**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


Washington
D.C. 20549


______________________________________________





**FORM
10-Q**





x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE


SECURITIES
EXCHANGE ACT OF 1934





**FOR
THE QUARTER** **LY
PERIOD ENDED MARCH 31, 2005**





or





o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
transition period from ______ to ______





Commission
File No. 0-20862





**VINEYARD
NATIONAL BANCORP**


(Exact
Name of Registrant as Specified in its Charter)





California
      (State
      or 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) 581-1668





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





APPLICABLE
TO CORPORATE ISSUER





Indicate
the number of shares outstanding of the issuer's common stock on the latest
practicable date: 9,529,296 shares of common stock as of April 29,
2005.





Page 1 of
36





**VINEYARD
NATIONAL BANCORP AND SUBSIDIARY**


**FORM
10-Q INDEX**


**FOR
THE PERIODS ENDED MARCH 31, 2005 AND 2004,**


**AND
DECEMBER 31, 2004**





**PART
I - FINANCIAL INFORMATION**





ITEM
      1.
    Financial
      StatementsConsolidated Statements of Financial Condition at
      March 31, 2005 and December 31, 2004
    4Consolidated Statements of Income for the Three
      Months Ended March 31, 2005 and 2004
    5Consolidated Statements of Changes in Stockholders' Equity
      for the Three Months Ended March 31, 2005 and 2004
    6Consolidated Statements of Cash Flows for the Three
      Months Ended March 31, 2005 and 2004
    7Notes to Consolidated Financial
      Statements
    8Report of Independent Registered Public Accounting
      Firm
    14ITEM
      2.
    Management's Discussion and Analysis of Financial Condition
      and Results of Operations
    15ITEM
      3.
    Quantitative and Qualitative Disclosures about Market
      Risk
    31ITEM
      4.
    Controls and Procedures
    33**PART
      II - OTHER INFORMATION**ITEM
      1.
    Legal Proceedings
    33ITEM
      2.
    Unregistered Sales of Equity Securities and Use
      of Proceeds
    33ITEM
      3.
    Defaults upon Senior Securities
    34ITEM
      4.
    Submission of Matters to a Vote of Security
      Holders
    34ITEM
      5.
    Other Information
    34ITEM
      6.
    Exhibits
    34Signatures
    
    36Exhibits








Page 2 of
36





**FORWARD-LOOKING
STATEMENTS**





Except
for historical information contained herein, the matters discussed in this Form
10-Q contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements represent estimates,
projections and statements of beliefs of Vineyard National Bancorp (the
“Company”) concerning future events, business plans, objectives, expected
operating results and the assumptions upon which those statements are based.
Forward-looking statements include without limitation, any statement that may
predict, forecast, indicate or imply future results, performance or
achievements, and are typically identified with words such as “believe,”
“anticipate,” “expect,” “estimate,” “project,” “intend,” “will,” “may,” or words
or phases of similar meaning. The Company cautions that the forward-looking
statements are based largely on the expectations of the Company and are subject
to a number of known and unknown risks and uncertainties that are subject to
change based on factors which are, in many instances, beyond the Company’s
control. Actual results, performance or achievements could differ materially
from those contemplated, expressed, or implied by the forward-looking statements
contained herein. For a discussion of some of the risks and uncertainties that
might cause such a difference, see Part I - Financial Information, Item 3.
Quantitative and Qualitative Disclosures about Market Risk. Investors should not
place undue reliance on forward-looking statements as a prediction of actual
results. The Company will not update the forward-looking statements to reflect
actual results or changes in the factors affecting the forwarding-looking
statements.
















Page 3 of
36




**PART
I**


**ITEM
I. FINANCIAL STATEMENTS**





**VINEYARD
NATIONAL BANCORP AND SUBSIDIARY**


**CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION**


**AT
MARCH 31, 2005 AND DECEMBER 31, 2004**





(Dollars
      in Thousands)
    
    March
      31,
    
    December
      31,2005
    
    2004(unaudited)
    
    (audited)**ASSETS**Cash
      and due from banks
    
    $
    26,511
    
    $
    20,551Federal
      funds sold
    
    
    2,000
    
    
    2,000Total
      Cash and Cash Equivalent
    
    
    28,511
    
    
    22,551Investment
      securities, available-for-sale
    
    
    276,437
    
    
    223,480Loans,
      net of unearned income
    
    
    1,077,706
    
    
    1,027,037Less:
      Allowance for possible loan losses
    
    
    (13,009
    )
    
    (13,001
    )Net
      Loans
    
    
    1,064,697
    
    
    1,014,036Bank
      premises and equipment, net
    
    
    13,541
    
    
    12,399Accrued
      interest
    
    
    6,133
    
    
    5,423Federal
      Home Loan Bank ("FHLB") and other stock, at cost
    
    
    11,518
    
    
    12,235Deferred
      income tax asset
    
    
    9,980
    
    
    8,196Other
      assets
    
    
    14,525
    
    
    13,177**TOTAL
      ASSETS**
    
    $
    1,425,342
    
    $
    1,311,497**LIABILITIES
      AND STOCKHOLDERS' EQUITY**LiabilitiesDepositsNon-interest
      bearing
    
    $
    124,590
    
    $
    127,466Interest-bearing
    
    
    922,629
    
    
    838,080Total
      Deposits
    
    
    1,047,219
    
    
    965,546FHLB
      advances
    
    
    210,700
    
    
    177,000Subordinated
      debentures
    
    
    5,000
    
    
    5,000Junior
      subordinated debentures
    
    
    71,139
    
    
    71,139Accrued
      interest and other liabilities
    
    
    9,612
    
    
    7,585**TOTAL
      LIABILITIES**
    
    
    1,343,670
    
    
    1,226,270**COMMITMENTS
      AND CONTINGENCIES (Note #2)**Stockholders'
      EquityContributed
      capitalCommon
      stock - no par value, authorized 15,000,000 shares;issued
      and outstanding 9,511,656 and 9,581,941 sharesin
      2005 and 2004, respectively
    
    
    65,314
    
    
    70,536Additional
      paid-in capital
    
    
    3,821
    
    
    3,772Unallocated
      ESOP shares
    
    
    (6,715
    )
    
    (6,856
    )Retained
      earnings
    
    
    24,454
    
    
    20,513Accumulated
      other comprehensive loss
    
    
    (5,202
    )
    
    (2,738
    )**TOTAL
      STOCKHOLDERS' EQUITY**
    
    
    81,672
    
    
    85,227**TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY**
    
    $
    1,425,342
    
    $
    1,311,497See
      accompanying notes to financial statements.








Page 4 of
36





**VINEYARD
NATIONAL BANCORP AND SUBSIDIARY**


**CONSOLIDATED STATEMENTS OF INCOME**


**FOR
THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004**





(Dollars
      in Thousands, except per share amounts)
    
    Three
      Months Ended March 31,2005
    
    2004(unaudited)
    
    (unaudited)**Interest
      Income**Interest
      and fees on loans
    
    $
    19,716
    
    $
    13,082Interest
      on investment securities
    
    
    2,976
    
    
    2,058Interest
      on federal funds sold
    
    
    2
    
    
    42**TOTAL
      INTEREST INCOME**
    
    
    22,694
    
    
    15,182**Interest
      Expense**Interest
      on savings deposits
    
    
    22
    
    
    23Interest
      on NOW and money market deposits
    
    
    2,681
    
    
    1,361Interest
      on time deposits in denominations of $100,000 or more
    
    
    1,474
    
    
    862Interest
      on other time deposits
    
    
    1,220
    
    
    772Interest
      on FHLB advances and other borrowings
    
    
    2,295
    
    
    1,050**TOTAL
      INTEREST EXPENSE**
    
    
    7,692
    
    
    4,068**NET
      INTEREST INCOME**
    
    
    15,002
    
    
    11,114**Provision
      for Possible Loan and Lease Losses**
    
    
    -
    
    
    (1,800
    )**NET
      INTEREST INCOME AFTER****PROVISION
      FOR POSSIBLE****LOAN
      AND LEASE LOSSES**
    
    
    15,002
    
    
    9,314**Other
      Income**Fees
      and service charges
    
    
    381
    
    
    438Gain
      on sale of SBA loans and broker fee income
    
    
    657
    
    
    884Net
      gain on sale of investment securities
    
    
    -
    
    
    207Other
      income
    
    
    75
    
    
    110**TOTAL
      OTHER INCOME**
    
    
    1,113
    
    
    1,639**Other
      Expense**Salaries
      and employee benefits
    
    
    4,924
    
    
    3,222Occupancy
      expense of premises
    
    
    801
    
    
    542Furniture
      and equipment
    
    
    738
    
    
    439Other
      expenses
    
    
    2,058
    
    
    1,727**TOTAL
      OTHER EXPENSES**
    
    
    8,521
    
    
    5,930**INCOME
      BEFORE INCOME TAXES**
    
    
    7,594
    
    
    5,023**INCOME
      TAX PROVISION**
    
    
    3,177
    
    
    2,054**NET
      INCOME**
    
    $
    4,417
    
    $
    2,969**EARNINGS
      PER SHARE****BASIC**
    
    $
    0.47
    
    $
    0.40**DILUTED**
    
    $
    0.45
    
    $
    0.34See
      accompanying notes to financial statements.











Page 5 of
36





**VINEYARD
NATIONAL BANCORP AND SUBSIDIARY**


**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY**


**FOR
THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004**


(unaudited)




(Dollars
      in Thousands)
    
    
    
    
    
    
    
    
    
    Stock
    
    
    
    
    
    AccumulatedPerpetual
    
    Common
      Stock
    
    Additional
    
    Dividend
    
    
    
    
    
    OtherPreferred
    
    Number
      of
    
    
    
    Paid-in
    
    To
      Be
    
    Comprehensive
    
    Retained
    
    ComprehensiveStock
    
    Shares
    
    Amount
    
    Capital
    
    Distributed
    
    Income
    
    Earnings
    
    Income
    
    Total**Balance
      December 31, 2003**
    
    $
    28,999
    
    
    3,145,715
    
    $
    9,739
    
    $
    3,307
    
    $
    4,981
    
    
    
    
    $
    8,237
    
    $
    (3,088
    )
    $
    52,175Two-for-one
      stock splitdistributed
      in August 2004
    
    
    
    
    
    3,145,715Stock
      options exercised
    
    
    
    
    
    60,060
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153Purchase
      of treasury stock
    
    
    
    
    
    (27,400
    )
    
    (506
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (506
    )Stock
      dividends distributed
    
    
    
    
    
    
    
    
    4,966
    
    
    
    
    
    (4,966
    )
    
    
    
    
    
    
    
    
    
    
    -Cash
      paid for fractional sharesof
      stock dividend distribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    (15
    )Cash
      dividends paid oncommon
      stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (126
    )
    
    
    
    
    (126
    )Cash
      dividends paid onpreferred
      stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (446
    )
    
    
    
    
    (446
    )Comprehensive
      incomeNet
      Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,969
    
    
    2,969
    
    
    
    
    
    2,969Unrealized
      security holdinggains
      (net of $1,190tax
      provision)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,713
    
    
    
    
    
    1,713
    
    
    1,713Less
      reclassificationadjustment
      for realizedgains
      (net of $85tax
      provision)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122
    
    
    
    
    
    122
    
    
    122Total
      comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,804**Balance,
      March 31, 2004**
    
    $
    28,999
    
    
    6,324,090
    
    $
    14,352
    
    $
    3,307
    
    $
    -
    
    
    
    
    $
    10,634
    
    $
    (1,253
    )
    $
    56,039
 AccumulatedCommon
      Stock
    
    Additional
    
    
    
    
    
    
    
    OtherNumber
      of
    
    
    
    Paid-in
    
    Comprehensive
    
    Retained
    
    Unallocated
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Income
    
    Earnings
    
    ESOP
    
    Income
    
    Total**Balance
      December 31, 2004**
    
    
    9,581,941
    
    $
    70,536
    
    $
    3,772
    
    
    
    
    $
    20,513
    
    $
    (6,856
    )
    $
    (2,738
    )
    $
    85,227Stock
      options exercised
    
    
    127,475
    
    
    751
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    751Warrants
      exercised
    
    
    4,410
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Purchase
      of treasury stock
    
    
    (202,170
    )
    
    (6,003
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,003
    )Release
      of ESOP shares
    
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    
    141
    
    
    
    
    
    190Cash
      dividends paid oncommon
      stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (476
    )
    
    
    
    
    
    
    
    (476
    )Comprehensive
      incomeNet
      Income
    
    
    
    
    
    
    
    
    
    
    $
    4,417
    
    
    4,417
    
    
    
    
    
    
    
    
    4,417Unrealized
      security holdinglosses
      (net of $1,784tax
      benefit)
    
    
    
    
    
    
    
    
    
    
    
    (2,464
    )
    
    
    
    
    
    
    
    (2,464
    )
    
    (2,464
    )Total
      comprehensive income
    
    
    
    
    
    
    
    
    
    
    $
    1,953**Balance,
      March 31, 2005**
    
    
    9,511,656
    
    $
    65,314
    
    $
    3,821
    
    
    
    
    $
    24,454
    
    $
    (6,715
    )
    $
    (5,202
    )
    $
    81,672See
      accompanying notes to financial statements.








Page 6 of
36








**VINEYARD
NATIONAL BANCORP AND SUBSIDIARY**


**CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004**





(Dollars
      in Thousands)
    
    Three
      Months Ended March 31,2005
    
    2004(unaudited)
    
    (unaudited)**Cash
      Flows From Operating Activities**Net
      Income
    
    $
    4,417
    
    $
    2,969Adjustments
      to Reconcile Net Incometo
      Net Cash Provided by Operating ActivitiesDepreciation
    
    
    650
    
    
    416Investment
      securities accretion/amortization
    
    
    269
    
    
    123Provision
      for possible loan losses
    
    
    -
    
    
    1,800FHLB
      dividends
    
    
    -
    
    
    (85
    )Amortization
      of intangible assets
    
    
    3
    
    
    3Amortization
      of SBA servicing asset
    
    
    179
    
    
    29Amortization
      of SBA interest only strip
    
    
    26
    
    
    5Reinvestment
      of mutual fund interest
    
    
    (18
    )
    
    -Release
      of ESOP shares
    
    
    190
    
    
    -Decrease
      in deferred tax assets
    
    
    -
    
    
    851Increase
      in taxes payable
    
    
    3,177
    
    
    1,202Increase
      in other assets
    
    
    (1,556
    )
    
    (1,669
    )Decrease
      in cash surrender value of life insurance policies
    
    
    -
    
    
    24Gain
      on sale of other real estate owned
    
    
    -
    
    
    (56
    )Gain
      on sale of loans
    
    
    (290
    )
    
    (371
    )Gain
      on sale of investment securities
    
    
    -
    
    
    (207
    )(Decrease)/increase
      in unearned loan fees
    
    
    (66
    )
    
    225Increase
      in interest receivable
    
    
    (710
    )
    
    (855
    )(Decrease)/increase
      in interest payable
    
    
    (163
    )
    
    305Decrease
      in accrued expense and other liabilities
    
    
    (987
    )
    
    (734
    )Total
      Adjustment
    
    
    704
    
    
    1,006**Net
      Cash Provided By Operating Activities**
    
    
    5,121
    
    
    3,975**Cash
      Flows From Investing Activities**Proceeds
      from sales of investment securities/mortgage-backedsecurities
      available-for-sale
    
    
    -
    
    
    26,029Proceeds
      from principal reductions and maturities ofmortgage-backed
      securities available-for-sale
    
    
    9,452
    
    
    5,447Purchase
      of mortgage-backed securities available-for-sale
    
    
    (66,908
    )
    
    -Purchase
      of FHLB & other stock
    
    
    (517
    )
    
    (3,090
    )Redemption
      of FHLB stock
    
    
    1,234
    
    
    -Recoveries
      on loans previously written off
    
    
    24
    
    
    14Net
      loans made to customers and principalcollection
      of loans
    
    
    (50,329
    )
    
    (277,482
    )Capital
      expenditures
    
    
    (1,792
    )
    
    (340
    )**Net
      Cash Used In Investing Activities**
    
    
    (108,836
    )
    
    (249,422
    )





(continued)





Page 7 of
36








**VINEYARD
NATIONAL BANCORP AND SUBSIDIARY**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS**


**FOR
THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004**


**(continued)**





(Dollars
      in Thousands)2005
    
    2004**Cash
      Flows From Financing Activities**Net
      increase in demand deposits, NOW accounts,savings
      accounts, and money market deposits
    
    
    11,138
    
    
    65,919Net
      increase in certificates of deposits
    
    
    70,535
    
    
    81,000Proceeds
      from issuance of junior subordinated debentures
    
    
    -
    
    
    10,000Net
      change in FHLB advancesand
      other borrowings
    
    
    33,700
    
    
    57,000Purchase
      of treasury stock
    
    
    (6,003
    )
    
    (506
    )Dividends
      paid on preferred stock
    
    
    -
    
    
    (446
    )Dividends
      paid on common stock
    
    
    (476
    )
    
    (126
    )Cash
      paid on fractional shares of stock dividend
    
    
    -
    
    
    (15
    )Proceeds
      from exercise of warrants
    
    
    30
    
    
    -Proceeds
      from exercise of stock options
    
    
    751
    
    
    153**Net
      Cash Provided By Financing Activities**
    
    
    109,675
    
    
    212,979**Net
      Decrease in Cash and Cash Equivalents**
    
    
    5,960
    
    
    (32,468
    )**Cash
      and Cash Equivalents**,
      Beginning of year
    
    
    22,551
    
    
    58,242**Cash
      and Cash Equivalents**,
      End of period
    
    $
    28,511
    
    $
    25,774**Supplemental
      Information**Net
      change in unrealized loss on investment securities
    
    $
    4,248
    
    $
    3,111Interest
      paid
    
    $
    7,855
    
    $
    3,762Income
      tax paid
    
    $
    -
    
    $
    -





See
accompanying notes to financial statements.






**Note #1 - Nature of Business and Summary of Significant
Accounting Policies**




The
accounting and reporting policies of Vineyard National Bancorp (the “Company”)
and its subsidiary conform to accounting principles generally accepted in the
United States of America and to general practices within the banking industry.
In the opinion of management, the unaudited Consolidated Financial Statements
contain all (consisting of only normal recurring adjustments) adjustments
necessary to present fairly the Company’s consolidated financial position at
March 31, 2005 and December 31, 2004, results of operations for each of the
three months ended March 31, 2005 and 2004, and the results of cash flows for
each of the three months ended March 31, 2005 and
2004.




Certain
information and footnote disclosures normally presented in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted. These interim Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in the Company’s 2004 Annual Report on
Form 10-K filed with the Securities Exchange Commission (“SEC”) on March 10,
2005. The results for each of the three months ended March 31, 2005 and 2004 may
not necessarily be indicative of the operating results for the full year.




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
subsidiary, Vineyard Bank (the “Bank”). Inter-company balances and transactions
have been eliminated.





Page 8 of 36
 
 
 Nature
of Operations
  The
Company is a bank holding company. The Company’s principal asset is the capital
stock of the Bank, a California-chartered commercial bank, headquartered in the
Inland Empire region of Southern California. The Bank operates nine full-service
banking centers within San Bernardino, Riverside and Los Angeles counties of
California, as well as three loan production offices in San Diego and Orange
counties of California. The Company is dedicated to relationship banking and the
success of its customers. The Company caters to the needs of small-to-mid-size
commercial businesses, retail community businesses, single family residence
developers/builders, individuals and local public and private organizations by
offering specialty product solutions. The Company attracts deposits from the
communities where it has established banking centers by offering competitive
interest rate products and providing value-added consumer services.
  Investment
in Nonconsolidated Subsidiaries
  The
Company accounts for its investments in its wholly-owned special purpose
entities, Vineyard Statutory Trust I, Vineyard Statutory Trust II, Vineyard
Statutory Trust III, Vineyard Statutory Trust IV, Vineyard Statutory Trust V,
Vineyard Statutory Trust VI and Vineyard Statutory Trust VII (collectively, the
“Trusts”), using the equity method under which the Trusts’ net earnings are
recognized in the Company’s statements of income.
  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 periods. Actual results could differ from those
estimates.
  Estimates
that are particularly susceptible to significant changes 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.
  Investment
Securities
  In
accordance with Statement of Financial Accounting Standards (“SFAS”) Statement
No. 115, *"Accounting
for Certain Investments in Debt and Equity Securities,"* which
addresses the accounting for investments in equity securities that have readily
determinable fair values and for investments in all debt securities, securities
are classified in three categories and accounted for as follows: debt securities
that the Company has the positive intent and ability to hold to maturity are
classified as held-to-maturity and are measured at amortized cost; debt and
equity securities bought and held principally for the purpose of selling in the
near term are classified as trading securities and are measured at fair value,
with unrealized gains and losses included in earnings; debt and equity
securities deemed as available-for-sale are measured at fair value, with
unrealized gains and losses reported in a separate component of stockholders'
equity. Gains or losses on sales of investment securities are determined on the
specific identification method. Premiums and discounts on investment securities
are amortized or accreted using the interest method over the expected lives of
the related securities.
  Allowance
for Possible Loan Losses
  The
Company estimates loan losses based on guidance established by the Financial
Accounting Standards Board (“FASB”) Statement No. 5, “ *Accounting
for Contingencies* ”, FASB
Statement No. 114, “ *Accounting
by Creditors for Impairment of a Loan* ” (“SFAS
No. 114”), and FASB Statement No. 118, “ *Accounting
by Creditors for Impairment of a Loan-Income Recognition and
Disclosure* ” (“SFAS
No. 118”), as well as standards established by regulatory Interagency Policy
Statements on the Allowance for Loan and Lease Losses (“ALLL”). The ALLL 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.





Page 9 of
36
 
 Comprehensive
Income
  The
Company follows FASB Statement No. 130, *“Reporting
Comprehensive Income,* ” which
requires the disclosure of comprehensive income and its components. Changes in
unrealized gains or 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 2004 financial statements to conform to
2005 classifications.
  Current
Accounting Pronouncements
  In
December 2004, FASB issued FASB Statement No. 123R “ *Share-Based
Payment* ” (“SFAS
No. 123R”), which is a revision to FASB Statement No.123, “ *Accounting
for Stock-Based Compensation* ” (“SFAS
No. 123”), and addresses the accounting for transactions in which an enterprise
receives employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the
enterprise’s equity instruments or that may be settled by the issuance of such
equity instruments. This statement eliminates the ability to account for
share-based compensation transactions using APB No. 25, and generally would
require instead that such transactions be accounted for using a fair-value-based
method. The statement does not change the accounting in SFAS No. 123, for
transactions in which an enterprise exchanges its equity instruments for
services of parties other than employees or the accounting for employee stock
ownership plans, which are subject to AICPA Statement of Position 93-6,
“ *Employers’
Accounting for Employee Stock Ownership Plans”* . The
phase-in period for this statement begins in the third quarter of 2005, at which
time the Company will account for stock-based compensation based on this new
pronouncement.
  In March
2005, the SEC staff issued Staff Accounting Bulletin No. 107 ("SAB No. 107") to
provide guidance on SFAS No. 123R. SAB No. 107 provides the staff's view
regarding the valuation of share-based payment arrangements for public
companies. In particular, SAB No. 107 provides guidance related to share-based
payment transactions with non-employees, the transition from non public to
public entity status, valuation methods (including assumptions such as expected
volatility and expected term), the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the classification of
compensation expense, non-GAAP financial measures, first time adoption of SFAS
No. 123R, the modification of employee share options prior to the adoption of
SFAS No. 123R and disclosure in Management's Discussion and Analysis subsequent
to adoption of SFAS No. 123R. The Company does not expect the adoption of SFAS
No. 123R and the guidance of SAB No. 107 to have a material impact on the
financial condition or operating results of the Company.
   **Note
#2 - 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 letters of credit. To varying degrees, these instruments
involve elements of credit and interest rate risk in excess of the amount
recognized in the Company’s Consolidated Financial Statements. The Company's
exposure to credit loss in the event of non-performance by the other party to
the financial instruments for undisbursed loan funds and letters of credit is
represented by the contractual amount of those instruments. At March 31, 2005
and December 31, 2004, the amounts of the Company’s undisbursed loan funds were
$482.1 million and $439.4 million, respectively, and obligations under standby
and commercial letters of credit were $2.5 million and $1.7 million for the same
periods, respectively.
  Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, income-producing commercial
properties, residential properties and properties under
construction.
  Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. Commercial letters of credit are
conditional commitments issued by the Company to facilitate trade or commerce.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.





Page 10 of
36
 
 
 In the
normal course of business, the Company is subject to legal actions and
complaints. At March 31, 2005, management is not aware of any material pending
legal action or complaint asserted against the Company.
   **Note
#3 - Dividends and Stock Splits**
  On
January 24, 2005, the Company announced an increase to its quarterly cash
dividend to $0.05 per share, which was paid on February 25, 2005 to shareholders
of record as of February 11, 2005.
  On July
21, 2004, the Company announced that its Board of Directors had approved a
two-for-one stock split, to be effected in the form of a stock dividend.
Shareholders received one additional share of common stock for each share that
they held on the record date of August 20, 2004. The additional shares were
distributed on August 30, 2004. All share and per share data for all periods
presented has been restated to reflect the stock split.
   **Note
#4 - Employee Stock Ownership Plan**
  During
April 2004, the Company’s Board of Directors approved the formation of a
company-sponsored Employee Stock Ownership Plan (the “ESOP”) under the Vineyard
National Bancorp Employee Stock Ownership Plan Trust (the “ESOP Trust”) for the
benefit of the Company’s eligible full-time employees. This leveraged ESOP is
funded by a loan, which is secured by the ESOP shares. The number of shares
released is based on the principal pay down of the loan balance. The amount of
shares allocated to each participant under the ESOP is based on the employee’s
annual compensation. ESOP shares become fully vested to employees upon the
completion of five years of service with the Company. ESOP participants are
entitled to receive distributions from the ESOP account generally upon
termination of service, which includes retirement and death.
  To fund
the purchase in the open market of shares of common stock of the Company, the
ESOP Trust secured a loan in the amount of $7.0 million with a third party bank
which was guaranteed by the Company. The ESOP loan bears a floating interest
rate of 0.5% over the national prime rate and is scheduled to mature ten years
after the date of initial advance. During the fourth quarter of 2004, the ESOP
Trust refinanced the ESOP loan with a new note with the same terms through the
Company and paid off the note with the third party bank, therefore eliminating
the loan payable balance on the Company’s financial statements. The outstanding
balance of the ESOP loan is collateralized by the assets of the ESOP and
guaranteed by the Company. Dividends paid on the unallocated shares owned by the
ESOP may be used to pay debt service or to pay trustee fees at the Company’s
election. Shares held by the ESOP are held by an independent trustee for
allocation among participants as the loan is repaid.
  The ESOP
used the full amount of the loan to purchase 149,000 shares of the Company’s
common stock in the open market. As a result of the stock split in August 2004,
the ESOP held 298,000 shares of the Company’s common stock. The cost of shares
held by the ESOP and not yet released or allocated to employees is reported as a
reduction of stockholders’ equity. Upon release of the shares, released shares
of the ESOP are charged to compensation expense based on the fair value of the
shares transferred, with a corresponding credit to the Company’s equity. The
Company recognized $0.2 million of compensation expense for the three months
ended March 31, 2005.
  For
purposes of earnings per share (“EPS”) computations, ESOP shares are treated as
outstanding if they have been allocated to participants, released, or committed
to be released. In December 2004, 6,006 shares were allocated to participants,
and during the first quarter of 2005, 201 of the allocated shares were forfeited
due to participants’ termination of employment. Forfeited shares are considered
to be released but unallocated shares. In January 2005, 5,967 shares were
released in conjunction with a paydown of the ESOP loan and will be allocated to
participants in December 2005.
  As of March 31,
2005 , 5,805
shares held by the ESOP have been allocated to participants, and an additional
6,168 shares have been released but unallocated to participants. The fair value
of unallocated ESOP shares as of March 31, 2005 was $8.0 million. The 292,195
unallocated shares represent 3.1% of the total number of common shares
outstanding at March 31, 2005.
   **Note
#5 - Earnings per Share and Book Value**
  Basic EPS
excludes dilution and is computed by dividing income available to common
shareholders 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.





Page 11 of
36





All share
and per share data has been adjusted to reflect the two-for-one stock split paid
in August 2004.





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





(Dollars
      in Thousands)
    
    Three
      Months Ended March 31,2005
    
    2004Income
    
    Shares
    
    Income
    
    SharesNet
      income as reported
    
    $
    4,417
    
    
    
    
    $
    2,969Less:
      preferred stock dividends
    
    
    -
    
    
    
    
    
    (446
    )Shares
      outstanding at end of period
    
    
    
    
    
    9,511,656
    
    
    
    
    
    6,324,090Unreleased
      and unallocated ESOP shares
    
    
    
    
    
    (286,027
    )
    
    
    
    
    -Impact
      of weighting shares purchased/(issued)
      during the period
    
    
    
    
    
    74,774
    
    
    
    
    
    (7,146
    )Used
      in basic EPS
    
    $
    4,417
    
    
    9,300,403
    
    $
    2,523
    
    
    6,316,944Plus
      convertible preferredstock
      dividends
    
    
    -
    
    
    
    
    
    402Dilutive
      effect of outstandingstock
      options and warrants
    
    
    
    
    
    444,897
    
    
    
    
    
    2,415,464Used
      in diluted EPS
    
    $
    4,417
    
    
    9,745,300
    
    $
    2,925
    
    
    8,732,408





The
following table illustrates the effect on net income and EPS if the Company had
applied the fair value recognition of SFAS No. 123 to stock based employee
compensation:





(Dollars
      in Thousands, except per share data)
    
    Three
      Months Ended March 31,2005
    
    2004Net
      income:As
      reported
    
    $
    4,417
    
    $
    2,969Less:
      preferred stock dividend
    
    
    -
    
    
    (446
    )Stock-based
      compensation that would have been reportedusing
      the fair value method of SFAS No.123
    
    
    (53
    )
    
    (63
    )Pro
      forma net income - used in basic EPS
    
    
    4,364
    
    
    2,460Add:
      anti-dilutive effects of Series B dividends
    
    
    -
    
    
    402Pro
      forma net income - used in diluted EPS
    
    $
    4,364
    
    $
    2,862Weighted
      average shares outstanding - basic
    
    
    9,300,403
    
    
    6,316,944Weighted
      average shares outstanding - diluted
    
    
    9,745,300
    
    
    8,732,408Basic
      EPSAs
      reported
    
    $
    0.47
    
    $
    0.40Pro
      forma
    
    $
    0.47
    
    $
    0.39Diluted
      EPSAs
      reported
    
    $
    0.45
    
    $
    0.34Pro
      forma
    
    $
    0.45
    
    $
    0.33








Page 12 of
36





The
following table sets forth the information that was used in calculating the
Company’s book value per common share as of March 31, 2005 and December 31,
2004:





As
      ofMarch
      31, 2005
    
    December
      31, 2004Period-end
      shares outstanding
    
    
    9,511,656
    
    
    9,581,941Unreleased
      and unallocated ESOP shares
    
    
    (286,027
    )
    
    (291,994
    )Used
      in basic book value per common stock
    
    
    9,225,629
    
    
    9,289,947Warrants(1)
    
    
    223,580
    
    
    227,990Additional
      Investment Rights(2)
    
    
    120,775
    
    
    120,775Used
      in book value per common stock,assuming
      exercise of warrants andadditional
      investment rights
    
    
    9,569,984
    
    
    9,638,712Book
      value per common stock, basic
    
    $
    8.85
    
    $
    9.17Book
      value per common stock, assumingexercise
      of warrants and additionalinvestment
      rights
    
    $
    9.39
    
    $
    9.69


**_____________________**





(1)
    In
      conjunction with the issuance of Series A Preferred Stock in December
      2002, warrants to purchase common stock were granted to eight individual
      investors. The warrants have an exercise price of $6.80 per share.
      Additional warrants were granted to institutional investors in June 2004
      in conjunction with a private placement of common stock. These warrants
      have an exercise price of $25.00 per share


(2)
    Additional
      Investment Rights to purchase common stock were granted to investors in
      conjunction with the December 2004 private placement of common stock and
      may be exercised for $31.05 per share.


****


****


**Note
#6 - Subsequent Events**




On April
18, 2005, the Company’s Board of Directors announced the issuance and private
placement of 10,000 shares of Floating Rate Series C Noncumulative Redeemable
Preferred Stock (“Series C Preferred Stock”) with an institutional investor as
part of a pooled transaction. The Series C Preferred Stock was issued at $1,000
per share for aggregate proceeds of $9.7 million, net of fees and expenses. Each
share of Series C Preferred Stock will be entitled to a noncumulative,
annual dividend at the rate of three-month LIBOR plus 3.80%, payable quarterly.
The interest rate resets quarterly and the initial rate is set at 6.95%. The
Series C Preferred Stock is not convertible into common stock and is
callable after five years at a premium and at a decreasing premium scale over
the following ten years until year fifteen when the instrument is callable at a
zero premium.




The
Company also announced on April 18, 2005 the private issuance of $10.3 million
in trust preferred securities as part of a pooled securitization transaction
with several other financial institutions. The trust preferred securities will
bear a floating interest rate of three-month LIBOR plus 2.25%, and will mature
on May 23, 2035. The interest rate resets quarterly and the initial rate is set
at a pretax interest cost of 5.39%. The trust preferred securities were issued
through a newly formed trust, Vineyard Statutory Trust VIII. Both the Series C
Preferred stock and the trust preferred securities constitute additional
resources to the Company with a combined net of tax cost of 5.04%.




On April
25, 2005, the Company declared an increase in its cash dividend on common shares
to $0.06 per share. The dividend is payable
on May 27, 2005, to shareholders of record as of May 13, 2005.





Page 13 of
36














**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM**








To the
Board of Directors and Shareholders of Vineyard National Bancorp:





We have
reviewed the accompanying consolidated statements of financial condition of
Vineyard National Bancorp and Subsidiary as of March 31, 2005, and the related
consolidated statements of income, cash flows and changes in stockholders’
equity for the three months then ended. These interim financial statements are
the responsibility of the Company's management.





We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.





Based on
our review, we are not aware of any material modifications that should be made
to the accompanying consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.










*/s/
Vavrinek, Trine Day, & Co., LLP*


Rancho
Cucamonga, California


April 27,
2005








Page 14 of
36
 
 ****
 **ITEM 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations**
  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 business, financial condition, results of operations,
liquidity and interest rate sensitivity. The following discussion and analysis
should be read in conjunction with the Company’s quarterly unaudited
Consolidated Financial Statements, and notes thereto, contained earlier in this
Report.
  Management’s
discussion and analysis of the Company’s financial condition and results of
operations are based upon the Company’s Consolidated Financial Statements, which
have been prepared in accordance with accounting principals generally accepted
in the United States of America. The preparation of these financial statements
requires management 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, management evaluates
their estimates including those related to allowance for loan losses and the
value of carried securities. Management bases their 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.
   **Business
and Organization**
  *Vineyard
National Bancorp*
  The
Company is a California-chartered bank holding company that commenced business
in December 1988 when it acquired all of the voting stock of Vineyard Bank, a
California-chartered commercial bank. The Bank commenced business in September
1981 as a national banking association and converted to a California bank
charter and took its present name in August 2001. The Bank operates under the
supervision of the California Department of Financial Institutions (“DFI”) and
the Federal Deposit Insurance Corporation (“FDIC”).
  At March
31, 2005, the Company had consolidated total assets of $1.4 billion, total
deposits of $1.0 billion and consolidated stockholders’ equity of $81.7 million.
The Company’s common stock is publicly traded on the Nasdaq National Market
under the symbol “VNBC.”
  *Vineyard
Bank*
  The Bank,
which is the Company’s wholly-owned subsidiary, is primarily involved in
attracting deposits from individuals and businesses and using those deposits,
together with borrowed funds, to originate and invest in various types of loans
and investment securities. The Bank operates nine full-service banking centers
located in each of the communities of Rancho Cucamonga, Chino, Diamond Bar, La
Verne, Crestline, Lake Arrowhead, Irwindale, Manhattan Beach and Corona, all of
which are located within Los Angeles, Riverside and San Bernardino counties in
California. The Bank also has two Small Business Administration (“SBA”) loan
production offices located in San Diego and Anaheim, California and an
income-property loan production office located in Irvine, California. The Rancho
Cucamonga office also serves as the Company’s headquarters.
  *The
Bank’s Strategic Plan*
  Since the
hiring of its current president and chief executive officer in October 2000, the
Bank has experienced significant growth pursuant to the execution of its
strategic business plan, which emphasizes growth through the expansion of its
lending products and deposit services. As the Bank implemented its growth
strategy, it has added additional executive management personnel with developed
business banking and service skills, concentrating on a sales and service
approach to its banking business. The Bank focuses its values of creativity,
integrity and flexibility on customer relationship management, while expanding
the Bank’s products and services by creating various specialty groups including
community-based core deposit growth through the banking center network, single
family coastal construction lending, single family tract construction lending,
commercial real estate, multi-family property lending, small business and
commercial lending, SBA lending, religious financial services (lending and
depository), specialized depository and cash management services for commercial
business, and private banking. The Bank believes that expanding many of its
existing relationships will prove to be an effective source of new business
opportunities. The Bank is focused on providing customer relationship management
to the following markets: (i) the Inland Empire region of Southern California,
which primarily includes San Bernardino and Riverside counties, (ii) the coastal
communities surrounding Los Angeles, California, (iii) the San Gabriel Valley
region of Los Angeles and (iv) the coastal communities of south Orange County
and San Diego. The Bank has targeted these markets because of its experience and
knowledge of, as well as the anticipated continued growth and potential for
development in, these markets. Further, the Bank believes that it can roll out
its developed products and services in a similar process as in the last few
years in non-contiguous geographic markets similar to its current
market.





Page 15 of
36
 **
 **
 *Expanded
Product Offering.* During
the last four years, the Bank has emphasized the growth of its commercial loan
portfolio and has augmented its traditional commercial and residential loans and
services with several specialty lending and depository services.





·
    In
      2001, the Bank began originating high-end market single-family
      construction loans within the coastal communities of Los Angeles county,
      California (primarily Manhattan Beach, Hermosa Beach, Palos Verdes and
      Redondo Beach), where it believes it has a competitive advantage based on
      the Bank’s familiarity and knowledge of the market. These types of
      construction loans typically range from $1.0 million to
      $5.0 million. The Bank’s single-family residential coastal
      construction loans amounted to $300.8 million and $299.0 million at
      March 31, 2005 and December 31, 2004, respectively, net of participations
      sold of $87.2 million and $59.6 million,
respectively.





·
    In
      2002, the Bank began originating single-family residential tract
      construction loans secured by newly constructed entry level homes. These
      loans are primarily originated within the Inland Empire of Southern
      California. These types of construction loans typically range from
      $3.0 million to $10.0 million. The Bank’s single-family
      residential tract construction loans amounted to $118.1 million and $129.9
      million at March 31, 2005 and December 31, 2004, respectively, net of
      participations sold of $0.6 million and $1.7 million,
      respectively.





·
    In
      2002, the Bank also began originating SBA loans and religious loans, which
      are comprised of loans to churches and private schools, throughout its
      market area. The Bank emphasizes these types of loans as they are a
      complement to the Bank’s focus on strengthening and supporting the local
      communities it serves. SBA loans amounted to $14.6 million and $18.0
      million at March 31, 2005 and December 31, 2004, respectively, net of
      guaranteed participations sold of $32.2 million and $29.0 million,
      respectively. Religious loans amounted to $23.9 million and
      $23.8 million at March 31, 2005 and December 31, 2004, respectively.





·
    In
      2003, the Bank established an income property lending division to service
      the growing markets for commercial real estate and apartments in Southern
      California. Commercial real estate loans generated from this division
      typically range from $2.0 million to $10.0 million, while apartment loans
      typically range from $0.5 million to $5.0 million. At March 31, 2005 and
      December 31, 2004, the balance of loans generated from this division
      amounted to $123.0 million and $91.6 million, respectively, for commercial
      real estate loans and $206.4 million and $177.9 million, respectively, for
      apartment loans.





·
    In
      order to expand the Bank’s core deposit franchise, the Community Banking
      Group of the Bank has focused on offering competitive interest rate
      products and providing value-added consumer services by introducing
      additional products and services. Each of the Bank’s nine full-service
      banking centers has a business plan catering specifically to the needs of
      consumers in that banking center market. Based on the demographics of the
      target market, each banking center tailors its offering of financial
      services and products for its customer base. Business deposits have been
      pursued by offering an expanded courier network, by introduction of cash
      management products and by specific targeting of small business customers.
      The Company’s core deposit franchise has been built around the community
      banking system, which has resulted in deposit growth of 8.5% for the three
      months ended March 31, 2005 and 24.4% for the same period ended in 2004.
      Consolidated total deposits amounted to $1.0 billion at March 31,
      2005 and $965.5 million at December 31, 2004. Non-interest bearing demand
      deposits amounted to $124.6 million at March 31, 2005 and $127.5
      million at December 31, 2004.





·
    In
      2004, the Bank began expanding its loan production offices located in San
      Diego, Anaheim and Irvine, California, and its full-service branch in
      Manhattan Beach, California, to accommodate the Private Reserve Group of
      the Bank. The Private Reserve Group will provide exclusive and flexible
      relationship management to entrepreneurs and high-end customers, and will
      focus on cash management and specialty deposit relationships. The Bank
      intends to convert the loan production offices in San Diego and Irvine,
      California into full-service depository banking centers in 2005.





Each of
the foregoing specialty lending groups and depository services bring diversity
to the Bank’s existing product lines, offering its customers greater flexibility
while providing additional opportunities for the Bank to serve new customers
within its primary market areas.




Page 16 of
36





The
Bank’s strategic plan and capital adequacy plan call for a measured growth. In
July 2004, the Bank’s Board of Directors approved and signed an Agreement with
the FDIC and DFI, which, among other things, requires notification to these
regulatory agencies for any deviations beyond its strategic plan, including any
growth beyond 25% of its total assets per annum, which level is within the
existing strategic plan’s framework. In relation to the Bank’s significant
growth over the last several years, the Bank continues to assess and develop its
policies and procedures to facilitate the successful implementation of its
strategic plan and capital adequacy plan while maintaining the safety and
soundness of the Bank.




The
Bank’s growth in loans, net of unearned income and deferred fees, was 4.9% for
the three months ended March 31, 2005 and 46.5% for the same period in 2004. The
volume of new loan commitments during the first quarter of 2005 was $300.3
million which not only replaced loan payoffs, but increased the gross loan
balance to $1.1 billion. As part of the Bank’s goal of balanced lending, net
increases in its loan portfolio are intended to produce a distribution mix of
5-15% in commercial loans, 0-5% in SBA loans, 15-35% in commercial real estate
loans, 15-30% in single-family coastal construction, 15-30% in single-family
tract construction, 15-25% in multi-family loans, 5-15% in consumer loans, 0-5%
in commercial real estate construction loans and 0-5% in land
loans.




Beginning
in 2004, the Bank has proactively managed the product concentrations within the
loan portfolio by selling participations and purchasing loans. During the three
months ended March 31, 2005, the Bank had $43.6 million in loan participation
sales and $12.7 million in loan participation purchases. These activities will
continue to be an integral part of the Bank’s strategic plan to diversify risk,
income sources and product/geographic concentrations within the loan
portfolio.




The
Bank’s net growth in deposits was 8.5% for the three months ended March 31, 2005
and 24.4% for the same period in 2004. The volume of deposits generated in the
first quarter of 2005 supported the growth of the loan portfolio. The intended
distribution of deposits is 10-25% in NOW and non-interest bearing demand
deposits, 30-50% in money market deposits and 30-50% in savings and time
deposits.




*Relationship
Banking Facilities.* The
Company continues to emphasize the relationship banking focus that was initiated
in 2001. The Company continues to seek and retain experienced banking
professionals with developed banking and service skills who share its
customer-oriented service philosophy. The Company believes that relationship
banking is best delivered in well-appointed and efficient banking centers that
provide the appropriate tools and environment for its customers. To that end,
the Bank’s facilities are redesigned to incorporate user-friendly technology and
personal service to facilitate its focus on relationship banking. Much of the
facilities improvements are near completion. The increase in the infrastructure
will support the continued expansion of the Company.




*Strategic
Expansion.* The
Company has experienced significant growth over the last several years in its
branch network and its asset size. This growth was a result of the successful
completion of Phase I of a strategic plan which includes six phases. The
objective of Phase I was to increase the number of offices and product lines in
the Company’s existing geographic markets. The Bank opened a new banking center
in Corona, California in the second quarter of 2003 and converted its loan
production office in Manhattan Beach, California into a full-service banking
center during the third quarter of 2003. In addition, the Bank opened an
additional loan production office in Irvine, California during the third quarter
of 2003. The Company’s acquisition of Southland Bank was consummated in July
2003. As a result of the acquisition, the Company acquired a banking center in
Irwindale, California.




In early
2004, the Bank opened a new SBA loan production office in Anaheim, California.
The Bank also entered into a lease of a building in Corona, California to house
the credit administration, central operations, and data center, amongst other
departments. The Company additionally entered into an office lease in San
Rafael, California, which will serve as a future banking site, and will help to
increase the Company’s operations in that geographic area. These locations were
selected to support the Company’s significant growth and are aligned with its
strategic expansion.




Phase II
of the Company’s strategic plan calls for contiguous expansion into the
surrounding communities of the Company’s current markets, possible de novo
offices and the continued branding and strategic marketing of the Vineyard Bank
brand in target geographic and product markets.




Phase III
of the Company’s strategic plan emphasizes non-contiguous expansion through
possible strategic acquisitions or de novo offices in new markets. Possible new
markets include the Palm Desert and Temecula corridors and south Orange County
in southern California.




Consistent
with the objectives of Phase II and Phase III of the strategic plan, the Company
has plans to expand its full-service banking facilities into Irvine, which
includes the surrounding communities of Newport Beach. In February 2005, the
Company entered into an office lease to accommodate the Irvine banking site. The
Company also plans to expand the San Diego loan production office into a
full-service banking facility. These facilities are expected to become fully
operational during the second quarter of 2005. These high-end growth markets
will also be supported by an expanded division of personnel focused on
entrepreneurs and the businesses they operate, while bringing the Company’s
specialty lending and deposit relationship efforts into new areas.




Page 17 of
36




Phase IV
of the Company’s strategic plan will emphasize expansion in the coastal
communities of California through possible strategic acquisitions or de novo
offices within markets with similar demographics as Manhattan Beach. This phase
also entails the distribution of existing products to these new markets and
placement of local management in different geographic regions of the
Bank.




The main
emphasis of Phase V of the Company’s strategic plan will be to strengthen the
strategic points of the coastal communities’ expansion initiative, recruit local
talent within each new market community and continue to build the infrastructure
and delivery systems of the Bank.




Phase VI
of the Company’s plan calls for locally-managed regional communities which offer
similar product lines and are all supported by a strong corporate infrastructure
and the Vineyard Bank brand.




*Asset
Growth.* The
Company’s total assets as of March 31, 2005 were $1.4 billion as compared
to $1.3 billion as of December 31, 2004. The Company believes it can
grow its assets while maintaining its asset quality. The Company’s lending
professionals are well experienced and follow policies and procedures that it
believes provide for a rigorous underwriting of all loans originated by the
Bank. At March 31, 2005, the Bank had $4.7 million of non-performing loans and
no other real estate owned. At December 31, 2004, the Bank had no non-performing
loans and no other real estate owned. The increase in non-accrual loans during
the three months ended March 31, 2005 relates mainly to one fully collateralized
tract construction loan which was placed on non-accrual status during March
2005.






**Results
of Operations**




During
the three months ended March 31, 2005, operating results demonstrated a steady
growth over the same period in 2004 as the volume of earning assets increased.
The growth in the Company’s earning assets is funded by growth in deposits and
increased borrowings, which are comprised of FHLB advances.




Net
income for the three months ended March 31, 2005 and 2004 was $4.4 million and
$3.0 million, respectively, representing an increase of 48.8% for the three
months ended March 31, 2005 as compared to the same period in 2004.




The
increase in net income was primarily due to an increase in interest income
generated from a higher level of loans which was partially offset by an increase
in interest expense incurred from a higher level of deposits and borrowings. On
a per diluted share basis, net income was $0.45 and $0.34 for the three months
ended March 31, 2005 and 2004, respectively. Prior period earnings per share
were adjusted for the Company’s two-for-one stock split in August
2004.




The
Company’s net interest income before provision for possible loan losses
increased by $3.9 million or 35.0% for the three months ended March 31, 2005 as
compared with the same period in 2004. Non-interest income decreased by $0.5
million or 32.1% for the three months ended March 31, 2005 as compared to the
same period in 2004. The higher non-interest income for the three months ended
March 31, 2004 relates generally to a gain of $0.2 million on the sale of
investment securities, whereas no investments were sold for the same period in
2005. The decrease in non-interest income for the three months ended March 31,
2005 as compared to the same period in 2004 also relates to a lower gain on sale
of SBA loans, which occurred as a result of the timing of the closing of the SBA
loan sales. Based on the substantial increase in net interest income offset by a
slight decrease in non-interest income, total net revenue (defined as net
interest income before provision for possible loan losses and non-interest
income) for the three months ended March 31, 2005 increased by $3.4 million or
26.4% as compared to the same period in 2004.




Total
non-interest expense was $8.5 million and $5.9 million for the three months
ended March 31, 2005 and 2004, respectively. This represents an increase of $2.6
million or 43.7% for the three month period. The largest item contributing to
non-interest expense was salaries and employee benefits which represented more
than 50% of total non-interest expense for each of the periods. The Company
continues to hire additional personnel to support its growth. The Company’s
efficiency ratio, which is a measure of non-interest expense divided by net
interest income before provision for possible loan losses plus non-interest
income, increased from 46.5% for the three months ended March 31, 2004 to 52.9%
for the same period in 2005 as the Company is near completion of its expansion
of the infrastructure to support the continued growth of the Company.




For the
three months ended March 31, 2005 and 2004, the provision for federal and state
income taxes was $3.2 million and $2.1 million, respectively. These provisions
for income taxes represent effective tax rates of 41.8% and 40.9% for the same
periods, respectively.




Page 18 of
36




The
quality of the Company’s loan portfolio continued to perform well, producing
approximately $8,000 in net recoveries for the three months ended March 31,
2005 ,
compared to approximately $14,000 in net charge-offs for the same period in
2004. This continued strong credit quality of the loan portfolio did not
necessitate an increase in the Company’s provision made to the allowance for
possible loan losses for the three months ended March 31, 2005, as compared to
an increase $1.8 million for the same period in 2004. The allowance for possible
loan losses was $13.0 million or 1.2% of gross loans at March 31, 2005 as
compared to $9.3 million or 1.1% of gross loans at March 31, 2004. At March 31,
2005, the Company had $4.7 million of non-performing loans and no other real
estate owned, representing 0.4% of non-performing loans to gross loans. At
December 31, 2004, the Company had no non-performing loans and no other real
estate owned.




*Net
Interest Income*




The
Company’s earnings are derived predominately from net interest income, which is
the difference between the interest income earned on interest-earning assets,
primarily loans and securities, and the interest expense incurred on
interest-bearing liabilities, primarily 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 lower yielding earning assets into higher
yielding earning assets. During the past four years, the Company has deployed
its excess liquidity previously invested in federal funds into mortgage-backed
securities with relatively short duration and higher cash flow components. The
investment portfolio is classified as available-for-sale and securities can be
sold at any time. The Company will continue to adjust and refine its
asset/liability management strategy to minimize interest rate risk and maximize
its net interest income.




Total
interest income for the three months ended March 31, 2005 and 2004 was $22.7
million and $15.2 million, respectively, while total interest expense was $7.7
million and $4.1 million for the same periods, respectively. Therefore, the net
interest income was $15.0 million and $11.1 million, respectively, for the same
periods.




The net
interest margin for the three months ended March 31, 2005 was 4.6%, as compared
to 4.9% for the same period in 2004. The decrease in the net interest margin was
attributable to the expansion of the Company's income property lending and its
investment securities portfolios, which are originated at lesser yields than the
construction lending portfolio, rather than the recent changes in market
interest rates. The Company's efforts continue to be focused on the measured
growth of all earning assets which complement a well-balanced loan and
investment securities portfolio.




The prime
rate has increased significantly during 2004 and 2005. The prime rate remained
stable at 4.0% for the first half of 2004. During 2004, the Federal Reserve
Board (“FRB”) began to increase the overnight borrowing rate. As a result, the
prime rate increased from 4.0% to 4.25% on July 1, 2004. The prime rate further
increased to 4.50%, 4.75%, 5.00%, and 5.25% in August 2004, September 2004,
November 2004, and December 2004, respectively. During 2005, the FRB continued
to increase the overnight borrowing rate, causing the prime rate to increase to
5.5% in February 2005 and to 5.75% in March 2005. The prime rate was 5.75% as of
March 31, 2005.




As new
loans are generated or certain existing loans are repriced, the new loans bear
higher interest rates due to the rising interest rate environment. The loan fees
generated by new loans, which are deferred and amortized over the life of the
loans, create revenue in addition to the revenue from loan yields. Construction
loans and commercial real estate loans generate the majority of loan fee income.
Construction loans generally have a duration of 12 months and as the percentage
of construction loans in the portfolio continues to decrease, loan fee income
will decrease as a percentage of total loan income.




For the
three months ended March 31, 2005, loan fee income represented $2.4 million or
12.4% of the $19.7 million in interest and fees on loans. For the three months
ended March 31, 2004, loan fee income was $2.3 million or 17.6% of the $13.1
million in interest and fees on loans.




For the
three months ended March 31, 2005, the Company experienced an increase in its
overall yield on its total interest-earning assets primarily due to the rising
interest rate environment, as new loans are originated at higher rates and
existing variable rate loans reprice at higher rates. Yields on total
interest-earning assets increased from 6.7% to 7.0% for the three months ended
March 31, 2004 and 2005, respectively. The yield on total interest-earning
assets was negatively impacted in the three months ended March 31, 2005 by the
change in the mix of interest-earning assets. Lower yielding investment
securities and income property loans became a higher percentage of
interest-earning assets during the period. The Company’s average loan balances
were 78.7% of total average interest-earning assets for the three months ended
March 31, 2005, as compared to 76.5% of total average interest-earning assets
for the same period in 2004.




Page 19 of
36




The cost
of interest-bearing liabilities increased from 2.1% to 2.7% for the three months
ended March 31, 2004 and 2005, respectively, as a result of the rising interest
rate environment during the first quarter of 2005, as many of the deposits and
debt instruments repriced immediately. The Company continues to offer
competitive-rate products in its banking communities to attract and retain
core-deposit customers in the midst of the rising interest rate
environment.




Interest
expense on deposits totaled $5.4 million for the three months ended March 31,
2005, as compared to $3.0 million for the same period in 2004, representing an
increase of $2.4 million. The increase in interest expense as mainly associated
with an increase in the Company’s interest-bearing deposits. Average interest
bearing deposits increased from $569.4 million for the three months ended March
31, 2004 to $864.0 million for the same period in 2005.




The
average interest rate on short-term borrowings increased from 1.3% for the three
months ended March 31, 2004, to 2.4% for the same period ended 2005, as interest
rates were higher during the first quarter of 2005 compared to the same period
in 2004. The cost of subordinated debt and junior subordinated debentures also
increased from 4.5% for the three months ended March 31, 2004 to 5.9% and 5.7%,
respectively, for the same period in 2005. This increase is also a result of the
higher interest rates in 2005, as these debt securities bear variable interest
rates indexed to LIBOR and adjust on a quarterly basis.




To
support the Bank’s growth, the Company has issued common stock through two
private placement transactions. These transactions, which occurred in December
2004 and June 2004, raised $29.2 million, net of fees and expenses. The Company
contributed $10.0 million of the proceeds to the Bank, and used the remaining
proceeds for repayment of debt and general corporate purposes. To further
support the Bank’s growth, the Company has also issued debt securities. The cost
of the debt securities is generally higher than the costs from deposits and FHLB
borrowings. These debt securities include $71.1 million of junior subordinated
debentures and $5.0 million in subordinated debt. In April 2005, the Company
completed a private placement of $10.0 million of its Series C Preferred Stock
as part of a pooled transaction and the issuance of $10.3 million of junior
subordinated debentures issued as part of a pooled trust preferred
securitization transaction. The Company intends to use the proceeds from these
transactions for general corporate purposes, including support for the continued
growth of the Bank.




At March
31, 2005, the Bank had unsecured borrowing lines with correspondent banks
totaling $66.0 million. In addition, at March 31, 2005, the Company had a $30.0
million line of credit and a $5.0 million offering line of credit (collectively,
the “credit facility”). The $5.0 million offering line of credit is at the
discretion of the correspondent bank at the time of request for funding by the
Company. At March 31, 2005, there were no outstanding balances on the Company’s
credit facility or the Bank’s borrowing lines.




Page 20 of
36





The
following table presents the distribution of the Company’s average assets,
liabilities and stockholders’ 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 for the three months ended March 31, 2005 and 2004.
Loans include non-accrual loans where non-accrual interest is
excluded.





(Dollars
      in Thousands)
    
    **Three
      Months Ended March 31,****2005**
    
    **2004****Average**
    
    
    
    **Average**
    
    **Average**
    
    
    
    **Average****Balance**
    
    **Interest**
    
    **Yield/Cost**
    
    **Balance**
    
    **Interest**
    
    **Yield/Cost**AssetsLoans(1)
    
    $
    1,039,428
    
    $
    19,716
    
    
    7.7
    %
    $
    698,278
    
    $
    13,082
    
    
    7.5
    %Investment
      securities(2)
    
    
    269,308
    
    
    2,870
    
    
    4.3
    %
    
    186,552
    
    
    1,968
    
    
    4.2
    %Federal
      funds sold
    
    
    276
    
    
    2
    
    
    2.9
    %
    
    18,406
    
    
    42
    
    
    0.9
    %Other
      investments
    
    
    11,594
    
    
    106
    
    
    3.7
    %
    
    9,341
    
    
    90
    
    
    3.9
    %Total
      interest-earning assets
    
    
    1,320,606
    
    
    22,694
    
    
    7.0
    %
    
    912,577
    
    
    15,182
    
    
    6.7
    %Other
      assets
    
    
    59,480
    
    
    
    
    
    
    
    
    42,344Less:
      allowance for possible loan losses
    
    
    (13,007
    )
    
    
    
    
    
    
    
    (8,065
    )Total
      average assets
    
    $
    1,367,079
    
    
    
    
    
    
    
    $
    946,856Liabilities
      and Stockholders' EquitySavings
      deposits(3)
    
    $
    458,935
    
    
    2,703
    
    
    2.4
    %
    $
    298,180
    
    
    1,384
    
    
    1.9
    %Time
      deposits
    
    
    405,111
    
    
    2,694
    
    
    2.7
    %
    
    271,181
    
    
    1,634
    
    
    2.4
    %Subordinated
      debt
    
    
    5,000
    
    
    73
    
    
    5.9
    %
    
    5,000
    
    
    56
    
    
    4.5
    %Junior
      subordinated debentures
    
    
    71,139
    
    
    1,000
    
    
    5.7
    %
    
    38,940
    
    
    435
    
    
    4.5
    %Short
      term borrowings
    
    
    206,738
    
    
    1,222
    
    
    2.4
    %
    
    172,929
    
    
    559
    
    
    1.3
    %Total
      interest-bearing liabilities
    
    
    1,146,923
    
    
    7,692
    
    
    2.7
    %
    
    786,230
    
    
    4,068
    
    
    2.1
    %Demand
      deposits
    
    
    125,546
    
    
    
    
    
    
    
    
    99,263Other
      liabilities
    
    
    9,295
    
    
    
    
    
    
    
    
    7,612Total
      average liabilities
    
    
    1,281,764
    
    
    
    
    
    
    
    
    893,105Stockholders'
      equity
    
    
    85,315
    
    
    
    
    
    
    
    
    53,751Total
      liabilities andstockholders'
      equity
    
    $
    1,367,079
    
    
    
    
    
    
    
    $
    946,856Net
      interest spread(4)
    
    
    
    
    
    
    
    
    4.3
    %
    
    
    
    
    
    
    
    4.6
    %Net
      interest incomeand
      net interest margin(5)
    
    
    
    
    $
    15,002
    
    
    4.6
    %
    
    
    
    $
    11,114
    
    
    4.9
    %


____________________





(1)  Interest
on loans includes loan fees, which totaled $2.4 million and $2.3 million for the
three months ended March 31, 2005 and 2004, respectively.


(2)  The
yield for securities that are classified as available-for-sale is based on
historical amortized cost balances.


(3)  Includes
savings, NOW and money market deposit accounts.


(4)  Net
interest spread represents the average yield earned on interest-earning assets
less the average rate paid on interest-bearing liabilities.


(5)  Net
interest margin is computed by dividing net interest income by total average
earning assets.




*Provision
for Possible Loan Losses*




For the
three months ended March 31, 2005 and 2004, the provision for possible loan
losses was $0 and $1.8 million, respectively. The provision for possible loan
losses was not increased for the first quarter of 2005 due to management’s
assessment that the current allowance was sufficient to support the current loan
portfolio as well as the inherent risks of construction and commercial
loans.





Page 21 of
36
 
 
 The
Company’s allowance for possible loan losses was $13.0 million at March 31, 2005
and December 31, 2004. Additions to the allowance are affected through the
provision for possible loan losses. Also affecting the allowance are loans
charged off and loans recovered. For the three months ended March 31, 2005, the
Company had approximately $8,000 in net recoveries as compared to net loan
charge-offs of approximately $14,000 for the same period in 2004, respectively.
Net charge-offs were less than 0.01% of the loan portfolio for both
periods.
  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 market condition, underlying loan
collateral, delinquency trends, borrowers’ cash flow and historic loan loss
experience. All of these factors can change without notice based on market and
economic conditions and other factors beyond controls of management.
  *Non-Interest
Income*
  Non-interest
income for the three months ended March 31, 2005 and 2004 was $1.1 million and
$1.6 million, respectively. This represents a decrease of $0.5 million or 32.1%.
The decrease in non-interest income was primarily due to the decreased gains on
the sale of SBA loans and broker fee income and the decrease in gain on sale of
investments.
  The
Company generally sells the guaranteed portions of SBA loans originated. Those
SBA loans sold, combined with broker fee income associated with SBA loans,
generated gains amounting to $0.7 million and $0.9 million for the three months
ended March 31, 2005 and 2004, respectively. Income from fees and service
charges was $0.4 million for the three months ended March 31, 2005 and 2004. For
the three months ended March 31, 2005, no investment securities were sold, and
therefore, there was no gain on sale of securities. Conversely, gain on sale of
securities totaled $0.2 million for the same period in 2004.
  *Non-Interest
Expenses*
  The
Company’s non-interest expense for the three months ended March 31, 2005 and
2004 was $8.5 million and $5.9 million, respectively. This represents an
increase of $2.6 million or 43.7%. Non-interest expense consists primarily of
(i) salaries and employee benefits, (ii) occupancy expense, (iii) furniture and
equipment expenses and (iv) marketing, office supplies, postage and telephone,
insurance, data processing, professional fees, administrative, business
development, and other non-interest expense.




(i)
    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, single family
      residential 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 the past four years, while
      providing the infrastructure needed to support longer-term growth. These
      infrastructure changes have increased the Company’s salaries and employee
      benefits expense by $1.7 million or 52.8% to $4.9 million for the three
      months ended March 31, 2005 as compared to the same period in 2004.





(ii)
    Occupancy
      expense amounted to $0.8 million for the three months ended March 31,
      2005, in comparison to $0.5 million for the same period in 2004. This
      represents an increase of $0.3 million or 47.8% over the same prior
      period. The increase in occupancy expense is primarily due to the
      Company’s expansion. In the latter half of 2004, the Company acquired
      additional office space in San Diego and Manhattan Beach to accommodate
      the Private Reserve Group as well as for general expansion purposes. In
      addition, the Company obtained an additional facility in San Rafael in
      early 2004. The existing Anaheim SBA loan production office was also
      relocated to a larger facility in Anaheim during the first quarter of
      2005.





(iii)
    As
      the Company continues to expand its banking network, expenses related to
      furniture and equipment also increased. Expenses related to furniture and
      equipment were $0.7 million and $0.4 million for the three months ended
      March 31, 2005 and 2004, respectively, which represents an increase of
      $0.3 million or 68.1% over the prior period.





Page 22 of
36




(iv)
    Other
      non-interest expense was $2.1 million and $1.7 million for the three
      months ended March 31, 2005 and 2004, respectively. This represents an
      increase of 19.2% over the prior period. The increase is due primarily to
      the Company’s implementation of its strategy to grow its business.





The
following is a breakdown of other non-interest expense for the three months
ended March 31, 2005 and 2004:





(Dollars
      in Thousands)
    
    Three
      Months Ended March 31,2005
    
    2004Other
      non-interest expense:Data
      processing
    
    $
    194
    
    $
    184Marketing
    
    
    153
    
    
    211Professional
    
    
    293
    
    
    272Office
      supplies, postage and telephone
    
    
    350
    
    
    347Insurance
      and assessment
    
    
    209
    
    
    95Administrative
    
    
    122
    
    
    151Business
      development
    
    
    384
    
    
    289Other
    
    
    353
    
    
    178Total
      other non-interest expense
    
    $
    2,058
    
    $
    1,727


****


****


**Financial
Condition**




*Assets*




At March
31, 2005, total assets increased $113.8 million or 8.7% to $1.4 billion from
$1.3 billion at December 31, 2004. Assets were comprised primarily of $1.1
billion in loans, net of unearned income, and $276.4 million in investment
securities, available-for-sale at March 31, 2005. This represents an increase of
$50.7 million or 4.9% in loans, net of unearned income, and an increase of $53.0
million or 23.7% in investment securities, available-for-sale from December 31,
2004.




*Investments*




All of
the Company’s securities in its portfolio are 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 accretion of
discounts. Almost all of the Company’s securities are insured by U.S. government
agencies or U.S. government-backed agencies.




The
Company’s securities portfolio amounted to $276.4 million or 19.4% of total
assets at March 31, 2005 and $223.5 million or 17.0% of total assets at December
31, 2004. The Company’s securities portfolio increased during the three months
ended March 31, 2005 as a result of purchases, net of principal paydowns of
securities.





The
amortized cost and fair values of investment securities, available-for-sale at
March 31, 2005 were as follows:




(Dollars
      in Thousands)
    
    
    
    Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    Fair
      ValueU.S.
      agency securities
    
    $
    11,207
    
    $
    -
    
    $
    (198
    )
    $
    11,009Mortgage-backed
      securities
    
    
    272,058
    
    
    -
    
    
    (8,668
    )
    
    263,390Mutual
      funds
    
    
    2,061
    
    
    -
    
    
    (23
    )
    
    2,038Total
    
    $
    285,326
    
    $
    -
    
    $
    (8,889
    )
    $
    276,437





The
amortized cost and fair values of investment securities, available-for-sale at
December 31, 2004 were as follows:




(Dollars
      in Thousands)
    
    
    
    Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    Fair
      ValueU.S.
      agency securities
    
    $
    11,033
    
    $
    -
    
    $
    (532
    )
    $
    10,501Mortgage-backed
      securities
    
    
    215,045
    
    
    116
    
    
    (4,228
    )
    
    210,933Mutual
      funds
    
    
    2,042
    
    
    4
    
    
    -
    
    
    2,046Total
    
    $
    228,120
    
    $
    120
    
    $
    (4,760
    )
    $
    223,480





Page 23 of
36
 
 
 The table
below shows the Company’s investment securities’ gross unrealized losses and
fair value by investment category and length of time that individual securities
have been in a continuous unrealized loss position at March 31, 2005. The
Company has reviewed individual securities classified as available-for-sale to
determine whether a decline in fair value below the amortized cost basis is
other-than-temporary. If it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the debt security
not impaired at acquisition, an other-than-temporary impairment shall be
considered to have occurred. If an other-than-temporary impairment occurs, the
cost basis of the security would be written down to its fair value as the new
cost basis and the write down accounted for as a realized loss.





(Dollars
      in Thousands)
    
    Less
      than 12 months
    
    12
      months or Longer
    
    TotalGross
    
    
    
    Gross
    
    
    
    GrossUnrealized
    
    
    
    Unrealized
    
    
    
    UnrealizedHolding
    
    
    
    Holding
    
    
    
    HoldingFair
      Value
    
    Losses
    
    Fair
      Value
    
    Losses
    
    Fair
      Value
    
    LossesU.S.
      agency securities
    
    $
    -
    
    $
    -
    
    $
    11,009
    
    $
    (198
    )
    $
    11,009
    
    $
    (198
    )Mortgage
      backed securities
    
    
    132,381
    
    
    (2,103
    )
    
    131,009
    
    
    (6,565
    )
    
    263,390
    
    
    (8,668
    )Mutual
      Funds
    
    
    2,038
    
    
    (23
    )
    
    -
    
    
    -
    
    
    2,038
    
    
    (23
    )Total
    
    $
    134,419
    
    $
    (2,126
    )
    $
    142,018
    
    $
    (6,763
    )
    $
    276,437
    
    $
    (8,889
    )





Despite
the unrealized loss position of these securities, the Company has concluded, as
of March 31, 2005, that these investments are not other-than-temporarily
impaired. This assessment was based on the following factors: i) the length of
time and the extent to which the market value has been less than cost; ii) the
financial condition and near-term prospects of the issuer; iii) the intent and
ability of the Company to retain its investment in a security for a period of
time sufficient to allow for any anticipated recovery in market value; and iv)
general market conditions which reflect prospects for the economy as a whole,
including interest rates and sector credit spreads.




The
amortized cost and fair values of investment securities, available-for-sale at
March 31, 2005, by contractual maturities are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. Mutual
funds of $2.0 million are not included, as they do not have any stated maturity
date.





(Dollars
      in Thousands)
    
    Securities
      Available-for-SaleMaturing
      5-10 years
    
    Maturing
      after 10 yearsAmortized
    
    
    
    AmortizedCost
    
    Fair
      Value
    
    Cost
    
    Fair
      ValueMortgage-backed
      securities
    
    $
    18,820
    
    $
    18,680
    
    $
    253,238
    
    $
    244,710U.S.
      agency securities
    
    
    11,207
    
    
    11,009
    
    
    -
    
    
    -Total
    
    $
    30,027
    
    $
    29,689
    
    $
    253,238
    
    $
    244,710





There
were no sales of investment securities, available-for-sale during the three
months ended March 31, 2005. Included in stockholders’ equity at March 31, 2005
is $5.2 million of net unrealized losses, net of tax benefits, on investment
securities, available-for-sale.




Proceeds
from sales of investment securities, available-for-sale during the three months
ended March 31, 2004 were $26.0 million. Gross gains on those sales
were $0.2 million. Included in stockholders’ equity at March 31, 2004 is
$1.3 million of net unrealized losses, net of tax benefits, on investment
securities, available-for-sale.




Securities
with fair value of $274.4 million and $221.4 million at March 31, 2005 and
December 31, 2004, respectively, were pledged to secure public monies as
required by law and FHLB borrowings.





Page 24 of
36
 
 **
 *Loans*
  Consistent
with the measured growth called for by the Company’s strategic plan, the loan
portfolio grew by 4.9% during the first quarter of 2005, net of loan
participations and payoffs. Loans, net of unearned income, increased by $50.7
million from $1.0 billion at December 31, 2004 to $1.1 billion at March 31,
2005. Almost all of 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 Riverside, San Diego, San Bernardino, Orange and Los Angeles
counties in California. The concentrations of credit by type of loan are set
forth below:





(Dollars
      in Thousands)
    
    As
      ofMarch
      31, 2005
    
    December
      31, 2004Commercial
      and industrial
    
    $
    34,079
    
    $
    36,095Real
      estate construction:Singe-family
      coastal
    
    
    300,818
    
    
    298,984Singe-family
      tract
    
    
    118,117
    
    
    129,900Commercial
    
    
    32,884
    
    
    36,215Real
      estate mortgage:Commercial
    
    
    239,135
    
    
    216,609Multi-family
      residential
    
    
    222,438
    
    
    189,912Land
    
    
    70,425
    
    
    61,979All
      other residential
    
    
    53,891
    
    
    56,983Consumer
      loans
    
    
    8,306
    
    
    2,905All
      other loans (including overdrafts)
    
    
    229
    
    
    1371,080,322
    
    
    1,029,719Unearned
      premium on loans
    
    
    499
    
    
    541Deferred
      loan fees
    
    
    (3,115
    )
    
    (3,223
    )Loans,
      net of unearned income
    
    $
    1,077,706
    
    $
    1,027,037





The Bank
originates SBA loans and generally sells the guaranteed portion of SBA loans to
governmental agencies and institutional investors. At March 31, 2005 and
December 31, 2004, SBA loans totaled $14.6 million and $18.0 million,
respectively, net of guaranteed SBA participations sold in the amount of $32.2
million and $29.0 million, respectively. The Bank had $38.5 million of real
estate construction loan participations sales and $5.1 million of SBA loan
participation sales during the three months ended March 31, 2005.




The
Company retains servicing rights to the SBA loans sold and records servicing
rights and interest-only strip receivables (collectively, “servicing rights”)
related to the loans sold. The balance of capitalized servicing rights included
in Other Assets on the Company’s Consolidated Balance Sheet at March 31, 2005
and December 31, 2004, was $1.6 million and $1.7 million, respectively. The fair
values of these servicing rights approximate their book values
respectively.





The
following summarizes servicing rights capitalized and amortized for the periods
indicated:





(Dollars
      in Thousands)
    
    Three
      months ended
    
    Year
      endedMarch
      31, 2005
    
    December
      31, 2004Servicing
      rights capitalized
    
    $
    106
    
    $
    1,143Servicing
      rights amortized
    
    $
    205
    
    $
    269Valuation
      allowances
    
    $
    -
    
    $
    -





The Bank
had approximately $368.2 million and $307.7 million in loans pledged to secure
FHLB borrowings at March 31, 2005 and December 31, 2004, respectively.




*Allowance
for Possible Loan Losses*




The
allowance for possible loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
Company’s loan 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 possible loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries.





Page 25 of
36





Transactions
in the reserve for possible loan losses are summarized as follows for the
periods indicated:





(Dollars
      in Thousands)
    
    Three
      months ended
    
    Year
      endedMarch
      31, 2005
    
    December
      31, 2004Balance,
      beginning of year
    
    $
    13,001
    
    $
    7,537Recoveries
      on loans previously charged off
    
    
    24
    
    
    122Loans
      charged off
    
    
    (16
    )
    
    (392
    )Provision
      charged to operating expense
    
    
    -
    
    
    5,734Balance,
      end of period
    
    $
    13,009
    
    $
    13,001





The
provisions of SFAS No. 114 and SFAS No. 118 permit the valuation allowance for
possible loan losses to be determined on a loan-by-loan basis or by aggregating
loans with similar risk characteristics. 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.





*Nonperforming
Assets*





The
following table sets forth the amounts and categories of the Company’s
non-performing assets at the dates indicated.





(Dollars
      in Thousands)
    
    As
      ofMarch
      31,
    
    December
      31,2005
    
    2004**Accruing
      Loans More than 90 Days Past Due**Aggregate
      loan amountsCommercial,
      financial and agricultural
    
    $
    -
    
    $
    -Real
      estate
    
    
    -
    
    
    -Installment
      loans to individuals
    
    
    -
    
    
    -Total
      loans past due more than 90 days
    
    $
    -
    
    $
    -**Renegotiated
      loans**
    
    
    -
    
    
    -**Non-accrual
      loans**Aggregate
      loan amountsCommercial,
      financial and agricultural
    
    $
    60
    
    $
    -Real
      estate
    
    
    4,636
    
    
    -Installment
      loans to individuals
    
    
    -
    
    
    -Total
      non-accrual loans
    
    $
    4,696
    
    $
    -Total
      non-performing loans
    
    $
    4,696
    
    $
    -





The
following is a summary of information pertaining to impaired loans for the dates
and periods specified.





(Dollars
      in Thousands)
    
    As
      ofMarch
      31,
    
    December
      31,2005
    
    2004Impaired
      loans with a specific valuation allowance
    
    $
    -
    
    $
    -Impaired
      loans without a specific valuation allowance
    
    
    4,636
    
    
    -Total
      impaired loans
    
    $
    4,636
    
    $
    -Valuation
      allowance related to impaired loans
    
    $
    -
    
    $
    -





(Dollars
      in Thousands)
    
    Three
      months ended
    
    Year
      endedMarch
      31, 2005
    
    December
      31, 2004Average
      recorded investment in impaired loans
    
    $
    10
    
    $
    238Cash
      receipts applied to reduce principal balance
    
    $
    4
    
    $
    671Interest
      income recognized for cash payments
    
    $
    3
    
    $
    21





Page 26 of
36
 
 
 If
interest on non-accrual loans had been recognized at the original interest
rates, interest income would have increased approximately $22,000, and $38,000
for the three months ended March 31, 2005 and for the year ended December 31,
2004, respectively.
  *Deposits*
  Deposits
represent the Bank’s primary source of funds for funding the Bank’s loan
activities. The Bank increased its deposits by $81.7 million or 8.5% from $965.5
million at December 31, 2004 to $1.0 billion at March 31, 2005. The increase was
primarily due to an increase of $15.5 million or 3.9% in money market accounts
and an increase of $70.5 million or 18.2% in time deposits (“TCD’s”) over the
period. This increase was offset by a slight decrease in demand and NOW accounts
during the three months ended March 31, 2005.
  As of
March 31, 2005, the Company’s deposits were comprised of 11.9% in non-interest
bearing deposits, 44.4% in money market, NOW and savings deposits, and 43.7% in
TCD’s, while the composition of deposits was 13.2%, 46.7% and 40.1%,
respectively, at December 31, 2004.





At March
31, 2005, the scheduled maturities of time certificates of deposit in
denominations of $100,000 or more are as follows:





(Dollars
      in Thousands)Three
      months or less
    
    $
    117,087Over
      three through twelve months
    
    
    117,150Over
      one through five years
    
    
    25,523$
    259,760


*Borrowings*




The
Company utilizes borrowings such as FHLB advances, federal funds purchased,
subordinated debt, junior subordinated debentures and lines of credit as a
source of funds.




At March
31, 2005, the Company had a $30.0 million line of credit and a $5.0 million
offering line of credit (collectively, the “credit facility”) with a
correspondent bank. The $5.0 million offering line of credit is at the
discretion of the correspondent bank at the time of request for funding by the
Company. There was no outstanding balance under the credit facility as of March
31, 2005 and December 31, 2004. In addition, the Bank has $66.0 million of
unsecured borrowing lines with six correspondent banks. Under these borrowing
lines, the Bank had no outstanding balance at March 31, 2005 and December 31,
2004.




The Bank
has an advance line with FHLB that allows the Bank to borrow up to 40% of the
Bank’s total assets as of March 31, 2005. Pursuant to the collateral agreement
with FHLB, advances are secured by capital stock investment in FHLB, certain
investment securities and certain eligible loans. FHLB advances were $210.7
million and $177.0 million at March 31, 2005 and December 31, 2004,
respectively. The increase in FHLB advances was part of the Company’s strategic
plan to fund the growth of earning assets. FHLB advances consisted of the
following as of March 31, 2005:





(Dollars
      in Thousands)
    
    WeightedAverageMaturity
    
    Rate
    
    Amount2005
    
    
    2.9
    %
    $
    195,7002006
    
    
    2.6
    %
    
    15,0002.9
    %
    $
    210,700








Page 27 of
36
 
 
 As of
March 31, 2005 and December 31, 2004, the Company had $71.1 million in junior
subordinated debentures outstanding from seven issuances of trust preferred
securities. Junior subordinated debentures as of March 31, 2005 consisted of the
following:





(Dollars
      in Thousands)
    
    
    
    
    
    
    
    As
      of March 31, 2005Minority
    
    EffectiveInterest
      Rate
    
    Due
      Date
    
    Interest
    
    Interest
      Rate
    
    BalanceVineyard
      Statutory Trust I
    
    
    3-month
      LIBOR + 3.60%
    
    
    December
      18, 2031
    
    $
    372
    
    
    6.11
    %
    $
    12,372Vineyard
      Statutory Trust II
    
    
    3-month
      LIBOR + 3.35%
    
    
    December
      26, 2032
    
    
    155
    
    
    6.01
    %
    
    5,155Vineyard
      Statutory Trust III
    
    
    3-month
      LIBOR + 3.05%
    
    
    October
      8, 2033
    
    
    310
    
    
    5.71
    %
    
    10,310Vineyard
      Statutory Trust IV
    
    
    3-month
      LIBOR + 2.85%
    
    
    January
      23, 2034
    
    
    310
    
    
    5.58
    %
    
    10,310Vineyard
      Statutory Trust V
    
    
    3-month
      LIBOR + 2.85%
    
    
    April
      23, 2034
    
    
    310
    
    
    5.51
    %
    
    10,310Vineyard
      Statutory Trust VI
    
    
    3-month
      LIBOR + 2.85%
    
    
    July
      23, 2034
    
    
    372
    
    
    5.54
    %
    
    12,372Vineyard
      Statutory Trust VII
    
    
    3-month
      LIBOR + 2.00%
    
    
    December
      16, 2034
    
    
    310
    
    
    4.50
    %
    
    10,310$
    2,139
    
    
    
    
    $
    71,139





Under FIN
No. 46R, the Company is not allowed to consolidate the Trusts into the Company’s
consolidated financial statements. Prior to the issuance of FIN No. 46R, bank
holding companies typically consolidated these entities. The Company has
excluded the Trusts from its consolidated financial statements.




On March
1, 2005, the FRB adopted a final rule that allows the continued inclusion of
trust preferred securities in the Tier 1 capital of bank holding companies,
subject to stricter quantitative limits and qualitative standards. Under the
final ruling, qualifying mandatory preferred securities may be included in Tier
1 capital, subject to a limit of 25 percent of all core capital. Amounts of
restricted core capital elements in excess of this limit generally may be
included in Tier 2 capital. The quantitative limits become effective on March
31, 2009, after a four-year transition period. As of March 31, 2005, the Company
has included the net junior subordinated debt in its Tier 1 Capital for
regulatory capital purposes.




The
Company also has $5.0 million in subordinated debt which bears a floating rate
of interest of 3.05% over the three month LIBOR and has a fifteen-year maturity
with quarterly interest payments. The effective rate as of March 31, 2005 was
5.60%. The outstanding balance of this subordinated debt was $5.0 million at
March 31, 2005 and December 31, 2004.




*Stockholders’
Equity*




Stockholders’
equity was $81.7 million and $85.2 million at March 31, 2005 and December 31,
2004, respectively. The decrease in stockholders’ equity during the quarter
ended March 31, 2005 relates mainly to the repurchase of $6.0 million of
treasury stock, along with an increase of $2.5 million in unrealized loss on
available-for-sale investment securities, net of tax. These decreases to
stockholders’ equity were partially offset by net income of $4.4 million for the
period.






**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
withdrawals 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 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 deposits
and borrowings ratio was 84.4% and 87.9% at March 31, 2005 and December 31,
2004, respectively.




Management
believes the level of liquid assets at the Bank is sufficient to meet current
and anticipated funding needs. The liquidity contingency process outlines
authorities and a reasonable course of action in case of unexpected liquidity
needs. As of March 31, 2005, the Company has no outstanding balance on its $35.0
million credit facility with a correspondent bank and no outstanding balance on
its $66.0 million of unsecured borrowing lines with its six correspondent banks.
In addition, the Bank has an advance line with FHLB which allows the Bank to
borrow up to 40% of the Bank’s total assets. As of March 31, 2005, the Bank has
a total borrowing capacity from FHLB of approximately $567.4 million and an
outstanding advance balance of $210.7 million. The FHLB advance line is
collateralized by the Company’s capital stock investment in FHLB, investment
securities and eligible loans.





Page 28 of
36
 
 ****
 **Capital
Resources**
  During
June 2004, the Company issued and sold 800,000 shares of its common stock to
institutional investors through a private placement, which raised $15.2 million
in additional capital, net of fees and expenses. The Company also granted the
investors warrants (the “Warrants”) to purchase up to 160,000 additional shares
of common stock. The Warrants, which expire on June 21, 2011, have an exercise
price of $25.00. As of March 31, 2005, no warrants had been exercised. The
Company down streamed $10.0 million of the proceeds from this private placement
to the Bank to support the continued growth of the Bank, and the remaining
proceeds were used by the Company for general corporate purposes. RBC Capital
Markets Corporation served as placement agent for the private offering. The
Company filed a registration statement with the SEC to register all of the
shares of common stock issued in the June 2004 private placement and the shares
of common stock issuable upon exercise of the Warrants. The registration
statement was declared effective on August 3, 2004.
  In
December 2004, the Company issued and sold 483,100 shares of its common stock to
institutional investors through a private placement, which raised $14.0 million
in additional capital, net of fees and expenses. The Company also granted the
investors the right (the “Right”) to purchase an additional 120,775 shares of
common stock for $31.05 per share. The Rights expire 90 trading days after the
effective date of the registration statement. The Company used the proceeds from
this private placement to payoff the ESOP loan held by a third party bank, repay
other debt, and for other general corporate purposes. As of March 31, 2005, no
Rights had been exercised. RBC Capital Markets Corporation served as placement
agent for the private offering. The Company filed a registration statement with
the SEC to register all of the shares of common stock issued in the December
2004 private placement and the shares of common stock issuable upon exercise of
the Rights. The registration statement was declared effective on February 4,
2005.
  The
common stock, Warrants and Rights were offered and sold pursuant to an exemption
to the registration requirements under Section 4(2) of the Securities Act of
1933, as amended (“Securities Act”).
  The
Company (on a consolidated basis) and the Bank are subject to various regulatory
capital requirements administered by federal and state 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 financial condition or operating
results of the Company and the Bank. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, as applicable, 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 classifications 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 March 31, 2005, that the Company
and the Bank meet all applicable capital adequacy requirements.
  Following
a regular joint examination by the FDIC and the DFI in November 2003, the Bank’s
Board of Directors approved and signed a voluntary agreement (the “Agreement”)
with the FDIC and DFI on July 7, 2004. In relation to the Bank’s significant
growth over the last several years, the Bank continues to assess and develop its
policies and procedures to facilitate the successful implementation of its
strategic plan and capital adequacy plan while maintaining the safety and
soundness of the Bank. The adoption of the Agreement formalizes many of the
actions that the Bank has already taken to strengthen its operational
procedures, broaden its directorship and augment its senior management team. The
Bank continues to maintain capital ratios in excess of regulatory requirements.
Operating performance and asset quality continues to be strong, and deposit
generation and liquidity continues to be satisfactory to support its operations.
  Prior to
entering into the Agreement, the Bank’s existing three-year strategic plan and
capital adequacy plan called for a measured growth. In accordance with the
Agreement, the Bank will notify the FDIC and DFI of any deviations beyond its
strategic plan, including any growth beyond 25% of its total assets per annum,
which level is within the existing strategic plan’s framework. Consistent with
the terms of the Agreement, the Bank added one new director to its Board of
Directors by December 31, 2004, and subsequently added another director in
January 2005. The Bank believes it is in fulfillment of the Agreement, and the
Agreement will not materially adversely affect the successful implementation of
the Company’s strategic business plan, the Company’s financial condition or
results of operations, or the Company’s previously announced earnings
guidance.





Page 29 of
36
 
 
 As of the
most recent formal notification from the FDIC, the Bank was categorized as well
capitalized under the regulatory framework for prompt corrective action.
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” (see table on the following page). At March 31, 2005, the Bank’s
total risk-based capital, Tier 1 capital and leverage ratios were 12.9%, 11.9%
and 11.2%, 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 March 31,
2005, the Company’s total risk-based capital, Tier 1 capital and leverage ratios
were 13.4%, 8.9%, and 8.4%, respectively.





The
following table sets forth the Bank’s and the Company’s actual regulatory
capital amounts and ratios as of the dates indicated:





(Dollars
      in Thousands)
    
    
    
    
    
    Capital
      NeededTo
      Be WellCapitalized
      UnderFor
      Capital
    
    Prompt
      CorrectiveActual
      Regulatory
    
    Adequacy
      Purposes
    
    Action
      ProvisionsCapital
    
    
    
    Capital
    
    
    
    CapitalAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio**As
      of March 31, 2005**Total
      capital to risk-weighted assets:Bank
    
    $
    166,303
    
    
    12.9
    %
    $
    103,000
    
    
    8.0
    %
    $
    128,700
    
    
    10.0
    %Consolidated
    
    $
    173,416
    
    
    13.4
    %
    $
    103,300
    
    
    8.0
    %
    
    N/A
    
    
    N/ATier
      1 capital to risk-weighted assets:Bank
    
    $
    153,294
    
    
    11.9
    %
    $
    51,500
    
    
    4.0
    %
    $
    77,200
    
    
    6.0
    %Consolidated
    
    $
    115,209
    
    
    8.9
    %
    $
    51,700
    
    
    4.0
    %
    
    N/A
    
    
    N/ATier
      1 capital to average assets:Bank
    
    $
    153,294
    
    
    11.2
    %
    $
    54,600
    
    
    4.0
    %
    $
    68,200
    
    
    5.0
    %Consolidated
    
    $
    115,209
    
    
    8.4
    %
    $
    54,800
    
    
    4.0
    %
    
    N/A
    
    
    N/A**As
      of December 31, 2004**Total
      capital to risk-weighted assets:Bank
    
    $
    160,509
    
    
    13.5
    %
    $
    95,200
    
    
    8.0
    %
    $
    118,900
    
    
    10.0
    %Consolidated
    
    $
    174,212
    
    
    14.6
    %
    $
    95,500
    
    
    8.0
    %
    
    N/A
    
    
    N/ATier
      1 capital to risk-weighted assets:Bank
    
    $
    147,508
    
    
    12.4
    %
    $
    47,600
    
    
    4.0
    %
    $
    71,400
    
    
    6.0
    %Consolidated
    
    $
    116,280
    
    
    9.7
    %
    $
    47,700
    
    
    4.0
    %
    
    N/A
    
    
    N/ATier
      1 capital to average assets:Bank
    
    $
    147,508
    
    
    11.3
    %
    $
    52,100
    
    
    4.0
    %
    $
    65,100
    
    
    5.0
    %Consolidated
    
    $
    116,280
    
    
    8.9
    %
    $
    52,300
    
    
    4.0
    %
    
    N/A
    
    
    N/A








Page 30 of
36
 
 ****
 **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK**
   **The
Company’s business is subject to general economic risks that could adversely
impact its operating results 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. 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 the Company’s
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 March 31, 2005, approximately 98.4% of the Company’s
loan portfolio 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 it 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.




*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 it 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 income earned on interest-earning assets and interest expense
incurred on interest-bearing liabilities. 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 investment
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 income earned on loans, investment
securities and other interest-earning assets, and interest expense incurred 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
FRB;


·
    international
      disorders; and


·
    instability
      in domestic and foreign financial markets.





Page 31 of
36
 
 
 The
Company is vulnerable to a sharp increase in interest rates in the short-run
because its interest-earning assets generally have longer repricing terms than
its interest-bearing liabilities. Under such circumstances, material and
prolonged increases in interest rates may negatively affect the Company’s market
value of equity. 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.
   **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 expense incurred on savings, time deposits and
borrowings. 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 FRB.
   **Asset/Liability
Management**
  The Bank
earns income principally from the differential or spread between the interest
income earned on loans, investments and other interest-earning assets, and the
interest expense incurred on deposits, borrowings and other interest-bearing
liabilities. The Bank, 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 Bank’s primary objective in managing
its interest rate risk is to minimize the adverse impact of changes in interest
rates on the Bank’s net interest income and capital, while maintaining an
asset-liability balance sheet mix that produces the most effective and efficient
returns.
  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 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.
  A sudden
and substantial increase or decrease in interest rates may adversely impact the
Bank’s operating results 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 Bank has adopted formal policies and practices to
monitor its interest rate risk exposure. As a part of its risk management
practices, the Bank uses the Economic Value of Equity (“EVE”) or Earnings at
Risk (“EAR”) to monitor its interest rate risk.
  The
Bank'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.
  The table
below shows the estimated impact of changes in interest rates on EVE and EAR at
March 31, 2005, assuming shifts of 100 to 200 basis points in both
directions:





(Dollars
      in Thousands)Economic
      Value of Equity
    
    Earnings
      at RiskSimulated
    
    Cumulative
    
    Cumulative
    
    Cumulative
    
    CumulativeRate
      Changes
    
    Dollar
      Change
    
    Percentage
      Change
    
    Dollar
      Change
    
    Percentage
      Change200
    
    $
    (28,204
    )
    
    -12.0
    %
    $
    2,275
    
    
    3.3
    %100
    
    $
    (14,273
    )
    
    -6.1
    %
    $
    1,060
    
    
    1.5
    %-100
    
    $
    11,249
    
    
    4.8
    %
    $
    3,808
    
    
    5.5
    %-200
    
    $
    16,456
    
    
    7.0
    %
    $
    8,464
    
    
    12.2
    %





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 cash flows
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.





Page 32 of
36
 
 
 The
Company has established operating limits for changes in EVE and EAR in each rate
change scenario from the base case. At March 31, 2005, the Company’s estimated
changes in EVE and EAR were within the operating limits established by the Board
of Directors for well-capitalized purposes. The Company will continue to monitor
its interest rate risk through monitoring the relationship between capital and
risk-weighted assets and the impact of changes in interest rates on EVE and
EAR.
   **ITEM 4. CONTROLS AND PROCEDURES**
  As
required by SEC Rule 13a-15(b), 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 Senior Vice
President and Chief Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures as of the end of
the period covered by this report. Based upon that evaluation, the Company’s
Chief Executive Officer along with the Company’s Senior 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 subsidiary) required to be
included in the Company’s periodic SEC filings. There have been no significant
changes in the Company’s internal control over financial reporting during the
Company’s most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
  Disclosure
controls and procedures are the Company’s 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 or submits under the
Exchange Act is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Senior Vice President and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
   **PART
II -- OTHER INFORMATION**
   **ITEM 1. LEGAL PROCEEDINGS**
  In the
normal course of business, the Company is subject to legal actions and
complaints.  As of March 31, 2005, management is not aware of any material
pending legal action or complaint asserted against the
Company.
   **ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS**
  **Purchases
of Equity Securities**
  The table
below summarizes the Company’s monthly repurchases and redemptions of its common
equity securities during the three months ended March 31, 2005.





**Period**
    
    **Total
      Number of Shares Purchased**
    
    **Average
      Price Paid Per Share**
    
    **Total
      Number of Shares Purchased as Part of Publicly Announced Plans or Programs****(1)**
    
    **Approximate
      Dollar Value of Shares that May Yet Be Purchased Under the Plans or
      Programs**January
      1 - 31, 2005
    
    
    90,800
    
    $
    30.80
    
    
    90,800
    
    $
    4,175,805February
      1 - 28, 2005
    
    
    37,870
    
    
    31.95
    
    
    37,870
    
    $
    2,965,870March
      1 - 31, 2005
    
    
    100,500
    
    
    28.10
    
    
    100,500
    
    $
    142,096Total
    
    
    229,170
    
    $
    29.81
    
    
    229,170


________________________





(1)
    In July
      2002, the Company adopted a stock repurchase program in the initial amount
      of $2.0 million. In December 2003 and February 2005, the Company
      approvedincreases in its stock repurchase program of $5.0 million for a total
      amount of $12.0 million. Under its stock repurchase program, the Company
      has been acquiring its common stock shares in the open market and holds
      the repurchased shares as authorized but unissued shares. The Company’s
      stock repurchase program does not have an expiration date.





Page 33 of
36





**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**





None








**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS**





None








**ITEM 5. OTHER INFORMATION**





None








**ITEM 6. EXHIBITS**





EXHIBIT
      NO.
    DESCRIPTION3.1
    
    Articles
      of Incorporation of Vineyard National Bancorp, as amended(1)3.2
    
    Bylaws
      of Vineyard National Bancorp(2)4
    
    Specimen
      Common Stock Certificate of Vineyard National Bancorp(3)4.1
    
    Form
      of Warrant to Purchase Shares of Common Stock(4)4.2
    
    The
      Registrant will furnish, upon request, to the Commission copies of all
      instruments defining the rights of holders of long-term debt instruments
      of the Registrant and its consolidated subsidiary.4.3
    
    Registration
      Rights Agreement(5)4.4
    
    Registration
      Rights Agreement(9)4.5
    
    Additional
      Investment Right(9)10.1
    
    Vineyard
      National Bancorp Nonqualified Deferred Compensation Plan(1)*10.2
    
    Vineyard
      National Bancorp Directors’ Deferred Compensation Plan(1)*10.3
    
    Vineyard
      National Bancorp 1997 Incentive Stock Option Plan(1)*10.4
    
    Vineyard
      National Bancorp 2002 Restricted Share Plan(1)*10.5
    
    Form
      of 2002 Restricted Share Award Agreement(7)*10.6
    
    Vineyard
      National Bancorp 2003 Restricted Share Plan(10)*10.7
    
    Form
      of 2003 Restricted Share Award Agreement(7)*10.8
    
    Vineyard
      National Bancorp 2004 Restricted Share Plan(8)*10.9
    
    Form
      of 2004 Restricted Share Award Agreement(7)*10.5
    
    Employment
      Agreement between Vineyard National Bancorp, Vineyard Bank and Norman A.
      Morales(6)*10.6
    
    Securities
      Purchase Agreement(5)11
    
    Statement
      regarding computation of per share earnings. See Note 5 to the
      Consolidated Financial Statements included in Item 1
  hereof31.1
    
    Certification
      of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
      200231.2
    
    Certification
      of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of
      200232
    
    Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act 0f 2002


____________________




(1)
    Incorporated
      by reference from the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2002 filed with the Commission on March 28,
      2003.(2)
    Incorporated
      by reference from the Registrant’s Registration Statement on Form S-8
      (File No. 333-18217) filed with the Commission on December 19,
      1996.(3)
    Incorporated
      by reference from the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 1988 filed with the Commission.(4)
    Incorporated
      by reference from the Registrant’s Proxy Statement for a special meeting
      held on December 18, 2002 filed with the Commission on November 25,
      2002.





Page 34 of
36




(5)
    Incorporated
      by reference from the Registrant’s Form 8-K filed with the Commission on
      June 21, 2004.(6)
    Incorporated
      by reference from the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2000 filed with the Commission on March 30,
      2001.(7)
    Incorporated
      by reference from the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2004 filed with the Commission on March 10,
      2005.(8)
    Incorporated
      by reference from the Registrant’s Proxy Statement for an annual meeting
      held on May 22, 2003 filed with the Commission on April 14,
      2003.(9)
    Incorporated
      by reference from the Registrant's Form 8-K filed with the SEC on December
      10, 2004.(10)
    Incorporated
      by reference from the Registrant’s Quarterly Report on Form 10-Q for the
      three months ended September 30, 2004 filed with the Commission on
      November 10, 2004.*
    Management
      contract or compensatory plan or
arrangement.





Page 35 of
36
 ****
 ****
 **SIGNATURES**
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized on this 3rd day of May 2005.





**VINEYARD NATIONAL
      BANCORP**By:
    /s/ *Norman A. Morales*Norman
      A. MoralesPresident and Chief Executive
Officer
 By:
    /s/ *Gordon Fong*Gordon FongSenior
      Vice President and Chief Financial Officer(Principal
      Financial Officer)





Page 36 of
36