  
|         |  | ITEM 8.  |  | Financial Statements and Supplementary Data                                                    |  | 47  
|         |  | ITEM 9.  |  | Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure           |  | 75  
|PART III |  |          |  |                                                                                                |  |     
|         |  | ITEM 10. |  | Director and Executive Officers of the Registrant                                              |  | 75  
|         |  | ITEM 11. |  | Executive Compensation                                                                         |  | 75  
|         |  | ITEM 12. |  | Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters |  | 75  
|         |  | ITEM 13. |  | Certain Relationships and Related Transactions                                                 |  | 75  
|         |  | ITEM 14. |  | Controls and Procedures                                                                        |  | 75  
|PART IV  |  |          |  |                                                                                                |  |     
|         |  | ITEM 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 76  

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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PART I




ITEM 1. Business

Vineyard National Bancorp

Vineyard National Bancorp (the Company) 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 Company 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 the
Bank, a $384.6 million (asset) commercial bank, and the business of the Bank is
carried on as a wholly-owned subsidiary of the Company. On November 12, 2002,
the Companys common stock was listed on the NASDAQ National Market System and
is publicly traded under the symbol VNBC. Prior to that, the Companys
common stock was traded on the NASDAQ SmallCap Stock Market under the same
symbol. The Company had approximately 1,031 shareholders that own
approximately 2,827,318 shares of the Companys common stock as of March 7,
2003.

The Company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. Vineyard Statutory Trust I and
Vineyard Statutory Trust II are wholly-owned subsidiaries of the Company,
formed on December 12, 2001 and December 19, 2002, respectively, for the sole
purpose of issuing trust preferred securities and to pay dividends on such
instruments. The Company may, in the future, consider acquiring other
businesses or engaging in other activities as permitted under Federal Reserve
Board regulations.

The Company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 the Company (See Item 1. Description of
Business; Supervision and Regulation  Dividends and Other Transfer of
Funds).

As of December 31, 2002, the Company had total consolidated assets of
approximately $385.3 million, total consolidated net loans of approximately
$253.3 million, total consolidated deposits of approximately $287.5 million and
total consolidated stockholders equity of approximately $20.0 million.

Vineyard 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 converted its charter to a California-chartered
commercial bank and now operates under the supervision of the California
Department of Financial Institutions (DFI) and the Federal Deposit Insurance
Corporation (FDIC). The Bank determined that it could better serve its
customers by converting to a state bank, which provided the Bank with increased
lending limits. 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.

The Bank is a community bank, dedicated to relationship banking and the
success of its customers. The Bank is primarily involved in attracting
deposits from individuals and businesses and using those deposits, together
with borrowed funds, to originate commercial business and commercial real
estate loans, primarily to small businesses, churches and private schools,
single-family construction loans (both tract and coastal loans), Small Business
Administration (SBA) loans and, to a lesser extent, single-family permanent
loans and various types of consumer loans. The Bank is focused on serving the
needs of commercial businesses with annual sales of less than $10 million,
retail community businesses, single-family residential developers and builders,
individuals and local public and private organizations. The Bank has
experienced substantial growth in recent years as it has expanded its core
deposit franchise and increased its originations of commercial and residential
construction loans.

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The Bank operates six full-service branch offices, which are located in
each of the communities of Rancho Cucamonga, Chino, Diamond Bar, La Verne,
Crestline and Blue Jay, all of which are located in San Bernardino County,
California. San Bernardino County is located approximately 50 miles east of
Los Angeles, California. The Rancho Cucamonga office also serves as the
Companys headquarters. A seventh full-service branch office is planned for
Corona, California, and is scheduled to open during the second quarter of 2003.
The new branch will give the Bank a greater extension into the Anaheim and
Northern Orange County region of California. In addition, the Bank operates a
loan production office in the city of Manhattan Beach, California, principally
for the marketing and origination of single-family construction lending in the
coastal communities of surrounding Los Angeles. The Bank also operates two
loan production offices located in San Diego, California, and Beverly Hills,
California. These offices are principally for the origination of SBA loans.

The Bank is, and has been since inception, headquartered in Rancho
Cucamonga, California and continues to have its roots in San Bernardino County.
The Bank believes that the demand for business and housing loans will remain
strong in the immediate future in the Banks primary market area, particularly
in San Bernardino County. Even during slow economic periods, businesses
continue to grow in San Bernardino County as the population migrates from
heavily populated areas such as Los Angeles County into San Bernardino County
where the cost of living and doing business are relatively less expensive.
San Bernardino County is an industrial/suburban area that serves as geographic
portal for many of the products that are shipped into the port of Los Angeles
and distributed through channels in the San Bernardino County region to the
rest of the United States. As business opportunities continue to grow in San
Bernardino County, demand for housing increases as the population expands in
the area.

The Bank attempts to differentiate itself from its competitors by
providing personalized service and building relationships with its customers.
The Bank believes relationship management is best delivered in contemporary,
well-appointed and efficient banking centers. Beginning in mid-2003, the
existing community banking centers will be redesigned to afford Bank clients
and employees with an environment conducive to providing personalized customer
service. In addition, ATM machines will be upgraded with current technology to
support branch designs and to better serve the Banks customers. The Bank
believes that alternative delivery locations may augment this branching network
beginning in 2004, which may be in the form of satellite branches and/or remote
kiosks. The satellite branches and remote kiosks would enable the Bank to
expand its presence in targeted markets without incurring significant overhead
expenses. The Bank will focus its new business generation efforts within those
communities of the new satellite branches, 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 implemented a new business strategy that
concentrates on a sales and service approach to community banking, with the
focus placed on customer needs fulfillment. As part of the Banks efforts to
implement its customer-oriented strategy, the Bank selectively recruited
experienced professionals with developed business banking skills, augmented its
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.

In late 2002, the Bank added single-family tract construction lending, SBA
lending and religious financial services to its existing specialty group,
single-family coastal construction lending. The Banks goal is for balanced
lending activities in each of these specialty groups. Additional specialty
groups that the Company anticipates pursuing include private banking, cash
management services and asset-based lending, among other products and services.
Each of these specialty groups will bring diversity to the Banks existing
product lines, offering its customers greater opportunities and opening new
opportunities for the Bank to serve new customers in the community. Loan growth
was 84% for fiscal year 2002 and 73% for fiscal year 2001. New loan commitment
volumes are targeted to produce net growth in loans outstanding between 50% to
70% for fiscal year 2003 and 25% to 30% for each year thereafter. As part of
the Banks goal of balanced lending, net increases in its loan portfolio are
intended to produce a distribution mix of 15% in commercial loans, 30% in
commercial real estate loans, 25% in single-family coastal construction, 15% in
single-family tract construction and 15% in consumer lending.

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In order to expand the Banks core deposit franchise, the Bank will
continue to introduce additional products and services 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 specific targeting of non-credit business
clientele. The Banks core deposit franchise has been built around the
community banking system, with deposit growth of 80% for fiscal year 2002 and
60% for fiscal year 2001. The Banks projected net growth in core deposits
ranges from 40% to 60% per annum with the intended distribution of 20% in
non-interest bearing demand deposits, 10% in NOW and savings deposits, 40% in
money market deposits and 30% in time deposits.

The Rancho Cucamonga and Chino full-service branches offer the most
balanced opportunities between lending and deposit generation among commercial
and consumer clientele. The Bank believes the communities of La Verne and
Diamond Bar offer substantial growth in the consumer depository markets while
the two branches within the San Bernardino mountain communities of Blue Jay and
Crestline will focus on capturing a larger market share of the community
deposits. The community of Corona serves as a launching point for servicing
the south western region of the Inland Empire and provides penetration into the
Northern Orange County marketplace. The Bank currently plans to convert the
Manhattan Beach loan production office into a full-service banking center
catering to professional and small businesses in the Los Angeles beach
communities.

In summary, the Company continues to expand its marketing efforts in seven primary areas:



| |  |  | Community-based core deposit growth;                                        
| | - |  | ----------------------------------------------------------------------------
|
| |  |  | Small business and commercial lending;                                      
|
| |  |  | Single family coastal construction lending;                                 
|
| |  |  | Single family tract (entry level) construction lending;                     
|
| |  |  | SBA lending;                                                                
|
| |  |  | Religious financial services (lending and depository); and                  
|
| |  |  | Specialized depository and cash management services for commercial business.

Vineyard Service Company, Inc.

The Bank owns 100% of the capital stock of Vineyard Service Company, Inc.,
which is an inactive service company of the Bank. Vineyard Service Company,
Inc. was originally formed to provide services to both customers of the Bank
and others, including life and disability insurance.

Risk Factors

The Company is implementing a business strategy that may result in
increased volatility of earnings.

The Companys business strategy is focused on commercial real estate,
commercial business and residential construction lending. At December 31,
2000, approximately 69% of the Banks loan portfolio was made up of commercial
real estate, commercial business and residential construction loans. As of
December 31, 2002, these types of loans had increased to approximately 88% of
the Banks loan portfolio and are anticipated to increase further as it
continues to implement its business strategy. As a result of this increase,
the Banks allowance for possible loan losses as of December 31, 2002 was
increased to 1.2% of its total loans and leases from 1.0% of total loans and
leases as of December 31, 2000.

These types of lending activities, while potentially more profitable,
generally entail a larger degree of credit risk than general permanent
single-family and consumer lending, because they are generally more sensitive
to regional and local economic conditions, making loss levels more difficult to
predict. Collateral evaluation in these types of loans requires a more
detailed analysis of financial statements at the time of loan approval and on
an on-going basis, and is more variable than for consumer loans. A decline in
real estate values, particularly in California, would reduce the value of the
real estate collateral securing the Banks loans and increase the risk that the
Bank would incur losses if borrowers defaulted on their loans. In

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addition, loan balances for commercial real estate, commercial business
and residential construction tract loans are typically larger than those for
permanent single-family and consumer loans, and when there are defaults and
losses, they are often greater on a per loan basis than those for permanent
single-family and consumer loans. A liquid secondary market for most types of
commercial real estate and commercial business loans does not exist, so the
Bank has less opportunity to mitigate credit risk by selling part or all of its
interest in these loans.

The Companys growth may not be managed successfully.

The Company has grown substantially from $110.8 million of total assets
and $99.6 million of total deposits at December 31, 2000 to $385.3 million of
total assets and $287.5 million of total deposits at December 31, 2002. The
Company expects to continue to experience significant growth in assets,
deposits and scale of operations. If the Company does not manage its growth
effectively, the Company will not have adequate resources to maintain and
secure key relationships contemplated by its business plan, and its business
and prospects could be harmed. The Companys growth subjects it to increased
capital and operating commitments. The Company must recruit experienced
individuals that have the skills and experience that it needs to transition the
areas of its lending concentration. The plan for additional customer products,
service introduction, enhancements and implementation have placed and will
continue to place a significant strain on the Companys personnel, systems, and
resources. The Company cannot guarantee that it will be able to obtain and
train qualified individuals to implement its business strategy in a timely,
cost effective and efficient manner.

Potential acquisitions may disrupt the Companys business, dilute
stockholder value and adversely affect its operating results.

The Company may grow by acquiring banks, related businesses or branches of
other banks that it believes provide a strategic fit with its business. To the
extent that the Company grows through acquisitions, it cannot guarantee that it
will be able to adequately or profitably manage this growth. Acquiring other
banks, businesses, or branches involves risks commonly associated with
acquisitions, including:



| |  |  | potential exposure to unknown or contingent liabilities of banks,
businesses, or branches the Company acquires;           
| | - |  | --------------------------------------------------------------------------------------------------------------------------
|
| |  |  | exposure to potential asset quality issues of the acquired banks,
businesses, or branches;                                
|
| |  |  | difficulty and expense of integrating the operations and personnel
of banks, businesses, or branches the Company acquires;
|
| |  |  | potential disruption to business;                                                                                         
|
| |  |  | potential diversion of managements time and attention; and                                                               
|
| |  |  | the possible loss of key employees and customers of the banks,
businesses, or branches the Company acquires.              

The Companys continued pace of growth may require it to raise additional
capital in the future, but that capital may not be available when it is needed.

The Company is required by federal regulatory authorities to maintain
adequate levels of capital to support its operations. The Company anticipates
that existing capital resources will satisfy its capital requirements for the
foreseeable future. However, the Company may at some point need to raise
additional capital to support continued growth, either internally or through
acquisitions. The Companys ability to raise additional capital, if needed,
will depend on conditions in the capital markets at that time, which are
outside the Companys control, and on its financial performance. Accordingly,
the Company cannot assure you of its ability to raise additional capital if
needed or on terms acceptable to the Company. If the Company cannot raise
additional capital when needed, the ability to further expand its operations
through internal growth and acquisitions could be materially impaired.

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The Companys business strategy relies upon its Chief Executive Officer
and other key employees.

Norman Morales has been the president and chief executive officer of the
Company and the Bank since October 2000. Mr. Morales developed numerous
aspects of the Banks current business strategy and the implementation of such
strategy depends heavily upon the active involvement of Mr. Morales. The loss
of Mr. Morales services could have a negative impact on the implementation and
success of the Companys business strategy. The Banks success will also
depend in large part upon its ability to attract and retain highly qualified
management, technical and marketing personnel to execute the strategic plan.
The Bank will need to retain persons with skills in areas that are new and
unfamiliar in order to manage these programs. Competition for qualified
personnel, especially those in management, sales and marketing is intense. The
Company cannot assure you that it will be able to attract and retain these
persons.

The Companys business is subject to various lending risks which could
adversely impact its results of operations and financial condition.

The Companys commercial real estate loans involve higher principal
amounts than other loans, and repayment of these loans may be dependent on
factors outside its control or the control of its borrowers. At December 31,
2002, commercial real estate loans totaled $93.1 million, or 36.7%, of the
Companys total loan portfolio. Commercial real estate lending typically
involves higher loan principal amounts and the repayment of such loans
generally is dependent, in large part, on the successful operation of the
property securing the loan or the business conducted on the property securing
the loan. These loans may be more adversely affected by conditions in the real
estate markets or in the economy generally. For example, if the cash flow from
the borrowers project is reduced due to leases not being obtained or renewed,
the borrowers ability to repay the loan may be impaired. In addition, many of
the Companys commercial real estate loans are not fully amortizing and contain
large balloon payments upon maturity. Such balloon payments may require the
borrower to either sell or refinance the underlying property in order to make
the payment.

Repayment of the Companys commercial business loans is often dependent on
the cash flows of the borrower, which may be unpredictable, and the collateral
securing these loans may fluctuate in value. At December 31, 2002, commercial
business loans totaled $19.2 million, or 7.6%, of the Companys total loan
portfolio. The Companys commercial business loans are primarily made based on
the identified cash flow of the borrower and secondarily on the underlying
collateral provided by the borrower. Most often, this collateral consists of
accounts receivable, inventory or equipment. Credit support provided by the
borrower for most of these loans and the probability of repayment is based on
the liquidation of the pledged collateral and enforcement of a personal
guarantee, if any exists. As a result, in the case of loans secured by
accounts receivable, the availability of funds for the repayment of these loans
may be substantially dependent on the ability of the borrower to collect
amounts due from its customers. The collateral securing other loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.

The Companys construction loans are based upon estimates of costs and
values associated with the complete project. These estimates may be
inaccurate. At December 31, 2002, construction loans totaled $110.2 million, or
43.4%, of the Companys total loan portfolio. Construction lending involves
additional risks when compared with permanent residential lending because funds
are advanced upon the security of the project, which is of uncertain value
prior to its completion. Because of the uncertainties inherent in estimating
construction costs, as well as the market value of the completed project and
the effects of governmental regulation of real property, it is relatively
difficult to evaluate accurately the total funds required to complete a project
and the related loan-to-value ratio. As a result, construction loans often
involve the disbursement of substantial funds with repayment dependent, in
part, on the success of the ultimate project and the ability of the borrower to
sell or lease the property or obtain permanent take-out financing, rather than
the ability of the borrower or guarantor to repay principal and interest. If
the Companys appraisal of the value of the completed project is inaccurate, it
may not have adequate security for the repayment of the loan upon completion of
construction of the project and may incur a loss.

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The Companys allowance for loan losses may prove to be insufficient to
absorb probable losses inherent in its loan portfolio.

Like all financial institutions, every loan the Company makes carries a
certain risk that it will not be repaid in accordance with its terms or that
any collateral securing it will not be sufficient to assure repayment. This
risk is affected by, among other things:



| |  |  | cash flow of the borrower and/or the project being financed;                                                 
| | - |  | -------------------------------------------------------------------------------------------------------------
|
| |  |  | in the case of a collateralized loan, the changes and uncertainties
as to the future value of the collateral;
|
| |  |  | the credit history of a particular borrower;                                                                 
|
| |  |  | changes in economic and industry conditions; and                                                             
|
| |  |  | the duration of the loan.                                                                                    

The Company maintains an allowance for loan losses which it believes is
appropriate to provide for any probable losses inherent in its loan portfolio.
The amount of this allowance is determined by management through a periodic
review and consideration of several factors.

At December 31, 2002, the Companys allowance for loan losses as a
percentage of total loans was 1.2%. Regulatory agencies, as an integral part
of their examination process, review the Companys loans and allowance for loan
losses. Although the Company believes its loan loss allowance is adequate to
absorb probable losses in its loan portfolio, the Company cannot predict these
losses or whether its allowance will be adequate or that regulators will not
require it to increase this allowance. Any of these occurrences could
materially and adversely affect the Companys business, financial condition,
prospects and profitability.

The Companys business is subject to general economic risks that could
adversely impact its results of operations and financial condition.

Changes in economic conditions, particularly an economic slowdown in
California, could hurt the Companys business.The Companys business is
directly affected by political and market conditions, broad trends in industry
and finance, legislative and regulatory changes, changes in governmental
monetary and fiscal policies and inflation, all of which are beyond the
Companys control. A deterioration in economic conditions, in particular an
economic slowdown within California, could result in the following
consequences, any of which could hurt the Companys business materially:



| |  |  | loan delinquencies may increase;                                                                                                                                                                                                   
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | problem assets and foreclosures may increase;                                                                                                                                                                                      
|
| |  |  | demand for the Companys products and services may decline; and                                                                                                                                                                    
|
| |  |  | collateral for loans made by the Company, especially real estate,
may decline in value, in turn reducing a clients borrowing power, and
reducing the value of assets and collateral associated with its loans
held for investment.

A downturn in the California real estate market could hurt its business.
The Companys business activities and credit exposure are concentrated in
California. A downturn in the California real estate market could hurt the
Companys business because many of its loans are secured by real estate located
within California. As of December 31, 2002, approximately 98% of the Companys
loans held for investment consisted of loans secured by real estate located in
California. If there is a significant decline in real estate values,
especially in California, the collateral for the Companys loans will provide
less security. As a result, the Companys ability to recover on defaulted
loans by selling the underlying real estate would be diminished, and the
Company would be more likely to suffer losses on defaulted loans. Real estate
values in California could be affected by, among other things, earthquakes and
other natural disasters particular to California.

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The Company may suffer losses in its loan portfolio despite its
underwriting practices. The Company seeks to mitigate the risks inherent in
its loan portfolio by adhering to specific underwriting practices. These
practices include analysis of a borrowers prior credit history, financial
statements, tax returns and cash flow projections, valuation of collateral
based on reports of independent appraisers and verification of liquid assets.
Although the Company believes that its underwriting criteria are appropriate
for the various kinds of loans the Company makes, the Company may incur losses
on loans that meet its underwriting criteria, and these losses may exceed the
amounts set aside as reserves in its allowance for loan losses.

The Companys business is subject to interest rate risk and variations in
interest rates may negatively affect its financial performance.

Like other financial institutions, the Companys operating results are
largely dependent on its net interest income. Net interest income is the
difference between interest earned on loans and securities and interest expense
incurred on deposits and borrowings. The Companys net interest income is
impacted by changes in market rates of interest, the interest rate sensitivity
of its assets and liabilities, prepayments on its loans and securities and
limits on increases in the rates of interest charged on its loans. The Company
expects that it will continue to realize income from the differential or
spread between the interest earned on loans, securities and other
interest-earning assets, and interest paid on deposits, borrowings and other
interest-bearing liabilities. Net interest spreads are affected by the
difference between the maturities and repricing characteristics of
interest-earning assets and interest-bearing liabilities.

The Company cannot control or accurately predict changes in market rates
of interest. The following are some factors that may affect market interest
rates, all of which are beyond the Companys control:



| |  |  | inflation;                                                          
| | - |  | --------------------------------------------------------------------
|
| |  |  | slow or stagnant economic growth or recession;                      
|
| |  |  | unemployment;                                                       
|
| |  |  | money supply and the monetary policies of the Federal Reserve Board;
|
| |  |  | international disorders; and                                        
|
| |  |  | instability in domestic and foreign financial markets.              

The Company is vulnerable to an increase in interest rates because its
interest-earning assets generally have longer maturities than its
interest-bearing liabilities. Under such circumstances, material and prolonged
increases in interest rates will negatively affect the Companys net interest
income. In addition, loan volume and yields are affected by market interest
rates on loans, and rising interest rates generally are associated with a lower
volume of loan originations. In addition, an increase in the general level of
interest rates may adversely affect the ability of certain borrowers to pay the
interest on and principal of their obligations. Accordingly, changes in levels
of market interest rates could materially and adversely affect the Companys
net interest spread, asset quality, loan origination volume, securities
portfolio, and overall profitability. Although the Company attempts to manage
its interest rate risk, the Company cannot assure you that it can minimize its
interest rate risk.

The Companys ability to service its debt, pay dividends, and otherwise
pay its obligations as they come due is substantially dependent on capital
distributions from the Bank, and these distributions are subject to regulatory
limits and other restrictions.

A substantial source of the Companys income from which it services its
debt, pays its obligations and from which it can pay dividends is the receipt
of dividends from the Bank. The availability of dividends from the Bank is
limited by various statutes and regulations. It is possible, depending upon
the financial condition of the Bank, and other factors, that the applicable
regulatory authorities could assert that payment of dividends or other payments
is an unsafe or unsound practice. In the event the Bank is unable to pay
dividends to the Company, the Company may not be able to service its debt, pay
its obligations or

9



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##### Table of Contents



pay dividends on its common stock. The inability to receive dividends
from the Bank would adversely affect the Companys business, financial
condition, results of operations and prospects.

The Company is facing strong competition from other financial
institutions, financial service companies and other organizations offering
services similar to those offered by the Company, which could hurt its
business.

The Bank faces direct competition from a significant number of financial
institutions, many with a state-wide or regional presence, and in some cases a
national presence, in both originating loans and attracting deposits. The
Banks primary competitors in its market areas are Bank of America, Wells
Fargo, Citizens Business Bank, Foothill Independent Bank, PFF Bank, Washington
Mutual, Union Bank of California and Bank of the West. Competition in
originating loans comes primarily from other banks, mortgage companies and
consumer finance institutions that make loans in the Banks primary market
areas. Neither the Banks deposits or loans of any of its offices exceed 1% of
the total loans or deposits of all financial institutions located in the
counties in which that office is located. In addition, banks with larger
capitalization and non-bank financial institutions that are not governed by
bank regulatory restrictions have large lending limits and are better able to
serve the needs of larger customers. Many of these financial institutions are
also significantly larger and have greater financial resources than the Company
or the Bank, have been in business for a long time and have established
customer bases and name recognition. The Bank also faces substantial
competition in attracting deposits from other banking institutions, money
market and mutual funds, credit unions and other investment vehicles. The Bank
competes for loans principally on the basis of interest rates and loan fees,
the types of loans which it originates, and the quality of service which it
provides to borrowers. The Banks ability to attract and retain deposits
requires that it provide customers with competitive investment opportunities
with respect to rate of return, liquidity, risk and other factors. To
effectively compete, the Bank may have to pay higher rates of interest to
attract deposits, resulting in reduced profitability. If the Bank is not able
to effectively compete in its market area, its profitability may be negatively
affected, limiting its ability to pay the Company dividends.

The Company is subject to extensive regulation which could adversely
affect its business.

The Companys operations are subject to extensive regulation by federal,
state and local governmental authorities and are subject to various laws and
judicial and administrative decisions imposing requirements and restrictions on
part or all of its operations. The Company believes that it are in substantial
compliance in all material respects with applicable federal, state and local
laws, rules and regulations. Because the Companys business is highly
regulated, the laws, rules and regulations applicable to it are subject to
regular modification and change. There are currently proposed various laws,
rules and regulations that, if adopted, would impact its operations. If these
or any other laws, rules or regulations are adopted in the future, they could
make compliance much more difficult or expensive, restrict its ability to
originate or sell loans, further limit or restrict the amount of commissions,
interest or other charges earned on loans originated or sold by the Company or
otherwise materially and adversely affect its business, financial condition,
prospects or profitability.

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
governmental economic and tax policies, general supply of money in the economy,
governmental budgetary actions, and the actions of the Federal Reserve Board.
(See Item 1. Business  Effect of Government Policies and Recent Legislation.)

10



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##### Table of Contents



Loan Portfolio

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



|                                       |             |      |              |         |  |      |       |         |  |      |         |         |  |  |       |      |  |   |        |        |  |  |       |      | 
|-------------------------------------- | ----------- | ---- | ------------ | ------- |  | ---- | ----- | ------- |  | ---- | ------- | ------- |  |  | ----- | ---- |  | - | ------ | ------ |  |  | ----- | ---- | 
|                                       |             |      | December 31,
|                                       |             |      |             
|(Dollars in thousands)                 |             | 2002 |              | Percent |  | 2001 |       | Percent |  | 2000 |         | Percent
|                                       |             |      |              |         |  |      |       |         |  |      |         |        
|Commercial and industrial              |             | $    | 19,232       |         |  |      | 7.6   |         |  | $    | 20,219  |         |  |  | 14.7  |      |  | $ | 10,665 |        |  |  | 13.3  |     
|Real estate construction               |             |      | 110,212      |         |  |      | 43.4  |         |  |      | 33,254  |         |  |  | 24.1  |      |  |   | 5,588  |        |  |  | 7.0   |     
|Real estate mortgage:                  |             |      |              |         |  |      |       |         |  |      |         |         |  |  |       |      |  |   |        |        |  |  |       |     
|                                       | Commercial  |      |              | 93,122  |  |      |       | 36.7    |  |      |         | 52,458  |  |  |       | 38.0 |  |   |        | 40,099 |  |  |       | 50.1 | 
|                                       | Residential |      |              | 23,480  |  |      |       | 9.3     |  |      |         | 19,063  |  |  |       | 13.8 |  |   |        | 11,192 |  |  |       | 14.0 | 
|Installment loans to individuals       |             |      | 5,659        |         |  |      | 2.2   |         |  |      | 8,318   |         |  |  | 6.0   |      |  |   | 12,049 |        |  |  | 15.1  |     
|Loans held for sale                    |             |      | 2,112        |         |  |      | 0.8   |         |  |      | 4,471   |         |  |  | 3.3   |      |  |   | 235    |        |  |  | 0.3   |     
|All other loans (including overdrafts) |             |      | 60           |         |  |      | 0.0   |         |  |      | 184     |         |  |  | 0.1   |      |  |   | 180    |        |  |  | 0.2   |     
|                                       |             |      |              |         |  |      |       |         |  |      |         |         |  |  |       |      |  |   |        |        |  |  |       |     
|                                       |             |      | 253,877      |         |  |      | 100.0 |         |  |      | 137,967 |         |  |  | 100.0 |      |  |   | 80,008 |        |  |  | 100.0 |     
|Less:                                  |             |      |              |         |  |      |       |         |  |      |         |         |  |  |       |      |  |   |        |        |  |  |       |     
|Unearned income                        |             |      | (626         | )       |  |      |       |         |  |      | (389    | )       |  |  |       |      |  |   | (484   | )      |  |  |       |     
|Allowance for possible loan losses     |             |      | (3,003       | )       |  |      |       |         |  |      | (1,450  | )       |  |  |       |      |  |   | (784   | )      |  |  |       |     
|                                       |             |      |              |         |  |      |       |         |  |      |         |         |  |  |       |      |  |   |        |        |  |  |       |     
|Total Net Loans                        |             | $    | 250,248      |         |  |      |       |         |  | $    | 136,128 |         |  |  |       |      |  | $ | 78,740 |        |  |  |       |     
|                                       |             |      |              |         |  |      |       |         |  |      |         |         |  |  |       |      |  |   |        |        |  |  |       |     

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                       |             |      |              |         |  |      |       |         |  |   |        |        |  |  |       |      | 
|-------------------------------------- | ----------- | ---- | ------------ | ------- |  | ---- | ----- | ------- |  | - | ------ | ------ |  |  | ----- | ---- | 
|                                       |             |      | December 31,
|                                       |             |      |             
|(Dollars in thousands)                 |             | 1999 |              | Percent |  | 1998 |       | Percent
|                                       |             |      |              |         |  |      |       |        
|Commercial and industrial              |             | $    | 14,671       |         |  |      | 17.0  |         |  | $ | 15,135 |        |  |  | 17.0  |     
|Real estate construction               |             |      | 6,602        |         |  |      | 7.6   |         |  |   | 3,825  |        |  |  | 4.3   |     
|Real estate mortgage:                  |             |      |              |         |  |      |       |         |  |   |        |        |  |  |       |     
|                                       | Commercial  |      |              | 36,181  |  |      |       | 41.8    |  |   |        | 34,874 |  |  |       | 39.1 | 
|                                       | Residential |      |              | 9,189   |  |      |       | 10.6    |  |   |        | 8,327  |  |  |       | 9.3  | 
|Installment loans to individuals       |             |      | 18,852       |         |  |      | 21.8  |         |  |   | 24,835 |        |  |  | 27.8  |     
|Loans held for sale                    |             |      | 835          |         |  |      | 1.0   |         |  |   | 2,178  |        |  |  | 2.4   |     
|All other loans (including overdrafts) |             |      | 170          |         |  |      | 0.2   |         |  |   | 92     |        |  |  | 0.1   |     
|                                       |             |      |              |         |  |      |       |         |  |   |        |        |  |  |       |     
|                                       |             |      | 86,500       |         |  |      | 100.0 |         |  |   | 89,266 |        |  |  | 100.0 |     
|Less:                                  |             |      |              |         |  |      |       |         |  |   |        |        |  |  |       |     
|Unearned income                        |             |      | (783         | )       |  |      |       |         |  |   | (1,333 | )      |  |  |       |     
|Allowance for possible loan losses     |             |      | (764         | )       |  |      |       |         |  |   | (686   | )      |  |  |       |     
|                                       |             |      |              |         |  |      |       |         |  |   |        |        |  |  |       |     
|Total Net Loans                        |             | $    | 84,953       |         |  |      |       |         |  | $ | 87,247 |        |  |  |       |     
|                                       |             |      |              |         |  |      |       |         |  |   |        |        |  |  |       |     

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The Companys loan portfolio increased 84% in 2002 as compared to 2001,
primarily due to the significant growth in real estate construction and
commercial real estate loans. The Companys business development efforts,
which began in early 2001and continued through 2002, were focused on the
expansion of its real estate construction lending, with the introduction of
higher-end market single family construction lending in early 2001 and single
family tract construction in late 2002. The higher-end market single family
constructions are geographically concentrated in the coastal communities of Los
Angeles and Orange Counties of California, where loan commitments are in the $750,000 to $2.0 million
range. In 2002, gross commitments generated for this loan product were in
excess of $180.0 million with loan fees in excess of $2.5 million. The
projected equilibrium level for this product is in excess of $100.0 million in
funded loan balances as new commitments are generated and existing
constructions are completed. The Bank also originates single family tract
construction loans. These loans typically are made on houses that sell in the
range of $200,000 to $300,000. The Bank began offering this product in late
2002 with expected annual production commitments in excess of $250.0 million
and targeted loan requests between $3.0 million and $7.5 million. The
projected equilibrium level for this product is in excess of $75.0 million in
funded loan balances. Single family tract construction loans typically have
shorter terms than the Banks other loan products. Approximately 94% of such
loans originated by the Bank will mature within one year and 6% will mature
within two years, as of December 31, 2002.

Within the Banks real estate mortgage portfolio, the predominant
concentration is on commercial real estate loans which typically represent
long-term financing for commercial buildings. Of these commercial real estate
loans as of December 31, 2002, approximately 7% mature within one year, 17%
mature within one to five years, and 76% in five to ten years, on average.

The Bank also provides one-to-four family residential real estate
financing for shorter duration than traditional mortgage loans. This category
includes equity lines of credit, first trust deeds, and junior lien loans. As
of December 31, 2002, approximately 27% of such loans mature within one year,
5% mature from within one to five years, and 68% mature over five years.

In late 2002, the Bank began its SBA lending division to expand on its
commercial and business banking product lines. SBA loans are generally made
pursuant to a federal government program designed to assist small businesses in
obtaining financing. The federal government guarantees SBA loans as an
incentive for financial institutions to make loans to small businesses. The
Banks origination of SBA loans is expected to be between $30.0 million and
$50.0 million per year. Intended sales of the guaranteed portion of the SBA
loan is approximately 75% of the originated balance at a premium sale price
between 105% and 110%.

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

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

The Bank also originates installment loans, which are loans to individuals
consisting primarily of personal loans, automobile loans and individual lines
of credit. Installment loans declined by 32% in 2002 as compared to 2001 as
the Bank moved away from indirect and dealer loans beginning in 2000,
concentrating on direct lending to its core customer base. Installment loans
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.

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Maturities and Sensitivities to Interest Rates

The following table shows the maturities and sensitivities to changes in
interest rates on loans outstanding, net of loan fees, at December 31, 2002.

|                                                 |                                  |               |         |            |         |            |        |       |        |   |        |       |        |   |         |         |         | 
|------------------------------------------------ | -------------------------------- | ------------- | ------- | ---------- | ------- | ---------- | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------- | ------- | ------- | 
|                                                 |                                  | Maturing      |         |            |         |           
|                                                 |                                  |               |         |            |         |           
|                                                 |                                  |               |         | Within     |         | One to     |        | After |        |   |        |      
|(Dollars in Thousands)                           |                                  | One Year      |         | Five Years |         | Five Years |        | Total
|                                                 |                                  |               |         |            |         |            |        |      
|                                                 | Commercial and industrial        |               | $       | 8,241      |         |            | $      | 8,031 |        |   | $      | 3,161 |        |   | $       | 19,433  |        
|                                                 | Real estate construction         |               |         | 103,650    |         |            |        | 6,562 |        |   |        |      |        |   |         | 110,212 |        
|                                                 | Real estate mortgage             |               |         |            |         |            |        |       |        |   |        |       |        |   |         |         |        
|                                                 |                                  | Commercial    |         |            | 3,820   |            |        |       | 15,829 |   |        |       | 72,677 |   |         |         | 92,326  | 
|                                                 |                                  | Residential   |         |            | 7,011   |            |        |       | 1,064  |   |        |       | 15,405 |   |         |         | 23,480  | 
|                                                 |                                  | Held for sale |         |            | 2,112   |            |        |       |       |   |        |       |       |   |         |         | 2,112   | 
|                                                 | Installment loans to individuals |               |         | 1,863      |         |            |        | 3,353 |        |   |        | 412   |        |   |         | 5,628   |        
|                                                 | All other loans                  |               |         | 60         |         |            |        |      |        |   |        |      |        |   |         | 60      |        
|                                                 |                                  |               |         |            |         |            |        |       |        |   |        |       |        |   |         |         |        
|                                                 |                                  | Total         |         | $          | 126,757 |            |        | $     | 34,839 |   |        | $     | 91,655 |   |         | $       | 253,251 | 
|                                                 |                                  |               |         |            |         |            |        |       |        |   |        |       |        |   |         |         |        
|Loans with predetermined interest rates          |                                  | $             | 7,117   |            |         | $          | 20,805 |       |        | $ | 52,021 |       |        | $ | 79,943  |        
|Loans with floating or adjustable interest rates |                                  |               | 119,640 |            |         |            | 14,034 |       |        |   | 39,634 |       |        |   | 173,308 |        
|                                                 |                                  |               |         |            |         |            |        |       |        |   |        |       |        |   |         |         |        
|                                                 |                                  | Total         |         | $          | 126,757 |            |        | $     | 34,839 |   |        | $     | 91,655 |   |         | $       | 253,251 | 
|                                                 |                                  |               |         |            |         |            |        |       |        |   |        |       |        |   |         |         |        

Investment Portfolio

As of December 31, 2002, the investment securities portfolio consisted of
$87.6 million in mortgage-backed securities as compared to $8.5 million in U.S.
Agency Securities and $22.0 million in mortgage-backed securities held at
December 31, 2001 for an increase of $57.0 million or 186.3% at December 31,
2002 as compared to December 31, 2001. The increase in investment securities
was part of managements strategy of augmenting earning assets to generate
greater yields. All securities are classified as available-for-sale and are
carried at fair market value. 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, liquidity
needs, or to better match the repricing characteristics of funding sources, its
entire portfolio is classified as available-for-sale. No securities are
classified as held-to-maturity.

The following table shows the book value of the portfolio of investment
securities at the end of each of the past three years. The Company accounts
for investments 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 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
stockholders equity.

|                           |                  |                    |        |        |  |      |        |        |  |   |       |       | 
|-------------------------- | ---------------- | ------------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ----- | ----- | 
|                           |                  | Available-for-Sale
|                           |                  |                    |       
|(Dollars in thousands)     |                  | 2002               |        | 2001   |  | 2000
|                           |                  |                    |        |        |  |     
|U.S. Agency securities     |                  | $                  |       |        |  | $    | 8,547  |        |  | $ | 5,520 |      
|Mortgage-backed securities |                  |                    | 87,553 |        |  |      | 22,003 |        |  |   | 7     |      
|                           |                  |                    |        |        |  |      |        |        |  |   |       |       | 
|                           | Total Securities |                    | $      | 87,553 |  |      | $      | 30,550 |  |   | $     | 5,527 | 
|                           |                  |                    |        |        |  |      |        |        |  |   |       |       | 

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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, 2002. 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, 26% of the deposits are in
non-interest bearing demand accounts and 41% are in non-interest bearing
savings products. Although the savings products are interest-bearing, their
longer term maturities make them less interest rate sensitive. The remaining
33% of the deposit portfolio is comprised of time certificates of deposit that
have rates fixed to maturity. The Company does not offer variable rate
certificates of deposit. The Company has, on average, approximately 95% of all
deposits classified as core deposits and only 5% 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 certificates of deposit 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. Due to the current low interest 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 substantially mitigate the compression of net interest margins
that traditionally accompanies a declining interest rate scenario. For the
year ended December 31, 2002, the Company has maintained a net interest margin
of 5.3% which is only a modest decrease of 90 basis points from the prior year
net interest margin of 6.2% in spite of a dramatic reduction in market interest
rates.

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##### Table of Contents



|                                           |                                        |              |         |           |         |            |         |            |        |         |         |          |        |      |        |        |        |   |         |        |        |   |         |         |         | 
|------------------------------------------ | -------------------------------------- | ------------ | ------- | --------- | ------- | ---------- | ------- | ---------- | ------ | ------- | ------- | -------- | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------- | ------- | 
|                                           |                                        |              |         |           |         |            |         | Over       |        | Over    |         |          |        |      |        |        |        |   |         |        |        |  
|                                           |                                        |              |         | Three     |         | Three      |         | One        |        |         |         |          |        | Non- |        |        |        |  
|                                           |                                        |              |         | Months    |         | Through    |         | Through    |        | Over    |         | interest |        |      |        |       
|(Dollars in Thousands)                     |                                        | or Less      |         | 12 Months |         | Five Years |         | Five Years |        | Bearing |         | Total   
|                                           |                                        |              |         |           |         |            |         |            |        |         |         |         
|Assets                                     |                                        |              |         |           |         |            |         |            |        |         |         |          |        |      |        |        |        |   |         |        |        |   |         |        
|                                           | Federal funds sold                     |              | $       | 15,829    |         |            | $       |           |        |         | $       |         |        |      | $      |       |        |   | $       |       |        |   | $       | 15,829  |        
|                                           | Investment securities                  |              |         |          |         |            |         |           |        |         |         |         |        |      |        | 87,553 |        |   |         |       |        |   |         | 87,553  |        
|                                           | Other investments                      |              |         |          |         |            |         |           |        |         |         |         |        |      |        | 2,270  |        |   |         |       |        |   |         | 2,270   |        
|                                           | Gross loans                            |              |         | 159,809   |         |            |         | 17,411     |        |         |         | 66,799   |        |      |        | 9,232  |        |   |         |       |        |   |         | 253,251 |        
|                                           | Noninterest-earning assets             |              |         |          |         |            |         |           |        |         |         |         |        |      |        |       |        |   |         | 26,399 |        |   |         | 26,399  |        
|                                           |                                        |              |         |           |         |            |         |            |        |         |         |          |        |      |        |        |        |   |         |        |        |   |         |         |        
|                                           |                                        | Total assets |         | $         | 175,638 |            |         | $          | 17,411 |         |         | $        | 66,799 |      |        | $      | 99,055 |   |         | $      | 26,399 |   |         | $       | 385,302 | 
|                                           |                                        |              |         |           |         |            |         |            |        |         |         |          |        |      |        |        |        |   |         |        |        |   |         |         |        
|Liabilities and stockholders equity       |                                        |              |         |           |         |            |         |            |        |         |         |          |        |      |        |        |        |   |         |        |        |   |         |        
|                                           | Non interest-bearing deposits          |              | $       |          |         |            | $       |           |        |         | $       |         |        |      | $      |       |        |   | $       | 61,906 |        |   | $       | 61,906  |        
|                                           | Interest-bearing deposits              |              |         | 151,900   |         |            |         | 56,279     |        |         |         | 17,427   |        |      |        |       |        |   |         |       |        |   |         | 225,606 |        
|                                           | Federal Home Loan Bank Advances        |              |         | 10,000    |         |            |         | 10,000     |        |         |         | 25,000   |        |      |        |       |        |   |         |       |        |   |         | 45,000  |        
|                                           | Subordinated debt                      |              |         |          |         |            |         |           |        |         |         |         |        |      |        | 5,000  |        |   |         |       |        |   |         | 5,000   |        
|                                           | Securities of subsidiary trust
holding |              |         |          |         |            |         |           |        |         |         |         |        |      |        | 17,000 |        |   |         |       |        |   |         | 17,000  |        
|                                           | Other Borrowings                       |              |         |           |         |            |         | 5,000      |        |         |         |          |        |      |        |       |        |   |         |        |        |   |         | 5,000   |        
|                                           | Other liabilities                      |              |         |          |         |            |         |           |        |         |         |         |        |      |        |       |        |   |         | 5,832  |        |   |         | 5,832   |        
|                                           | Stockholders equity                   |              |         |          |         |            |         |           |        |         |         |         |        |      |        |       |        |   |         | 19,958 |        |   |         | 19,958  |        
|                                           |                                        |              |         |           |         |            |         |            |        |         |         |          |        |      |        |        |        |   |         |        |        |   |         |         |        
|Total liabilities and
Stockholders equity |                                        | $            | 161,900 |           |         | $          | 71,279  |            |        | $       | 42,427  |          |        | $    | 22,000 |        |        | $ | 87,696  |        |        | $ | 385,302 |        
|                                           |                                        |              |         |           |         |            |         |            |        |         |         |          |        |      |        |        |        |   |         |        |        |   |         |         |        
|Interest rate sensitivity gap              |                                        | $            | 13,738  |           |         | $          | (53,868 | )          |        | $       | 24,372  |          |        | $    | 77,055 |        |        | $ | (61,297 | )      |        |   |         |        
|                                           |                                        |              |         |           |         |            |         |            |        |         |         |          |        |      |        |        |        |   |         |        |        |   |         |         |        
|Cumulative interest rate sensitivity gap   |                                        | $            | 13,738  |           |         | $          | (40,130 | )          |        | $       | (15,758 | )        |        | $    | 61,297 |        |        |   |         |        |        |   |         |        
|                                           |                                        |              |         |           |         |            |         |            |        |         |         |          |        |      |        |        |        |   |         |        |        |   |         |        

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 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 Economic Value of Equity (EVE)
or Earnings at Risk (EAR) to monitor its interest rate risk.

The Companys overall strategy is to minimize the adverse impact of
immediate incremental changes in market interest rates (rate shock) on EVE and
EAR. The EVE is defined as the present value of assets, minus the present value
of liabilities. The EAR is defined as the net interest income, which is
interest income less interest expense. The attainment of this goal requires a
balance between profitability, liquidity and interest rate risk exposure. To
minimize the adverse impact of changes in market interest rates, the Bank
simulates the effect of instantaneous interest rate changes on EVE at period
end and EAR over a one year horizon.

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The table below shows the estimated impact of changes in interest rates on
EVE and EAR on December 31, 2002, assuming shifts of 100 to 200 basis points in
both directions:

|                       |  |                          |        |                  |  |        |      |            |  |   |      |   |  |  |      |  
|---------------------- |  | ------------------------ | ------ | ---------------- |  | ------ | ---- | ---------- |  | - | ---- | - |  |  | ---- | -
|(Dollars in Thousands) |  |                          |        |                  |  |        |      |            |  |   |      |   |  |  |      |  
|                       |  | Economic Value of Equity |        | Earnings at Risk
|                       |  |                          |        |                 
|                       |  | Cumulative               |        |                  |  |        |      | Cumulative |  |   |      |  
|                       |  | Dollar                   |        | Percentage       |  | Dollar |      | Percentage
|Simulated Rate Changes |  | Change                   |        | Change           |  | Change |      | Change    
|                       |  |                          |        |                  |  |        |      |           
|+200 Basis Points      |  | $                        | (4,480 | )                |  |        | -8.1 | %          |  | $ | 718  |   |  |  | 4.6  | %
|+100 Basis Points      |  |                          | (1,568 | )                |  |        | -2.8 | %          |  |   | 164  |   |  |  | 1.1  | %
|-200 Basis Points      |  |                          | (199   | )                |  |        | -0.4 | %          |  |   | (513 | ) |  |  | -3.3 | %
|-100 Basis Points      |  |                          | (1,876 | )                |  |        | -3.4 | %          |  |   | (243 | ) |  |  | -1.6 | %

The amount and percentage changes represent the cumulative dollar and
percentage change in each rate change scenario from the base case. 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.

At December 31, 2002, the Companys estimated changes in EVE and EAR were
within the ranges established by the Board of Directors.

Non-Accrual, Past Due, and Restructured Loans

As of December 31, 2002 and 2001, there were no loans past due more than
90 days, no loans on non-accrual and no renegotiated loans.

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, 2002, the Companys classified loans consisted of $1.8
million as substandard. This current level represents an improvement of
approximately $0.7 million from the prior year reporting period.

With the exception of these loans, management is not aware of any loans as
of December 31, 2002, 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. Management cannot 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

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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 be classified as discussed above.

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 the
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.

Summary of Loan Loss Experience

In August 2001, the Bank was approved for a change in banking charters and
converted from a national to a California-chartered state bank. The conversion
to a state bank was necessitated by the Banks need to meet the growing credit
requirements of its customer base as it implemented its newly adopted strategic
plan. In conjunction with its charter conversion, the Banks primary banking
regulators changed from the Office of the Comptroller of the Currency to the
DFI and 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. 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 FFEIC. 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 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

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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.

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 external credit examiners   

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

|                                                                                      |             |                           |                 |   |      |    |       |   |      |     |      |   |      |     |     |   |     |    |     |   |     |     | 
|------------------------------------------------------------------------------------- | ----------- | ------------------------- | --------------- | - | ---- | -- | ----- | - | ---- | --- | ---- | - | ---- | --- | --- | - | --- | -- | --- | - | --- | --- | 
|(Dollars in Thousands)                                                                |             | December 31,             
|                                                                                      |             |                          
|                                                                                      |             |                           |                 |   | 2002 |    | 2001  |   | 2000 |     | 1999 |   | 1998
|                                                                                      |             |                           |                 |   |      |    |       |   |      |     |      |   |     
|Allowance for possible loan losses balance,
beginning of year                         |             | $                         | 1,450           |   |      | $  | 784   |   |      | $   | 764  |   |      | $   | 686 |   |     | $  | 695 |  
|                                                                                      | Charge-offs |                           |                 |   |      |    |       |   |      |     |      |   |      |     |     |   |     |    |     |   |    
|                                                                                      |             | Commercial and industrial |                 |   | 117  |    |       |   | 69   |     |      |   | 305  |     |     |   | 94  |    |     |   | 40  |    
|                                                                                      |             | Real estate-mortgage      |                 |   |     |    |       |   |     |     |      |   |     |     |     |   |    |    |     |   |    |    
|                                                                                      |             | Consumer loans            |                 |   | 124  |    |       |   | 60   |     |      |   | 61   |     |     |   | 103 |    |     |   | 213 |    
|                                                                                      |             |                           |                 |   |      |    |       |   |      |     |      |   |      |     |     |   |     |    |     |  
|                                                                                      |             |                           | 241             |   |      |    | 129   |   |      |     | 366  |   |      |     | 197 |   |     |    | 253 |  
|                                                                                      |             |                           |                 |   |      |    |       |   |      |     |      |   |      |     |     |   |     |    |     |  
|                                                                                      | Recoveries  |                           |                 |   |      |    |       |   |      |     |      |   |      |     |     |   |     |    |     |   |    
|                                                                                      |             | Commercial and industrial |                 |   | 78   |    |       |   | 3    |     |      |   | 110  |     |     |   | 27  |    |     |   | 8   |    
|                                                                                      |             | Real estate-mortgage      |                 |   |     |    |       |   |     |     |      |   |     |     |     |   |    |    |     |   | 41  |    
|                                                                                      |             | Consumer loans            |                 |   | 89   |    |       |   | 19   |     |      |   | 20   |     |     |   | 82  |    |     |   | 52  |    
|                                                                                      |             |                           |                 |   |      |    |       |   |      |     |      |   |      |     |     |   |     |    |     |  
|                                                                                      |             |                           | 167             |   |      |    | 22    |   |      |     | 130  |   |      |     | 109 |   |     |    | 101 |  
|                                                                                      |             |                           |                 |   |      |    |       |   |      |     |      |   |      |     |     |   |     |    |     |  
|                                                                                      |             |                           | Net charge-offs |   |      | 74 |       |   |      | 107 |      |   |      | 236 |     |   |     | 88 |     |   |     | 152 | 
|Provision for possible loan losses                                                    |             |                           | 1,430           |   |      |    | 773   |   |      |     | 256  |   |      |     | 166 |   |     |    | 143 |  
|Allowance relating to acquired loan portfolio                                         |             |                           | 197             |   |      |    |      |   |      |     |     |   |      |     |    |   |     |    |    |  
|                                                                                      |             |                           |                 |   |      |    |       |   |      |     |      |   |      |     |     |   |     |    |     |  
|Allowance for possible loan losses, end of year                                       |             | $                         | 3,003           |   |      | $  | 1,450 |   |      | $   | 784  |   |      | $   | 764 |   |     | $  | 686 |  
|                                                                                      |             |                           |                 |   |      |    |       |   |      |     |      |   |      |     |     |   |     |    |     |  
|Ratio of net charge-offs during the year to
average loans outstanding during the year |             |                           |                | % |      |    | 0.1   | % |      |     | 0.3  | % |      |     | 0.1 | % |     |    | 0.2 | %
|                                                                                      |             |                           |                 |   |      |    |       |   |      |     |      |   |      |     |     |   |     |    |     |  
|Ratio of allowance for possible loan losses to
loans at year-end                      |             |                           | 1.2             | % |      |    | 1.1   | % |      |     | 1.0  | % |      |     | 0.9 | % |     |    | 0.8 | %
|                                                                                      |             |                           |                 |   |      |    |       |   |      |     |      |   |      |     |     |   |     |    |     |  

Non-Accrual, Past Due, and Restructured Loans

The following table sets forth the amounts and categories of the Companys
non-performing assets at the dates indicated. As of December 31, 2002 and
2001, there were no loans past due more than 90 days, no loans on non-accrual
and no renegotiated loans.

|                                          |                                        |                                        |   |                         |   |      |   |      |   |      |   |     |     |  |   |     |     |  |   |     |     | 
|----------------------------------------- | -------------------------------------- | -------------------------------------- | - | ----------------------- | - | ---- | - | ---- | - | ---- | - | --- | --- |  | - | --- | --- |  | - | --- | --- | 
|                                          |                                        |                                        |   | Year Ended December 31,
|                                          |                                        |                                        |   |                        
|(Dollars in Thousands)                    |                                        | 2002                                   |   | 2001                    |   | 2000 |   | 1999 |   | 1998
|                                          |                                        |                                        |   |                         |   |      |   |      |   |     
|Accruing Loans More than 90 Days Past Due |                                        |                                        |   |                         |   |      |   |      |   |      |   |     |     |  |   |     |     |  |   |    
|Aggregate loan amounts                    |                                        |                                        |   |                         |   |      |   |      |   |      |   |     |     |  |   |     |     |  |   |    
|                                          | Commercial, financial and agricultural |                                        | $ |                        |   |      | $ |     |   |      | $ |    |     |  | $ |    |     |  | $ |    |    
|                                          | Real estate                            |                                        |   |                        |   |      |   |     |   |      |   |    |     |  |   |    |     |  |   |    |    
|                                          | Installment loans to individuals       |                                        |   |                        |   |      |   |     |   |      |   | 25  |     |  |   | 14  |     |  |   | 1   |    
|                                          |                                        |                                        |   |                         |   |      |   |      |   |      |   |     |     |  |   |     |     |  |   |     |    
|                                          |                                        | Total loans past due more than 90 days |   |                         |  |      |   |      |  |      |   |     | 25  |  |   |     | 14  |  |   |     | 1   | 
|Renegotiated loans                        |                                        |                                        |  |                         |   |      |  |      |   |      |  |     |     |  |  |     |     |  |  |    
|Non-accrual loans                         |                                        |                                        |   |                         |   |      |   |      |   |      |   |     |     |  |   |     |     |  |   |    
|Aggregate loan amounts                    |                                        |                                        |   |                         |   |      |   |      |   |      |   |     |     |  |   |     |     |  |   |    
|                                          | Commercial, financial and agricultural |                                        |   |                        |   |      |   |     |   |      |   | 131 |     |  |   | 269 |     |  |   | 114 |    
|                                          | Real estate                            |                                        |   |                        |   |      |   |     |   |      |   | 176 |     |  |   | 226 |     |  |   |    |    
|                                          | Installment loans to individuals       |                                        |   |                        |   |      |   |     |   |      |   |    |     |  |   |    |     |  |   |    |    
|                                          |                                        |                                        |   |                         |   |      |   |      |   |      |   |     |     |  |   |     |     |  |   |    
|                                          |                                        | Total non-accrual loans                |   |                         |  |      |   |      |  |      |   |     | 307 |  |   |     | 495 |  |   |     | 114 | 
|                                          |                                        | Total non-performing loans             |   | $                       |  |      |   | $    |  |      |   | $   | 332 |  |   | $   | 509 |  |   | $   | 115 | 
|                                          |                                        |                                        |   |                         |   |      |   |      |   |      |   |     |     |  |   |     |     |  |   |    

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Allowance for Possible Loan Loss by Category

The allowance for possible loan losses was $3.0 million and $1.5 million
at December 31, 2002 and 2001, respectively, representing approximately 1.2%
and 1.1% of total loans at year end, respectively. Actual net charge offs for
the years ending December 31, 2002 and 2001 were $74,000 and $107,000,
respectively, representing only 0.04% and 0.11%, respectively, of total
average loans. The increase in the ALLL was principally related to the
expansion of the Companys loan portfolio. The following table sets forth the
Companys allowance for possible loan losses by loan category and the percent
of loans in each category to total loans at the dates indicated.



|                                     |       |                 |              |       |             |  |              |       |             |   |              |       |             |  |      |       |   |   |            |     |  |  |      |       |  
|------------------------------------ | ----- | --------------- | ------------ | ----- | ----------- |  | ------------ | ----- | ----------- | - | ------------ | ----- | ----------- |  | ---- | ----- | - | - | ---------- | --- |  |  | ---- | ----- | -
|(Dollars in Thousands)               |       | At December 31,
|                                     |       |                
|                                     |       |                 | 2002         |       | 2001        |  | 2000        
|                                     |       |                 |              |       |             |  |             
|                                     |       |                 |              |       |             |  | Percent of   |       |             |   |              |       | Percent of  |  |      |       |   |   | Percent of
|                                     |       |                 |              |       |             |  | Loans in     |       |             |   |              |       | Loans in    |  |      |       |   |   | Loans in  
|                                     |       |                 | Allowance    |       | Each        |  | Allowance    |       | Each        |   | Allowance    |       | Each       
|                                     |       |                 | for Possible |       | Category to |  | for Possible |       | Category to |   | for Possible |       | Category to
|                                     |       |                 | Loan Losses  |       | Total Loans |  | Loan Losses  |       | Total Loans |   | Loan Losses  |       | Total Loans
|                                     |       |                 |              |       |             |  |              |       |             |   |              |       |            
|Commercial and industrial            |       | $               | 515          |       |             |  | 8.4          | %     |             | $ | 497          |       |             |  | 18.0 | %     |   | $ | 180        |     |  |  | 13.6 | %    
|Residential real estate construction |       |                 | 1,298        |       |             |  | 43.4         |       |             |   | 336          |       |             |  | 24.1 |       |   |   | 15         |     |  |  | 7.0  |      
|Residential 1-4 family               |       |                 | 127          |       |             |  | 9.3          |       |             |   | 126          |       |             |  | 13.8 |       |   |   | 29         |     |  |  | 14.0 |      
|Commercial real estate               |       |                 | 682          |       |             |  | 36.7         |       |             |   | 372          |       |             |  | 38.0 |       |   |   | 101        |     |  |  | 50.1 |      
|Installment loans to individuals     |       |                 | 31           |       |             |  | 2.2          |       |             |   | 72           |       |             |  | 6.1  |       |   |   | 24         |     |  |  | 15.3 |      
|Other risks                          |       |                 | 350          |       |             |  |             |       |             |   | 47           |       |             |  |     |       |   |   | 435        |     |  |  |     |      
|                                     |       |                 |              |       |             |  |              |       |             |   |              |       |             |  |      |       |   |   |            |     |  |  |      |      
|                                     | Total |                 | $            | 3,003 |             |  |              | 100.0 | %           |   | $            | 1,450 |             |  |      | 100.0 | % |   | $          | 784 |  |  |      | 100.0 | %
|                                     |       |                 |              |       |             |  |              |       |             |   |              |       |             |  |      |       |   |   |            |     |  |  |      |      

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                     |       |                 |              |     |             |  |              |       |             |   |     |     |            |  |      |       |  
|------------------------------------ | ----- | --------------- | ------------ | --- | ----------- |  | ------------ | ----- | ----------- | - | --- | --- | ---------- |  | ---- | ----- | -
|(Dollars in Thousands)               |       | At December 31,
|                                     |       |                
|                                     |       |                 | 1999         |     | 1998       
|                                     |       |                 |              |     |            
|                                     |       |                 |              |     |             |  | Percent of   |       |             |   |     |     | Percent of
|                                     |       |                 |              |     |             |  | Loans in     |       |             |   |     |     | Loans in  
|                                     |       |                 | Allowance    |     | Each        |  | Allowance    |       | Each       
|                                     |       |                 | for Possible |     | Category to |  | for Possible |       | Category to
|                                     |       |                 | Loan Losses  |     | Total Loans |  | Loan Losses  |       | Total Loans
|                                     |       |                 |              |     |             |  |              |       |            
|Commercial and industrial            |       | $               | 78           |     |             |  | 18.0         | %     |             | $ | 56  |     |            |  | 19.4 | %    
|Residential real estate construction |       |                 |             |     |             |  | 7.6          |       |             |   |    |     |            |  | 4.3  |      
|Residential 1-4 family               |       |                 |             |     |             |  | 10.6         |       |             |   |    |     |            |  | 9.3  |      
|Commercial real estate               |       |                 |             |     |             |  | 41.8         |       |             |   |    |     |            |  | 39.1 |      
|Installment loans to individuals     |       |                 | 10           |     |             |  | 22.0         |       |             |   | 61  |     |            |  | 27.9 |      
|Other risks                          |       |                 | 676          |     |             |  |             |       |             |   | 569 |     |            |  |     |      
|                                     |       |                 |              |     |             |  |              |       |             |   |     |     |            |  |      |      
|                                     | Total |                 | $            | 764 |             |  |              | 100.0 | %           |   | $   | 686 |            |  |      | 100.0 | %
|                                     |       |                 |              |     |             |  |              |       |             |   |     |     |            |  |      |      

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Deposits

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

|                                     |                |                         |         |         |         |  |         |     |         |   |         |         |         |  |     |     |   |   |        |         |  |  |     |     |  
|------------------------------------ | -------------- | ----------------------- | ------- | ------- | ------- |  | ------- | --- | ------- | - | ------- | ------- | ------- |  | --- | --- | - | - | ------ | ------- |  |  | --- | --- | -
|(Dollars in Thousands)               |                | Year Ended December 31,
|                                     |                |                        
|                                     |                |                         | 2002    |         | 2001    |  | 2000   
|                                     |                |                         |         |         |         |  |        
|                                     |                |                         | Average |         | Average |  | Average |     | Average |   | Average |         | Average
|                                     |                |                         | Balance |         | Rate    |  | Balance |     | Rate    |   | Balance |         | Rate   
|                                     |                |                         |         |         |         |  |         |     |         |   |         |         |        
|Non-interest bearing
demand deposits |                | $                       | 55,936  |         |         |  |        | %   |         | $ | 41,020  |         |         |  |    | %   |   | $ | 37,097 |         |  |  |    | %  
|Savings deposits 1                   |                |                         | 89,489  |         |         |  | 2.0     |     |         |   | 41,504  |         |         |  | 1.8 |     |   |   | 37,046 |         |  |  | 1.7 |    
|Time deposits                        |                |                         | 73,394  |         |         |  | 3.6     |     |         |   | 48,229  |         |         |  | 5.3 |     |   |   | 27,719 |         |  |  | 5.1 |    
|                                     |                |                         |         |         |         |  |         |     |         |   |         |         |         |  |     |     |   |   |        |         |  |  |     |    
|                                     | Total Deposits |                         | $       | 218,819 |         |  |         | 2.0 | %       |   | $       | 130,753 |         |  |     | 2.5 | % |   | $      | 101,862 |  |  |     | 2.0 | %
|                                     |                |                         |         |         |         |  |         |     |         |   |         |         |         |  |     |     |   |   |        |         |  |  |     |    



---

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

Short-term Borrowings

Set forth below is a schedule of outstanding short-term borrowings (less
than or equal to 1 year):

|                        |                             |                         |        |        |      |   |       |       |  |   |   |   | 
|----------------------- | --------------------------- | ----------------------- | ------ | ------ | ---- | - | ----- | ----- |  | - | - | - | 
|(Dollars in Thousands)  |                             | Year Ended December 31,
|                        |                             |                        
|                        |                             |                         | 2002   |        | 2001 |   | 2000 
|                        |                             |                         |        |        |      |   |      
|Federal Funds Purchased |                             | $                       |       |        |      | $ | 3,000 |       |  | $ |  |  
|FHLB Advances           |                             |                         | 20,000 |        |      |   |      |       |  |   |  |  
|Line of Credit          |                             |                         | 5,000  |        |      |   |      |       |  |   |  |  
|                        |                             |                         |        |        |      |   |       |       |  |   |   |  
|                        | Total Short-term borrowings |                         | $      | 25,000 |      |   | $     | 3,000 |  |   | $ |  | 
|                        |                             |                         |        |        |      |   |       |       |  |   |   |  

Time Certificate of Deposits

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

|                             |  |                      |        | 
|---------------------------- |  | -------------------- | ------ | 
|(Dollars in Thousands)       |  | At December 31, 2002
|                             |  |                     
|Three months or less         |  | $                    | 10,898 | 
|Over three through 12 months |  |                      | 28,363 | 
|Over one through Five Years  |  |                      | 8,368  | 
|                             |  |                      |        | 
|                             |  | $                    | 47,629 | 
|                             |  |                      |        | 

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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), and average equity to average total assets/(equity to asset ratio).

|                                    |  |      |      |      |  |  |      |  
|----------------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                                    |  | 2002 |      | 2001
|                                    |  |      |      |     
|Return on average assets            |  |      | 1.1  | %    |  |  | 0.8  | %
|Return on average equity            |  |      | 22.2 | %    |  |  | 11.7 | %
|Cash dividend payout ratio          |  |      |     |      |  |  |     |  
|Stockholders equity to asset ratio |  |      | 5.0  | %    |  |  | 6.8  | %

A stock dividend of 5% was declared in December 2002 and paid in January
2003 to all holders of the Companys common stock as of December 23 2002.

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.

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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.)

Supervision and Regulation

General

Bank holding companies and banks are extensively regulated under both
federal and state law. The regulation is intended primarily for the protection
of depositors and the deposit insurance fund and not for the benefit of
shareholders of the Company. Set forth below is a summary description of the
material laws and regulations, which relate to the operations of the Company
and the Bank. This description does not purport to be complete and is
qualified in its entirety by reference to the applicable laws and regulations.

In recent years significant legislative proposals and reforms affecting
the financial services industry have been discussed and evaluated by Congress,
the state legislature and before the various Bank regulatory agencies. These
proposals may increase or decrease the cost of doing business, limiting or
expanding permissible activities, or enhance the competitive position of other
financial service providers. The likelihood and timing of any such proposals
or bills and the impact they might have on the Company and its subsidiaries
cannot be predicted.

The Company

The Company is a registered bank holding company and is subject to
regulation under the Bank Holding Company Act of 1956, as amended (BHCA).
Accordingly, the Companys operations, and its subsidiaries are subject to
extensive regulation and examination by the Board of Governors of the Federal
Reserve System (FRB).

The Company is required to file with the FRB quarterly and annual reports
and such additional information as the FRB may require pursuant to the BHCA.
The FRB conducts periodic 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 of 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 nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with an extension of
credit, lease or sale of property or furnishing of services. For example, with
certain exceptions, a bank may not condition an extension of credit on a
promise by its customer to obtain other services provided by it, its holding
company or other subsidiaries, or on a promise by its customer not to obtain
other services from a competitor. In addition, federal law imposes certain
restrictions on transitions between the Company and its subsidiaries. Further,
the Company is required by the Federal Reserve Board to maintain certain levels
of capital. (See Item 7. Management Discussion and Analysis of Financial
Condition and Results of OperationsCapital Resources.)

Directors, officers and principal shareholders of the Company have had and
will continue to have banking transactions with the Bank in the ordinary course
of business. Any loans and commitments to lend included in such transactions
are made in accordance with applicable law, on substantially the same terms,

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including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons of similar creditworthiness, and
on terms not involving more than the normal risks of collection or presenting
other unfavorable features.

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 share 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.

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 Boards 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.

The Companys securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the Exchange
Act). As such, the Company is subject to the information, proxy solicitation,
insider trading and other requirements and restrictions of the Exchange Act.
See (Item 1. Business  Supervision and Regulation  Sarbanes-Oxley Act of 2002.)

The Bank

The Bank, as a California chartered bank, is subject to primary
supervision, periodic examination, and regulation by the DFI and the FDIC. To
a lesser extent, the Bank is also subject to certain regulations promulgated by
the Federal Reserve Board. If, as a result of an examination of the Bank, the
FDIC 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 FDIC. 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 an increase in capital, to restrict the growth
of the Bank, to assess civil monetary penalties, to remove officers and
directors and ultimately to terminate the Banks deposit insurance, which for a
California chartered bank would result in a revocation of the Banks charter.
The DFI has many of the same remedial powers.

Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statues and regulations relate to many aspects of the Banks
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain certain levels of
capital. See (Item 7. Management Discussion and Analysis of Financial
Condition and Results of Operations  Capital Resources.)

Dividends and Other Transfer of Funds

Dividends from the Bank constitute the principal source of income to the
Company. 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

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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.

The FDIC and the DFI also have authority to prohibit the Bank from
engaging in activities that, in their 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 FDIC
and the DFI could assert that the payment of dividends or other payments might,
under some circumstances, be an unsafe or unsound practice. Further, the FDIC
and the FRB 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. An insured depository institution is prohibited 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. The DFI may impose similar limitations
on the Bank. (See Item. 1 Business - Supervision and Regulation - Prompt Corrective Action.)

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 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 affiliates are limited, individually, 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 restriction with respect to transactions involving the
Company and other controlling persons of the Bank. Additional restrictions on
transaction 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 Action.)

Capital Requirements

The Federal Reserve Board and the FDIC have established risk-based minimum
capital guidelines with respect to the maintenance of appropriate levels of
capital by United States banking organizations. These guidelines are 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 commercial loans.

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%. 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 must be 3%. 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 minimum guidelines and
ratios.

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Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), among other things, identifies five capital categories for insured
depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective federal regulatory agencies to
implement systems for prompt corrective action for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines
could also subject a banking institution to capital raising requirements. An
undercapitalized institution must develop a capital restoration plan. At
December 31, 2002 the Bank exceeded all of the required ratios for
classification as well capitalized.

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 practice warrants such treatment. At each
successive lower capital category, an insured depository institution is subject
to more restrictions.

Banking agencies have also adopted regulations which mandate that
regulators take into consideration (i) concentrations of credit risk; (ii)
interest rate risk (when the interest rate sensitivity of an institutions
assets does not match the sensitivity of its liabilities or its
off-balance-sheet position); and (iii) risks from non-traditional activities,
as well as an institutions ability to manage those risks, when determining the
adequacy of an institutions capital. That evaluation will be made as a part of
the institutions regular safety and soundness examination. In addition, the
banking agencies have amended their regulatory capital guidelines to
incorporate a measure for market risk. In accordance with the amended
guidelines, the Company and any company with significant trading activity must
incorporate a measure for market risk in its regulatory capital calculations.

In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the supervising agencies for unsafe or unsound practices
in conducting their businesses for violations of law, rule, regulation or any
condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions vary commensurate with the severity of the
violation.

Safety and Soundness Standards

The federal banking agencies have adopted guidelines designed to assist
the federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (i) internal controls,
information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation,
fees and benefits. In addition, the federal banking agencies have also adopted
safety and soundness guidelines with respect to asset quality and earnings
standards. These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and prevent those assets from
deteriorating. Under these standards, any insured depository institution
should: (i) conduct periodic asset quality reviews to identify problem assets,
(ii) estimate the inherent losses in problem assets and establish reserves that
are sufficient to absorb estimated losses, (iii) compare problem asset totals
to capital, (iv) take appropriate corrective action to resolve problem assets,
(v) consider the size and potential risks of material asset concentrations, and
(vi) provide periodic asset quality reports with adequate information for
management and the board of directors to assess the level of asset risk. These
guidelines also set forth standards for evaluating and monitoring earnings and
for ensuring that earnings are sufficient for the maintenance of adequate
capital and reserves.

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Premiums for Deposit Insurance

The Companys deposit accounts are insured by the Bank Insurance Fund
(BIF), as administered by the FDIC, up to the maximum permitted by law.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operation, or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC or the institutions
primary regulator.

The FDIC charges an annual assessment for the insurance of deposits, which
as of December 31, 2002, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular institution poses to its deposit
insurance fund. The risk classification is based on an institutions capital
group and supervisory subgroup assignment. An institutions risk category is
based upon whether the institution is well capitalized, adequately capitalized,
or less than adequately capitalized. Each insured depository institution is
also assigned to one of the following supervisory subgroups. Subgroup A, B
or C. Subgroup A institutions are financially sound institutions with few
minor weaknesses; Subgroup B institutions are institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration;
and Subgroup C institutions are institutions for which there is a substantial
probability that the FDIC will suffer a loss in connection with the institution
unless effective action is taken to correct the areas of weakness. Insured
institutions are not allowed to disclose their risk assessment classification
and no assurance can be given as to what the future level of premiums will be.

The Community Reinvestment Act (CRA)

The Bank is subject to certain fair lending requirements and reporting
obligations involving lending, investing and other CRA activities. CRA requires
each Company to identify the communities served by the Companys offices and to
identify the types of credit and investments the Company is prepared to extend
within such communities including low and moderate income neighborhoods. It
also requires the Companys regulators to assess the Companys performance in
meeting the credit needs of its community and to take such assessment into
consideration in reviewing application for mergers, acquisitions, relocation of
existing branches, opening of new branches and other transactions. A bank may
be subject to substantial penalties and corrective measures for a violation of
certain fair lending laws. The federal banking agencies may take compliance
with such laws and CRA in consideration when regulating and supervising other
banking activities.

A Banks compliance with its CRA obligations is based on a performance
based evaluation system which bases CRA ratings on an institutions lending
service and investment performance. An unsatisfactory rating may be the basis
for denying a merger application. The Banks latest CRA examination was
completed by the Federal Reserve Bank of San Francisco. The Bank received an
overall rating of satisfactory in complying with its CRA obligations.

Financial Services Modernization Legislation

In November 1999, the Gramm-Leach-Bliley Act of 1999 (GLB) was enacted.
The GLB repeals provisions of the Glass-Steagall Act which restricted the
affiliation of Federal Reserve member banks with firms engaged principally in
specified securities activities, and which restricted officer, director or
employee interlocks between a member bank and any company or person primarily
engaged in specified securities activities.

In addition, the GLB contains provisions that expressly preempt any state
law restricting the establishment of financial affiliations, primarily related
to insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms and other financial service providers by revising and
expanding the BHCA framework to permit a holding company to engage in a full
range of financial activities through a new entity known as a financial
holding company. Financial activities is broadly defined to include not only
banking, insurance and securities activities, but also merchant banking and
additional activities that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines to be financial in

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nature, incidental to such financial activities or complementary
activities that do not pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally.

The GLB provides that no company may acquire control of an insured savings
association unless that company engages, and continues to engage, only in the
financial activities permissible for a financial holding company, unless the
company is grandfathered as a unitary savings and loan holding company. The
GLB grandfathers any company that was a unitary savings and loan holding
company on May 4, 1999 or became a unitary savings and loan holding company
pursuant to an application pending on that date.

The GLB also permits national banks to engage in expanded activities
through the formation of financial subsidiaries. A national bank may have a
subsidiary engaged in any activity authorized for national banks directly or
any financial activity, except for insurance underwriting, insurance
investments, real estate investment or development, or merchant banking, which
may only be conducted through a subsidiary of a financial holding company.
Financial activities include all activities permitted under new sections of the
BHCA or permitted by regulation.

To the extent that the GLB permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. The GLB is intended to grant to community banks powers as a
matter of right that larger institutions have accumulated on an ad hoc basis
and which unitary savings and loan holding companies already possess.
Nevertheless, the GLB may have the result of increasing the amount of
competition that the Company faces from larger institutions and other types of
companies offering financial products, many of which may have substantially
more financial resources than the Company has.

Regulation W

Transactions between a bank and its affiliates are governed by Sections
23A and 23B of the Federal Reserve Act. The Federal Deposit Insurance Act
applies Sections 23A and 23B to insured nonmember banks in the same manner and
to the same extent as if they were members of the Federal Reserve System. The
Federal Reserve Board has also recently issued Regulation W, which codifies
prior regulations under Sections 23A and 23B of the Federal Reserve Act and
provides interpretative guidance with respect to affiliate transactions.
Affiliates of a bank include, among other entities, the banks holding company
and companies that are under common control with the bank. The Company is
considered to be an affiliate of the Bank. In general, subject to certain
specified exemptions, a bank or its subsidiaries are limited in their ability
to engage in covered transactions with affiliates:



| |  |  | to an amount equal to 10% of the banks capital and surplus, in the
case of covered transactions with any one affiliate; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to an amount equal to 20% of the banks capital and surplus, in the
case of covered transactions with all affiliates.       

In addition, a bank and its subsidiaries may engage in covered
transactions and other specified transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
bank or its subsidiary, as those prevailing at the time for comparable
transactions with nonaffiliated companies. A covered transaction includes:



| |  |  | a loan or extension of credit to an affiliate;                        
| | - |  | ----------------------------------------------------------------------
|
| |  |  | a purchase of, or an investment in, securities issued by an affiliate;
|
| |  |  | a purchase of assets from an affiliate, with some exceptions;         

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| |  |  | the acceptance of securities issued by an affiliate as
collateral for a loan or extension of credit to and party; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  | the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.                               

In addition, under Regulation W:



| |  |  | a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;                                                                                                                                                                 
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | covered transactions and other specified transactions between
a bank or its subsidiaries and an affiliate must be on terms and
conditions that are consistent with safe and sound banking
practices; and                                            
|
| |  |  | with some exceptions, each loan or extension of credit by a
bank to an affiliate must be secured by collateral with a market
value ranging from 100% to 130%, depending on the type of
collateral, of the amount of the loan or extension of credit.

Regulation W generally excludes all non-bank and non-savings association
subsidiaries of banks from treatment as affiliates, except to the extent that
the Federal Reserve Board decides to treat these subsidiaries as affiliates.

Under a present exemption from compliance with the quantitative limits and
collateral requirements of Regulation W and Section 23A, a bank can purchase
loans, or other extensions of credit, from an affiliate without being subject
to the 10% and 20% limitation for covered transactions as long as:



| |  |  | the extension of credit is originated by the affiliate;                                                                                                                                                                                                                                                                                                                                                           
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the bank makes an independent evaluation of the
creditworthiness of the borrower before the affiliate makes or
commits to make the extension of credit;                                                                                                                                                                                                                                                           
|
| |  |  | the bank commits to purchase the extension of credit before
the affiliate makes or commits to make the extension of credit;                                                                                                                                                                                                                                                                                       
|
| |  |  | the bank does not make a blanket advance commitment to
purchase extensions of credit from the affiliate; and                                                                                                                                                                                                                                                                                                      
|
| |  |  | the dollar amount of the extension of credit, when aggregated
with the dollar amount of all other extensions of credit purchased
from the affiliate during the preceding 12 calendar months by the
bank and its FDIC insured depository institution affiliates, does
not represent more than 50% of the dollar amount of extensions of
credit originated by the affiliate during the preceding 12 calendar
months.

Concurrently with the adoption of Regulation W, the Federal Reserve Board
has proposed a regulation which would limit the amount of loans that could be
purchased by a bank from an affiliate under this exemption to not more than
100% of the banks capital and surplus. Comments on the proposed rule were due
by January 13, 2003.

USA Patriot Act of 2001

On October 26, 2001, President Bush signed the USA Patriot Act of 2001.
Enacted in response to the terrorist attacks on September 11, 2001, the Patriot
Act is intended to strengthen U.S. law enforcements and the intelligence
communities ability to work cohesively to combat terrorism on a variety of
fronts. The potential impact of the Patriot Act on financial institution of
all kinds is significant and wide ranging. The

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Patriot Act contains sweeping
anti-money laundering and financial transparency laws and requires various
regulations, including:



| |  |  | due diligence requirements for financial institutions that
administer, maintain, or manage private banks accounts or
correspondent accounts for non-U.S. persons;                
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | standards for verifying customer identification at account
opening;                                                                                                              
|
| |  |  | rules to promote cooperation among financial institutions,
regulators, and law enforcement entities in identifying parties that
may be involved in terrorism or money laundering;
|
| |  |  | reports by nonfinancial trades and business filed with the
Treasury Departments Financial Crimes Enforcement Network for
transactions exceeding $10,000 and;                    
|
| |  |  | filing of suspicious activities reports securities by brokers
and dealers if they believe a customer may be violating U.S. laws
and regulations.                                 

Sarbanes-Oxley Act of 2002

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (SOA). The stated goals of the SOA are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the
securities laws.

The SOA generally applies to all companies, both U.S. and non-U.S., that
file or are required to file periodic reports with the Securities and Exchange
Commission (SEC) under the Exchange Act. Given the extensive SEC role in
implementing rules relating to many of the SOAs new requirements, the final
scope of these requirements remains to be determined.

The SOA includes very specific additional disclosure requirements and new
corporate governance rules, requires the SEC and securities exchanges to adopt
extensive additional disclosure, corporate governance and other related rules
and mandates further studies of specified issues by the SEC and the Comptroller
General. The SOA represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors
and its committees.

The SOA addresses, among other matters:



| |  |  | audit committees;                                                                                                                                                                                                                                                        
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | certification of financial statements by the chief executive
officer and the chief financial officer;                                                                                                                                                                    
|
| |  |  | the forfeiture of bonuses or other incentive-based
compensation and profits from the sale of an issuers securities by
directors and senior officers in the twelve month period following
initial publication of any financial statements that later require
restatement;
|
| |  |  | a prohibition on insider trading during pension plan black out periods;                                                                                                                                                                                                  
|
| |  |  | disclosure of off-balance sheet transactions;                                                                                                                                                                                                                            
|
| |  |  | a prohibition on personal loans to directors and officers;                                                                                                                                                                                                               

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| |  |  | expedited filing requirements for Forms 4s;                                             
| | - |  | -----------------------------------------------------------------------------------------
|
| |  |  | disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code;
|
| |  |  | real time filing of periodic reports;                                                  
|
| |  |  | the formation of a public accounting oversight board;                                    
|
| |  |  | auditor independence; and                                                                
|
| |  |  | various increased criminal penalties for violations of securities laws.                  

The SOA contains provisions which became effective upon enactment on July
30, 2002 and provisions which will become effective from within 30 days to one
year from enactment. The SEC has been delegated the task of enacting rules to
implement various provisions with respect to, among other matters, disclosure
in periodic filings pursuant to the Exchange Act.

Accounting Changes

In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for by a single method  the
purchase method. SFAS No. 141 also specifies the criteria required for
intangible assets to be recognized and reported apart from goodwill. SFAS No.
142 requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead tested for impairment at least annually.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121
(as superceded by SFAS No. 144), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to
adopt the provisions of SFAS No. 141 immediately and SFAS No. 142 effective
January 1, 2002. The adoption of SFAS Nos. 141 and 142 did not have a material
impact on the financial condition or operating results of the Company.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company does not expect adoption of SFAS No. 143 to have a material impact on
the financial condition or operating results of the Company.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes a single
accounting model for the impairment or disposal of long-lived assets, including
discontinued operations. SFAS No. 144 superseded SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and APB Opinion No. 30, Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. This Statement is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
The adoption of SFAS No. 144 did not have a material impact on the financial
condition or operating results of the Company.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. Among other provisions, SFAS No. 145 rescinds SFAS No.
4, Reporting Gains and Losses from Extinguishment of Debt. Accordingly, gains
or losses from extinguishment of debt shall not be reported as extraordinary
items unless the

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extinguishment qualifies as an extraordinary item under the
criteria of APB No. 30. Gains or losses from extinguishment of debt that do not
meet the criteria of APB No. 30 should be reclassified to income from
continuing operations in all prior periods presented. This Statement is
effective for fiscal years beginning after May 15, 2002. The Company does not
expect the adoption of SFAS No. 145 to have a material impact on the financial
position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires that a
liability for the cost associated with an exit or disposal activity be
recognized when the liability is incurred and nullifies the guidance of EITF
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in
Restructuring), which recognized a liability for an exit cost at the date of an
entitys commitment to an exit plan. SFAS No. 146 requires that the initial
measurement of a liability be at fair value. This statement will be effective
for exit and disposal activities that are initiated after December 31, 2002.
The Company does not expect the adoption of SFAS No. 146 to have a material
impact on the financial position or results of operations.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which require that most financial services companies
subject to long-term customer relationship intangible assets to an annual
impairment test instead of being amortized. SFAS No. 147 applies to all new
and past financial institution acquisitions, including branch acquisitions that
qualify as acquisitions of a business, but excluding acquisitions between
mutual institutions. All acquisitions within the scope of the new statement
will now be governed by the requirements of SFAS Nos. 141 and 142. Certain
provisions of SFAS No. 147 were effective on October 1, 2002, while other
provisions are effective for acquisitions on or after October 1, 2002. The
adoption of SFAS No. 147 will not have a material impact on the financial
condition or operating results of the Company.

Employees

At December 31, 2002, the Company had approximately 116 full-time
equivalent employees as compared to approximately 89 in 2001. The Company
believes that its employee relations are satisfactory.

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ITEM 2. Properties

The following table sets forth certain information with respect to the
Banks offices at December 31, 2002.

|                                       |  |              |  |                       |     |  |  | 
|-------------------------------------- |  | ------------ |  | --------------------- | --- |  |  | 
|Office Location                        |  | Leased/Owned |  | Lease Expiration Date
|                                       |  |              |  |                      
|27177 Highway 189, Suite G(1)          |  | Leased       |  | April 2004           
|Blue Jay, California 92317             |  |              |  |                       |     |  |  | 
|                                       |  |              |  |                       |     |  |  | 
|5455 Riverside Drive(1)                |  | Owned        |  |                       | N/A | 
|Chino, California 91710                |  |              |  |                       |     |  |  | 
|                                       |  |              |  |                       |     |  |  | 
|23840 Lake Drive(1)                    |  | Owned        |  |                       | N/A | 
|Crestline, California 92325            |  |              |  |                       |     |  |  | 
|                                       |  |              |  |                       |     |  |  | 
|1200 S. Diamond Bar Boulevard(1)       |  | Leased       |  | In process of renewal
|Diamond Bar, California 91765          |  |              |  |                       |     |  |  | 
|                                       |  |              |  |                       |     |  |  | 
|2100 E. Foothill Boulevard(1)          |  | Leased       |  | In process of renewal
|LaVerne, California 91750              |  |              |  |                       |     |  |  | 
|                                       |  |              |  |                       |     |  |  | 
|9590 Foothill Boulevard(1)(2)          |  | Owned        |  |                       | N/A | 
|Rancho Cucamonga, California 91730     |  |              |  |                       |     |  |  | 
|                                       |  |              |  |                       |     |  |  | 
|7676 Hazard Center Drive, Suite 450(3) |  | Leased       |  | October 2007         
|San Diego, California 91208            |  |              |  |                       |     |  |  | 
|                                       |  |              |  |                       |     |  |  | 
|433 North Camden Drive, Suite 600(3)   |  | Leased       |  | Month to Month       
|Beverly Hills, California 90210        |  |              |  |                       |     |  |  | 
|                                       |  |              |  |                       |     |  |  | 
|1230 Rosecrans Avenue, Suite 120(4)    |  | Leased       |  | March 2007           
|Manhattan Beach, California 90266      |  |              |  |                       |     |  |  | 
|                                       |  |              |  |                       |     |  |  | 
|8748 Industrial Lane                   |  | Leased       |  | Month to Month       
|Rancho Cucamonga, California 91730     |  |              |  |                       |     |  |  | 



---



|(1) |  | Full-service branch office of the Bank.                           
|--- |  | ------------------------------------------------------------------
|   
|(2) |  | This location also serves as the Companys corporate headquarters.
|   
|(3) |  | This location serves as the Banks SBA lending office.            
|   
|(4) |  | This location serves as a loan production office.                 
|   
|(5) |  | This location serves as the Banks warehouse facility.            




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 reduced verdict in the amount of $860,000. During 1999, the
Company accrued a loss of $860,000 in recognition of the amount of liability
determined

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by the court which was included in litigation expense. During fiscal
2000, the parties settled the lawsuit. In 2002, the Bank received $540,000 in
litigation recovery from its insurance carriers.

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

A Special Meeting of Shareholders (Special Meeting) was held on December
18, 2002 to vote on a proposal to amend the Articles of Incorporation of the
Company to increase the total number of authorized shares from 15 million to 25
million of which 10 million shares were for preferred stock. The proposal was
approved by the shareholders at the Special Meeting. The shareholder votes
received at the Special Meeting were 1,562,509 shares voting in favor of the
proposal, 22,505 shares voting against and 17,681 shares abstaining. There
were no broker non-votes received.




PART II




ITEM 5. Market for the Registrants Common Stock and Related Stockholder Matters

The Companys common stock has been listed on the NASDAQ National Market
System under the symbol VNBC since November 2002. Prior to such time, the
Companys common stock was listed on the NASDAQ SmallCap Market under the same
symbol. 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 Stock   
|     |                |  |                
|     |                |  | High            |       | Low
|     |                |  |                 |       |    
|2002 |                |  |                 |       |     |  |  |      
|     | First Quarter  |  |                 | 8.80  |     |  |  | 6.05  | 
|     | Second Quarter |  |                 | 10.05 |     |  |  | 7.65  | 
|     | Third Quarter  |  |                 | 12.35 |     |  |  | 8.65  | 
|     | Fourth Quarter |  |                 | 16.25 |     |  |  | 10.63 | 
|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  | 

As of March 7, 2003, the Company had approximately 1,031 shareholders that
own approximately 2,827,318 shares of common stock.

The Company has not paid any cash dividends on its common stock to date.
The Company does not currently anticipate paying cash dividends. The Companys
primary source of income is dividends from the Bank, and the Bank is subject to
certain regulatory restrictions which may limit its ability to pay dividends to
the Company. (See Item 1. Business  Supervision and Regulation  Dividends
and Other Transfer of Funds.)

On December 18, 2002, the Company issued 50 shares of 7.0% Series A
Preferred Stock (the Series A Preferred) at $50,000 per share to eight
individual investors for aggregate proceeds of $2.5 million.

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Each share of Series A Preferred is entitled to a noncumulative,
annual dividend of 7.0%, payable quarterly. The Series A Preferred is not
convertible into common stock and is redeemable at the option of the Company at
face value, plus any unpaid dividends declared. With each share of Series A
Preferred, the Company issued a warrant to purchase 2,000 shares of the
Companys common stock at $15.00 per share. The total number of shares
issuable pursuant to the warrants was increased to 105,000 shares and the per
share exercise price has been adjusted to $14.29 to reflect the 5% stock
dividend declared by the Company on December 23, 2002. Each warrant must be
exercised prior to December 18, 2005 or it will expire pursuant to its terms.
The Series A Preferred were offered and sold pursuant to an exemption to the
registration requirements under Section 4(2) of the Securities Act of 1933, as
amended.




ITEM 6. Selected Financial Data

The selected financial data set forth below for the fiscal years ended
December 31, 2002, 2001, and 2000 are derived from the audited consolidated
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, 1999 and 1998
are derived from audited financial statements examined by Vavrinek, Trine, Day
& Co., LLP which are not included in this Report.

|                                           |         |                         |        |           |         |      |        |           |         |      |       |           |         |   |       |           |         |   |       |           |         | 
|------------------------------------------ | ------- | ----------------------- | ------ | --------- | ------- | ---- | ------ | --------- | ------- | ---- | ----- | --------- | ------- | - | ----- | --------- | ------- | - | ----- | --------- | ------- | 
|(Dollars in Thousands)                     |         | Year Ended December 31,
|                                           |         |                        
|                                           |         |                         |        | 2002      |         | 2001 |        | 2000      |         | 1999 |       | 1998     
|                                           |         |                         |        |           |         |      |        |           |         |      |       |          
|Interest Income                            |         | $                       | 19,170 |           |         | $    | 11,602 |           |         | $    | 8,965 |           |         | $ | 8,995 |           |         | $ | 9,178 |          
|Interest Expense                           |         |                         | 5,765  |           |         |      | 3,586  |           |         |      | 2,048 |           |         |   | 2,204 |           |         |   | 2,552 |          
|                                           |         |                         |        |           |         |      |        |           |         |      |       |           |         |   |       |           |         |   |       |          
|Net Interest Income                        |         |                         | 13,405 |           |         |      | 8,016  |           |         |      | 6,917 |           |         |   | 6,791 |           |         |   | 6,626 |          
|Provision for Possible Loan Losses         |         |                         | (1,430 | )         |         |      | (773   | )         |         |      | (256  | )         |         |   | (166  | )         |         |   | (143  | )        
|Other Income                               |         |                         | 3,907  |           |         |      | 2,191  |           |         |      | 1,582 |           |         |   | 1,903 |           |         |   | 1,916 |          
|Other Expenses                             |         |                         | 10,793 |           |         |      | 8,295  |           |         |      | 7,174 |           |         |   | 8,564 |           |         |   | 7,649 |          
|                                           |         |                         |        |           |         |      |        |           |         |      |       |           |         |   |       |           |         |   |       |          
|Income/(Loss) Before Taxes                 |         |                         | 5,089  |           |         |      | 1,139  |           |         |      | 1,069 |           |         |   | (36   | )         |         |   | 750   |          
|Income Tax (Provision) Benefit             |         |                         | (2,081 | )         |         |      | 17     |           |         |      | (449  | )         |         |   | 11    |           |         |   | (307  | )        
|                                           |         |                         |        |           |         |      |        |           |         |      |       |           |         |   |       |           |         |   |       |          
|Net Income/(Loss)                          |         | $                       | 3,008  |           |         | $    | 1,156  |           |         | $    | 620   |           |         | $ | (25   | )         |         | $ | 443   |          
|                                           |         |                         |        |           |         |      |        |           |         |      |       |           |         |   |       |           |         |   |       |          
|Earnings/(Loss) Per Share of Common Stock1 |         |                         |        |           |         |      |        |           |         |      |       |           |         |   |       |           |         |   |       |          
|                                           | Basic   |                         | $      | 1.32      |         |      | $      | 0.59      |         |      | $     | 0.32      |         |   |       | ($0.01    | )       |   | $     | 0.23      |        
|                                           | Diluted |                         | $      | 1.12      |         |      | $      | 0.52      |         |      | $     | 0.32      |         |   |       | ($0.01    | )       |   | $     | 0.21      |        
|Weighted Average Number of Shares1         |         |                         |        |           |         |      |        |           |         |      |       |           |         |   |       |           |         |   |       |          
|                                           | Basic   |                         |        | 2,275,832 |         |      |        | 1,961,911 |         |      |       | 1,957,226 |         |   |       | 1,955,915 |         |   |       | 1,955,915 |        
|                                           | Diluted |                         |        | 2,823,069 |         |      |        | 2,542,466 |         |      |       | 1,958,553 |         |   |       | 2,088,047 |         |   |       | 2,093,968 |        
|Balance Sheet Data                         |         |                         |        |           |         |      |        |           |         |      |       |           |         |   |       |           |         |   |       |          
|                                           |         | Assets                  |        | $         | 385,302 |      |        | $         | 191,286 |      |       | $         | 110,753 |   |       | $         | 116,228 |   |       | $         | 115,863 | 
|                                           |         |                         |        |           |         |      |        |           |         |      |       |           |         |   |       |           |         |   |       |          
|                                           |         | Deposits                |        | $         | 287,512 |      |        | $         | 159,381 |      |       | $         | 99,583  |   |       | $         | 104,523 |   |       | $         | 105,315 | 
|                                           |         |                         |        |           |         |      |        |           |         |      |       |           |         |   |       |           |         |   |       |          
|                                           |         | Net Loans               |        | $         | 250,248 |      |        | $         | 136,128 |      |       | $         | 78,740  |   |       | $         | 84,953  |   |       | $         | 87,247  | 
|                                           |         |                         |        |           |         |      |        |           |         |      |       |           |         |   |       |           |         |   |       |          
|                                           |         | Stockholders Equity    |        | $         | 19,958  |      |        | $         | 10,455  |      |       | $         | 9,295   |   |       | $         | 8,630   |   |       | $         | 8,728   | 
|                                           |         |                         |        |           |         |      |        |           |         |      |       |           |         |   |       |           |         |   |       |          



---

|1 |  | Basic earnings per share 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 earnings per share
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. The weighted average number of shares and the
earnings per share were adjusted to reflect the 5% stock dividend declared
in December 2002.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ITEM 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company is a bank holding company. The Companys principal asset is
the common stock of the Bank, a California-chartered commercial bank. The Bank
is a community bank located in the Inland Empire region of Southern California.
The Bank focuses on the needs of small-to-mid-size commercial businesses,
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, California. In addition, the Bank has three
loan production offices located in Manhattan Beach, San Diego, and Beverly
Hills, California. Shares of the Companys common stock are traded on the
NASDAQ National Market System under the 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

The Companys discussion and analysis of its financial condition and
results of operations are based upon its 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 the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, the Company
evaluates its estimates including those related to allowance for possible loan
losses and the value of carried securities. The Company bases its 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 as compared to the year
ended 2002.

Results of Operations

Net income for the periods ending December 31, 2002, 2001 and 2000, was
$3.0 million, $1.2 million, and $620,000, respectively, representing an
increase of 160.2% for the year ended 2002 as compared to the year ended 2001
and an increase of 86.5% for the year ended 2001 compared to the year ended
2000. On a per diluted share basis, net income was $1.12, $0.52, and $0.32 for
2002, 2001, and 2000, respectively. Prior period earnings per share were
adjusted for the 5% stock dividend declared in December 2002.

The Companys net interest income before its provision for possible loan
losses increased by $5.4 million or 67.2% in 2002 as compared with the same
period in 2001 and increased by $1.1 million or 15.9% in 2001 as compared with
the same period in 2000. In fiscal 2002, non-interest income increased by
$1.7 million or 78.3% as compared to fiscal 2001 and non-interest income for
fiscal 2001 increased by $0.6 million or 38.5% as compared to the same period in
2000. Thus, total net revenue (net interest income and non-interest income)
for the period ending December 31, 2002 increased by $7.1 million or 69.6% as
compared to the same period in 2001. The net revenue for fiscal 2001 increased
by $1.7 million or 20.1% as compared to the same period in 2000.

In fiscal 2002, operating result demonstrated a significant increase over
the same periods in 2001 and 2000 as the volume of earning assets increased.
Total assets of the Company have more than doubled at December 31, 2002 as
compared to December 31, 2001. Total assets have increased $194.0 million or
101.4% to $385.3 million at December 31, 2002 as compared to the same period in
2001. The Company continued to have significant growth in the loan portfolio
during fiscal 2002, bringing gross loans
outstanding to $253.3 million at December 31, 2002, an
increase $115.7
million or 84.1% over year-end

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2001s level of $137.6 million. In augmenting
the loan portfolio, investment securities have also increased. Investment
securities at December 31, 2002 were $87.6 million as compared to $30.6 million
at December 31, 2001, for an increase of $57.0 million or 186.3%. The growth
in earning assets was primarily funded by the growth in deposits and other
borrowings. 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 at December 31, 2002 were $287.5 million as compared to $159.4
million at December 31, 2001 for an increase of $128.1 million or 80.4%. The
Company continued to draw from its FHLB borrowing facility to end the year 2002
with $45.0 million in FHLB borrowings as compared to $3.0 million at the end of
2001. In 2002, the Company also drew $5 million from a line of credit with a
correspondent bank. Further, the Company issued additional debt instruments
as part of its strategy to raise capital in support of its banking subsidiary.
The Company issued trust preferred securities of $5.0 million and subordinated
debt of $5.0 million. Such funds were held at the Bank and used to fund
earning assets.

During the year 2001, the prime rate decreased by 475 basis points, or 50%
from its level at year end 2000. Further, in 2002, the prime rate decreased by
50 basis points from it level at year end 2001. At December 31, 2002, the
national prime rate was at 4.25%. Despite this decrease in 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 90 basis
points during each of the years ending December 31, 2002 and 2001. The net
interest margin for the years ended December 31, 2002, 2001 and 2000 was 5.3%,
6.2% and 7.1%, respectively.

Total non-interest expense was $10.8 million, $8.3 million and $7.2
million for the years ended December 31, 2002, 2001 and 2000, respectively.
This was an increase of $2.5 million or 30.1% for fiscal 2002 as compared to
fiscal 2001 and an increase of $1.1 million or 15.6% for fiscal 2001 as
compared to fiscal 2000. The largest item contributing to non-interest expense
was salaries and benefits which represents approximately 50% of total
non-interest expense for each of those years. In order to support its growth,
the Company hired additional employees for business development and several
experienced managers in fiscal 2002. The Companys efficiency ratio, which is
a measure of non-interest expense divided by net interest income plus
non-interest income, was 62.3%, 81.3%, and 84.4% for the years ended 2002, 2001
and 2000, respectively, as the Company is achieving efficiencies of scale as it
continues to grow.

The quality of the Companys loan portfolio continued to improve and
perform well as compared to peer group standards, sustaining only $74,000 in
net charge-offs or 0.04% of average loans in 2002 and $107,000 in net
charge-offs or 0.11% of total average loans in 2001. The Companys continued
growth of its loan portfolio necessitated a provision made to the allowance for
possible loan losses in the amount of $1.4 million and $0.8 million for the
years 2002 and 2001, respectively. The allowance for possible loan losses
increased to 1.2% of gross loans at December 31, 2002 as compared to 1.1% at
December 31, 2001. At December 31, 2002 and 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. (see Note #12 of the Notes to Consolidated
Financial Statements). In 2002, the provision for federal and state income
taxes was $2.1 million. The effective tax rate for the Company was 40.9%.

In December 2001, the Company formed a Statutory Trust I which issued and
sold $12.0 million in trust preferred securities. The proceeds from the sale
of these securities allowed the Company to downstream $8.0 million to the Bank
as additional capital. In December 2002, the Company formed Statutory Trust II
and sold $5.0 million in Trust Preferred Securities. Simultaneously, the
Company issued $5.0 million in subordinated debt through a pooled offering. In
addition, in December 2002, the Company issued $2.5 million in Series A
Preferred Stock to eight individual investors.

In 2002, the Company contributed a total of $13.0 million to the Bank to
support its continued growth. At year end 2002, the Banks equity was $38.9
million. As a result, the Bank exceeds the required

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considered well capitalized. Pursuant to regulatory guidelines under prompt
corrective action rules, a bank must have total risk-based capital of 10% or
greater, Tier 1 capital of 6% or greater and a leverage ratio of 5% or greater
to be considered well capitalized. At year end 2002, the Banks total
risk-based capital, Tier 1 capital and leverage ratios were 14.9%, 13.9% and
11.6%, respectively. On a consolidated basis, the Company has similar ratios.
The minimum ratios that the Company must meet are total risk-based capital of
8%, Tier 1 capital of 4% and a leverage ratio of 4%. At year end 2002, the
Companys total risk-based capital, Tier 1 and leverage ratios were 16.0%,
9.4%, and 7.9%, respectively.

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.

Beginning in early 2001, the Company began to implement an asset/liability
management strategy that was built around the risk elements of interest rate,
asset duration and funding risks. A component of this strategy was to deploy
excess liquidity previously invested in federal funds into higher yielding
mortgage-backed securities with shorter duration and higher cash flow
components. The Company increased the investment portfolio accordingly, which
enhanced the Companys overall yields and better addressed the risk elements
identified above. In doing so, the Company began to realize excessive
prepayments on call options on certain of its mortgage-backed security
investments and liquidated those securities prior to market premium erosion
while generating gains on sale of investment securities. The Companys
investment securities increased by $57.0 million from $30.6 million at December
31, 2001 to $87.6 million at December 31, 2002. The increase in investment
securities in fiscal 2002 provided an increase of $1.6 million in interest
income for the year ending December 31, 2002 over the prior period. Interest
income from investment securities for the years ending December 2002, 2001 and
2000 was $2.6 million, $0.9 million and $0.5 million, respectively. The
Company decreased its average investment in overnight federal funds by $8.6
million at December 31, 2002 compared to December 31, 2001. As a result, the
interest income from overnight federal funds decreased by $0.5 million for the
year ending December 31, 2002 compared to the year ending December 31, 2001.
Interest income from overnight federal funds for the years ending December 31,
2002, 2001 and 2000 was $0.1 million, $0.6 million and $0.4 million,
respectively.

Net Interest Income

Total interest income for the years ended 2002, 2001 and 2000 was $19.2
million, $11.6 million and $9.0 million, respectively, while total interest
expenses was $5.8 million, $3.6 million and $2.0 million, respectively.
Therefore, the net interest income was $13.4 million, $8.0 million and $6.9
million for each of the years ended 2002, 2001, and 2000, respectively, for a
net interest margin of 5.3%, 6.2% and 7.1%, respectively.

Although
the net interest margin decreased a modest 90 basis points from 6.2% in 2001
to 5.3% in 2002, the net interest income increased $5.4 million or 67.2% from
$8.0 million in 2001 to $13.4 million in 2002 as the volume of earning assets
increased. As discussed above, during the year 2001, the prime interest rate
decreased by 475 basis points, or 50%, from its level at year end 2000.
Further, in 2002, the prime interest rate decreased by 50 basis points from its
level at year end 2001. At December 31, 2002, the national prime interest rate
was at 4.25%. The Company experienced some compression in the net interest
margin as existing loans paid off and new loans were originated at lower market
rates. However, the volume of loans originated increased dramatically in 2002
as compared to 2001 therefore contributing to an increase in net interest
income of $7.2 million from volume which was offset by a $1.8 million decrease
as a result of rate
changes. The net increase of $5.4 million for fiscal 2002 is an
improvement over the prior period change of $1.1 million in net interest
income.

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Though the Company is asset-sensitive in the short-run, its loan portfolio
experienced a shift in composition and complexity during 2002, which enabled it
to substantially avoid net interest margin compression during the year despite
the declining interest rate environment. A substantial portion of the
Companys repriceable loan portfolio has reached its floor rates during the
year. These loans did not continue to adjust downward as the market interest
rates decreased. Loan fee income, which is included in interest income, also
stabilized interest income during a period of declining interest rates. For
the year ending December 31, 2002, loan fee income represented $2.7 million of
the $16.5 million in loan income, or 16.4% of total loan related income. For
the year ending December 31, 2001, loan fee income was $1.6 million of the
$10.1 million in total loan income compared to loan income of $0.6 million of
the $8.1 million in total income for the year ending December 31, 2000.
Construction loans and commercial real estate loans generate the bulk of all
loan fee income. The Company continues its emphasis in single-family coastal
construction loans from its Manhattan Beach loan production office which began
in 2001, concentrating on the coastal communities of Los Angeles. In late
2002, the Company began a new product line of single-family tract home
construction loans serving the counties of Los Angeles and San Bernardino. The
loan fees generated from these construction loan products continue to generate
greater loan yields. Construction loans generally have a duration of 12 months.
As a result, construction loans generate higher yields than longer term loans
because the loan fees are recognized sooner over the life of the construction
loan compared to longer term loans.

At December 31, 2002, the composition of the average deposit portfolio was
26% in non-interest bearing deposits, 41% in money market, NOW, and savings
deposits, and 33% in time certificates of deposit; while the composition was
31%, 32%, and 37%, respectively at December 31, 2001. Although
interest-bearing deposits increased in 2002 compared to 2001, the Company
continues to offer competitive rates and have decreased the cost of funds on
its deposits. For the year ended 2002, the cost of funds of deposits was 2.0%
as compared to 2.5% for 2001. Although the cost of funds decreased as interest
rates on deposits have decreased, interest expense on deposits increased from
$1.1 million in 2002 as compared to 2001 as the volume of interest-bearing
deposits increased. Aggregate interest expense on savings, NOW and money
market accounts was $1.8 million, $0.7 million and $0.6 million for 2002, 2001
and 2000, respectively.

An additional form of funding for the Banks growth was debt issued by the
Company which resulted in a higher consolidated cost of funds. In December
2002, the Company issued $5.0 million in Trust Preferred Securities and $5.0
million in subordinated debt. The Company also borrowed $5.0 million on a line
of credit with a financial institution. Those instruments bear variable
interest rates indexed to LIBOR and adjusts on a quarterly basis. The
consolidated cost of funds for the Company for the year ended December 31,
2002 was 2.9%, down from 3.9% for the year ended December 31, 2001. As market
rates have decreased, the interest on those variable notes has decreased. Such
instruments contributed to an increase in interest expense of about $1.0
million in 2002 as compared to 2001. Interest expense on these instruments was
$1.4 million, $0.3 million and $2,000 for 2002, 2001 and 2000, respectively.

Overall, the Companys net interest margin compressed modestly from 6.2%
in 2001 to 5.3% in 2002 as management of the Company continues to manage its
interest sensitive assets and interest sensitive liabilities by matching the
duration of those instruments to mitigate interest rate risk. Further, the net
interest income increased from $8.0 million to $13.4 million as the volume of
earnings assets, in particular, loans, have increased as new loan product lines
including single family tract home construction and SBA lending were
introduced in 2002.

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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.

|                                             |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |      |     |  
|-------------------------------------------- | -------------------------- | ------------------------------------------ | ------- | -------------- | ------- | -------- | ------ | ----------------- | ------ | --------------- | --- | -------- | --- | ----------------- | ------- | ------ | ------- | - | ----- | ------ | ------ |  | --- | ---- | --- | -
|(Dollars in Thousands)                       |                            | 2002                                       |         | 2001          
|                                             |                            |                                            |         |               
|                                             |                            |                                            |         | AverageBalance |         | Interest |        | AverageYield/Cost |        | Average Balance |     | Interest |     | AverageYield/Cost
|                                             |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                  
|Assets                                       |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |     
|                                             | Loans                      |                                            | $       | 191,598        |         |          | $      | 16,457            |        |                 |     | 8.6      | %   |                   | $       | 98,872 |         |   | $     | 10,069 |        |  |     | 10.2 | %  
|                                             | Investment securities1     |                                            |         | 54,063         |         |          |        | 2,567             |        |                 |     | 4.7      |     |                   |         | 17,146 |         |   |       | 925    |        |  |     | 5.4  |    
|                                             | Federal funds sold         |                                            |         | 5,165          |         |          |        | 82                |        |                 |     | 1.6      |     |                   |         | 13,790 |         |   |       | 592    |        |  |     | 4.3  |    
|                                             | Other investments          |                                            |         | 1,194          |         |          |        | 64                |        |                 |     | 5.4      |     |                   |         | 292    |         |   |       | 16     |        |  |     | 5.5  |    
|                                             |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |     
|                                             |                            | Total interest-earning assets              |         |                | 252,020 |          |        |                   | 19,170 |                 |     |          | 7.6 | %                 |         |        | 130,100 |   |       |        | 11,602 |  |     |      | 8.9 | %
|                                             |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |     
|Other assets                                 |                            |                                            | 19,478  |                |         |          |        |                   |        |                 |     |          |     |                   | 16,819  |        |         |   |       |        |        |  |     |     
|                                             |                            | Less: Allowance for possible loan
losses   |         |                | (2,089  | )        |        |                   |        |                 |     |          |     |                   |         |        | (999    | ) |       |        |        |  |     |      |     |  
|                                             |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |     
|                                             |                            | Total average assets                       |         | $              | 269,409 |          |        |                   |        |                 |     |          |     |                   |         | $      | 145,920 |   |       |        |        |  |     |      |     |  
|                                             |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |     
|Liabilities and Shareholders Equity         |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |     
|                                             | Savings deposits           |                                            | $       | 89,489         |         |          |        | 1,783             |        |                 |     | 2.0      | %   |                   |         | 41,504 |         |   |       | 732    |        |  |     | 1.8  | %  
|                                             | Time deposits              |                                            |         | 73,394         |         |          |        | 2,631             |        |                 |     | 3.6      |     |                   |         | 48,229 |         |   |       | 2,554  |        |  |     | 5.3  |    
|                                             | Subordinated debt          |                                            |         | 208            |         |          |        | 8                 |        |                 |     | 3.8      |     |                   |         |       |         |   |       |       |        |  |     |     |    
|                                             | Convertible debentures     |                                            |         | 2,150          |         |          |        | 278               |        |                 |     | 12.9     |     |                   |         | 2,281  |         |   |       | 269    |        |  |     | 11.8 |    
|                                             | Trust preferred securities |                                            |         | 12,417         |         |          |        | 702               |        |                 |     | 5.7      |     |                   |         | 333    |         |   |       | 26     |        |  |     | 7.8  |    
|                                             | Short term borrowings      |                                            |         | 20,776         |         |          |        | 363               |        |                 |     | 1.7      |     |                   |         | 228    |         |   |       | 5      |        |  |     | 2.2  |    
|                                             |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |     
|                                             |                            | Total interest-bearing liabilities         |         |                | 198,434 |          |        |                   | 5,765  |                 |     |          | 2.9 | %                 |         |        | 92,575  |   |       |        | 3,586  |  |     |      | 3.9 | %
|                                             |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |     
|                                             | Demand deposits            |                                            |         | 55,936         |         |          |        |                   |        |                 |     |          |     |                   |         | 41,020 |         |   |       |        |        |  |     |      |    
|                                             | Other liabilities          |                                            |         | 1,486          |         |          |        |                   |        |                 |     |          |     |                   |         | 2,419  |         |   |       |        |        |  |     |      |    
|                                             |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |     
|Total average liabilities                    |                            |                                            | 255,856 |                |         |          |        |                   |        |                 |     |          |     |                   | 136,014 |        |         |   |       |        |        |  |     |     
|Shareholders equity                         |                            |                                            | 13,553  |                |         |          |        |                   |        |                 |     |          |     |                   | 9,906   |        |         |   |       |        |        |  |     |     
|                                             |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |     
|                                             |                            | Total liabilities and shareholders equity |         | $              | 269,409 |          |        |                   |        |                 |     |          |     |                   |         | $      | 145,920 |   |       |        |        |  |     |      |     |  
|                                             |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |     
|Net interest spread2                         |                            |                                            |         |                |         |          |        |                   |        |                 | 4.7 | %        |     |                   |         |        |         |   |       |        |        |  | 5.0 | %   
|                                             |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |     
|Net interest income and net interest
margin3 |                            |                                            |         |                |         | $        | 13,405 |                   |        |                 | 5.3 | %        |     |                   |         |        |         | $ | 8,016 |        |        |  | 6.2 | %   
|                                             |                            |                                            |         |                |         |          |        |                   |        |                 |     |          |     |                   |         |        |         |   |       |        |        |  |     |     

(Footnotes on following page)

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|                                              |                            |                                          |                                                    |         |         |         |          |       |       |  |         |      |     |   | 
|--------------------------------------------- | -------------------------- | ---------------------------------------- | -------------------------------------------------- | ------- | ------- | ------- | -------- | ----- | ----- |  | ------- | ---- | --- | - | 
|(Dollars in Thousands)                        |                            | 2000                                    
|                                              |                            |                                         
|                                              |                            |                                          |                                                    |         | Average |         |          |       |       |  | Average
|                                              |                            |                                          |                                                    |         | Balance |         | Interest |       | Yield
|                                              |                            |                                          |                                                    |         |         |         |          |       |      
|Assets                                        |                            |                                          |                                                    |         |         |         |          |       |       |  |         |     
|                                              | Loans                      |                                          | $                                                  | 82,436  |         |         | $        | 8,083 |       |  |         | 9.8  | %  
|                                              | Investment
securities 1    |                                          |                                                    | 8,650   |         |         |          | 495   |       |  |         | 5.7  |    
|                                              | Federal funds sold         |                                          |                                                    | 5,709   |         |         |          | 364   |       |  |         | 6.4  |    
|                                              | Other investments          |                                          |                                                    | 391     |         |         |          | 23    |       |  |         | 5.9  |    
|                                              |                            |                                          |                                                    |         |         |         |          |       |       |  |         |     
|                                              |                            | Total interest-earning assets            |                                                    |         | 97,186  |         |          |       | 8,965 |  |         |      | 9.2 | %
|                                              |                            |                                          |                                                    |         |         |         |          |       |       |  |         |     
|                                              | Other Assets               |                                          |                                                    | 16,714  |         |         |          |       |       |  |         |      |    
|                                              |                            | Less: Allowance for possible loan losses |                                                    |         | (735    | )       |          |       |       |  |         |      |     |  
|                                              |                            |                                          |                                                    |         |         |         |          |       |       |  |         |     
|                                              |                            | Total average assets                     |                                                    | $       | 113,165 |         |          |       |       |  |         |      |     |  
|                                              |                            |                                          |                                                    |         |         |         |          |       |       |  |         |     
|Liabilities and shareholders equity          |                            |                                          |                                                    |         |         |         |          |       |       |  |         |     
|                                              | Savings deposits           |                                          |                                                    | 37,046  |         |         |          | 621   |       |  |         | 1.7  | %  
|                                              | Time deposits              |                                          |                                                    | 27,719  |         |         |          | 1,425 |       |  |         | 5.1  |    
|                                              | Subordinated
debt          |                                          |                                                    |        |         |         |          |      |       |  |         |     |    
|                                              | Convertible
debentures     |                                          |                                                    |        |         |         |          |      |       |  |         |     |    
|                                              | Trust preferred
securities |                                          |                                                    |        |         |         |          |      |       |  |         |     |    
|                                              | Short term borrowings      |                                          |                                                    | 18      |         |         |          | 2     |       |  |         | 11.1 |    
|                                              |                            |                                          |                                                    |         |         |         |          |       |       |  |         |     
|                                              |                            | Total interest-bearing liabilities       |                                                    |         | 64,783  |         |          |       | 2,048 |  |         |      | 3.2 | %
|                                              |                            |                                          |                                                    |         |         |         |          |       |       |  |         |     
|                                              | Demand deposits            |                                          |                                                    | 37,097  |         |         |          |       |       |  |         |      |    
|                                              | Other liabilities          |                                          |                                                    | 2,372   |         |         |          |       |       |  |         |      |    
|                                              |                            |                                          |                                                    |         |         |         |          |       |       |  |         |     
|                                              | Total average liabilities  |                                          |                                                    | 104,252 |         |         |          |       |       |  |         |      |    
|                                              | Shareholders equity       |                                          |                                                    | 8,913   |         |         |          |       |       |  |         |      |    
|                                              |                            |                                          |                                                    |         |         |         |          |       |       |  |         |     
|                                              |                            |                                          | Total
average liabilities and shareholders equity |         | $       | 113,165 |          |       |       |  |         |      |     |   | 
|                                              |                            |                                          |                                                    |         |         |         |          |       |       |  |         |     
|Net
interest spread 2                         |                            |                                          |                                                    |         |         |         |          |       |       |  | 6.0     | %   
|                                              |                            |                                          |                                                    |         |         |         |          |       |       |  |         |     
|Net
interest income and net interest margin 3 |                            |                                          |                                                    |         |         | $       | 6,917    |       |       |  | 7.1     | %   
|                                              |                            |                                          |                                                    |         |         |         |          |       |       |  |         |     



---

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

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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.

|                        |                         |                                                                          |        |                                            |       |        |        |      |        |       |        |        |       |      |       |       |       |   |     |  |     |   |       |  |       |   |       | 
|----------------------- | ----------------------- | ------------------------------------------------------------------------ | ------ | ------------------------------------------ | ----- | ------ | ------ | ---- | ------ | ----- | ------ | ------ | ----- | ---- | ----- | ----- | ----- | - | --- |  | --- | - | ----- |  | ----- | - | ----- | 
|(Dollars in Thousands)  |                         | 2002-2001                                                                |        | 2001-2000                                 
|                        |                         |                                                                          |        |                                           
|                        |                         |                                                                          |        |                                            |       | Volume |        | Rate |        | Total |        | Volume |       | Rate |       | Total
|                        |                         |                                                                          |        |                                            |       |        |        |      |        |       |        |        |       |      |       |      
|Increase (Decrease) in: |                         |                                                                          |        |                                            |       |        |        |      |        |       |        |        |       |      |       |       |       |   |     |  |     |   |       | 
|                        | Interest income:        |                                                                          |        |                                            |       |        |        |      |        |       |        |        |       |      |       |       |       |   |     |  |     |   |       |  |      
|Loans                   |                         | $                                                                        | 9,563  |                                            |       | $      | (3,175 | )    |        | $     | 6,388  |        |       | $    | 1,647 |       |       | $ | 339 |  |     | $ | 1,986 | 
|                        |                         | Investment securities                                                    |        |                                            | 1,986 |        |        |      | (344   | )     |        |        | 1,642 |      |       |       | 454   |   |     |  | (24 | ) |       |  | 430   |  
|                        |                         | Other investments                                                        |        |                                            | 53    |        |        |      | (5     | )     |        |        | 48    |      |       |       | (5    | ) |     |  | (2  | ) |       |  | (7    | )
|                        |                         | Federal funds sold                                                       |        |                                            | (371  | )      |        |      | (139   | )     |        |        | (510  | )    |       |       | 222   |   |     |  | 6   |   |       |  | 228  
|                        |                         |                                                                          |        |                                            |       |        |        |      |        |       |        |        |       |      |       |       |       |   |     |  |     |   |       | 
|                        |                         |                                                                          | 11,231 |                                            |       |        | (3,663 | )    |        |       | 7,568  |        |       |      | 2,318 |       |       |   | 319 |  |     |   | 2,637 | 
|                        |                         |                                                                          |        |                                            |       |        |        |      |        |       |        |        |       |      |       |       |       |   |     |  |     |   |       | 
|                        | Increase (Decrease) in: |                                                                          |        |                                            |       |        |        |      |        |       |        |        |       |      |       |       |       |   |     |  |     |   |       |  |      
|                        |                         | Interest expense:                                                        |        |                                            |       |        |        |      |        |       |        |        |       |      |       |       |       |   |     |  |     |   |       |  |       |  
|                        |                         | Savings deposits                                                         |        |                                            | 894   |        |        |      | 157    |       |        |        | 1,051 |      |       |       | 70    |   |     |  | 41  |   |       |  | 111   |  
|                        |                         | Time deposits                                                            |        |                                            | 1,334 |        |        |      | (1,257 | )     |        |        | 77    |      |       |       | 1,072 |   |     |  | 57  |   |       |  | 1,129 |  
|                        |                         | Borrowings                                                               |        |                                            | 452   |        |        |      | (94    | )     |        |        | 358   |      |       |       | 7     |   |     |  | (4  | ) |       |  | 3     |  
|                        |                         | Convertible
debentures, subordinated debt and trust
preferred securities |        |                                            | 1,344 |        |        |      | (651   | )     |        |        | 693   |      |       |       | 295   |   |     |  |    |   |       |  | 295   |  
|                        |                         |                                                                          |        |                                            |       |        |        |      |        |       |        |        |       |      |       |       |       |   |     |  |     |   |       | 
|                        |                         |                                                                          | 4,024  |                                            |       |        | (1,845 | )    |        |       | 2,179  |        |       |      | 1,444 |       |       |   | 94  |  |     |   | 1,538 | 
|                        |                         |                                                                          |        |                                            |       |        |        |      |        |       |        |        |       |      |       |       |       |   |     |  |     |   |       | 
|                        |                         |                                                                          |        | Increase (Decrease) in Net interest income |       | $      | 7,207  |      |        | $     | (1,818 | )      |       | $    | 5,389 |       |       | $ | 874 |  |     | $ | 225   |  |       | $ | 1,099 | 
|                        |                         |                                                                          |        |                                            |       |        |        |      |        |       |        |        |       |      |       |       |       |   |     |  |     |   |       | 

Provision for Possible Loan Losses

For the years ended December 31, 2002, 2001 and 2000, the provision for
loan losses was $1.4 million, $0.8 million and $0.3 million, respectively. The
provision for loan losses was increased to support the increasing loan balances
for each of those years.

The Companys allowance for possible loan losses was $3.0 million or 1.2%
of gross loans at December 31, 2002 compared to $1.5 million or 1.1% of gross
loans at December 31, 2001. At December 31, 2000, the allowance for possible
loan losses was $0.8 million or 1.0% of gross loans. As the volume of loans
increases, the level of allowance for possible loan loss would increase
accordingly in order to achieve a similar ratio of reserve to loans. Additions
to the reserve are effected through the provision for possible loan losses.
Also affecting the reserve are loans charged off and loans recovered. Net loan
charge-offs were $74,000, $107,000 and $236,000 for the years ended 2002, 2001
and 2000, respectively.

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.

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Non-Interest Income

Non-interest income for the years ended December 31, 2002, 2001, and 2000
was $3.9 million, $2.2 million and $1.6 million, respectively, for an increase
of $1.7 million or 78.3% in 2002 as compared to 2001 and an increase of $0.6
million or 38.5% in 2001 as compared to 2000.

In the fourth quarter 2002, the Company began its SBA lending department.
The guaranteed portion of the SBA loans originated are eventually sold. Those
SBA loans sold, combined with other loans held for sale and sold during the
year, generated gains amounting to $0.5 million in 2002 as compared to $0.3
million in 2001 and $0.1 million in 2000.

During 2002, gain from the sale of investment securities amounted to $1.3
million as compared to $6,000 for 2001 and none for 2000. The gain was a result
of managements ability to manage liquidity needs, interest rate risk, and
strategic planning in meeting capital requirements during a period when market
rates were favorable and therefore, the Company realized gains upon sale from
its held-for-sale investment portfolio.

During 2002, the Company received $540,000 in litigation recovery from its
former insurance couriers. This stems from a reimbursement of legal fees
advanced by the Bank over a period of several years in the early to mid 1990s.

Non-Interest Expenses

The Companys non-interest expense for the years ended December 31, 2002,
2001 and 2000 was $10.8 million, $8.3 million and $7.2 million, respectively.
The increase from 2001 to 2002 was $2.5 million or 30.1% and the increase from
2000 to 2001 was $1.1 million or 15.6%. Non-interest expense, 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.

Salaries and employee benefits is the largest component of 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, 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, finance and
human resources. Additional personnel have been placed in business development
capacities for commercial and community banking. With the addition of these
individuals to the Companys existing personnel, the Company has been able to
produce significant growth in deposits and loans in 2002 and 2001, while
providing the infrastructure needed to support longer-term growth. These
changes have increased the Companys compensation expense by $0.8 million or
18.3% from 2001 to 2002 and $1.0 million or 30.3% between 2000 and 2001.

Occupancy expense increased $0.2 million or 28.7% in 2002 from $0.7
million in 2001 to $0.9 million in 2002. In 2002, the loan production office
in Manhattan Beach expanded into a larger facility to accommodate additional
staff as the single family coastal construction loan production increased. In
addition, the Company began its SBA lending department in the fourth quarter of
2002. The Company also entered into new office leases in San Diego and Beverly
Hills for the production of SBA loans. Correspondingly, expenses related to
furniture and fixtures increased $0.2 million or 28.9% in 2002 as compared to
the same period in 2001.

Other expenses were $4.0 million, $2.7 million and $2.7 million for the
years ending December 31, 2002, 2001 and 2000, respectively. Other expenses
increased $1.3 million or 49.8% in 2002 as compared to the same period in 2001.
Other expenses increased significantly in 2002 due primarily to the Companys
implementation of its strategy to grow the Company. All categories of
non-interest expense

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have increased including professional services, insurance, telephone and
other overhead as the number of employees have increased and the volume of
loans and deposits production have increased. In particular, the Companys
marketing expense increased significantly from $0.4 million in 2001 to $0.7
million in 2002 as the Company increased its effort in advertising and
promotional campaigns in its communities. Also included in other expense in
2002 was the one-time conversion charge of $274,000 paid to debenture holders
relating to the inducement of converting the debentures into common stock.

Income Tax

A valuation allowance of $475,000 was established in 1994 against the
deferred tax asset as a result of significant losses of approximately $1.5
million incurred in 1994. This valuation allowance was attributable to the
uncertainty of realizing the tax benefits associated with operating losses
generated for income tax purposes. The $475,000 in the income tax valuation
allowance was released in 2001. After reviewing the operating results, and the
significant increases in the loan and deposit portfolios, management of the
Company determined that it was appropriate to fully release the valuation
allowance in 2001 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.

In 2002, the Company provided $2,081,000 in federal and state taxes,
representing an effective tax rate of 40.9%. In 2001, the Company had a tax
benefit of $17,000 as a result of the relief of the valuation allowance against
deferred tax assets. In 2000, the Company provided $449,000 in federal and
state taxes, representing an effective tax rate of 42.0%.

Financial Condition

Assets

At December 31, 2002, total assets were $385.3 million as compared to
$191.3 million at December 31, 2001. Assets were comprised primarily of $253.3
million in loans and $87.6 million in investment securities at December 31,
2002. This is an increase from $137.6 million in gross loans and $30.6 million in
investment securities from December 31, 2001.

Liabilities

Deposits represent the Banks primary source of funds for funding the
Banks loan activities. At December 31, 2002, the Bank increased its deposits
by approximately 80% primarily in money markets which saw an increase of
approximately 390%. The Banks main focus is to increase its core deposit base
through relationships.

At December 31, 2002, the Bank had approximately 6,257 demand deposit
accounts with an aggregate balance of $69.5 million with an average balance of
$11,012. In addition the Banks NOW, and money market accounts represented
3,670 accounts with an aggregate balance of $116.8 million with an average
balance of $31,794. Savings deposits remained relatively steady with 3,680
accounts with an aggregate balance of $12.7 million with an average balance of
$3,463. Time deposits (TCDs) increased to approximately 2,284 accounts with
a balance of $96.1 million with an average balance of $42,131. TCDs with an
account balance of $100,000 or more equaled $47.6 million.

As compared to December 31, 2001, the Bank had approximately 5,993 demand
deposit accounts representing aggregate deposits of approximately $50.3 million
with an average account balance of $8,221. In addition, the Bank had
approximately 2,699 accounts representing approximately $39.9 million in NOW
and money market accounts with an average account balance of $14,794,
approximately 3,602 representing approximately $11.2 million in savings
deposits with an average account balance of $3,107 and approximately 1,898
accounts representing approximately $62.1 million in TCDs with an average
account balance of $29,657. Of the total deposits at December 31, 2001, $23.6
million were in the form of TCDs in denominations of $100,000 or more.

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At December 31, 2002 and 2001, Federal Home Loan Bank (FHLB) advances
were $45.0 million and $3.0 million, respectively. The increase in FHLB
advances was part of the strategic plan in supporting the funding needs of the
Banks earning assets.

In December 2002, the Company obtained a $5.0 million line of credit from
a correspondent financial institution. The funds were drawn and held at the
Company as working capital.

In December 2002, the Company completed the issuance of additional Trust
Preferred Securities. The Company obligated preferred securities of subsidiary
trust holding floating rate junior subordinated deferrable interest debentures
increased from $12.0 million at December 31, 2001 to $17.0 million at December
31, 2002. Additionally, in December 2002, the Company issued $5.0 million in
subordinated debentures. The total of those two issuances of $10.0 million was
downstreamed to the Bank as additional capital for the Bank.

Stockholders Equity

At December 31, 2002 and 2001, stockholders equity was $20.0 million and
$10.5 million, respectively. The increase in stockholders equity was due
primarily to the 2002 net income of $3.0 million, the conversion of the
debentures to common stock of $3.5 million and the issuance of the Series A
Preferred Stock of $2.5 million.

Liquidity

The Company relies on asset-liability management to assure adequate
liquidity and to maintain an appropriate balance between interest
sensitive-earning assets and interest-bearing liabilities. 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 75% and 85% as of December 31, 2002 and 2001,
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 is sufficient to meet
current and anticipated funding needs. Liquid assets represent approximately
18.1% of total assets at December 31, 2002. The liquidity contingency process
outlines authorities and a reasonable course of action in case of unexpected
liquidity needs. The Bank has borrowing lines with five correspondent banks
totaling $27.7 million as well as an Advance Line with the Federal Home Loan
Bank (FHLB) allowing the bank to borrow up to 20% of its total assets as of
December 31, 2002. During the first quarter of 2003, the FHLB increased the
Banks borrowing capacity to 30% of its total assets. This advance line is
collateralized by investment securities and/or eligible loans.

Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. The 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 in similar time horizons in order to minimize or eliminate any impact
from interest rate changes.

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

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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):

|                        |                                        |        |        |                   |       |                       |        |      |       |  |             |        |              |  |  |     |   |  |                        |        |  |  |  |      |  
|----------------------- | -------------------------------------- | ------ | ------ | ----------------- | ----- | --------------------- | ------ | ---- | ----- |  | ----------- | ------ | ------------ |  |  | --- | - |  | ---------------------- | ------ |  |  |  | ---- | -
|                        |                                        |        |        |                   |       |                       |        |      |       |  |             |        |              |  |  |     |   |  | To Be Well Capitalized
|                        |                                        |        |        |                   |       |                       |        |      |       |  | For Capital |        | Under Prompt
|(Dollars in thousands)  |                                        | Actual |        | Adequacy Purposes |       | Corrective Provisions
|                        |                                        |        |        |                   |       |                      
|                        |                                        |        | Amount |                   | Ratio |                       | Amount |      | Ratio |  | Amount      |        | Ratio       
|                        |                                        |        |        |                   |       |                       |        |      |       |  |             |        |             
|As
of December 31, 2002 |                                       
|                        | Total capital to risk-weighted assets  |        | $      | 41,789            |       |                       |        | 14.9 | %     |  | $           | 22,364 |              |  |  | 8.0 | % |  | $                      | 27,955 |  |  |  | 10.0 | %
|                        | Tier 1 capital to risk-weighted assets |        |        | 38,786            |       |                       |        | 13.9 |       |  |             | 11,182 |              |  |  | 4.0 |   |  |                        | 16,773 |  |  |  | 6.0  |  
|                        | Tier 1 capital to average assets       |        |        | 38,786            |       |                       |        | 11.6 |       |  |             | 13,353 |              |  |  | 4.0 |   |  |                        | 16,691 |  |  |  | 5.0  |  
|As of December 31, 2001 |                                       
|                        | Total capital to risk-weighted assets  |        | $      | 23,020            |       |                       |        | 16.1 | %     |  | $           | 11,439 |              |  |  | 8.0 | % |  | $                      | 14,299 |  |  |  | 10.0 | %
|                        | Tier 1 capital to risk-weighted assets |        |        | 21,570            |       |                       |        | 15.1 |       |  |             | 5,720  |              |  |  | 4.0 |   |  |                        | 8,579  |  |  |  | 6.0  |  
|                        | Tier 1 capital to average assets       |        |        | 21,570            |       |                       |        | 12.5 |       |  |             | 6,887  |              |  |  | 4.0 |   |  |                        | 8,608  |  |  |  | 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 the Southern
California counties of Los Angeles, San Bernardino and Orange through its six
full service offices located in Rancho Cucamonga, Chino, Diamond Bar,
Crestline, Blue Jay and La Verne. In February 2001, the Bank opened a loan
production office in Manhattan Beach to primarily service the single family
residence construction lending practice in the coastal communities of Los
Angeles and in August 2002, the Bank opened two SBA loan production offices,
one in San Diego and one in Beverly Hills, for the production of SBA loans.
Further, the Bank is planning to open a seventh full service office in Corona
in the second quarter of 2003.

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.




ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.

See
Business - Risk Factors and Business  - Asset Liability Management in Item 1 hereof.

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ITEM 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
VINEYARD NATIONAL BANCORP

|                                           |                                                           |  |    |    | 
|------------------------------------------ | --------------------------------------------------------- |  | -- | -- | 
|Independent Auditors Report               |                                                           |  | 48 |   
|Financial Statements                       |                                                           |  |    |   
|                                           | Consolidated Balance Sheets                               |  |    |    | 
|                                           | December 31, 2002 and 2001                                |  |    | 49 | 
|                                           | Consolidated Statements of Income                         |  |    |    | 
|                                           | For the Years Ended December 31, 2002, 2001, and 2000     |  |    | 50 | 
|                                           | Consolidated Statement of Changes in Stockholders Equity |  |    |    | 
|                                           | For the Years Ended December 31, 2002, 2001, and 2000     |  |    | 51 | 
|                                           | Consolidated Statements of Cash Flows                     |  |    |    | 
|                                           | For the Years Ended December 31, 2002, 2001, and 2000     |  |    | 52 | 
|Notes to Consolidated Financial Statements |                                                           |  | 54 |   

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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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, the results of their
operations, changes in stockholders equity and cash flows for each of the
three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.

/s/ Vavrinek, Trine, Day & Company LLP
Rancho Cucamonga, California
February 14, 2003

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001

|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |       |        |         |         | 
|---------------------------------------------- | ------------------------------------------------------------------ | ------------------ | ----------------------------------------------------------------------- | -------------------------------------------------------------- | ------ | ---------------------- | ------- | ----- | ------ | ------- | ------- | 
|                                               |                                                                    |                    |                                                                         |                                                                |        | 2002                   |         | 2001 
|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|                                               |                                                                    |                    |                                                                         |                                                                |        | (dollars in thousands)
|ASSETS                                         |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|Cash and due from banks                        |                                                                    | $                  | 17,533                                                                  |                                                                |        | $                      | 8,430   |      
|Federal funds sold                             |                                                                    |                    | 15,829                                                                  |                                                                |        |                        | 6,280   |      
|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|                                               |                                                                    |                    |                                                                         | Total Cash and Cash Equivalents                                |        |                        | 33,362  |       |        |         | 14,710  | 
|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|Investment securities                          |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|                                               |                                                                    | Available-for-sale |                                                                         |                                                                | 87,553 |                        |         |       | 30,550 |        
|Loans, net of unearned income                  |                                                                    |                    | 251,139                                                                 |                                                                |        |                        | 133,107 |      
|Loans held for sale                            |                                                                    |                    | 2,112                                                                   |                                                                |        |                        | 4,471   |      
|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|                                               |                                                                    |                    | 253,251                                                                 |                                                                |        |                        | 137,578 |      
|                                               |                                                                    |                    | Less: Allowance for loan losses                                         |                                                                |        | (3,003                 | )       |       |        | (1,450  | )      
|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|                                               |                                                                    |                    | 250,248                                                                 |                                                                |        |                        | 136,128 |      
|Bank premises and equipment, net               |                                                                    |                    | 5,600                                                                   |                                                                |        |                        | 5,388   |      
|Accrued interest                               |                                                                    |                    | 1,487                                                                   |                                                                |        |                        | 901     |      
|Federal Home Loan Bank and other stock at cost |                                                                    |                    | 2,270                                                                   |                                                                |        |                        | 177     |      
|Deferred income tax asset                      |                                                                    |                    | 2,328                                                                   |                                                                |        |                        | 1,413   |      
|Other assets                                   |                                                                    |                    | 2,454                                                                   |                                                                |        |                        | 2,019   |      
|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|                                               |                                                                    |                    |                                                                         | TOTAL ASSETS                                                   |        | $                      | 385,302 |       |        | $       | 191,286 | 
|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|LIABILITIES AND STOCKHOLDERS EQUITY           |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|Liabilities                                    |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|                                               | Deposits                                                           |                    |                                                                         |                                                                |        |                        |         |       |       
|                                               |                                                                    |                    | Non-interest-bearing                                                    |                                                                | $      | 61,906                 |         |       | $      | 45,951  |        
|                                               |                                                                    |                    | Interest-bearing                                                        |                                                                |        | 225,606                |         |       |        | 113,430 |        
|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|                                               |                                                                    |                    |                                                                         | Total deposits                                                 |        |                        | 287,512 |       |        |         | 159,381 | 
|                                               | Federal Home Loan Bank advances                                    |                    |                                                                         | 45,000                                                         |        |                        |         | 3,000 |       
|                                               | Other Borrowings                                                   |                    |                                                                         | 5,000                                                          |        |                        |         |      |       
|                                               | Convertible debentures                                             |                    |                                                                         |                                                               |        |                        |         | 3,750 |       
|                                               | Subordinated debentures                                            |                    |                                                                         | 5,000                                                          |        |                        |         |      |       
|                                               | Company obligated preferred securities of subsidiary trust holding |                    |                                                                         |                                                                |        |                        |         |       |       
|                                               |                                                                    |                    | floating rate junior subordinated deferrable interest debentures        |                                                                |        | 17,000                 |         |       |        | 12,000  |        
|                                               | Accrued interest and other liabilities                             |                    |                                                                         | 5,832                                                          |        |                        |         | 2,700 |       
|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|                                               |                                                                    |                    |                                                                         | TOTAL LIABILITIES                                              |        |                        | 365,344 |       |        |         | 180,831 | 
|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|COMMITMENTS AND CONTINGENCIES(Note #13)        |                                                                    |                    |                                                                        |                                                                |        |                        |        |      
|Stockholders Equity                           |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|                                               | Contributed capital                                                |                    |                                                                         |                                                                |        |                        |         |       |       
|                                               |                                                                    |                    | Perpetual preferred stock - no par value, authorized 10,000,000 shares, |                                                                |        |                        |         |       |        |         |        
|                                               |                                                                    |                    |                                                                         | issued and outstanding 50 shares in 2002 and no shares in 2001 |        |                        | 2,450   |       |        |         |        | 
|                                               |                                                                    |                    | Common stock - no par value, authorized 25,000,000 shares,              |                                                                |        |                        |         |       |        |         |        
|                                               |                                                                    |                    |                                                                         | issued and outstanding 2,849,680 shares in 2002 and            |        |                        |         |       |        |         |         | 
|                                               |                                                                    |                    |                                                                         | 1,969,780 shares in 2001                                       |        |                        | 6,052   |       |        |         | 2,151   | 
|                                               | Additional paid-in capital                                         |                    |                                                                         | 3,307                                                          |        |                        |         | 3,307 |       
|                                               | Stock dividends to be distributed                                  |                    |                                                                         | 2,026                                                          |        |                        |         |      |       
|                                               | Retained earnings                                                  |                    |                                                                         | 6,014                                                          |        |                        |         | 5,032 |       
|                                               | Accumulated other comprehensive income / (loss)                    |                    |                                                                         | 109                                                            |        |                        |         | (35   | )     
|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|                                               |                                                                    |                    |                                                                         | TOTAL STOCKHOLDERS EQUITY                                     |        |                        | 19,958  |       |        |         | 10,455  | 
|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |      
|                                               |                                                                    |                    |                                                                         | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                     |        | $                      | 385,302 |       |        | $       | 191,286 | 
|                                               |                                                                    |                    |                                                                         |                                                                |        |                        |         |      

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

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |       | 
|--------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------ | ------ | ------------------------------------------------ | ------ | ---- | ------ | ------ | ----- | - | ----- | ----- | ----- | 
|                                                                |                                                                |                                |        | 2002                                             |        | 2001 |        | 2000  
|                                                                |                                                                |                                |        |                                                  |        |      |        |       
|                                                                |                                                                |                                |        | (dollars in thousands, except per share amounts)
|Interest Income                                                 |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |      
|                                                                | Interest and fees on loans                                     |                                | $      | 16,457                                           |        |      | $      | 10,069 |       |   | $     | 8,083 |      
|                                                                | Interest on investment securities - taxable                    |                                |        | 2,631                                            |        |      |        | 935    |       |   |       | 504   |      
|                                                                | Interest on deposits in other financial institutions           |                                |        |                                                 |        |      |        | 6      |       |   |       | 14    |      
|                                                                | Interest on Federal funds sold                                 |                                |        | 82                                               |        |      |        | 592    |       |   |       | 364   |      
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      
|TOTAL INTEREST INCOME                                           |                                                                |                                | 19,170 |                                                  |        |      | 11,602 |        |       |   | 8,965 |      
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      
|Interest Expense                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |      
|                                                                | Interest on savings deposits                                   |                                |        | 113                                              |        |      |        | 182    |       |   |       | 201   |      
|                                                                | Interest on NOW and money market deposits                      |                                |        | 1,670                                            |        |      |        | 550    |       |   |       | 420   |      
|                                                                | Interest on time deposits in denominations of $100,000 or more |                                |        | 1,352                                            |        |      |        | 998    |       |   |       | 426   |      
|                                                                | Interest on other time deposits                                |                                |        | 1,279                                            |        |      |        | 1,556  |       |   |       | 999   |      
|                                                                | Interest on Federal funds purchased and other borrowings       |                                |        | 1,351                                            |        |      |        | 300    |       |   |       | 2     |      
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      
|TOTAL INTEREST EXPENSE                                          |                                                                |                                | 5,765  |                                                  |        |      | 3,586  |        |       |   | 2,048 |      
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      
|NET INTEREST INCOME                                             |                                                                |                                | 13,405 |                                                  |        |      | 8,016  |        |       |   | 6,917 |      
|Provision for Loan and Lease Losses                             |                                                                |                                | (1,430 | )                                                |        |      | (773   | )      |       |   | (256  | )    
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      
|NET INTEREST INCOME AFTER
   PROVISION FOR LOANAND LEASE LOSSES |                                                                |                                | 11,975 |                                                  |        |      | 7,243  |        |       |   | 6,661 |      
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      
|Other Income                                                    |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |      
|                                                                | Fees and service charges                                       |                                |        | 1,518                                            |        |      |        | 1,581  |       |   |       | 1,456 |      
|                                                                | Gain on sale of loans                                          |                                |        | 534                                              |        |      |        | 338    |       |   |       | 107   |      
|                                                                | Net gain on sale of investment securities                      |                                |        | 1,285                                            |        |      |        | 6      |       |   |       |      |      
|                                                                | Other income                                                   |                                |        | 570                                              |        |      |        | 266    |       |   |       | 19    |      
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      
|                                                                |                                                                | TOTAL OTHER INCOME             |        |                                                  | 3,907  |      |        |        | 2,191 |   |       |       | 1,582 | 
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      
|Other Expenses                                                  |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |      
|                                                                | Salaries and employee benefits                                 |                                |        | 5,125                                            |        |      |        | 4,331  |       |   |       | 3,325 |      
|                                                                | Occupancy expense of premises                                  |                                |        | 878                                              |        |      |        | 682    |       |   |       | 622   |      
|                                                                | Furniture and equipment expense                                |                                |        | 780                                              |        |      |        | 605    |       |   |       | 547   |      
|                                                                | Other expenses                                                 |                                |        | 4,010                                            |        |      |        | 2,677  |       |   |       | 2,680 |      
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      
|                                                                |                                                                | TOTAL OTHER EXPENSES           |        |                                                  | 10,793 |      |        |        | 8,295 |   |       |       | 7,174 | 
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      
|                                                                |                                                                | INCOME BEFORE INCOME TAXES     |        |                                                  | 5,089  |      |        |        | 1,139 |   |       |       | 1,069 | 
|                                                                |                                                                | INCOME TAX EXPENSE / (BENEFIT) |        |                                                  | 2,081  |      |        |        | (17   | ) |       |       | 449   | 
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      
|                                                                |                                                                | NET INCOME                     |        | $                                                | 3,008  |      |        | $      | 1,156 |   |       | $     | 620   | 
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      
|EARNINGS PER SHARE                                              |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |      
|                                                                | BASIC                                                          |                                | $      | 1.32                                             |        |      | $      | 0.59   |       |   | $     | 0.32  |      
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      
|                                                                | DILUTED                                                        |                                | $      | 1.12                                             |        |      | $      | 0.52   |       |   | $     | 0.32  |      
|                                                                |                                                                |                                |        |                                                  |        |      |        |        |       |   |       |       |      

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

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

|                           |                                      |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        |       |       |  
|-------------------------- | ------------------------------------ | ---------------------------------------------------------------------- | ----- | ---------------------- |  | ------------ | --------- | ---------- |  | ------------- | ----- | ----------- |  | --------------- | ----- | ------------- |  | ---------------- | ----- | ---------------- |  |  | - | ----- | ----- | - | ----- | ------ | ----- | - | --- | - | ---- | - | ------ | ----- | ----- | -
|                           |                                      |                                                                        |       | Perpetual              |  | Common Stock |           | Additional |  | StockDividend |       |             |  |                 |       |               |  |                  |       | AccumulatedOther |  |  |   |      
|                           |                                      |                                                                        |       | Preferred              |  | Number of    |           |            |  |               |       | Paid-in     |  | To Be           |       | Comprehensive |  | Retained         |       | Comprehensive    |  |  |   |      
|                           |                                      |                                                                        |       | Stock                  |  | Shares       |           | Amount     |  | Capital       |       | Distributed |  | Income / (Loss) |       | Earnings      |  | Income / (Loss ) |       | Total           
|                           |                                      |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                 
|                           |                                      |                                                                        |       | (dollars in thousands)
|Balance, December 31, 1999 |                                      |                                                                        |       |                        |  |              | 1,862,774 |            |  | $             | 2,107 |             |  | $               | 3,307 |               |  |                  |       |                  |  |  |   |       |       | $ | 3,256 |        |       | $ | (39 | ) |      | $ | 8,631  |      
|                           | Stock options exercised              |                                                                        |       |                        |  |              |           | 2,052      |  |               |       | 6           |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        | 6     |      
|                           | Comprehensive income                 |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        |       |      
|                           |                                      | Net income                                                             |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   | $     | 620   |   |       |        | 620   |   |     |   |      |   |        |       | 620   |  
|                           |                                      | Unrealized security holding
gains (net of $28 tax)                     |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       | 39    |   |       |        |       |   |     |   | 39   |   |        |       | 39    |  
|                           |                                      |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        |      
|                           | Total Comprehensive income           |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  | $ | 659   |       |   |       |        |       |   |     |   |      |   |        |       |      
|                           |                                      |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        |      
|Balance,
December 31, 2000 |                                      |                                                                        |      |                        |  |              | 1,864,826 |            |  |               | 2,113 |             |  |                 | 3,307 |               |  |                  |      |                  |  |  |   |       |       |   | 3,876 |        |       |   |    |   |      |   | 9,296  |      
|                           | Stock options exercised              |                                                                        |       |                        |  |              |           | 11,300     |  |               |       | 38          |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        | 38    |      
|                           | Comprehensive income                 |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        |       |      
|                           |                                      | Net income                                                             |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       | 1,156 |   |       |        | 1,156 |   |     |   |      |   |        |       | 1,156 |  
|                           |                                      | Unrealized security holding
losses (net of $28 tax)                    |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       | (38   | ) |       |        |       |   |     |   | (38  | ) |        |       | (38   | )
|                           |                                      | less reclassification
adjustments for realized
gains (net of $2 tax)   |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       | 3     |   |       |        |       |   |     |   | 3    |   |        |       | 3     |  
|                           |                                      |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        |      
|                           | Total Comprehensive income           |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  | $ | 1,121 |       |   |       |        |       |   |     |   |      |   |        |       |      
|                           |                                      |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        |      
|Balance,
December 31, 2001 |                                      |                                                                        |      |                        |  |              | 1,876,126 |            |  |               | 2,151 |             |  |                 | 3,307 |               |  |                  |      |                  |  |  |   |       |       |   | 5,032 |        |       |   | (35 | ) |      |   | 10,455 |      
|                           | Issuance of preferred stock          |                                                                        | $     | 2,450                  |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        | 2,450 |      
|                           | Stock options exercised              |                                                                        |       |                        |  |              |           | 92,400     |  |               |       | 350         |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        | 350   |      
|                           | Conversion of convertible
debentures |                                                                        |       |                        |  |              |           | 787,500    |  |               |       | 3,551       |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        | 3,551 |      
|                           | Stock Dividend to be distributed     |                                                                        |       |                        |  |              |           | 93,654     |  |               |       |             |  |                 |       |               |  |                  | $     | 2,026            |  |  |   |       |       |   |       | (2,026 | )     |   |     |   |      |   |        |      |      
|                           | Comprehensive income                 |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        |       |      
|                           |                                      | Net income                                                             |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       | 3,008 |   |       |        | 3,008 |   |     |   |      |   |        |       | 3,008 |  
|                           |                                      | Unrealized security holding
gains (net of $644 tax)                    |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       | 889   |   |       |        |       |   |     |   | 889  |   |        |       | 889   |  
|                           |                                      | less reclassification
adjustments for realized
gains (net of $539 tax) |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       | (745  | ) |       |        |       |   |     |   | (745 | ) |        |       | (745  | )
|                           |                                      |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        |      
|                           | Total Comprehensive income           |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  | $ | 3,152 |       |   |       |        |       |   |     |   |      |   |        |       |      
|                           |                                      |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        |      
|Balance,
December 31, 2002 |                                      | $                                                                      | 2,450 |                        |  |              | 2,849,680 |            |  | $             | 6,052 |             |  | $               | 3,307 |               |  | $                | 2,026 |                  |  |  |   |       |       | $ | 6,014 |        |       | $ | 109 |   |      | $ | 19,958 |      
|                           |                                      |                                                                        |       |                        |  |              |           |            |  |               |       |             |  |                 |       |               |  |                  |       |                  |  |  |   |       |       |   |       |        |       |   |     |   |      |   |        |      

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

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

|                                     |                                                                                              |                                                                                                    |                                                       |       |                        |          |      |       |         |         |   |     |        |        |  
|------------------------------------ | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ----- | ---------------------- | -------- | ---- | ----- | ------- | ------- | - | --- | ------ | ------ | -
|                                     |                                                                                              |                                                                                                    |                                                       |       | 2002                   |          | 2001 |       | 2000   
|                                     |                                                                                              |                                                                                                    |                                                       |       |                        |          |      |       |        
|                                     |                                                                                              |                                                                                                    |                                                       |       | (dollars in thousands)
|Cash Flows from Operating Activities |                                                                                              |                                                                                                    |                                                       |       |                        |          |      |       |         |         |   |    
|                                     | Net Income                                                                                   |                                                                                                    | $                                                     | 3,008 |                        |          | $    | 1,156 |         |         | $ | 620 |       
|                                     |                                                                                              |                                                                                                    |                                                       |       |                        |          |      |       |         |         |   |     |       
|                                     | Adjustments to Reconcile Net Income to Net
Cash Provided by / (Used In) Operating Activities |                                                                                                    |                                                       |       |                        |          |      |       |         |         |   |     |       
|                                     |                                                                                              | Depreciation                                                                                       |                                                       |       | 668                    |          |      |       | 534     |         |   |     | 548    |       
|                                     |                                                                                              | Investment securities accretion/amortization                                                       |                                                       |       | 515                    |          |      |       | 141     |         |   |     | (32    | )     
|                                     |                                                                                              | FHLB Dividends                                                                                     |                                                       |       | (43                    | )        |      |       |        |         |   |     |       |       
|                                     |                                                                                              | Provision for loan and lease losses                                                                |                                                       |       | 1,430                  |          |      |       | 773     |         |   |     | 256    |       
|                                     |                                                                                              | Provision for OREO losses                                                                          |                                                       |       |                       |          |      |       |        |         |   |     | 32     |       
|                                     |                                                                                              | Loss on sale of equipment                                                                          |                                                       |       | 1                      |          |      |       | 42      |         |   |     |       |       
|                                     |                                                                                              | Increase / (decrease) in taxes payable                                                             |                                                       |       | 2,732                  |          |      |       | (486    | )       |   |     | (147   | )     
|                                     |                                                                                              | (Increase) / decrease in deferred taxes                                                            |                                                       |       | (1,529                 | )        |      |       | (475    | )       |   |     | 13     |       
|                                     |                                                                                              | Decrease / (Increase) in other assets                                                              |                                                       |       | 7                      |          |      |       | (1,560  | )       |   |     | (244   | )     
|                                     |                                                                                              | Decrease in cash surrender value of life insurance policies                                        |                                                       |       | 46                     |          |      |       |        |         |   |     |       |       
|                                     |                                                                                              | Decrease / (increase) in loans held for sale                                                       |                                                       |       | 2,359                  |          |      |       | (4,236  | )       |   |     | 600    |       
|                                     |                                                                                              | Increase / (decrease) in unearned loan fees                                                        |                                                       |       | 235                    |          |      |       | (95     | )       |   |     | (298   | )     
|                                     |                                                                                              | (Increase) / decrease in interest receivable                                                       |                                                       |       | (586                   | )        |      |       | (331    | )       |   |     | 3      |       
|                                     |                                                                                              | (Decrease) / increase in interest payable                                                          |                                                       |       | (5                     | )        |      |       | 674     |         |   |     | 47     |       
|                                     |                                                                                              | Increase / (decrease) in accrued expense and other liabilities                                     |                                                       |       | 352                    |          |      |       | 259     |         |   |     | (1,119 | )     
|                                     |                                                                                              | Gain on sale of investment securities, net                                                         |                                                       |       | (1,285                 | )        |      |       | (6      | )       |   |     |       |       
|                                     |                                                                                              | Loss on sale of OREO                                                                               |                                                       |       |                       |          |      |       |        |         |   |     | 12     |       
|                                     |                                                                                              |                                                                                                    |                                                       |       |                        |          |      |       |         |         |   |     |       
|                                     |                                                                                              |                                                                                                    | Total Adjustments                                     |       |                        | 4,897    |      |       |         | (4,766  | ) |     |        | (329   | )
|                                     |                                                                                              |                                                                                                    |                                                       |       |                        |          |      |       |         |         |   |     |       
|                                     |                                                                                              |                                                                                                    | Net Cash Provided By / (Used In)
Operating Activities |       |                        | 7,905    |      |       |         | (3,610  | ) |     |        | 291    |  
|                                     |                                                                                              |                                                                                                    |                                                       |       |                        |          |      |       |         |         |   |     |       
|Cash Flows From Investing Activities |                                                                                              |                                                                                                    |                                                       |       |                        |          |      |       |         |         |   |    
|                                     |                                                                                              | Proceeds from maturities of investment securities,
available-for-sale                              |                                                       |       | 21,500                 |          |      |       | 25,035  |         |   |     | 5,000  |       
|                                     |                                                                                              | Proceeds from sales of investment securities,
available-for-sale                                   |                                                       |       | 137,421                |          |      |       | 7       |         |   |     |       |       
|                                     |                                                                                              | Purchase of investment securities available-for-sale                                               |                                                       |       | (36,007                | )        |      |       | (27,997 | )       |   |     | (1,000 | )     
|                                     |                                                                                              | Purchase of mortgage-backed securities available-for-sale                                          |                                                       |       | (188,466               | )        |      |       | (24,569 | )       |   |     |       |       
|                                     |                                                                                              | Proceeds from principal reductions and maturities
of mortgage-backed securities available-for-sale |                                                       |       | 9,567                  |          |      |       | 2,307   |         |   |     |       |       
|                                     |                                                                                              | Net decrease in deposits in other
financial institutions                                           |                                                       |       |                       |          |      |       | 198     |         |   |     | 297    |       
|                                     |                                                                                              | Purchase of Federal Home Loan Bank stock, net                                                      |                                                       |       | (2,050                 | )        |      |       | (177    | )       |   |     |       |       
|                                     |                                                                                              | Proceeds from sale of Federal Reserve Bank stock                                                   |                                                       |       |                       |          |      |       | 177     |         |   |     |       |       
|                                     |                                                                                              | Recoveries on loans previously written off                                                         |                                                       |       | 166                    |          |      |       | 22      |         |   |     | 130    |       
|                                     |                                                                                              | Net loans made to customers and principal
collections of loans                                     |                                                       |       | (118,310               | )        |      |       | (53,853 | )       |   |     | 5,526  |       
|                                     |                                                                                              | Purchase of life insurance policies                                                                |                                                       |       | (124                   | )        |      |       | (256    | )       |   |     |       |       
|                                     |                                                                                              | Proceeds from disposal of life insurance policies                                                  |                                                       |       |                       |          |      |       | 2,528   |         |   |     |       |       
|                                     |                                                                                              | Capital expenditures                                                                               |                                                       |       | (883                   | )        |      |       | (481    | )       |   |     |       |       
|                                     |                                                                                              | Proceeds from sale of property, plant and equipment                                                |                                                       |       | 2                      |          |      |       |        |         |   |     | 21     |       
|                                     |                                                                                              | Proceeds from sale of OREO                                                                         |                                                       |       |                       |          |      |       |        |         |   |     | 219    |       
|                                     |                                                                                              |                                                                                                    |                                                       |       |                        |          |      |       |         |         |   |     |       
|                                     |                                                                                              |                                                                                                    | Net Cash (Used In) / Provided By
Investing Activities |       |                        | (177,184 | )    |       |         | (77,059 | ) |     |        | 10,193 |  
|                                     |                                                                                              |                                                                                                    |                                                       |       |                        |          |      |       |         |         |   |     |       

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

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VINEYARD NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000, Continued

|                                                       |                                                                                                         |                                                       |        |                        |         |      |        |        |        |   |        |        |        |  
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ------ | ---------------------- | ------- | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                                       |                                                                                                         |                                                       |        | 2002                   |         | 2001 |        | 2000  
|                                                       |                                                                                                         |                                                       |        |                        |         |      |        |       
|                                                       |                                                                                                         |                                                       |        | (dollars in thousands)
|Cash Flows From Financing Activities                   |                                                                                                         |                                                       |        |                        |         |      |        |        |        |   |        |       
|                                                       | Net increase / (decrease) in demand deposits, NOW
accounts, savings accounts, and money market deposits |                                                       |        | 94,250                 |         |      |        | 24,534 |        |   |        | (2,025 | )     
|                                                       | Net increase / (decrease) in certificates of deposits                                                   |                                                       |        | 33,881                 |         |      |        | 35,264 |        |   |        | (2,915 | )     
|                                                       | Proceeds from issuance of perpetual preferred stock                                                     |                                                       |        | 2,450                  |         |      |        |       |        |   |        |       |       
|                                                       | Proceeds from issuance of trust preferred securities                                                    |                                                       |        | 5,000                  |         |      |        | 12,000 |        |   |        |       |       
|                                                       | Proceeds from issuance of convertible debentures                                                        |                                                       |        |                       |         |      |        | 3,750  |        |   |        |       |       
|                                                       | Proceeds from issuance of subordinated debt                                                             |                                                       |        | 5,000                  |         |      |        |       |        |   |        |       |       
|                                                       | Increase in other borrowings                                                                            |                                                       |        | 5,000                  |         |      |        |       |        |   |        |       |       
|                                                       | Net change in Federal Home Loan Bank advances                                                           |                                                       |        | 42,000                 |         |      |        | 3,000  |        |   |        |       |       
|                                                       | Stock options exercised                                                                                 |                                                       |        | 350                    |         |      |        | 38     |        |   |        | 6      |       
|                                                       |                                                                                                         |                                                       |        |                        |         |      |        |        |        |   |        |        |       
|                                                       |                                                                                                         | Net Cash Provided By / (Used In)
Financing Activities |        |                        | 187,931 |      |        |        | 78,586 |   |        |        | (4,934 | )
|                                                       |                                                                                                         |                                                       |        |                        |         |      |        |        |        |   |        |        |       
|Net Increase / (Decrease) in Cash and Cash Equivalents |                                                                                                         |                                                       | 18,652 |                        |         |      | (2,083 | )      |        |   | 5,550  |       
|Cash and Cash Equivalents, Beginning of year           |                                                                                                         |                                                       | 14,710 |                        |         |      | 16,793 |        |        |   | 11,243 |       
|                                                       |                                                                                                         |                                                       |        |                        |         |      |        |        |        |   |        |        |       
|Cash and Cash Equivalents, End of year                 |                                                                                                         | $                                                     | 33,362 |                        |         | $    | 14,710 |        |        | $ | 16,793 |       
|                                                       |                                                                                                         |                                                       |        |                        |         |      |        |        |        |   |        |        |       
|Supplementary Information                              |                                                                                                         |                                                       |        |                        |         |      |        |        |        |   |        |       
|                                                       | Change in valuation allowance
for investment securities                                                 |                                                       | $      | 144                    |         |      | $      | (35    | )      |   | $      | 67     |       
|                                                       |                                                                                                         |                                                       |        |                        |         |      |        |        |        |   |        |        |       
|                                                       | Conversion of convertible debentures                                                                    |                                                       | $      | 3,551                  |         |      | $      |       |        |   | $      |       |       
|                                                       |                                                                                                         |                                                       |        |                        |         |      |        |        |        |   |        |        |       
|                                                       | Income taxes paid                                                                                       |                                                       | $      | 876                    |         |      | $      | 944    |        |   | $      | 583    |       
|                                                       |                                                                                                         |                                                       |        |                        |         |      |        |        |        |   |        |        |       
|                                                       | Interest paid                                                                                           |                                                       | $      | 5,770                  |         |      | $      | 2,912  |        |   | $      | 2,001  |       
|                                                       |                                                                                                         |                                                       |        |                        |         |      |        |        |        |   |        |        |       

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

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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 National Bank (the Bank), Vineyard Statutory Trust I,
and Vineyard Statutory Trust II. 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, 2002.

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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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 inDebt 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
non-interest 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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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, 2002, 2001, and 2000, was approximately $0.7 million, $0.5
million, and $0.5 million, 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. The Company had no such properties at December
31, 2002 or 2001.

Accounting for Vineyard Statutory Trust I and Vineyard Statutory Trust II

Vineyard Statutory Trust I and II are statutory business trusts 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 and II are treated
as subsidiaries 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 #21.

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Note #1 - Summary of Significant Accounting Policies,Continued

Stock-Based Compensation, Continued

Had compensation cost for the Banks stock options plans been determined based
on the fair value at the grant dates for awards under those plans consistent
with the method of SFAS No. 123, the Banks net income and earning per share
(EPS) would have been reduced to the pro forma amount indicated below (in
thousands, except per share amounts):

|                            |                                                                                                |  |      |       |      |  |      |       |   |  |   |      |  
|--------------------------- | ---------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ---- | -
|                            |                                                                                                |  | 2002 |       | 2001 |  | 2000
|                            |                                                                                                |  |      |       |      |  |     
|Net income:                 |                                                                                                |  |      |       |      |  |      |       |   |  |   |     
|                            | As reported                                                                                    |  | $    | 3,008 |      |  | $    | 1,156 |   |  | $ | 620  |  
|                            | Stock-Based compensation using the intrinsic value method                                      |  |      |      |      |  |      |      |   |  |   |     |  
|                            | Stock-Based compensation that would have been reported
using the fair value method of SFAS 123 |  |      | (301  | )    |  |      | (81   | ) |  |   | (2   | )
|                            |                                                                                                |  |      |       |      |  |      |       |   |  |   |      |  
|                            | Pro Forma net income - Used in Basic EPS                                                       |  |      | 2,707 |      |  |      | 1,075 |   |  |   | 618  |  
|                            | Dilutive effect of convertible debentures                                                      |  |      | 147   |      |  |      | 156   |   |  |   |     |  
|                            |                                                                                                |  |      |       |      |  |      |       |   |  |   |      |  
|                            | Pro Forma net income - Used in Diluted EPS                                                     |  | $    | 2,854 |      |  | $    | 1,231 |   |  | $ | 618  |  
|                            |                                                                                                |  |      |       |      |  |      |       |   |  |   |      |  
|Basic earnings per share:   |                                                                                                |  |      |       |      |  |      |       |   |  |   |     
|                            | As reported                                                                                    |  | $    | 1.32  |      |  | $    | 0.59  |   |  | $ | 0.32 |  
|                            | Pro forma                                                                                      |  | $    | 1.19  |      |  | $    | 0.55  |   |  | $ | 0.32 |  
|Diluted earnings per share: |                                                                                                |  |      |       |      |  |      |       |   |  |   |     
|                            | As reported                                                                                    |  | $    | 1.12  |      |  | $    | 0.52  |   |  | $ | 0.32 |  
|                            | Pro forma                                                                                      |  | $    | 1.01  |      |  | $    | 0.48  |   |  | $ | 0.32 |  

Comprehensive Income

The Company follows 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 2001 and 2000 financial
statements to conform to 2002 classifications.

Current Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for by a single method  the purchase method. SFAS No. 141 also
specifies the criteria required for intangible assets to be recognized and
reported apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. SFAS No. 142 also requires
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121 (as superceded by SFAS
No. 144), Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The Company is required to adopt the provisions of
SFAS No. 141 immediately and SFAS No. 142 effective January 1, 2002. The
adoption of SFAS Nos. 141 and 142 did not have a material impact on the
financial condition or operating results of the Company.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This Statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This Statement is effective for
financial statements issued for fiscal years beginning after

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Note #1 - Summary of Significant Accounting Policies,Continued

June 15, 2002. The Company does not expect adoption of SFAS No. 143 to have a
material impact on the financial condition or operating results of the Company.

Current Accounting Pronouncements, Continued

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 establishes a single accounting
model for the impairment or disposal of long-lived assets, including
discontinued operations. SFAS No. 144 superseded SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and APB Opinion No. 30, Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. This Statement is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
The adoption of SFAS No. 144 did not have a material impact on the financial
condition or operating results of the Company.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Among other provisions, SFAS No. 145 rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt. Accordingly, gains or
losses from extinguishment of debt shall not be reported as extraordinary items
unless the extinguishment qualifies as an extraordinary item under the criteria
of APB No. 30. Gains or losses from extinguishment of debt that do not meet the
criteria of APB No. 30 should be reclassified to income from continuing
operations in all prior periods presented. This Statement is effective for
fiscal years beginning after May 15, 2002. The Company does not expect the
adoption of SFAS No. 145 to have a material impact on the financial position or
results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement requires that a liability for
the cost associated with an exit or disposal activity be recognized when the
liability is incurred and nullifies the guidance of EITF No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in Restructuring), which
recognized a liability for an exit cost at the date of an entitys commitment
to an exit plan. SFAS No. 146 requires that the initial measurement of a
liability be at fair value. This statement will be effective for exit and
disposal activities that are initiated after December 31, 2002. The Company
does not expect the adoption of SFAS No. 146 to have a material impact on the
financial position or results of operations.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which require that most financial services companies
subject to long-term customer relationship intangible assets to an annual
impairment test instead of being amortized. SFAS No. 147 applies to all new
and past financial institution acquisitions, including branch acquisitions that
qualify as acquisitions of a business, but excluding acquisitions between
mutual institutions. All acquisitions within the scope of the new statement
will now be governed by the requirements of SFAS Nos. 141 and 142. Certain
provisions of SFAS No. 147 were effective on October 1, 2002, while other
provisions are effective for acquisitions on or after October 1, 2002. The
adoption of SFAS No. 147 will not have a material impact on the financial
condition or operating results of the Company.

Note #2 - Investment Securities

At December 31, 2002 and 2001, 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, 2002, were (in thousands):

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Note #2 - Summary of Significant Accounting Policies,Continued

|                           |  |           |        |            |  |            |     |            |  |   |   |  |  |   |        | 
|-------------------------- |  | --------- | ------ | ---------- |  | ---------- | --- | ---------- |  | - | - |  |  | - | ------ | 
|                           |  |           |        |            |  | Gross      |     | Gross      |  |   |   | 
|                           |  | Amortized |        | Unrealized |  | Unrealized |     |            |  |  
|                           |  | Cost      |        | Gains      |  | Losses     |     | Fair Value
|                           |  |           |        |            |  |            |     |           
|Mortgage-backed securities |  | $         | 87,364 |            |  | $          | 189 |            |  | $ |  |  |  | $ | 87,553 | 
|                           |  |           |        |            |  |            |     |            |  |   |   |  |  |   |        | 

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

|                           |       |   |           |        |            |   |            |     |            |   |      |      |   |   |        |        | 
|-------------------------- | ----- | - | --------- | ------ | ---------- | - | ---------- | --- | ---------- | - | ---- | ---- | - | - | ------ | ------ | 
|                           |       |   |           |        |            |   | Gross      |     | Gross      |   |      |      |  
|                           |       |   | Amortized |        | Unrealized |   | Unrealized |     |            |   |     
|                           |       |   | Cost      |        | Gains      |   | Losses     |     | Fair Value
|                           |       |   |           |        |            |   |            |     |           
|U.S. Agency securities     |       | $ | 8,499     |        |            | $ | 48         |     |            | $ |     |      |   | $ | 8,547  |       
|Mortgage-backed securities |       |   | 22,111    |        |            |   | 54         |     |            |   | (162 | )    |   |   | 22,003 |       
|                           |       |   |           |        |            |   |            |     |            |   |      |      |   |   |        |       
|                           | Total |   | $         | 30,610 |            |   | $          | 102 |            |   | $    | (162 | ) |   | $      | 30,550 | 
|                           |       |   |           |        |            |   |            |     |            |   |      |      |   |   |        |       

The amortized cost and fair values of investment securities available-for-sale
at December 31, 2002, by expected maturity are shown below (in thousands).
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 after 10 years |  | $                  | 87,364 |            |  | $ | 87,553 | 
|                   |  |                    |        |            |  |   |        | 

Proceeds from sales of investment securities available-for-sale during 2002
were $137.4 million. Gross gains on those sales were $1.3 million. Included
in stockholders equity at December 31, 2002 is $109,000 of net unrealized
gains (net of $80,000 estimated tax) on investment securities
available-for-sale.

Proceeds from sales of investment securities available-for-sale during 2001
were $7,000. Gross gains on those sales were $6,000. Included in
stockholders equity at December 31, 2001 is $35,000 of net unrealized losses
(net of $25,000 estimated tax benefit) on investment securities
available-for-sale.

There were no investments sold during 2000.

Securities with a carrying value and fair value of $87.6 million and $5.7
million at December 31, 2002 and 2001, 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 (in thousands):

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Note #3  Loans,Continued

|                                       |             |                               |         |        |         |      |         |        |         | 
|-------------------------------------- | ----------- | ----------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | 
|                                       |             |                               |         | 2002   |         | 2001
|                                       |             |                               |         |        |         |     
|Commercial, financial and agricultural |             | $                             | 19,232  |        |         | $    | 20,219  |       
|Real Estate - construction             |             |                               | 110,212 |        |         |      | 33,254  |       
|Real Estate - mortgage:                |             |                               |         |        |         |      |         |       
|                                       | Commercial  |                               |         | 93,122 |         |      |         | 52,458 |        
|                                       | Residential |                               |         | 23,480 |         |      |         | 19,063 |        
|Installment loans to individuals       |             |                               | 5,659   |        |         |      | 8,318   |       
|All other loans (including overdrafts) |             |                               | 60      |        |         |      | 184     |       
|                                       |             |                               |         |        |         |      |         |       
|                                       |             |                               | 251,765 |        |         |      | 133,496 |       
|Unearned income on installment loans   |             |                               | (31     | )      |         |      | (117    | )     
|Deferred loan fees                     |             |                               | (595    | )      |         |      | (272    | )     
|                                       |             |                               |         |        |         |      |         |       
|                                       |             | Loans, Net of Unearned Income |         | $      | 251,139 |      |         | $      | 133,107 | 
|                                       |             |                               |         |        |         |      |         |       
|Loans held for sale                    |             | $                             | 2,112   |        |         | $    | 4,471   |       
|                                       |             |                               |         |        |         |      |         |       

At December 31, 2002, the Bank had approximately $40.7 million in loans pledged
to secure FHLB borrowings.

The following is a summary of information pertaining to impaired loans. There
were no impaired loans as of December 31, 2002 and 2001 (in thousands).

|                                                             |  |                          |    |      |  |      |    |  |  |   |     | 
|------------------------------------------------------------ |  | ------------------------ | -- | ---- |  | ---- | -- |  |  | - | --- | 
|                                                             |  | Years Ended December 31,
|                                                             |  |                         
|                                                             |  | 2002                     |    | 2001 |  | 2000
|                                                             |  |                          |    |      |  |     
|Average investment in impaired loans                         |  | $                        | 22 |      |  | $    | 13 |  |  | $ | 245 | 
|Interest income recognized on impaired loans                 |  |                          |   |      |  |      |   |  |  |   |    | 
|Interest income recognized on a cash
basis on impaired loans |  |                          |   |      |  |      |   |  |  |   |    | 

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.

There were no non-accruing loans at December 31, 2002 and 2001. If interest on
nonaccrual loans had been recognized at the original interest rates, interest
income would have increased approximately $-0-, $-0-, and $9,000 for the years
ended 2002, 2001, and 2000, respectively.

At December 31, 2002 and 2001, the Company had no loans past due 90 days or
more in interest or principal and still accruing interest.

At December 31, 2002, no loans were classified as troubled debt restructurings.

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Note #4 - Allowance for Loan and Lease Losses

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

|                                           |  |      |       |      |  |      |       |   |  |   |      |  
|------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ---- | -
|                                           |  | 2002 |       | 2001 |  | 2000
|                                           |  |      |       |      |  |     
|Balance, Beginning of year                 |  | $    | 1,450 |      |  | $    | 784   |   |  | $ | 764  |  
|Credit from purchase of loan portfolio     |  |      | 197   |      |  |      |      |   |  |   |     |  
|Recoveries on loans previously charged off |  |      | 167   |      |  |      | 22    |   |  |   | 130  |  
|Loans charged off                          |  |      | (241  | )    |  |      | (129  | ) |  |   | (366 | )
|Provision charged to operating expense     |  |      | 1,430 |      |  |      | 773   |   |  |   | 256  |  
|                                           |  |      |       |      |  |      |       |   |  |   |      |  
|Balance, End of year                       |  | $    | 3,003 |      |  | $    | 1,450 |   |  | $ | 784  |  
|                                           |  |      |       |      |  |      |       |   |  |   |      |  

Note #5 - Loans and Deposits 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, 2002 and 2001, amounted to approximately $1.0 million and $0.9
million, respectively. Not included in the balances outstanding at December
31, 2002 and 2001, were undisbursed commitments to lend of approximately $0.4
million and $0.2 million, respectively. There were no non-accruing loans to
Directors and Officers and loans classified by the Companys regulatory agency
or by the Company in 2002 and 2001.

Deposits from related parties held by the Bank at December 31, 2002 and 2001
amounted to approximately $0.6 million and $0.7 million, respectively.

Note #6 - Premises and Equipment

Major classifications of Company premises and equipment are summarized as
follows (in thousands):

|                        |                                                 |       |       |        |       |      |       |        |       | 
|----------------------- | ----------------------------------------------- | ----- | ----- | ------ | ----- | ---- | ----- | ------ | ----- | 
|                        |                                                 |       |       | 2002   |       | 2001
|                        |                                                 |       |       |        |       |     
|Building                |                                                 | $     | 3,642 |        |       | $    | 3,642 |       
|Furniture and equipment |                                                 |       | 4,171 |        |       |      | 3,435 |       
|Leasehold improvements  |                                                 |       | 1,484 |        |       |      | 1,338 |       
|                        |                                                 |       |       |        |       |      |       |       
|                        |                                                 |       | 9,297 |        |       |      | 8,415 |       
|                        | Less: Accumulated depreciation
and amortization |       |       | (4,982 | )     |      |       | (4,312 | )    
|Land                    |                                                 |       | 1,285 |        |       |      | 1,285 |       
|                        |                                                 |       |       |        |       |      |       |       
|                        |                                                 | Total |       | $      | 5,600 |      |       | $      | 5,388 | 
|                        |                                                 |       |       |        |       |      |       |       

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 (in thousands):

|             |  |   |       | 
|------------ |  | - | ----- | 
|Year Ending  |  |   |       | 
|December 31, |  |   |       | 
|             |  |   |       | 
|2003         |  | $ | 248   | 
|2004         |  |   | 250   | 
|2005         |  |   | 254   | 
|2006         |  |   | 256   | 
|2007         |  |   | 195   | 
|Thereafter   |  |   | 1,177 | 
|             |  |   |       | 
|Total        |  | $ | 2,380 | 
|             |  |   |       | 

Total property and equipment expenditures charged to leases for the years ended
December 31, 2002, 2001, and 2000, were approximately $0.3 million, $0.1
million, and $0.1 million, respectively.

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Note #7  -  Time Deposit Liabilities

The aggregate amount of time certificates of deposit in denominations of
$100,000 or more at December 31, 2002 and 2001 was $47.6 million and $27.1
million respectively. At December 31, 2002, the scheduled maturities of time
certificates of deposit are as follows (in thousands):

|     |  |   |        | 
|---- |  | - | ------ | 
|2003 |  | $ | 78,482 | 
|2004 |  |   | 17,420 | 
|2005 |  |   | 165    | 
|     |  |   |        | 
|     |  | $ | 96,067 | 
|     |  |   |        | 

Note #8  -  Borrowings

The Bank has borrowing lines with five correspondent banks totaling $27.7
million and another line at the Federal Home Loan Bank totaling $76.0 million
as of year-end, representing 20% of total assets of the Bank.

Federal Home Loan Bank (FHLB) Advances

Pursuant to collateral agreements with FHLB, advances are secured by all
capital stock in FHLB, certain investment securities, and certain qualifying
loans. FHLB advances consist of the following as of December 31, 2002 (dollars
in thousands):

|         |  |          |      |        |  |   |        | 
|-------- |  | -------- | ---- | ------ |  | - | ------ | 
|         |  | Weighted |      |        |  |  
|         |  | Average  |      |        |  |  
|Maturity |  | Rate     |      | Amount
|         |  |          |      |       
|2003     |  |          | 1.52 | %      |  | $ | 20,000 | 
|2004     |  |          | 1.86 | %      |  |   | 15,000 | 
|2005     |  |          | 1.98 | %      |  |   | 10,000 | 
|         |  |          |      |        |  |   |        | 
|         |  |          |      |        |  | $ | 45,000 | 
|         |  |          |      |        |  |   |        | 

Subordinated Debentures

During 2002, the Company issued $5.0 million in subordinated debt. The debt
bears a floating rate of interest of 3.05% over the three month LIBOR. The
initial rate is set at 4.45%. The subordinated debt has a fifteen-year
maturity, with quarterly interest payments.

Other Borrowings

During 2002, the Company obtained a loan from The Independent Bankers Bank in
the amount of $5.0 million. The loan bears interest at a floating rate and
matures on January 4, 2004. Interest is due quarterly. The loan is secured by
1,218,700 shares of the Banks stock.

Note #9  -  Trust Preferred Securities

On December 18, 2001, Vineyard Statutory
Trust I, a wholly owned subsidiary of Vineyard National Bancorp, issued $12.0
million 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 on December 18, 2006, at par.

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Note #9 - Trust Preferred Securities, Continued

On December 19, 2002, Vineyard Statutory Trust II, a wholly owned subsidiary of
Vineyard National Bancorp, issued $5.0 million of Floating Rate Capital
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 Capital 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 Capital Securities. Vineyard National Bancorp has
guaranteed, on a subordinated basis, payment of the Trusts obligation. The
Capital Securities will mature on December 26, 2032, but can be called at any
time commencing on December 26, 2007, at par.

Note #10 - Convertible Debentures

On April 30, 2001, the Company issued $3.8 million 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%. During 2002, the Company offered the holders of the
convertible debentures an incentive to convert. This incentive totaled
$0.3 million and is included in other expenses. All convertible debentures were
converted in 2002. Total interest expense recorded for 2002 and 2001 was
$0.3 million and $0.3 million, respectively.

Note #11 - 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 $8.9 million,
which consisted of $18,000 in leasehold improvements and other fixed assets,
$35,000 in other assets and $8.8 million in cash. In addition, the Bank also
assumed $8.9 million of deposits. No premium was paid in connection with the
purchase.

Note #12 - Income Taxes

The provision for income taxes consist of the following (in thousands):

|                                                                  |                     |                           |       |                          |       |      |      |      |     |   |     |     |     | 
|----------------------------------------------------------------- | ------------------- | ------------------------- | ----- | ------------------------ | ----- | ---- | ---- | ---- | --- | - | --- | --- | --- | 
|                                                                  |                     |                           |       | Year Ending December 31,
|                                                                  |                     |                           |       |                         
|                                                                  |                     |                           |       | 2002                     |       | 2001 |      | 2000
|                                                                  |                     |                           |       |                          |       |      |      |     
|Tax provision / (credit) applicable to
income before income taxes |                     | $                         | 2,081 |                          |       | $    | (17  | )    |     | $ | 449 |    
|                                                                  |                     |                           |       |                          |       |      |      |      |     |   |     |    
|Federal Income Tax                                                |                     |                           |       |                          |       |      |      |      |     |   |     |    
|                                                                  | Current             |                           |       | 2,303                    |       |      |      | 709  |     |   |     | 299 |    
|                                                                  | Deferred / (credit) |                           |       | (752                     | )     |      |      | (402 | )   |   |     | 2   |    
|                                                                  |                     |                           |       |                          |       |      |      |      |     |   |     |    
|                                                                  |                     | Total Federal Income Tax  |       |                          | 1,551 |      |      |      | 307 |   |     |     | 301 | 
|                                                                  |                     |                           |       |                          |       |      |      |      |     |   |     |    
|State Franchise Tax                                               |                     |                           |       |                          |       |      |      |      |     |   |     |    
|                                                                  | Current             |                           |       | 747                      |       |      |      | 259  |     |   |     | 107 |    
|                                                                  | Deferred / (credit) |                           |       | (217                     | )     |      |      | (108 | )   |   |     | 41  |    
|                                                                  |                     |                           |       |                          |       |      |      |      |     |   |     |    
|                                                                  |                     | Total State Franchise Tax |       |                          | 530   |      |      |      | 151 |   |     |     | 148 | 
|                                                                  |                     |                           |       |                          |       |      |      |      |     |   |     |    
|Change in valuation allowance                                     |                     |                           |      |                          |       |      | (475 | )    |     |   |    |    
|                                                                  |                     |                           |       |                          |       |      |      |      |     |   |     |    
|                                                                  |                     | Total Income Taxes        |       | $                        | 2,081 |      |      | $    | (17 | ) |     | $   | 449 | 
|                                                                  |                     |                           |       |                          |       |      |      |      |     |   |     |    

As a result of the following
items, the total income tax expense/(credit) for 2002,
2001, and 2000, was different than the amount computed by
applying the statutory U.S. Federal income tax rate to
income before taxes (dollar amounts in thousands):

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Note #12 - Income Taxes, Continued

|                                                            |       |   |        |       |        |  |           |      |        |   |        |     |           |  |       |      |   |   |           |     |  |  |      |      | 
|----------------------------------------------------------- | ----- | - | ------ | ----- | ------ |  | --------- | ---- | ------ | - | ------ | --- | --------- |  | ----- | ---- | - | - | --------- | --- |  |  | ---- | ---- | 
|                                                            |       |   | 2002   |       | 2001   |  | 2000     
|                                                            |       |   |        |       |        |  |          
|                                                            |       |   |        |       |        |  | Percent   |      |        |   |        |     | Percent   |  |       |      |   |   | Percent  
|                                                            |       |   |        |       |        |  | of Pretax |      |        |   |        |     | of Pretax |  |       |      |   |   | of Pretax
|                                                            |       |   | Amount |       | Income |  | Amount    |      | Income |   | Amount |     | Income   
|                                                            |       |   |        |       |        |  |           |      |        |   |        |     |          
|Federal rate                                                |       | $ | 1,730  |       |        |  | 34.0      |      |        | $ | 387    |     |           |  | 34.0  |      |   | $ | 363       |     |  |  | 34.0 |     
|Changes due to State income
tax, net of Federal tax benefit |       |   | 361    |       |        |  | 7.1       |      |        |   | 81     |     |           |  | 7.1   |      |   |   | 76        |     |  |  | 7.1  |     
|Change in valuation allowance                               |       |   |       |       |        |  |          |      |        |   | (475   | )   |           |  | (41.7 | )    |   |   |          |     |  |  |     |     
|Other                                                       |       |   | (10    | )     |        |  | (0.2      | )    |        |   | (10    | )   |           |  | (0.9  | )    |   |   | 10        |     |  |  | 0.9  |     
|                                                            |       |   |        |       |        |  |           |      |        |   |        |     |           |  |       |      |   |   |           |     |  |  |      |     
|                                                            | Total |   | $      | 2,081 |        |  |           | 40.9 |        |   | $      | (17 | )         |  |       | (1.5 | ) |   | $         | 449 |  |  |      | 42.0 | 
|                                                            |       |   |        |       |        |  |           |      |        |   |        |     |           |  |       |      |   |   |           |     |  |  |      |      | 

The deferred tax assets and liabilities of the Company are composed of the
following tax-affected cumulative timing differences (in thousands):

|                         |                                     |  |       |       |      |  |       |       |  
|------------------------ | ----------------------------------- |  | ----- | ----- | ---- |  | ----- | ----- | -
|                         |                                     |  | 2002  |       | 2001
|                         |                                     |  |       |       |     
|Deferred Tax Assets      |                                     |  |       |       |      |  |       |      
|                         | Reserve for loan losses             |  | $     | 1,097 |      |  | $     | 460   |  
|                         | Deferred compensation               |  |       | 346   |      |  |       | 310   |  
|                         | Deferred fees                       |  |       | 245   |      |  |       | 136   |  
|                         | Non-deductible reserves             |  |       | 422   |      |  |       | 419   |  
|                         | Fixed assets                        |  |       | 43    |      |  |       |      |  
|                         | Other assets and liabilities        |  |       | 254   |      |  |       | 88    |  
|                         | Other Unrealized Loss on Securities |  |       |      |      |  |       | 25    |  
|                         |                                     |  |       |       |      |  |       |       |  
|                         |                                     |  | 2,407 |       |      |  | 1,438 |      
|Deferred Tax Liabilities |                                     |  |       |       |      |  |       |      
|                         | Other Unrealized Gain on Securities |  |       | (79   | )    |  |       |      |  
|                         | Fixed assets                        |  |       |      |      |  |       | (25   | )
|                         |                                     |  |       |       |      |  |       |       |  
|                         |                                     |  | (79   | )     |      |  | (25   | )    
|                         |                                     |  |       |       |      |  |       |       |  
|                         | Net Deferred Tax Assets             |  | $     | 2,328 |      |  | $     | 1,413 |  
|                         |                                     |  |       |       |      |  |       |       |  

Note #13 - 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, 2002 and 2001, the Company had commitments to
extend credit of approximately $97.2 million and $39.6 million and obligations
under standby letters of credit of approximately $0.4 million and $0.2
million. 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.

64



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##### Table of Contents



Note #13 - Commitments and Contingencies, Continued

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 $0.9 million. During 1999, the Bank accrued a loss of
$0.9 million in recognition of the amount of liability determined by the court
which is included in litigation expense. During 2000, the lawsuit was settled.
In 2002, the Bank received $0.5 million in litigation recovery from its insurance
carriers.

The Company is involved in various other litigations. 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 #14 - Perpetual Preferred Stock

During 2002, the Company issued fifty shares of 7.0% Series A Preferred Stock
at $50,000 per share to eight individual investors for aggregate gross proceeds
of $2.5 million. Each share of Series A Preferred will be entitled to a
noncumulative, annual dividend of 7.0%, payable quarterly. The 7.0% Series A
Preferred Stock is not convertible into common stock and is redeemable at the
option of the Company at face value, plus any unpaid dividends declared. With
each share of 7.0% Series A Preferred Stock, the Company issued a warrant to
purchase 2,000 shares of the Companys common stock at an exercise price of $15
per share. The Series A Preferred Stock qualifies as Tier 1 capital under the
regulations of the Federal Reserve Board.

Note #15 - Dividends

On December 23, 2002, the Company declared a 5% stock dividend to be payable on
January 15, 2003 to stockholders of record as of December 23, 2002. All share
and per share data has been retroactively adjusted to reflect the stock
dividend.

Note #16 - 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, 2002, that the Company and the Bank meets all capital adequacy requirements
to which it is subject.

As of the most recent formal notification from the Federal Deposit Insurance
Corporation, the Bank was categorized as well capitalized under the regulatory
framework for prompt corrective action. 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):

65



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##### Table of Contents



Note #16 - Regulatory Matters,Continued

|                                        |              |  |                   |        |                   |  |                   |       |         |  |                |        |                   |  |         |     |   |  |                   |        |  |  |  |       |  
|--------------------------------------- | ------------ |  | ----------------- | ------ | ----------------- |  | ----------------- | ----- | ------- |  | -------------- | ------ | ----------------- |  | ------- | --- | - |  | ----------------- | ------ |  |  |  | ----- | -
|                                        |              |  |                   |        |                   |  |                   |       |         |  | 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, 2002                 |              |  |                   |        |                   |  |                   |       |         |  |                |        |                   |  |         |     |   |  |                   |        |  |  |  |      
|Total capital to risk-weighted assets:  |              |  |                   |        |                   |  |                   |       |         |  |                |        |                   |  |         |     |   |  |                   |        |  |  |  |      
|                                        | Bank         |  | $                 | 41,789 |                   |  |                   | 14.95 | %       |  | $              | 22,364 |                   |  |         | 8.0 | % |  | $                 | 27,955 |  |  |  | 10.00 | %
|                                        | Consolidated |  | $                 | 44,838 |                   |  |                   | 15.98 | %       |  | $              | 22,454 |                   |  |         | 8.0 | % |  |                   | N/A    |  |  |  | N/A   |  
|Tier 1 capital to risk-weighted assets: |              |  |                   |        |                   |  |                   |       |         |  |                |        |                   |  |         |     |   |  |                   |        |  |  |  |      
|                                        | Bank         |  | $                 | 38,786 |                   |  |                   | 13.87 | %       |  | $              | 11,182 |                   |  |         | 4.0 | % |  | $                 | 16,773 |  |  |  | 6.00  | %
|                                        | Consolidated |  | $                 | 26,452 |                   |  |                   | 9.42  | %       |  | $              | 11,227 |                   |  |         | 4.0 | % |  |                   | N/A    |  |  |  | N/A   |  
|Tier 1 capital to average assets:       |              |  |                   |        |                   |  |                   |       |         |  |                |        |                   |  |         |     |   |  |                   |        |  |  |  |      
|                                        | Bank         |  | $                 | 38,786 |                   |  |                   | 11.62 | %       |  | $              | 13,353 |                   |  |         | 4.0 | % |  | $                 | 16,691 |  |  |  | 5.00  | %
|                                        | Consolidated |  | $                 | 26,452 |                   |  |                   | 7.89  | %       |  | $              | 13,412 |                   |  |         | 4.0 | % |  |                   | N/A    |  |  |  | N/A   |  
|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 |  | $                 | 27,510 |                   |  |                   | 19.10 | %       |  | $              | 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 |  | $                 | 13,807 |                   |  |                   | 9.59  | %       |  | $              | 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 |  | $                 | 13,807 |                   |  |                   | 8.02  | %       |  | $              | 6,887  |                   |  |         | 4.0 | % |  |                   | N/A    |  |  |  | N/A   |  

Note #17 - Employee and Director Benefit Plans



|A. |  | Deferred Compensation Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company has a Nonqualified 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 $40,000, $40,000, and
$11,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
|  
|B. |  | 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 $11,000 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 $61,000, $36,000, and $12,000 for the years ended
December 31, 2002, 2001, and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                       

66



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Note #17 - Employee and Director Benefit Plans,Continued



|C. |  | 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; plus 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 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 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 2002 and 2001,
approximately $116,000 and $102,000, respectively (inclusive of deferred
board fees and interest) was expensed for this plan.                                                     
|  
|D. |  | 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 2002
and 2001, approximately $28,000 and $43,000, 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.                                                                                                                                                                                                                    
|  
|E. |  | Restricted Stock Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | During 2002, the Company adopted a Restricted Stock Plan for the benefit of
key employees whereby shares of the Companys stock is purchased in the open
market and granted to employees. During 2002, 23,000 stock rights were
granted which cliff vest in four years. Compensation is based upon the fair
market value of the stock on the grant date and is recognized evenly over
the vesting period. Total compensation expense recorded during 2002 was
approximately $19,000 related to these stock rights.                                                                                                                     

Note #18 - Stock Option Plan

At December 31, 2002, the Company has one stock-based compensation plan, which
is described below:

An incentive stock option plan was approved by the stockholders in 1987
covering an aggregate of 132,300 shares (after giving retroactive effect for
stock splits and a 5% stock dividend declared in 2002). 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 210,000 shares (after giving retroactive effect for 5% stock
dividend declared in 2002) of the Bancorps authorized but unissued common
stock to be combined with the 55,981 shares (after giving retroactive effect
for 5% stock dividend declared in 2002) which remain under the 1987 Plan for a
total of 265,981 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 2002, 2001, and 2000,
respectively, were estimated on the date of grant using the Black-Scholes option pricing model with the following
assumptions; risk-free rates of 3.31%,

67



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Note #18  -  Stock Option Plan,Continued

5.13%, and 5.26%, dividend yield of -0-% for all years; volatility of 36%, 36%,
and 33%, expected life of 7 years for 2002, 8 years for 2001, and 10 years for
2000.

A summary of the status of the Companys incentive stock option plan as of
December 31, 2002, 2001, and 2000, respectively, and changes during the years
ending on those dates is presented below:

|                                                               |  |                  |          |             |  |                  |         |           |  |             |      |       |  |  |          |          |  |   |         |   |  |   |      | 
|-------------------------------------------------------------- |  | ---------------- | -------- | ----------- |  | ---------------- | ------- | --------- |  | ----------- | ---- | ----- |  |  | -------- | -------- |  | - | ------- | - |  | - | ---- | 
|                                                               |  | 2002             |          | 2001       
|                                                               |  |                  |          |            
|                                                               |  | 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                               |  |                  | 69,405   |             |  |                  | 259,350 |           |  | $           | 3.92 |       |  |  | 190,155  |          |  |   | 150,465 |   |  | $ | 4.18 | 
|Additional options authorized                                  |  |                  | 210,000  |             |  |                  |        |           |  |             |      |       |  |  |         |          |  |   |        |   |  |   |      | 
|Exercised                                                      |  |                  |         |             |  |                  | (92,400 | )         |  | $           | 3.79 |       |  |  |         |          |  |   | (11,865 | ) |  | $ | 3.74 | 
|Cancelled                                                      |  |                  | 44,450   |             |  |                  | (44,450 | )         |  | $           | 4.87 |       |  |  | 27,300   |          |  |   | (27,300 | ) |  | $ | 3.24 | 
|Granted                                                        |  |                  | (279,825 | )           |  |                  | 279,825 |           |  | $           | 7.89 |       |  |  | (148,050 | )        |  |   | 148,050 |   |  | $ | 4.69 | 
|                                                               |  |                  |          |             |  |                  |         |           |  |             |      |       |  |  |          |          |  |   |         |   |  |   |      | 
|Outstanding at end of year                                     |  |                  | 44,030   |             |  |                  | 402,325 |           |  | $           | 6.60 |       |  |  | 69,405   |          |  |   | 259,350 |   |  | $ | 3.92 | 
|                                                               |  |                  |          |             |  |                  |         |           |  |             |      |       |  |  |          |          |  |   |         |   |  |   |      | 
|Options exercisable at year-end                                |  |                  |          |             |  |                  | 155,225 |           |  |             |      |       |  |  |          |          |  |   | 85,224  |   |  |   |      | 
|Weighted-average fair value of
Options granted during the year |  |                  |          |             |  | $                | 3.50    |           |  |             |      |       |  |  |          |          |  | $ | 1.93    |   |  |   |      | 

|                                                               |  |                  |          |             |  |       |          |          |  |   |      | 
|-------------------------------------------------------------- |  | ---------------- | -------- | ----------- |  | ----- | -------- | -------- |  | - | ---- | 
|                                                               |  | 2000            
|                                                               |  |                 
|                                                               |  | Number of Shares |          |            
|                                                               |  |                  |          | Weighted-  
|                                                               |  | Available        |          |             |  |       |          | Average 
|                                                               |  | For              |          |             |  |       |          | Exercise
|                                                               |  | Granting         |          | Outstanding |  | Price
|                                                               |  |                  |          |             |  |      
|Outstanding at beginning of year                               |  |                  | 121,934  |             |  |       | 220,840  |          |  | $ | 5.00 | 
|Additional options authorized                                  |  |                  |         |             |  |       |          |          |  |   |      | 
|Exercised                                                      |  |                  |         |             |  |       | (2,155   | )        |  | $ | 2.78 | 
|Cancelled                                                      |  |                  | 269,296  |             |  |       | (269,296 | )        |  | $ | 4.92 | 
|Granted                                                        |  |                  | (201,075 | )           |  |       | 201,075  |          |  | $ | 4.26 | 
|                                                               |  |                  |          |             |  |       |          |          |  |   |      | 
|Outstanding at end of year                                     |  |                  | 190,155  |             |  |       | 150,465  |          |  | $ | 4.18 | 
|                                                               |  |                  |          |             |  |       |          |          |  |   |      | 
|Options exercisable at year-end                                |  |                  |          |             |  |       | 11,199   |          |  |   |      | 
|Weighted-average fair value of
Options granted during the year |  |                  |          |             |  | $     | 2.37     |          |  |   |      | 

The following table summarizes information about incentive stock options
outstanding at December 31, 2002:

|                    |  |                     |         |                  |  |           |      |             |  |          |      |  |  |           |         |  |  |   |      | 
|------------------- |  | ------------------- | ------- | ---------------- |  | --------- | ---- | ----------- |  | -------- | ---- |  |  | --------- | ------- |  |  | - | ---- | 
|Options Outstanding |  | Options Exercisable
|                    |  |                    
|                    |  |                     |         |                  |  | Weighted- |      | Weighted-   |  |          |      |  |  | Weighted-
|                    |  |                     |         |                  |  | Average   |      | Average     |  |          |      |  |  | Average  
|Exercise            |  | Number              |         | Remaining        |  | Exercise  |      | Number      |  | Exercise
|Price               |  | Outstanding         |         | Contractual Life |  | Price     |      | Exercisable |  | Price   
|                    |  |                     |         |                  |  |           |      |             |  |         
|$2.86 - $3.81       |  |                     | 118,300 |                  |  |           | 8.08 |             |  | $        | 3.67 |  |  |           | 43,400  |  |  | $ | 3.73 | 
|$4.76 - $6.67       |  |                     | 88,200  |                  |  |           | 8.59 |             |  | $        | 6.12 |  |  |           | 6,825   |  |  | $ | 5.84 | 
|$8.57 - $11.43      |  |                     | 195,825 |                  |  |           | 9.51 |             |  | $        | 8.59 |  |  |           | 105,000 |  |  | $ | 8.57 | 
|                    |  |                     |         |                  |  |           |      |             |  |          |      |  |  |           |         |  |  |   |      | 
|                    |  |                     | 402,325 |                  |  |           | 8.89 |             |  | $        | 6.60 |  |  |           | 155,225 |  |  | $ | 7.10 | 
|                    |  |                     |         |                  |  |           |      |             |  |          |      |  |  |           |         |  |  |   |      | 

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Note #19  -  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% of its
contributed capital and retained earnings. At December 31, 2002, the maximum
combined amount of funds available from these two sources amounted to
approximately $13.7 million or 35% of the Banks stockholders equity.

Note #20 -  Other Expenses

The following is a breakdown of expenses for the years ended December 31, 2002,
2001, and 2000 (in thousands):

|               |                                           |  |      |       |      |  |      |       |  |  |   |       | 
|-------------- | ----------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|               |                                           |  | 2002 |       | 2001 |  | 2000
|               |                                           |  |      |       |      |  |     
|Other Expenses |                                           |  |      |       |      |  |      |       |  |  |   |      
|               | Data processing                           |  | $    | 676   |      |  | $    | 686   |  |  | $ | 618   | 
|               | Marketing expenses                        |  |      | 713   |      |  |      | 419   |  |  |   | 208   | 
|               | Professional expenses                     |  |      | 554   |      |  |      | 384   |  |  |   | 797   | 
|               | Office supplies, postage and telephone    |  |      | 643   |      |  |      | 469   |  |  |   | 361   | 
|               | Insurance and assessment expense          |  |      | 197   |      |  |      | 196   |  |  |   | 139   | 
|               | Administrative expense                    |  |      | 205   |      |  |      | 225   |  |  |   | 381   | 
|               | Convertible debentures conversion expense |  |      | 274   |      |  |      |      |  |  |   |      | 
|               | Other                                     |  |      | 748   |      |  |      | 298   |  |  |   | 176   | 
|               |                                           |  |      |       |      |  |      |       |  |  |   |       | 
|               | Total                                     |  | $    | 4,010 |      |  | $    | 2,677 |  |  | $ | 2,680 | 
|               |                                           |  |      |       |      |  |      |       |  |  |   |       | 

Note #21 -  Income Per Common and Common Equivalent Share

The following is a reconciliation of net income and shares outstanding to the
income and number of shares used to compute EPS (dollar amounts in thousands):

|                                                     |  |        |       |        |  |        |           |        |  |        |       |        |  |  |           |   |  |   |     |  |  |  |           |  
|---------------------------------------------------- |  | ------ | ----- | ------ |  | ------ | --------- | ------ |  | ------ | ----- | ------ |  |  | --------- | - |  | - | --- |  |  |  | --------- | -
|                                                     |  | 2002   |       | 2001   |  | 2000  
|                                                     |  |        |       |        |  |       
|                                                     |  | Income |       | Shares |  | Income |           | Shares |  | Income |       | Shares
|                                                     |  |        |       |        |  |        |           |        |  |        |       |       
|Net income as reported                               |  | $      | 3,008 |        |  |        |           |        |  | $      | 1,156 |        |  |  |           |   |  | $ | 620 |  |  |  |           |  
|Shares outstanding at year-end                       |  |        |       |        |  |        | 2,849,680 |        |  |        |       |        |  |  | 1,969,780 |   |  |   |     |  |  |  | 1,957,915 |  
|Impact of weighting shares
purchased during the year |  |        |       |        |  |        | (573,848  | )      |  |        |       |        |  |  | (7,869    | ) |  |   |     |  |  |  | (689      | )
|                                                     |  |        |       |        |  |        |           |        |  |        |       |        |  |  |           |   |  |   |     |  |  |  |           |  
|Used in Basic EPS                                    |  |        | 3,008 |        |  |        | 2,275,832 |        |  |        | 1,156 |        |  |  | 1,961,911 |   |  |   | 620 |  |  |  | 1,957,226 |  
|Dilutive effect of outstanding
stock options         |  |        |       |        |  |        | 31,759    |        |  |        |       |        |  |  | 51,959    |   |  |   |     |  |  |  | 1,327     |  
|Dilutive effect of convertible
debentures            |  |        | 147   |        |  |        | 515,478   |        |  |        | 156   |        |  |  | 528,596   |   |  |   |    |  |  |  |          |  
|                                                     |  |        |       |        |  |        |           |        |  |        |       |        |  |  |           |   |  |   |     |  |  |  |           |  
|Used in Diluted EPS                                  |  | $      | 3,155 |        |  |        | 2,823,069 |        |  | $      | 1,312 |        |  |  | 2,542,466 |   |  | $ | 620 |  |  |  | 1,958,553 |  
|                                                     |  |        |       |        |  |        |           |        |  |        |       |        |  |  |           |   |  |   |     |  |  |  |           |  

Note #22 - 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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Note #22 - Fair Value of Financial
Instruments, Continued

The following table presents the carrying amounts and fair values of financial
instruments at December 31, 2002. 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 (in
thousands).

|            |                                      |  |                   |         |                   |  |        |         |            |  |   |         |  |  |   |         | 
|----------- | ------------------------------------ |  | ----------------- | ------- | ----------------- |  | ------ | ------- | ---------- |  | - | ------- |  |  | - | ------- | 
|            |                                      |  | December 31, 2002 |         | December 31, 2001
|            |                                      |  |                   |         |                  
|            |                                      |  | Carrying          |         |                   |  |        |         | Carrying   |  |   |         | 
|            |                                      |  | Amount            |         | Fair Value        |  | Amount |         | Fair Value
|            |                                      |  |                   |         |                   |  |        |         |           
|Assets      |                                      |  |                   |         |                   |  |        |         |            |  |   |         |  |  |   |        
|            | Cash and cash equivalents            |  | $                 | 33,362  |                   |  | $      | 33,362  |            |  | $ | 14,710  |  |  | $ | 14,710  | 
|            | Investment securities                |  |                   | 87,553  |                   |  |        | 87,553  |            |  |   | 30,550  |  |  |   | 30,550  | 
|            | Loans receivable held for investment |  |                   | 251,139 |                   |  |        | 256,028 |            |  |   | 133,107 |  |  |   | 134,141 | 
|            | Loans held for sale                  |  |                   | 2,112   |                   |  |        | 2,114   |            |  |   | 4,471   |  |  |   | 4,471   | 
|            | Accrued interest receivable          |  |                   | 1,487   |                   |  |        | 1,487   |            |  |   | 901     |  |  |   | 901     | 
|Liabilities |                                      |  |                   |         |                   |  |        |         |            |  |   |         |  |  |   |        
|            | Non-interest bearing deposits        |  |                   | 61,906  |                   |  |        | 61,906  |            |  |   | 45,951  |  |  |   | 45,951  | 
|            | Interest bearing deposits            |  |                   | 225,606 |                   |  |        | 226,345 |            |  |   | 113,430 |  |  |   | 113,803 | 
|            | Federal Home Loan Bank advances      |  |                   | 45,000  |                   |  |        | 45,388  |            |  |   | 3,000   |  |  |   | 3,000   | 
|            | Trust Preferred Securities           |  |                   | 17,000  |                   |  |        | 17,000  |            |  |   | 12,000  |  |  |   | 12,000  | 
|            | Convertible Debentures               |  |                   |        |                   |  |        |        |            |  |   | 3,750   |  |  |   | 3,750   | 
|            | Subordinated debentures              |  |                   | 5,000   |                   |  |        | 5,000   |            |  |   |        |  |  |   |        | 
|            | Other borrowings                     |  |                   | 5,000   |                   |  |        | 5,000   |            |  |   |        |  |  |   |        | 
|            | Accrued interest payable             |  |                   | 993     |                   |  |        | 993     |            |  |   | 998     |  |  |   | 998     | 

|                                                                                         |  |          |        |              |  |          |     |              |  |   |        |  |  |   |     | 
|---------------------------------------------------------------------------------------- |  | -------- | ------ | ------------ |  | -------- | --- | ------------ |  | - | ------ |  |  | - | --- | 
|                                                                                         |  | 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 |  | $        | 97,582 |              |  | $        | 976 |              |  | $ | 39,754 |  |  | $ | 398 | 

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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Note #22 - Fair Value of Financial
Instruments, Continued



| |  | Loans Held for Sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | Fair values of loans held for sale are based on commitments on hand from
investors or prevailing market prices.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| 
| |  | 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.
| 
| |  | Borrowed Funds                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| 
|  |  | The fair value of fixed-rate borrowed funds is determined by discounting
contractual cash flows at current market interest rates. The carrying
values of variable-rate borrowings approximate fair values.                                                                                                                                                                                                                                                                                                                                                        
| 
| |  | 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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Note #23 - Condensed Financial Information of Vineyard National Bancorp (Parent Company)

|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |       | 
|-------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | - | ---------------------- | ------ | ---- | - | ------ | ------ | - | - | ----- | ----- | 
|Balance Sheets      
|                     |                                                                                                                                     | 2002                                                                  |   | 2001                   |        | 2000
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |       
|                     |                                                                                                                                     |                                                                       |   | (dollars in thousands)
|Assets               |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |      
|                     | Cash and due from bank                                                                                                              |                                                                       | $ | 7,533                  |        |      | $ | 3,496  |        |   | $ | 14    |      
|                     | Investment in Vineyard Bank                                                                                                         |                                                                       |   | 38,908                 |        |      |   | 21,715 |        |   |   | 9,281 |      
|                     | Investment in Vineyard Statutory Trust I                                                                                            |                                                                       |   | 394                    |        |      |   | 373    |        |   |   |      |      
|                     | Investment in Vineyard Statutory Trust II                                                                                           |                                                                       |   | 155                    |        |      |   |       |        |   |   |      |      
|                     | Prepaid expenses                                                                                                                    |                                                                       |   | 848                    |        |      |   | 672    |        |   |   |      |      
|                     | Other assets                                                                                                                        |                                                                       |   | 281                    |        |      |   | 348    |        |   |   |      |      
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      
|                     |                                                                                                                                     | Total Assets                                                          |   | $                      | 48,119 |      |   | $      | 26,604 |   |   | $     | 9,295 | 
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      
|Liabilities          |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |      
|                     | Accrued interest and other liabilities                                                                                              |                                                                       | $ | 634                    |        |      | $ | 27     |        |   | $ |      |      
|                     | Convertible debentures payable                                                                                                      |                                                                       |   |                       |        |      |   | 3,750  |        |   |   |      |      
|                     | Subordinated debentures                                                                                                             |                                                                       |   | 5,000                  |        |      |   |       |        |   |   |      |      
|                     | Other borrowings                                                                                                                    |                                                                       |   | 5,000                  |        |      |   |       |        |   |   |      |      
|                     | Company obligated preferred securities of subsidiary trust
holding floating rate junior subordinated deferrable interest
debentures |                                                                       |   | 17,527                 |        |      |   | 12,372 |        |   |   |      |      
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      
|                     |                                                                                                                                     | Total Liabilities                                                     |   |                        | 28,161 |      |   |        | 16,149 |   |   |       |      | 
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      
|Stockholders Equity |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |      
|                     | Preferred stock                                                                                                                     |                                                                       |   | 2,450                  |        |      |   |       |        |   |   |      |      
|                     | Common stock                                                                                                                        |                                                                       |   | 6,052                  |        |      |   | 2,151  |        |   |   | 2,112 |      
|                     | Stock dividends to be distributed                                                                                                   |                                                                       |   | 2,026                  |        |      |   |       |        |   |   |      |      
|                     | Additional paid-in capital                                                                                                          |                                                                       |   | 3,307                  |        |      |   | 3,307  |        |   |   | 3,307 |      
|                     | Retained earnings                                                                                                                   |                                                                       |   | 6,123                  |        |      |   | 4,997  |        |   |   | 3,876 |      
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      
|                     |                                                                                                                                     | Total Stockholders Equity                                            |   |                        | 19,958 |      |   |        | 10,455 |   |   |       | 9,295 | 
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      
|                     |                                                                                                                                     | Total Liabilities and Stockholders Equity                            |   | $                      | 48,119 |      |   | $      | 26,604 |   |   | $     | 9,295 | 
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      
|Statements of Income
|Income               |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |      
|                     | Other income                                                                                                                        |                                                                       | $ |                       |        |      | $ | 250    |        |   | $ | 2     |      
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      
|                     |                                                                                                                                     | Total Income                                                          |   |                        |       |      |   |        | 250    |   |   |       | 2     | 
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      
|Expenses             |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |      
|                     | Interest expense                                                                                                                    |                                                                       |   | 1,021                  |        |      |   | 296    |        |   |   |      |      
|                     | Salaries and benefits                                                                                                               |                                                                       |   | 60                     |        |      |   | 42     |        |   |   |      |      
|                     | Conversion expense on convertible debentures                                                                                        |                                                                       |   | 274                    |        |      |   |       |        |   |   |      |      
|                     | Other                                                                                                                               |                                                                       |   | 444                    |        |      |   | 280    |        |   |   |      |      
|                     | Allocated tax (benefit) / income taxes                                                                                              |                                                                       |   | (737                   | )      |      |   | (154   | )      |   |   | 1     |      
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      
|                     |                                                                                                                                     | Total Expenses                                                        |   |                        | 1,062  |      |   |        | 464    |   |   |       | 1     | 
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      
|                     |                                                                                                                                     | (Loss) / Income Before Equity In Undistributed
Income of Subsidiaries |   |                        | (1,062 | )    |   |        | (214   | ) |   |       | 1     | 
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      
|                     |                                                                                                                                     | Equity in Undistributed Income of Subsidiaries                        |   |                        | 4,070  |      |   |        | 1,370  |   |   |       | 619   | 
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      
|                     |                                                                                                                                     | Net Income                                                            |   | $                      | 3,008  |      |   | $      | 1,156  |   |   | $     | 620   | 
|                     |                                                                                                                                     |                                                                       |   |                        |        |      |   |        |        |   |   |       |      

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Note #23 - Condensed Financial
Information of Vineyard National Bancorp (Parent Company),
Continued

|                                             |                                                                                  |                                            |                                       |         |                        |         |        |         |        |         |    |     |      |   | 
|-------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------- | ------- | ---------------------- | ------- | ------ | ------- | ------ | ------- | -- | --- | ---- | - | 
|                                             |                                                                                  |                                            |                                       |         | 2002                   |         | 2001   |         | 2000  
|                                             |                                                                                  |                                            |                                       |         |                        |         |        |         |       
|                                             |                                                                                  |                                            |                                       |         | (dollars in thousands)
|Increase in Cash                             |                                                                                  |                                            |                                       |         |                        |         |        |         |        |         |    |    
|Cash Flows From Operating Activities         |                                                                                  |                                            |                                       |         |                        |         |        |         |        |         |    |    
|                                             | Net Income                                                                       |                                            |                                       | 3,008   |                        |         |        | 1,156   |        |         |    | 620 |     
|                                             | Adjustments to Reconcile Net Income
to Net Cash Provided By Operating Activities |                                            |                                       |         |                        |         |        |         |        |         |    |     |     
|                                             |                                                                                  | Increase in other assets                   |                                       |         | (308                   | )       |        |         | (1,020 | )       |    |     |     |  
|                                             |                                                                                  | Undistributed earnings of subsidiaries     |                                       |         | (4,070                 | )       |        |         | (1,370 | )       |    |     | (619 | )
|                                             |                                                                                  | Increase / (decrease) in other liabilities |                                       |         | 607                    |         |        |         | 28     |         |    |     | (1   | )
|                                             |                                                                                  |                                            |                                       |         |                        |         |        |         |        |         |    |     |     
|                                             |                                                                                  |                                            | Net Cash Used In Operating Activities |         |                        | (763    | )      |         |        | (1,206  | )  |     |      |  | 
|                                             |                                                                                  |                                            |                                       |         |                        |         |        |         |        |         |    |     |     
|Cash Flows From Investing Activities         |                                                                                  |                                            |                                       |         |                        |         |        |         |        |         |    |    
|                                             | Investment in Subsidiaries                                                       |                                            |                                       | (13,155 | )                      |         |        | (11,622 | )      |         |    |    |     
|                                             | Dividends received from subsidiary                                               |                                            |                                       |        |                        |         |        | 150     |        |         |    |    |     
|                                             |                                                                                  |                                            |                                       |         |                        |         |        |         |        |         |    |     |     
|                                             |                                                                                  |                                            | Net Cash Used In Investing Activities |         |                        | (13,155 | )      |         |        | (11,472 | )  |     |      |  | 
|                                             |                                                                                  |                                            |                                       |         |                        |         |        |         |        |         |    |     |     
|Cash Flows From Financing Activities         |                                                                                  |                                            |                                       |         |                        |         |        |         |        |         |    |    
|                                             | Proceeds from issuance of trust preferred securities                             |                                            |                                       | 5,155   |                        |         |        | 12,372  |        |         |    |    |     
|                                             | Proceeds from issuance of convertible debentures                                 |                                            |                                       |        |                        |         |        | 3,750   |        |         |    |    |     
|                                             | Proceeds from issuance of subordinated debentures                                |                                            |                                       | 5,000   |                        |         |        |        |        |         |    |    |     
|                                             | Proceeds from increase in other borrowings                                       |                                            |                                       | 5,000   |                        |         |        |        |        |         |    |    |     
|                                             | Proceeds from issuance of preferred stock                                        |                                            |                                       | 2,450   |                        |         |        |         |        |         |    |     |     
|                                             | Stock options exercised                                                          |                                            |                                       | 350     |                        |         |        | 38      |        |         |    | 6   |     
|                                             |                                                                                  |                                            |                                       |         |                        |         |        |         |        |         |    |     |     
|Net Cash Provided By Financing Activities    |                                                                                  |                                            | 17,955                                |         |                        |         | 16,160 |         |        |         | 6  |    
|                                             |                                                                                  |                                            |                                       |         |                        |         |        |         |        |         |    |     |     
|Net Increase in Cash and Cash Equivalents    |                                                                                  |                                            | 4,037                                 |         |                        |         | 3,482  |         |        |         | 6  |    
|Cash and Cash Equivalents, Beginning of year |                                                                                  |                                            | 3,496                                 |         |                        |         | 14     |         |        |         | 8  |    
|                                             |                                                                                  |                                            |                                       |         |                        |         |        |         |        |         |    |     |     
|Cash and Cash Equivalents, End of year       |                                                                                  | $                                          | 7,533                                 |         |                        | $       | 3,496  |         |        | $       | 14 |    
|                                             |                                                                                  |                                            |                                       |         |                        |         |        |         |        |         |    |     |     

73



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##### Table of Contents



SELECTED QUARTERLY FINANCIAL DATA

|                                                 |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |        | 
|------------------------------------------------ | ----------------------------------------------------------- | ------- | ------------------------------------ | ------- | ------ | ------- | ----- | ------- | ------ | ----- | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ------ | 
|                                                 |                                                             |         | For the Year Ended December 31, 2002
|                                                 |                                                             |         |                                     
|                                                 |                                                             |         | First                                |         | Second |         | Third |         | Fourth |       |       |       | 
|(Dollars in thousands, except per share amounts) |                                                             | Quarter |                                      | Quarter |        | Quarter |       | Quarter |        | Total
|                                                 |                                                             |         |                                      |         |        |         |       |         |        |      
|Interest income                                  |                                                             | $       | 3,772                                |         |        | $       | 4,468 |         |        | $     | 5,526 |       |  | $ | 5,404 |       |  | $ | 19,170 |       
|Interest expense                                 |                                                             |         | 1,151                                |         |        |         | 1,328 |         |        |       | 1,554 |       |  |   | 1,732 |       |  |   | 5,765  |       
|                                                 |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |       
|                                                 | Net interest income                                         |         |                                      | 2,621   |        |         |       | 3,140   |        |       |       | 3,972 |  |   |       | 3,672 |  |   |        | 13,405 | 
|Provision for possible loan losses               |                                                             |         | (200                                 | )       |        |         | (335  | )       |        |       | (610  | )     |  |   | (285  | )     |  |   | (1,430 | )     
|                                                 |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |       
|                                                 | Net interest income after
provision forpossible loan
losses |         |                                      | 2,421   |        |         |       | 2,805   |        |       |       | 3,362 |  |   |       | 3,387 |  |   |        | 11,975 | 
|Non-interest income                              |                                                             |         | 528                                  |         |        |         | 673   |         |        |       | 1,339 |       |  |   | 1,367 |       |  |   | 3,907  |       
|Non-interest expense                             |                                                             |         | 2,369                                |         |        |         | 2,224 |         |        |       | 3,309 |       |  |   | 2,891 |       |  |   | 10,793 |       
|                                                 |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |       
|                                                 | Income before income taxes                                  |         |                                      | 580     |        |         |       | 1,254   |        |       |       | 1,392 |  |   |       | 1,863 |  |   |        | 5,089  | 
|Income tax provision                             |                                                             |         | 226                                  |         |        |         | 500   |         |        |       | 584   |       |  |   | 771   |       |  |   | 2,081  |       
|                                                 |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |       
|                                                 | Net income                                                  |         | $                                    | 354     |        |         | $     | 754     |        |       | $     | 808   |  |   | $     | 1,092 |  |   | $      | 3,008  | 
|                                                 |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |       
|Net income per share:                            |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |       
|                                                 | Basic(1)                                                    |         | $                                    | 0.18    |        |         | $     | 0.38    |        |       | $     | 0.36  |  |   | $     | 0.38  |  |   | $      | 1.32   | 
|                                                 | Fully diluted(1)                                            |         | $                                    | 0.14    |        |         | $     | 0.28    |        |       | $     | 0.33  |  |   | $     | 0.36  |  |   | $      | 1.12   | 

|                                                 |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |       | 
|------------------------------------------------ | ----------------------------------------------------------- | ------- | ------------------------------------ | ------- | ------ | ------- | ----- | ------- | ------ | ----- | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ----- | 
|                                                 |                                                             |         | For the Year Ended December 31, 2001
|                                                 |                                                             |         |                                     
|                                                 |                                                             |         | First                                |         | Second |         | Third |         | Fourth |       |       |       | 
|(Dollars in thousands, except per share amounts) |                                                             | Quarter |                                      | Quarter |        | Quarter |       | Quarter |        | Total
|                                                 |                                                             |         |                                      |         |        |         |       |         |        |      
|Interest income                                  |                                                             | $       | 2,335                                |         |        | $       | 2,767 |         |        | $     | 3,244 |       |  | $ | 3,256 |       |  | $ | 11,602 |      
|Interest expense                                 |                                                             |         | 661                                  |         |        |         | 855   |         |        |       | 1,021 |       |  |   | 1,049 |       |  |   | 3,586  |      
|                                                 |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |      
|                                                 | Net interest income                                         |         |                                      | 1,674   |        |         |       | 1,912   |        |       |       | 2,223 |  |   |       | 2,207 |  |   |        | 8,016 | 
|Provision for possible loan losses               |                                                             |         |                                     |         |        |         | (300  | )       |        |       | (115  | )     |  |   | (358  | )     |  |   | (773   | )    
|                                                 |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |      
|                                                 | Net interest income after
provision forpossible loan
losses |         |                                      | 1,674   |        |         |       | 1,612   |        |       |       | 2,108 |  |   |       | 1,849 |  |   |        | 7,243 | 
|Non-interest income                              |                                                             |         | 436                                  |         |        |         | 476   |         |        |       | 510   |       |  |   | 769   |       |  |   | 2,191  |      
|Non-interest expense                             |                                                             |         | 1,845                                |         |        |         | 2,084 |         |        |       | 2,124 |       |  |   | 2,242 |       |  |   | 8,295  |      
|                                                 |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |      
|                                                 | Income before income taxes                                  |         |                                      | 265     |        |         |       | 4       |        |       |       | 494   |  |   |       | 376   |  |   |        | 1,139 | 
|Income tax provision (benefit)                   |                                                             |         |                                     |         |        |         | (361  | )       |        |       | 207   |       |  |   | 137   |       |  |   | (17    | )    
|                                                 |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |      
|                                                 | Net income                                                  |         | $                                    | 265     |        |         | $     | 365     |        |       | $     | 287   |  |   | $     | 239   |  |   | $      | 1,156 | 
|                                                 |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |      
|Net income per common share:                     |                                                             |         |                                      |         |        |         |       |         |        |       |       |       |  |   |       |       |  |   |        |      
|                                                 | Basic(1)                                                    |         | $                                    | 0.14    |        |         | $     | 0.19    |        |       | $     | 0.15  |  |   | $     | 0.11  |  |   | $      | 0.59  | 
|                                                 | Fully diluted(1)                                            |         | $                                    | 0.14    |        |         | $     | 0.16    |        |       | $     | 0.12  |  |   | $     | 0.10  |  |   | $      | 0.52  | 



---

|(1) |  | Per share data has been adjusted to reflect the 5% stock dividend declared
by the Company in December 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------

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ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.




PART III




ITEM 10. Directors and Executive Officer of the Registrant.

The information required by Items 401 and 405 of Regulation S-K is
incorporated by reference from the information contained in the sections
captioned Nominees for Director, Executive Officers Who Are Not Directors
and Executive Compensation  Compliance with Section 16(a) of the Securities
Exchange Act of 1934, in the Registrants Proxy Statement for the 2003 Annual
Meeting of Shareholders (Proxy Statement).




ITEM 11. Executive Compensation.

The information required by Item 402 of Regulation S-K is incorporated by
reference from the information contained in the section captioned Executive
Compensation in the Registrants Proxy Statement.




ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.

The information required by Item 403 of Regulation S-K is incorporated by
reference from the information contained in the section captioned Proxy
Statement  Beneficial Ownership of the Common Stock in the Registrants Proxy
Statement. The information required by Item 201(d) of Regulation S-K is
incorporated by reference from the information contained in the section
captioned Executive Compensation-Equity Compensation Plan Information in the
Registrants Proxy Statement.




ITEM 13. Certain Relationships and Related Transactions.

The information required by Item 404 of Regulation S-K is incorporated by
reference from the information contained in the section captioned Proxy
Statement  Certain Transactions in the Registrants Proxy Statement.




ITEM 14. Controls and Procedures.

Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer along
with the Companys Executive Vice President and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures pursuant to the Exchange Act Rule 13a-14. Based upon that
evaluation, the Companys Chief Executive Officer along with the Companys
Executive Vice President and Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Companys periodic
SEC filings. There have been no significant changes in the Companys internal
controls or in other factors which could significantly affect these controls
subsequent to the date the Company carried out its evaluation.

Disclosure controls and procedures are Company controls and other
procedures that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files under the Exchange Act is accumulated and communicated to the
Companys management, including its Chief Executive Officer and Executive Vice
President and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.

75



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##### Table of Contents






ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)     Documents filed as part of this report.

(1)     The following documents are filed as part of this Annual Report on
Form 10-K and are incorporated herein by reference to Item 8 hereof:



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Independent Auditors Report.                                                                                   
|
| | Consolidated Balance Sheets as of December 31, 2002 and 2001.                                                   
|
| | Consolidated Statements of Income for the Years Ended December 31,
2002, 2001 and 2000.                         
|
| | Consolidated Statements of Changes in Stockholders Equity for the
Years Ended December 31, 2002, 2001 and 2000.
|
| | Consolidated Statements of Cash Flows for the Years Ended December
31, 2002, 2001 and 2000.                     
|
| | Notes to Consolidated Financial Statements.                                                                     

(2)     All schedules for which provision is made in the applicable accounting
regulation of the SEC are omitted because they are not applicable or the
required information is included in the Consolidated Financial Statements or
notes thereto.

(3)(a) The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.

|            |      |             |  |                                                                                                                                                                                                                                   
|----------- | ---- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |      | DESCRIPTION
|            |      |            
|            | 3.1  |             |  | Articles of Incorporation of Vineyard National Bancorp, as amended                                                                                                                                                                
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 3.2  |             |  | Bylaws of Vineyard National Bancorp (1)                                                                                                                                                                                           
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 4.0  |             |  | Specimen Common Stock Certificate of Vineyard National Bancorp (2)                                                                                                                                                                
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 4.1  |             |  | Form of Certificate of Determination of Series A Preferred Stock (3)                                                                                                                                                              
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 4.2  |             |  | Form of Warrant to Purchase Shares of Common Stock (3)                                                                                                                                                                            
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 4.3  |             |  | Form of 10% Convertible Subordinated Debenture due June 30, 2008 (4)                                                                                                                                                              
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 4.4  |             |  | Indenture by and between Vineyard National Bancorp and Trustee,
relating to 10% Convertible Subordinated Debenture, dated April 30,
2001 (4)                                                                                      
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 4.5  |             |  | Debenture Subscription Agreement, dated as of December 19, 2002,
between Vineyard National Bancorp and Vineyard Statutory Trust II                                                                                                
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 4.6  |             |  | Indenture, dated as of December 19, 2002, between Vineyard National
Bancorp, as Issuer, and Wilmington Trust Company, as Trustee,
relating to the floating rate junior subordinated debt securities
due 2033                      
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 10.1 |             |  | Vineyard National Bancorp Nonqualified Deferred Compensation Plan*                                                                                                                                                                
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 10.2 |             |  | Vineyard National Bancorp Directors Deferred Compensation Plan*                                                                                                                                                                  
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 10.3 |             |  | Vineyard National Bancorp 1997 Incentive Stock Option Plan*                                                                                                                                                                       
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 10.4 |             |  | Vineyard National Bancorp 2002 Restricted Share Plan*                                                                                                                                                                             
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 10.5 |             |  | Employment Agreement between Vineyard National Bancorp, Vineyard
National Bank and Norman A. Morales (5)*                                                                                                                         
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 10.6 |             |  | Amended and Restated Declaration of Trust by and among State Street
Bank and Trust Company of Connecticut, National Association, as
Institutional Trustee and Vineyard National Bancorp, as Sponsor,
dated as of December 18, 2001
|            |      |             |  |                                                                                                                                                                                                                                   
|            | 10.7 |             |  | Guarantee Agreement by and between Vineyard National Bancorp and
State Street Bank and Trust Company of Connecticut and National
Association, dated as of December 18, 2001                                                       

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| |       |  |  |                                                                                                                                                                                                                                                       
| | ----- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.8  |  |  | Amended and Restated Declaration of Trust, dated as of December 19, 2002, of Vineyard
Statutory Trust II                                                                                                                                              
|
| | 10.9  |  |  | Guarantee Agreement, dated as of December 19, 2002                                                                                                                                                                                                    
|
| | 10.10 |  |  | Indenture dated as of December 19, 2002, between Vineyard National Bancorp, as Issuer, and State
Street Bank and Trust Company of Connecticut, National Association, as Trustee, relating to
the floating rate junior subordinated debentures due 2017
|
| | 11    |  |  | Statement regarding computation of per share earnings. See Note 21 to the Consolidated
Financial Statements included in Item 8 hereof                                                                                                                 
|
| | 21    |  |  | Subsidiaries of the Registrant (See Business in Item 1 hereof for the required information)                                                                                                                                                         
|
| | 23    |  |  | Consent of Vavrinek, Trine, Day & Co., LLP                                                                                                                                                                                                            



---



|(1) |  | Incorporated by reference from the Registrants Registration Statement on
Form S-8 (File No. 333-18217) filed by the Registrant with the Commission
on December 19, 1996.        
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference from the Registrants Annual Report on Form
10-K for the year ended December 31, 1988 filed by the Registrant with the
Commission.                     
|   
|(3) |  | Incorporated by reference from the Registrants Proxy Statement for a
special meeting held on December 18, 2002 filed by the Registrant with the
Commission on November 25, 2002.
|   
|(4) |  | Incorporated by reference to the Registrants Registration Statement on
Form S-2 (File No. 333-68734) filed by the Registrant with the Commission
on August 30, 2001.            
|   
|(5) |  | Incorporated by reference from the Registrants Annual Report on Form
10-K for the year ended December 31, 2000 filed by the Registrant with the
Commission on March 30, 2001.   
|   
|*   |  | Management contract or compensatory plan or arrangement.                                                                                                                         

(b)        Reports filed on Form 8-K.



| | The Registrant has filed the following Reports on Form 8-K during the
quarter ended December 31, 2002:
| | ------------------------------------------------------------------------------------------------------
|
| | 1.                                                                                                    
|
| | 2.                                                                                                    
|
| | 3.                                                                                                    
|
| | 4.                                                                                                    

77



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized on this 28th day of
March, 2003.

| |                           |  |                                                              
| | ------------------------- |  | -------------------------------------------------------------
| | VINEYARD
NATIONAL BANCORP
| | By:                       |  | /s/ Norman A. Morales                                        
| |                           |  |                                                              
| |                           |  | Norman A. Morales
President and Chief Executive
Officer      
| |                           |  |                                                              
| | By:                       |  | /s/ Gordon Fong                                              
| |                           |  |                                                              
| |                           |  | Gordon Fong
Senior Vice President and Chief Financial
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

|                                         |  |                                                                                                                  |  |               
|---------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | --------------
|NAME                                     |  | TITLE                                                                                                            |  | DATE          
|                                         |  |                                                                                                                  |  |               
|                                         |  |                                                                                                                  |  |               
|/s/ Norman A. MoralesNorman A. Morales   |  | President, Chief Executive
Officer and Director (Principal
Executive Officer)                                    |  | March 28, 2003
|                                        
|                                         |  |                                                                                                                  |  |               
|                                        
|/s/ Frank S. AlvarezFrank S. Alvarez     |  | Chairman of the Board                                                                                            |  | March 28, 2003
|                                        
|                                         |  |                                                                                                                  |  |               
|                                        
|/s/ Charles L. KeagleCharles L. Keagle   |  | Director                                                                                                         |  | March 28, 2003
|                                        
|                                         |  |                                                                                                                  |  |               
|                                        
|/s/ Joel H. RavitzJoel H. Ravitz         |  | Director                                                                                                         |  | March 28, 2003
|                                        
|                                         |  |                                                                                                                  |  |               
|                                        
|/s/ Lester Stroh, M.D.Lester Stroh, M.D. |  | Director                                                                                                         |  | March 28, 2003
|                                        
|                                         |  |                                                                                                                  |  |               
|                                        
|/s/ Gordon FongGordon Fong               |  | Senior Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer) |  | March 28, 2003

78



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##### Table of Contents



CERTIFICATIONS

I, Norman A. Morales, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Vineyard National
Bancorp;                                                                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                               



| | (a) |  | Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Evaluated the effectiveness of the
registrant s disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                 
|
| | (c) |  | Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and to the audit
committee of the registrants board of directors (or persons performing
the equivalent function):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls;
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                    



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |                                                                             
|-------------------- |  | ----------------------------------------------------------------------------
|Date: March 28, 2003 |  |                                                                             
|                     |  | /s/ Norman A. MoralesNorman A. Morales
President and Chief Executive Officer

79



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##### Table of Contents



I, Gordon Fong, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Vineyard National
Bancorp;                                                                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                               



| | (a) |  | Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Evaluated the effectiveness of the
registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and to the audit
committee of the registrants board of directors (or persons performing
the equivalent function):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls;
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                    



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |                                                                              |  | 
|-------------------- |  | ---------------------------------------------------------------------------- |  | 
|Date: March 28,
2003 |  | /s/ Gordon FongGordon Fong
Senior Vice President and Chief Financial
Officer

80



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##### Table of Contents






EXHIBIT INDEX

|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|----------- |  | ----------- | ---- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION
|            |  |            
|            |  |             | 3.1  |  |  | Articles of Incorporation of Vineyard National Bancorp, as amended                                                                                                                                                                
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 3.2  |  |  | Bylaws of Vineyard National Bancorp (1)                                                                                                                                                                                           
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 4.0  |  |  | Specimen Common Stock Certificate of Vineyard National Bancorp (2)                                                                                                                                                                
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 4.1  |  |  | Form of Certificate of Determination of Series A Preferred Stock (3)                                                                                                                                                              
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 4.2  |  |  | Form of Warrant to Purchase Shares of Common Stock (3)                                                                                                                                                                            
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 4.3  |  |  | Form of 10% Convertible Subordinated Debenture due June 30, 2008 (4)                                                                                                                                                              
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 4.4  |  |  | Indenture by and between Vineyard National Bancorp and Trustee,
relating to 10% Convertible Subordinated Debenture, dated April 30,
2001 (4)                                                                                      
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 4.5  |  |  | Debenture Subscription Agreement, dated as of December 19, 2002,
between Vineyard National Bancorp and Vineyard Statutory Trust II                                                                                                
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 4.6  |  |  | Indenture, dated as of December 19, 2002, between Vineyard National
Bancorp, as Issuer, and Wilmington Trust Company, as Trustee,
relating to the floating rate junior subordinated debt securities
due 2033                      
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 10.1 |  |  | Vineyard National Bancorp Nonqualified Deferred Compensation Plan*                                                                                                                                                                
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 10.2 |  |  | Vineyard National Bancorp Directors Deferred Compensation Plan*                                                                                                                                                                  
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 10.3 |  |  | Vineyard National Bancorp 1997 Incentive Stock Option Plan*                                                                                                                                                                       
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 10.4 |  |  | Vineyard National Bancorp 2002 Restricted Share Plan*                                                                                                                                                                             
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 10.5 |  |  | Employment Agreement between Vineyard National Bancorp, Vineyard
National Bank and Norman A. Morales (5)*                                                                                                                         
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 10.6 |  |  | Amended and Restated Declaration of Trust by and among State Street
Bank and Trust Company of Connecticut, National Association, as
Institutional Trustee and Vineyard National Bancorp, as Sponsor,
dated as of December 18, 2001
|            |  |             |      |  |  |                                                                                                                                                                                                                                   
|            |  |             | 10.7 |  |  | Guarantee Agreement by and between Vineyard National Bancorp and
State Street Bank and Trust Company of Connecticut, National
Association, dated as of December 18, 2001                                                          





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##### Table of Contents



|            |  |             |       |  |  |                                                                                                                                                                                                                                                
|----------- |  | ----------- | ----- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION
|            |  |            
|            |  |             | 10.8  |  |  | Amended and Restated Declaration of Trust, dated as of December 19, 2002, of Vineyard
Statutory Trust II                                                                                                                                       
|            |  |             |       |  |  |                                                                                                                                                                                                                                                
|            |  |             | 10.9  |  |  | Guarantee Agreement, dated as of December 19, 2002                                                                                                                                                                                             
|            |  |             |       |  |  |                                                                                                                                                                                                                                                
|            |  |             | 10.10 |  |  | Indenture dated as of December 19, 2002. Vineyard National Bancorp, as Issuer, and State
Street Bank and Trust Company of Connecticut, National Association, as Trustee, relating to
the floating rate junior subordinated debentures due 2017.
|            |  |             |       |  |  |                                                                                                                                                                                                                                                
|            |  |             | 11    |  |  | Statement regarding computation of per share earnings. See Note 21 to the Consolidated
Financial Statements included in Item 8 hereof                                                                                                          
|            |  |             |       |  |  |                                                                                                                                                                                                                                                
|            |  |             | 21    |  |  | Subsidiaries of the Registrant (See Business in Item 1 hereof for the required information)                                                                                                                                                  
|            |  |             |       |  |  |                                                                                                                                                                                                                                                
|            |  |             | 23    |  |  | Consent of Vavrinek, Trine, Day & Co., LLP                                                                                                                                                                                                     



---

|(1) |  | Incorporated by reference from the Registrants Registration Statement on
Form S-8 (File No. 333-18217) filed by the Registrant with the Commission
on December 19, 1996.        
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference from the Registrants Annual Report on Form
10-K for the year ended December 31, 1988 filed by the Registrant with the
Commission.                     
|   
|(3) |  | Incorporated by reference from the Registrants Proxy Statement for a
special meeting held on December 18, 2002 filed by the Registrant with the
Commission on November 25, 2002.
|   
|(4) |  | Incorporated by reference to the Registrants Registration Statement on
Form S-2 (File No. 333-68734) filed by the Registrant with the Commission
on August 30, 2001.            
|   
|(5) |  | Incorporated by reference from the Registrants Annual Report on Form
10-K for the year ended December 31, 2000 filed by the Registrant with the
Commission on March 30, 2001.