**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 SEPTEMBER 30, 2004**





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 xNo o





Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x





APPLICABLE TO CORPORATE ISSUER





Indicate the number of shares outstanding of the issuer's common stock on the latest practicable date: 8,732,041 shares of common stock as of November 10, 2004.


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****VINEYAR**D NATIONAL BANCORP AND SUBSIDIARY**


**FORM 10-Q INDEX**


**FOR THE PERIODS ENDED SEPTEMBER 30, 2004 AND 2003,**


**AND DECEMBER 31, 2003**





**PART I - FINANCIAL INFORMATION**





ITEM 1.
Financial StatementsConsolidated Statements of Financial Condition at September 30, 2004 and December 31, 2003
4Consolidated Statements of Income for the Nine and Three Months Ended September 30, 2004 and 2003
5Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2004 and 2003
6Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
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
30ITEM 4.
Controls and Procedures
32**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
33ITEM 4.
Submission of Matters to a Vote of Security Holders
33ITEM 5.
Other Information
33ITEM 6.
Exhibits
34Signatures

35Exhibits





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**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 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.





3




**PART I**


****ITEM I**.  FINANCIAL STATEMENTS**





**VINEYARD NATIONAL BANCORP AND SUBSIDIARY**


**CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**


**AT SEPTEMBER 30, 2004 AND DECEMBER 31, 2003**





|(Dollars in Thousands)                                          |  | September 30, |           | December 31, |  
|--------------------------------------------------------------- |  | ------------- | --------- | ------------ | -
|                                                                |  | 2004          |           | 2003         |  
|                                                                |  | (unaudited)   |           | (audited)    |  
|**ASSETS**                                                      |  |               |           |              |  
|Cash and due from banks                                         |  | $             | 24,531    |              | $
|Federal funds sold                                              |  |               | 2,000     |              |  
|Total Cash and Cash Equivalent                                  |  |               | 26,531    |              |  
|                                                                |  |               |           |              |  
|Investment securities, available-for-sale                       |  |               | 216,446   |              |  
|Loans, net of unearned income                                   |  |               | 1,020,490 |              |  
|Less: Allowance for possible loan losses                        |  |               | (12,130   | )            |  
|Net Loans                                                       |  |               | 1,008,360 |              |  
|Bank premises and equipment, net                                |  |               | 11,475    |              |  
|Accrued interest                                                |  |               | 5,052     |              |  
|Federal Home Loan Bank (FHLB) and other stock, at cost        |  |               | 12,572    |              |  
|Deferred income tax asset                                       |  |               | 7,005     |              |  
|Other assets                                                    |  |               | 11,194    |              |  
|**TOTAL ASSETS**                                                |  | $             | 1,298,635 |              | $
|                                                                |  |               |           |              |  
|**LIABILITIES AND STOCKHOLDERS' EQUITY**                        |  |               |           |              |  
|Liabilities                                                     |  |               |           |              |  
|Deposits                                                        |  |               |           |              |  
|Non-interest bearing                                            |  | $             | 120,500   |              | $
|Interest-bearing                                                |  |               | 810,661   |              |  
|Total Deposits                                                  |  |               | 931,161   |              |  
|                                                                |  |               |           |              |  
|FHLB advances and other borrowings                              |  |               | 222,425   |              |  
|Subordinated debentures                                         |  |               | 5,000     |              |  
|Junior subordinated debentures                                  |  |               | 60,829    |              |  
|Guarantee of ESOP debt                                          |  |               | 6,997     |              |  
|Accrued interest and other liabilities                          |  |               | 6,072     |              |  
|****TOTAL LIABILITIES****                                       |  |               | 1,232,484 |              |  
|                                                                |  |               |           |              |  
|****COMMITMENTS AND CONTINGENCIES (Note #3)****                 |  |               |           |              |  
|                                                                |  |               |           |              |  
|Stockholders' Equity                                            |  |               |           |              |  
|Contributed capital                                             |  |               |           |              |  
|Perpetual preferred stock - authorized 10,000,000 shares        |  |               |           |              |  
|Series A - no par value, issued 50 shares; outstanding 0 and 50 |  |               |           |              |  
|shares in 2004 and 2003, respectively                           |  |               | -         |              |  
|Series B - no par value, issued 1,150,000 shares; outstanding   |  |               |           |              |  
|0 and 1,150,000 shares in 2004 and 2003, respectively           |  |               | -         |              |  
|Common stock - no par value, authorized 15,000,000 shares;      |  |               |           |              |  
|issued and outstanding 8,874,466 and 6,291,430 shares           |  |               |           |              |  
|in 2004 and 2003, respectively                                  |  |               | 55,234    |              |  
|Additional paid-in capital                                      |  |               | 3,307     |              |  
|Unallocated ESOP shares                                         |  |               | (6,997    | )            |  
|Stock dividends to be distributed                               |  |               | -         |              |  
|Retained earnings                                               |  |               | 16,811    |              |  
|Accumulated other comprehensive loss                            |  |               | (2,204    | )            |  
|****TOTAL STOCKHOLDERS' EQUITY****                              |  |               | 66,151    |              |  
|****TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY****              |  | $             | 1,298,635 |              | $
|                                                                |  |               |           |              |  
|See accompanying notes to financial statements.                 |  |               |           |              |  




4


**VINEYARD NATIONAL BANCORP AND SUBSIDIARY**


**CONSOLIDATED STATEMENTS OF INCOME**


**FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003**





(Dollars in Thousands, except per share amounts)
Nine Months Ended September 30,

Three Months Ended September 30,2004

2003

2004

2003(unaudited)

(unaudited)

(unaudited)

(unaudited)**Interest Income**Interest and fees on loans
$
47,169

$
20,645

$
17,931

$
8,587Interest on investment securities

6,333


5,469


2,380


2,384Interest on federal funds sold

49


90


2


22**TOTAL INTEREST INCOME**

53,551


26,204


20,313


10,993**Interest Expense**Interest on savings deposits

77


52


33


19Interest on NOW and money market deposits

5,211


2,545


2,255


984Interest on time deposits in denominations of $100,000 or more

2,964


1,629


1,088


672Interest on other time deposits

2,632


1,445


932


602Interest on other borrowings

4,422


2,122


1,853


808**TOTAL INTEREST EXPENSE**

15,306


7,793


6,161


3,085**NET INTEREST INCOME**

38,245


18,411


14,152


7,908**Provision for Possible Loan Losses**

(4,833
)

(2,210
)

(1,350
)

(460
)**NET INTEREST INCOME AFTER****PROVISION FOR POSSIBLE LOAN LOSSES**

33,412


16,201


12,802


7,448**Other Income**Fees and service charges

1,367


1,094


443


432Gain on sale of SBA loans and broker fee income

2,314


1,444


1,052


463Net gain on sale of investment securities

207


1,571


-


-Other income

167


173


31


60**TOTAL OTHER INCOME**

4,055


4,282


1,526


955**Other Expense**Salaries and employee benefits

11,627


5,970


4,949


2,430Occupancy expense of premises

1,787


978


690


434Furniture and equipment

1,681


779


664


322Other expenses

5,589


3,615


1,820


1,301**TOTAL OTHER EXPENSES**

20,684


11,342


8,123


4,487**INCOME BEFORE INCOME TAXES**

16,783


9,141


6,205


3,916**INCOME TAX PROVISION**

6,859


3,744


2,535


1,608**NET INCOME**
$
9,924

$
5,397

$
3,670

$
2,308**EARNINGS PER SHARE****BASIC**
$
1.25

$
0.87

$
0.43

$
0.36**DILUTED**
$
1.11

$
0.79

$
0.40

$
0.32





See accompanying notes to financial statements.


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****VINEYA**RD NATIONAL BANCORP AND SUBSIDIARY**


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


**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003**


(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/(Loss)

Total**Balance December 31, 2002**
$
2,450


2,849,680

$
6,052

$
3,307

$
2,026




$
6,014

$
109

$
19,958Five percent stock dividenddistributed in January 2004




142,042Two-for-one stock splitdistributed in August 2004




2,991,722Issuance of common stock




349,045


3,200

















3,200Issuance of preferred stock

26,549























26,549Stock options exercised




91,875


227

















227Purchase of treasury stock




(160,864
)

(1,420
)
















(1,420
)Stock dividends distributed







2,024





(2,024
)










-Cash paid for fractional sharesfor stock dividend distribution













(2
)










(2
)Cash dividends paid oncommon stock



















(59
)




(59
)Cash dividends paid onpreferred stock



















(137
)




(137
)Comprehensive incomeNet Income















$
5,397


5,397





5,397Unrealized securityholding losses (net of$2,002 tax benefit)
















(2,881
)




(2,881
)

(2,881
)Less reclassificationadjustment forrealized gains (net of$644tax provision)
















**(927**
**)**
****
****
****
****
**(927**
**)**
****
**(927**
**)**Total comprehensive income















**$**
**1,589****Balance, September 30, 2003**
**$**
**28,999**


**6,263,500**

**$**
**10,083**

**$**
**3,307**

**$**
**-**

****

**$**
**11,215**

**$**
**(3,699**
**)**
**$**
**49,905**






Stock







AccumulatedPerpetual

Common Stock

Additional

Dividend







OtherPreferred

Number of



Paid-in

To Be

Comprehensive

Retained

Unallocated

ComprehensiveStock

Shares

Amount

Capital

Distributed

Income

Earnings

ESOP

Income/(Loss)

Total**Balance December 31, 2003**
$
28,999


6,291,430

$
9,739

$
3,307

$
4,981




$
8,237




$
(3,088
)
$
52,175Issuance of common stock




800,000


15,187




















15,187Stock options exercised




138,054


463




















463Purchase of treasury stock




(82,200
)

(1,612
)



















(1,612
)Purchase of common stockto pre-fund ESOP





















$
(6,997
)




(6,997
)Redemption of Series Apreferred stock

(2,450
)

























(2,450
)Redemption and conversion ofSeries B preferred stockto common stock

(26,547
)

1,727,182


26,491




















(56
)Cash paid for fractional shares forSeries B stock conversion

(2
)

























(2
)Stock dividends distributed







4,966





(4,966
)













-Cash paid for fractional shares forstock dividend distribution













(15
)













(15
)Cash paid in excess of cost toredeem Series A preferred stock



















(51
)







(51
)Cash paid in excess of cost to redeemand convert Series B preferred stock



















(20
)







(20
)Cash dividends paid on common stock



















(577
)







(577
)Cash dividends paid on preferred stock



















(702
)







(702
)Comprehensive incomeNet Income















$
9,924


9,924








9,924Unrealized security holding gains(net of $529 tax provision)
















762








762


762Less reclassificationadjustment for realized gains(net of $85 tax provision)
















122








122


122Total comprehensive income















**$**
**10,808****Balance, September 30, 2004**
**$**
**-**


**8,874,466**

**$**
**55,234**

**$**
**3,307**

**$**
**-**



**$**
**16,811**

**$**
**(6,997**
**)**
**$**
**(2,204**
**)**
**$**
**66,151**
  See accompanying notes to financial statements.


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****VINE**YARD NATIONAL BANCORP AND SUBSIDIARY**


**CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003**





(Dollars in Thousands)

Nine Months Ended September 30,2004

2003(unaudited)

(unaudited)**Cash Flows From Operating Activities**Net Income

$
9,924

$
5,397Adjustments to Reconcile Net Incometo Net Cash Provided by Operating ActivitiesDepreciation


1,458


617Loss from disposal of property, plant & equipment


-


27Investment securities accretion/amortization


477


317Provision for possible loan losses


4,833


2,210Reinvestment of mutual fund dividends


(24
)

-FHLB dividends


(314
)

(167
)Amortization of intangible assets


202


52Gain on sale of other real estate owned


(56
)

-Decrease/(increase) in net deferred tax assets


852


(859
)Increase/(decrease) in taxes payable


290


(1,134
)Increase in other assets


(3,332
)

(2,022
)(Increase)/decrease in cash surrender value of life insurance policies


(196
)

14Gain on sale of investment securities


(207
)

(1,571
)Decrease in loans held for sale


-


698(Decrease)/increase in unearned loan fees


(39
)

1,393Increase in interest receivable


(1,945
)

(1,453
)(Decrease)/increase in interest payable


(107
)

92Decrease in accrued expense and other liabilities


(1,263
)

(1,132
)Total Adjustment


629


(2,918
)**Net Cash Provided By Operating Activities**


10,553


2,479**Cash Flows From Investing Activities**Proceeds from sales of investment securities/mortgage-backedsecurities available-for-sale


26,029


176,843Proceeds from maturities/calls of investment securitiesavailable-for-sale


-


20,000Proceeds from principal reductions and maturities ofmortgage-backed securities


21,480


14,543Purchase of investment securities available-for-sale


-


(30,002
)Purchase of mortgage-backed securities available-for-sale


(60,635
)

(344,913
)Purchase of FHLB & other stock


(3,670
)

(5,890
)Redemption of FHLB stock


607


-Recoveries on loans previously written off


105


20Net loans made to customers and principalcollection of loans


(423,789
)

(217,029
)Net cash provided by acquisition


-


12,766Capital expenditures


(3,498
)

(2,929
)**Net Cash Used In Investing Activities**


(443,371
)

(376,591
)**Cash Flows From Financing Activities**Net increase in demand deposits, NOW accounts,savings accounts, and money market deposits


212,989


114,338Net increase in certificates of deposits


114,846


102,943Proceeds from issuance of junior subordinated debentures


22,682


10,310Net change in FHLB advancesand other borrowings


40,425


107,200Issuance of common stock


15,187


-Issuance of Series B preferred stock


-


26,549Purchase of treasury stock


(1,612
)

(1,420
)Redemption of Series A preferred stock (includingcash paid in excess of cost)


(2,501
)

-Redemption of Series B preferred stock (includingcash paid in excess of cost)


(76
)

-Dividends paid on preferred stock


(702
)

(137
)Dividends paid on common stock


(577
)

(59
)Cash paid on fractional shares of stock dividend


(15
)

(2
)Cash paid on fractional shares of preferred stock conversion


(2
)

-Stock options exercised


463


227**Net Cash Provided By Financing Activities**


401,107


359,949**Net Decrease in Cash and Cash Equivalents**


(31,711
)

(14,163
)**Cash and Cash Equivalents**, Beginning of year


58,242


33,362**Cash and Cash Equivalents**, End of period

$
26,531

$
19,199**Supplemental Information**Net change in unrealized loss on investment securities

$
(1,498
)
$
6,457Interest paid

$
15,199

$
7,140Income tax paid

$
7,920

$
7,210





See accompanying notes to financial statements.


7


****


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





The accounting and reporting policies of Vineyard National Bancorp (the Company) and its s ubsidiary 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 September 30, 2004 and December 31, 2003, results of operations for each of the nine and three months ended September 30, 2004 and 2003, and the results of cash flows for each of the nine months ended September 30, 2004 and 2003.





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 2003 Annual Report to shareholders. The results for each of the nine and three months ended September 30, 2004 and 2003 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.





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 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, and Vineyard Statutory Trust VI (collectively, the Trusts), using the equity method under which the subsidiaries 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) 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.


8  Allowance for Possible Loan Losses





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





Comprehensive Income





The Company follows SFAS No. 130, *Reporting Comprehensive Income,*  which requires the disclosure of comprehensive income and its components. Changes in unrealized gains 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 2003 financial statements to conform to 2004 classifications.





Current Accounting Pronouncements





In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, *Consolidation of Variable Interest Entities an Interpretation of ARB No. 51* ("FIN 46") and in December 2003, FASB issued a revision ("FIN 46R"). FIN 46 and FIN 46R address the requirements for consolidation by business enterprises of variable interest entities. Subsidiary business trusts formed by bank holding companies to issue trust preferred securities and lend the proceeds to the parent holding company have been determined to not meet the definition of a variable interest entity and therefore must be deconsolidated for financial reporting purposes. Bank holding companies had previously consolidated these entities and reported the trust preferred securities as liabilities in the Consolidated Financial Statements. The Company has adopted FIN 46 and FIN 46R as of December 31, 2003 and restated prior periods presented, which did not have a material impact on the financial condition or operating results of the Company.





In December 2003, American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-3, *Accounting for Certain Loans or Debt Securities Acquired in a Transfer* (SOP 03-3). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investors initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 does not apply to loans originated by the entity. SOP 03-3 limits the yield that may be accreted (accretable yield) to the excess of the investors estimate of undiscounted expected principal, interest, and other cash flows over the investors initial investment in the loan. SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected not be recognized as an adjustment of yield, loss accrual, or valuation allowance. SOP 03-3 prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loans yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 is not expected to have a material impact on the financial condition or operating results of the Company.





In March 2004, FASB issued an exposure draft of a proposed SFAS, *Share-Based Payment, an amendment of Statements No. 123 and 95* , for public comment. This proposed statement 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 proposed statement would eliminate the ability to account for share-based compensation transaction using APB Opinion No. 25, *Accounting for Stock Issued to Employees* , and generally would require instead that such transactions be accounted for using a fair-value-based method. The proposed statement would neither change the accounting in FASB Statement No. 123, *Accounting for Stock-Based Compensation* , for transactions in which an enterprise exchanges its equity instruments for services of parties other than employees nor change the accounting for employee stock ownership plans, which are subject to AICPA Statement of Position 93-6, *Employers Accounting for Employee Stock Ownership Plans* . Comments on this exposure draft were due on June 30, 2004. FASB has analyzed the comments relating to this exposure draft and has resumed deliberations to consider and discuss the accounting issues raised during the public comment period. FASB is working to reach tentative decisions on the issues raised, and a final statement is expected to be issued in the fourth quarter of 2004. The Company will continue to monitor the status of the exposure draft. The expected impact of the exposure draft on the operating results of the Company is shown in the pro-forma table in Note #5.





9


In January 2003, FASB issued the Emerging Information Task Force Issue 03-1, *The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investors,* which was updated in March 2004 ** (EITF 03-1). EITF 03-1 addresses the meaning of other-than-temporary impairment and its application to certain debt and equity securities. EITF 03-1 aids in the determination of impairment of an investment and gives guidance as to the measurement of impairment loss and the recognition and disclosures of other-than-temporary investments. EITF 03-1 also provides a model to determine other-than-temporary impairment using evidence-based judgment about the recovery of the fair value up to the cost of the investment by considering the severity and duration of the impairment in relation to the forecasted recovery of the fair value. The March 2004 update to EITF 03-1 included application guidance as to the determination of impairment, disclosures required by an impairment, and guidance for the transition period and effective dates of disclosure requirements. In March 2004, FASB also issued two proposed FASB Staff Positions (FSP): FSP EITF Issue 03-1-a, which gives additional guidance on the determination of impairment for debt securities impaired because of interest rate and/or sector spread increases, and FSP EITF Issue 03-1-b, which delays the disclosure effective date for debt securities impaired because of interest rate and/or sector spread increases. The comment deadlines for the proposed FSP EITF Issues 03-1-a and 03-1-b were October 29, 2004 and September 29, 2004, respectively, and the application and effective dates of portions of EITF 03-1 are deferred until the issuance of FSP EITF Issue 03-1-a and FSP EITF Issue 03-1-b, which could be as early as November 2004. The adoption of EITF 03-1 and FSP EITF Issues 03-1-a and 03-1-b are not expected to have a material impact on the financial condition or operating results of the Company.








**Note #2 - Junior Subordinated Debentures**





In December 2003, September 2003, December 2002 and December 2001, the Company issued junior subordinated debentures of $10.3 million, $10.3 million, $5.2 million and $12.4 million, respectively, with effective interest rates of 4.53%, 4.65%, 4.95% and 5.13% as of September 30, 2004, respectively, to Vineyard Statutory Trusts IV, III, II, and I, respectively.


On March 25, 2004, the Company issued $10.3 million of Floating Rate Junior Subordinated Deferrable Interest Debentures (the Debt Securities) to Vineyard Statutory Trust V, a statutory trust created under the laws of the State of Connecticut. The Debt Securities are subordinated to effectively all borrowings of the Company except for similar debt securities issued to Vineyard Statutory Trust I, Vineyard Statutory Trust II, Vineyard Statutory Trust III, Vineyard Statutory Trust IV and Vineyard Statutory Trust VI. The Debt Securities are due and payable on April 23, 2034. Interest is payable quarterly at a rate of 3-Month LIBOR plus 2.85% for an effective rate of 4.45% as of **** September 30, 2004. The Debt Securities can be called at any time commencing on April 7, 2009, at par. The Debt Securities can also be redeemed at par if certain events occur that impact the tax treatment or the capital treatment of the issuance. The Company also purchased a 3% minority interest totaling $310,000 in Vineyard Statutory Trust V. The balance of the equity of Vineyard Statutory Trust V is comprised of mandatorily redeemable preferred securities and is included in Other Assets on the Companys Consolidated Balance Sheet.





On May 18, 2004, the Company issued $12.4 million of Debt Securities to Vineyard Statutory Trust VI, a statutory trust created under the laws of the State of Connecticut. The Debt Securities are subordinated to effectively all borrowings of the Company except for similar debt securities issued to Vineyard Statutory Trust I, Vineyard Statutory Trust II, Vineyard Statutory Trust III, Vineyard Statutory Trust IV and Vineyard Statutory Trust V. The Debt Securities are due and payable on July 23, 2034. Interest is payable quarterly at a rate of 3-Month LIBOR plus 2.85% for an effective rate of 4.50% as of September 30, 2004. The Debt Securities can be called at any time commencing on July 23, 2009, at par. The Debt Securities can also be redeemed at par if certain events occur that impact the tax treatment or the capital treatment of the issuance. The Company also purchased a 3% minority interest totaling $372,000 in Vineyard Statutory Trust VI. The balance of the equity of Vineyard Statutory Trust VI is comprised of mandatorily redeemable preferred securities and is included in Other Assets on the Companys Consolidated Balance Sheet.





Under FIN 46 and FIN 46R, the Company is not allowed to consolidate statutory trusts into the Companys Consolidated Financial Statements. Hence, the Company has excluded the Trusts from its Consolidated Financial Statements. On May 6, 2004, the Federal Reserve Board (FRB) issued a notice of proposed rulemaking in regards to trust preferred securities and the definition of capital. In general, the FRB proposed to allow the continued inclusion of outstanding and prospective issuances of trust preferred securities in Tier 1 capital of bank holding companies, subject to stricter quantitative limits and qualitative standards. The quantitative limits would become effective after a three-year transition period. As of September 30, 2004, the Company has included the qualifying junior subordinated debentures in its Tier 1 Capital for regulatory capital purposes.








**Note #3 - 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 September 30, 2004 and December 31, 2003, the amounts of the Companys undisbursed loan funds were $427.1 million and $361.4 million, respectively, and obligations under standby and commercial letters of credit were $0.8 million and $0.7 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.





10


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.








**Note #4 - Dividends****and Stock Splits**





On July 21, 2004, the Company declared a $0.03 per share cash dividend paid on August 23, 2004 to common stock shareholders of record as of August 13, 2004. During the second quarter of 2004, the Company declared and paid cash dividends of $0.03 per common share. During the first quarter of 2004, the Company declared and paid cash dividends of $0.02 per common share. The total amount of cash dividends on common stock paid during the nine months ended September 30, 2004 was $0.6 million.





On July 21, 2004, the Company announced that its Board of Directors had approved a 2 for 1 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 have been restated to reflect the stock split.





On December 23, 2002, the Company declared a 5% common stock dividend paid on January 15, 2003 to shareholders of record as of December 23, 2002. Additionally, on December 23, 2003, the Company declared a 5% common stock dividend paid on January 26, 2004 to shareholders of record as of January 12, 2004. All shares and per share data have been retroactively adjusted to reflect these stock dividends.


**Note #5 - Earnings per Share and Book Value**





Basic earnings per share (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.





The EPS was adjusted to reflect a 2 for 1 stock split paid in August 2004, and 5% stock dividends paid in January 2004 and January 2003.





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)

Nine Months Ended September 30,

Three Months Ended September 30,2004

2003

2004

2003Income

Shares

Income

Shares

Income

Shares

Income

SharesNet income as reported

$
9,924




$
5,397




$
3,670




$
2,308Less: preferred stock dividends


(702
)




(137
)




-





(44
)Less: excess of cost to redeempreferred stock


(71
)




-





(3
)




-Shares outstanding at end of period





8,874,466





6,263,500





8,874,466





6,263,500Unallocated ESOP shares





(298,000
)




-





(298,000
)




-Impact of weighting shares (issued)/purchased during the period





(1,266,451
)




(231,349
)




(21,274
)




(33,226
)Used in Basic EPS

$
9,151


7,310,015

$
5,260


6,032,151

$
3,667


8,555,192

$
2,264


6,230,274Plus anti-dilutive effect of Series Bdividends and redemption


654





-





3





-Dilutive effect of outstandingstock options and warrants





1,526,615





626,622





672,953





836,770Used in diluted EPS

$
9,805


8,836,630

$
5,260


6,658,773

$
3,670


9,228,145

$
2,264


7,067,044







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The following table illustrates the effect on net income and EPS if the Company had applied the fair value recognition of SFAS No. 123,  *Accounting for Stock Based Compensation*  (SFAS No. 123) to stock based employee compensation:





(Dollars in Thousands, except per share data)
Nine Months Ended September 30,

Three Months Ended September 30,2004

2003

2004

2003Net income:As reported
$
9,924

$
5,397

$
3,670

$
2,308Less: preferred stock dividend

(702
)

(137
)

-


(44
)Less: excess of cost to redeem preferred stock

(71
)

-


(3
)

-Stock-based compensation that would have been reportedusing the fair value method of SFAS No.123

(86
)

(186
)

(7
)

(18
)Pro forma net income - used in basic EPS

9,065


5,074


3,660


2,246Add: anti-dilutive effects of Series B dividends and redemption

654


-


3


-Pro forma net income - used in diluted earnings per share
$
9,719

$
5,074

$
3,663

$
2,246Weighted average shares outstanding - basic

7,310,015


6,032,151


8,555,192


6,230,274Weighted average shares outstanding - diluted

8,836,630


6,658,773


9,228,145


7,067,044Basic EPSAs reported
$
1.25

$
0.87

$
0.43

$
0.36Pro forma
$
1.24

$
0.84

$
0.43

$
0.36EPS - assuming dilutionAs reported
$
1.11

$
0.79

$
0.40

$
0.32Pro forma
$
1.10

$
0.76

$
0.40

$
0.32





The following table sets forth the information that was used in calculating the Companys book value per common share as of September 30, 2004 and December 31, 2003:





As ofSeptember 30, 2004

December 31, 2003 (1)Period-end shares outstanding (2)Basic


8,576,466


6,291,430Series B preferred stock


-


1,730,934Warrants


160,000
(3)

-Used in book value per common stock,assuming conversion of Series B preferredstock and exercise of warrants


8,736,466


8,022,364Book value per common stock, basic

$
7.71

$
3.68Book value per common stock, assumingconversion of Series B preferred stock andexercise of warrants

$
8.03

$
6.20


**_____________________**





(1)   Number of shares and per share data reflect the 2:1 stock split paid in August 2004.


(2)   Number of shares of common stock outstanding at period end excludes 298,000 unallocated ESOP shares.


(3)   Number of shares outstanding assumes a cash exercise price of $25.00 per share. Warrant holders have an option to transact a cashless exercise. See Note #8 below.








**Note #6 - 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 a scheduled 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. No shares held by the ESOP were allocated as of September 30, 2004.





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. The ESOP loan bears a floating interest rate of 0.5% over the national prime rate and matures in ten years starting on the date of initial advance. The effective rate of the loan was 5.25% as of September 30, 2004. 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 off the loan 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 Company, as the sponsor of the ESOP, may elect to prepay the principal balance of the loan and therefore release additional shares to be allocated to participants.


12




The ESOP has 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 holds 298,000 shares of the Companys common stock, representing 3.4% of the total number of common shares outstanding at September 30, 2004. The cost of shares held by the ESOP and not yet allocated to employees is reported as a reduction of stockholders equity. Upon allocation of the shares, allocated shares of the ESOP will be charged to compensation expense based on the fair value of the shares transferred, with a corresponding credit to the Companys equity.








**Note #7 - Redemption and Conversion of Preferred Stock**





On April 19, 2004, the Company announced that it would redeem all 50 outstanding shares of its 7.0% Series A Perpetual Preferred Stock (Series A Preferred Stock) pursuant to their terms on May 19, 2004. On May 19, 2004, the Company redeemed the 50 outstanding shares at a redemption price of $50,000 per share plus accrued interest, for an aggregate approximate amount of $2.5 million.





Pursuant to the provisions of the Certificate of Determination of the Companys 5.6% Series B Non-cumulative Convertible Preferred Stock (Series B Preferred Stock), the Company had the option to redeem the Series B Preferred Stock at any time upon the achievement of certain price levels of its common stock. In April 2004, the Companys common stock price satisfied these requirements. On May 4, 2004, the Company announced that it would redeem all 1,150,000 outstanding shares of its Series B Preferred Stock on June 3, 2004. Holders of the Series B Preferred Stock had the right to convert their shares of Series B Preferred Stock into shares of common stock. Prior to the redemption date, 1,147,595 shares of Series B Preferred Stock elected to convert into shares of common stock. On June 3, 2004, the Company redeemed the remaining 2,405 shares of its Series B Preferred Stock outstanding at a redemption price of $25.00 per share, plus declared and unpaid dividends, for an aggregate approximate amount of $0.3 million. Prior to the redemption, the Series B Preferred Stock was traded on the American Stock Exchange.








**Note #8 - Sale of Capital Stock in Private Placement**





During June 2004, the Company issued and sold 400,000 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 to purchase up to 80,000 additional shares of common stock. The warrants entitle the holders to exercise their warrants and purchase shares of common stock for $50.00 per share (the Exercise Price) at any time through June 21, 2011 (the Expiration Date). As of September 30, 2004, due to adjustment of the 2 for 1 stock split paid in August 2004, there are 160,000 warrants outstanding with an exercise price of $25.00 per share. Warrants exercised prior to the Expiration Date can be settled on a net share basis, wherein investors receive common stock equal to the difference between the Exercise Price and the average closing sale price for the common shares over the five trading days immediately preceding the Exercise Date. At expiration, the Company may elect to settle the warrants on a net share basis, provided certain conditions are satisfied. As of September 30, 2004, there have been no exercises of warrants and all warrants issued remain outstanding. 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 are used by the Company for general corporate purposes.





The Company filed a registration statement with the Securities and Exchange Commission to register all of the shares of common stock issued in the private placement and the shares of common stock issuable upon exercise of the warrants. The registration statement was declared effective on August 3, 2004.








**Note #9 - Subsequent Event**





On October 25, 2004, the Company announced an increase in its quarterly cash dividend to $0.04 per share, payable on November 22, 2004, to shareholders of record as of November 12, 2004. The Company initiated its cash dividend program in the third quarter of 2003 with an initial declaration of $0.01 per share.


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|
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****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 September 30, 2004, and the related consolidated statements of income for the three and nine months ended September 30, 2004 and the consolidated statements of cash flows and changes in stockholders equity for the nine 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*


Vavrinek, Trine Day, & Co., LLP


Rancho Cucamonga, California


November 10 , 2004


14  ****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 and the Federal Deposit Insurance Corporation.





At September 30, 2004, the Company had consolidated total assets of $1.3 billion, total deposits of $931.2 million and consolidated stockholders equity of $66.2 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, and currently 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 has 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s management team has focused its efforts into developing a customer-oriented service philosophy, while expanding the Banks lending products by creating various specialty lending groups. 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 relationship banking services 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, and (iii) the San Gabriel Valley region of Los Angeles. 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.





*Expanded Product Offering.* During the last three 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 community 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 $2.5 million. The Banks single-family residential coastal construction loans amounted to $311.6 million and $212.7 million at September 30, 2004 and December 31, 2003, respectively. 
 15
 
  ·
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 $135.5 million and $104.5 million at September 30, 2004 and December 31, 2003, 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. SBA loans amounted to $12.2 million and $15.1 million at September 30, 2004 and December 31, 2003, respectively. Religious loans amounted to $23.9 million and $15.9 million at September 30, 2004 and December 31, 2003, respectively. The Bank anticipates increasing the origination of these types of loans.  ·
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. The outstanding balance of loans generated from this division amounted to $57.1 million and $2.4 million for commercial real estate loans and $169.3 million and $19.6 million for apartment loans at September 30, 2004 and December 31, 2003, respectively. The significant increase in apartment loans during the nine months ended September 30, 2004 is primarily due to the concentrated origination efforts of the income-property lending division and the purchase of an apartment loan pool in the amount of $85.0 million in March 2004. The Bank anticipates continued growth in this specialty lending group. 
 ·
The Banks core deposit franchise is built around the community banking system. In order to expand the Banks core deposit franchise, the Bank has and will continue to focus 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 expansion effort has resulted in deposit growth of 54.3% for the nine months ended September 30, 2004 and 109.8% for the year ended December 31, 2003. Consolidated total deposits amounted to $931.2 million and $603.3 million at September 30, 2004 and December 31, 2003, respectively. Non-interest bearing demand deposits amounted to $120.5 million and $94.2 million at September 30, 2004 and December 31, 2003, respectively. 
 Each of the foregoing specialty lending groups and depository services brings 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. The Banks growth in loans, net of unearned income and deferred fees, was 70.9% for the nine months ended September 30, 2004 and 135.7% for the year ended December 31, 2003.





*Relationship Banking* . 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. In 2005, the Company will introduce a private banking group in its banking network system consisting of banking professionals to serve as a single point of contact for its customers' deposit and loan needs and desired services. 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 being redesigned to incorporate user-friendly technology and personal service to facilitate its focus on relationship banking.





*Strategic Expansion.* The Company has experienced significant growth over the last three 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 Companys acquisition of Southland Bank was consummated in July 2003 which added the Irwindale banking center. The Bank opened a new banking center in Corona, California during the second quarter of 2003. The Bank opened an additional loan production office in Irvine, California during the third quarter of 2003. In addition, the Bank converted its loan production office in Manhattan Beach, California into a full-service banking center during the fourth quarter of 2003.





In early 2004, the Bank opened a new SBA loan production office in Anaheim, California and relocated its banking center in Blue Jay, California to Lake Arrowhead, California. Additionally, the Bank entered into a lease, commencing upon completion of a building in Corona, California to support its infrastructure and house its administration including credit administration, central operations, data center, training facilities, amongst other departments. In addition to the Corona lease, the Company entered into a lease agreement for an office building in San Rafael, California, as part of the Company's strategic plan to facilitate administrative office functions in that local region.  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.


16


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.





Phase IV of the Companys strategic plan emphasizes 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 is 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 infrastructure and the Vineyard Bank brand.





*Asset Growth.* The Companys total assets as of September 30, 2004 were $1.3 billion as compared to $887.8 million as of December 31, 2003. 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 September 30, 2004, the Company had $0.2 million of non-performing loans and no other real estate owned. At December 31, 2003, the Company had $0.2 million of non-performing loans and $0.1 million of other real estate owned.


**Results of Operations**





During the three and nine months ended September 30, 2004, operating results demonstrated a significant growth over the same periods in 2003 as the volume of earning assets increased. The growth in the Companys earning assets is funded by growth in deposits, increased borrowings, and issuances of common stock and junior subordinated debentures.





Net income for the three months ended September 30, 2004 and 2003 was $3.7 million and $2.3 million, respectively, representing an increase of 59.0% for the three months ended September 30, 2004 as compared to the same period in 2003. Net income increased 83.9% over the nine months ended September 30, 2004 as compared to the same period in 2003, as net income for the nine months ended September 30, 2004 and 2003 was $9.9 million and $5.4 million, respectively. 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, as well as a higher provision for possible loan losses. On a per diluted share basis, net income was $0.40 and $0.32 for the three months ended September 30, 2004 and 2003, respectively, and $1.11 and $0.79 for the nine months ended September 30, 2004 and 2003, respectively. Prior period earnings per share were adjusted for the Companys 2 for 1 stock split paid in August 2004 and 5% stock dividends paid in January 2003 and January 2004.





The Companys net interest income before provision for possible loan losses increased by $6.2 million or 79.0% for the three months ended September 30, 2004 as compared with the same period in 2003. Non-interest income increased by $0.6 million or 59.8% for the three months ended September 30, 2004 as compared to the same period in 2003. Thus, total net revenue (defined as net interest income before provision for possible loan losses and non-interest income) for the three months ended September 30, 2004 increased by $6.8 million or 76.9% as compared to the same period in 2003.





The Companys net interest income before provision for possible loan losses increased by $19.8 million or 107.7% for the nine months ended September 30, 2004 as compared with the same period in 2003. Non-interest income decreased by $0.2 million or 5.3% for the nine months ended September 30, 2004 as compared to the same period in 2003 due to higher gains on sale of investments in 2003 than in 2004, which was partially offset by higher gains on sale of SBA loans and broker fee income in 2004 than in 2003. Thus, total net revenue for the nine months ended September 30, 2004 increased by $19.6 million or 86.4% as compared to the same period in 2003.





Total non-interest expense was $8.1 million and $4.5 million for the three months ended September 30, 2004 and 2003, respectively, and $20.7 million and $11.3 million for the nine months ended September 30, 2004 and 2003, respectively. This represents an increase of $3.6 million or 81.0% and $9.3 million or 82.4% for the three and nine month periods, respectively. 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 50.6% for the three months ended September 30, 2003 to 51.8% for the same period in 2004. The efficiency ratio decreased from 50.0% for the nine months ended September 30, 2003 to 48.9% for the same period in 2004.





For the three months ended September 30, 2004 and 2003, the provision for federal and state income taxes was $2.5 million and $1.6 million, respectively. The provision for federal and state income taxes was $6.9 million and $3.7 million for the nine months ended September 30, 2004 and 2003, respectively. These provisions for income taxes represent an effective tax rate of 40.9% for all periods.


17




The quality of the Companys loan portfolio continued to perform well, producing approximately $5,000 in net recoveries and $0.2 million in net charge-offs for the three and nine months ended September 30, 2004, respectively, compared to $0.1 million in net charge-offs for the same periods in 2003. The Companys continued growth of its loan portfolio necessitated an increase in its provision made to the allowance for possible loan losses in the amount of $1.4 million and $4.8 million for the three and nine months ended September 30, 2004, respectively, as compared to $0.5 million and $2.2 million for the same periods in 2003, respectively. The allowance for possible loan losses was $12.1 million or 1.2% of gross loans at September 30, 2004 as compared to $6.0 million or 1.2% of gross loans at September 30, 2003. At September 30, 2004, the Company had $0.2 million of non-performing loans and no other real estate owned. At December 31, 2003, the Company had $0.2 million of non-performing loans and $0.1 million of 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 three 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 margin.





Total interest income for the three months ended September 30, 2004 and 2003 was $20.3 million and $11.0 million, respectively, while total interest expense was $6.2 million and $3.1 million for the same periods, respectively. Therefore, the net interest income was $14.1 million and $7.9 million, respectively, for the same periods.





Total interest income for the nine months ended September 30, 2004 and 2003 was $53.6 million and $26.2 million, respectively, while total interest expense was $15.3 million and $7.8 million for the same periods, respectively. Therefore, the net interest income was $38.3 million and $18.4 million, respectively, for the same periods.





The net interest margin for the three and nine months ended September 30, 2004 was 4.6% and 4.7%, respectively, as compared to 4.7% for the same periods in 2003.





During the fourth quarter of 2002, the FRB decreased the overnight borrowing rate by 50 basis points, thus bringing the national prime rate down to 4.25%, where it remained until June 24, 2003, when it was lowered to 4.0%. During 2004, the 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, increased to 4.5% on August 11, 2004, and finally increased to 4.75% on September 22, 2004. 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. As the Company continues to emphasize single-family coastal and tract home construction loans, the volume of construction fees has increased significantly for the three and nine months ended September 30, 2004 and 2003. Construction loans generally have a duration of 12 months and as the level of construction loans continues to grow, the yield on the loan portfolio increases.


For the three months ended September 30, 2004, loan fee income represented $2.5 million or 14.1% of the $17.9 million in interest and fees on loans. For the three months ended September 30, 2003, loan fee income was $1.3 million or 15.6% of the $8.6 million in interest and fees on loans. For the nine months ended September 30, 2004, loan fee income represented $7.2 million or 15.3% of the $47.2 million in interest and fees on loans. For the nine months ended September 30, 2003, loan fee income was $2.9 million or 14.1% of the $20.6 million in interest and fees on loans.





For the three months ended September 30, 2004, the Company experienced an increase in its overall yield on its total interest-earning assets primarily due to strategically deploying funds into higher yielding loans from lower yielding investment securities. Yields on total interest-earning assets increased from 6.5% to 6.6% for the three months ended September 30, 2003 and 2004, respectively. For the nine months ended September 30, 2004, the Company experienced a decrease in its yield on each type of interest-earning assets as a result of the overall lower interest rate environment year-to-date in 2004 than in 2003, but was able to maintain the overall yield on its total interest-earning assets by strategically deploying funds into higher yielding loans from lower yielding investment securities. As a result, yields on total interest-earning assets increased from 6.6% to 6.7% for the nine months ended September 30, 2003 and 2004, respectively. The Companys average loan balances were 81.2% and 80.5% of total average interest-earning assets for the three and nine months ended September 30, 2004, respectively, as compared to 66.6% and 68.3% of total average interest-earning assets for the same periods in 2003, respectively.


18




The cost of interest-bearing liabilities increased from 2.1% to 2.3% for the three months ended September 30, 2003 and 2004, respectively, as a result of the rising interest rate environment during the third quarter 2004, as many of the deposits and debt instruments repriced immediately. For the nine months ended September 30, 2003 and 2004, the cost of interest-bearing liabilities declined from 2.3% to 2.2%, respectively, due to the overall lower interest rate environment of the nine month period ending September 30, 2004 than the same period in 2003. 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 $4.3 million and $10.9 million for the three and nine months ended September 30, 2004, respectively, as compared to $2.3 million and $5.7 million for the same periods in 2003, respectively, representing increases of $2.0 million and $5.2 million, respectively. The increase in interest expense was mainly associated with an increase in the Companys interest-bearing deposits. Average non-interest bearing deposits increased from $86.1 million and $70.0 million for the three and nine months ended September 30, 2003, respectively, to $122.7 million and $111.5 million for the same periods in 2004, respectively.





The average interest rate on Federal Home Loan Bank (FHLB) and other borrowings changed from 1.5% and 1.6% for the three and nine months ended September 30, 2003, respectively, to 1.7% and 1.5% for the same periods ended September 30, 2004, respectively, as interest rates increased during the third quarter of 2004.





To support the Banks growth, the Company also issued debt securities. The cost of the debt securities is generally higher than the costs from deposits and FHLB borrowings. In May 2004, March 2004, December 2003, September 2003, December 2002 and December 2001, the Company issued junior subordinated debentures of $12.4 million, $10.3 million, $10.3 million, $10.3 million, $5.2 million and $12.4 million through the Trusts, respectively. Additionally, the Company issued $5.0 million in subordinated debt in December 2002. These debt securities bear variable interest rates indexed to LIBOR and adjust on a quarterly basis. The Company also has a $12.0 million outstanding balance under a $20.0 million credit facility with a correspondent bank as of September 30, 2004.


19




The following tables present 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 and nine months ended September 30, 2004 and 2003, respectively. Loans include non-accrual loans where non-accrual interest is excluded.





(Dollars in Thousands)
**Three Months Ended September 30,****2004**

**2003****Average**



**Average**

**Average**



**Average****Balance**

**Interest**

**Yield/Cost**

**Balance**

**Interest**

**Yield/Cost**AssetsLoans
$
988,207

$
17,931


7.2
%
$
449,458

$
8,587


7.6
%Investment securities (1)

214,949


2,218


4.1
%

208,791


2,314


4.4
%Federal funds sold

627


2


1.3
%

8,986


22


1.0
%Other investments

12,579


162


5.1
%

7,171


70


3.9
%Total interest-earning assets

1,216,362


20,313


6.6
%

674,406


10,993


6.5
%Other assets

49,709








29,353Less: allowance for possible loan losses

(11,236
)







(5,718
)Total average assets
$
1,254,835







$
698,041Liabilities and Stockholders' EquitySavings deposits (2)
$
428,922


2,288


2.1
%
$
220,785


1,003


1.8
%Time deposits

332,013


2,020


2.4
%

192,008


1,274


2.6
%Subordinated debt

5,000


62


4.9
%

5,000


54


4.3
%Junior subordinated debentures

60,829


767


5.0
%

17,543


209


4.7
%Short term borrowings

236,806


1,024


1.7
%

145,808


545


1.5
%Total interest-bearing liabilities

1,063,570


6,161


2.3
%

581,144


3,085


2.1
%Demand deposits

122,706








86,064Other liabilities

6,198








4,940Total average liabilities

1,192,474








672,148Stockholders' equity

62,361








25,893Total liabilities andstockholders' equity
$
1,254,835







$
698,041Net interest spread (3)







4.3
%







4.4
%Net interest incomeand net interest margin (4)



$
14,152


4.6
%



$
7,908


4.7
%


20




(Dollars in Thousands)
**Nine Months Ended September 30,****2004**

**2003****Average**



**Average**

**Average**



**Average****Balance**

**Interest**

**Yield/Cost**

**Balance**

**Interest**

**Yield/Cost**AssetsLoans
$
866,501

$
47,169


7.3
%
$
360,820

$
20,645


7.6
%Investment securities (1)

191,501


5,988


4.2
%

151,236


5,300


4.7
%Federal funds sold

7,002


49


0.9
%

10,946


90


1.1
%Other investments

11,450


345


4.0
%

5,065


169


4.5
%Total interest-earning assets

1,076,454


53,551


6.7
%

528,067


26,204


6.6
%Other assets

45,629








26,371Less: allowance for possible loan losses

(9,803
)







(4,304
)Total average assets
$
1,112,280







$
550,134Liabilities and Stockholders' EquitySavings deposits (2)
$
356,784


5,288


2.0
%
$
180,851


2,597


1.9
%Time deposits

309,861


5,596


2.4
%

144,509


3,074


2.8
%Subordinated debt

5,000


173


4.6
%

5,000


171


4.6
%Junior subordinated debentures

51,437


1,805


4.7
%

17,183


650


5.1
%Short term borrowings

215,751


2,444


1.5
%

105,966


1,301


1.6
%Total interest-bearing liabilities

938,833


15,306


2.2
%

453,509


7,793


2.3
%Demand deposits

111,522








70,008Other liabilities

6,720








4,854Total average liabilities

1,057,075








528,371Stockholders' equity

55,205








21,763Total liabilities andstockholders' equity
$
1,112,280







$
550,134Net interest spread (3)







4.5
%







4.3
%Net interest incomeand net interest margin (4)



$
38,245


4.7
%



$
18,411


4.7
%


____________________





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


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


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


(4)  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 September 30, 2004 and 2003, the provision for possible loan losses was $1.4 million and $0.5 million, respectively. Total provision for possible loan losses was $4.8 million for the nine month period ended September 30, 2004 compared to $2.2 million for the same period in 2003. Provision for possible loan losses was increased to support the increasing loan balances for the periods as well as to reflect the inherent risks of construction and commercial loans.





The Companys allowance for possible loan losses was $12.1 million and $7.5 million at September 30, 2004 and December 31, 2003, respectively. 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 and nine months ended September 30, 2004, the Company had approximately $5,000 in net recoveries and $0.2 million in net charge-offs, respectively, as compared to net loan charge-offs of approximately $0.1 million for the same periods in 2003, respectively. Net charge-offs were less than 1% of the loan portfolio for both periods.


21  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 September 30, 2004 and 2003 was $1.5 million and $1.0 million, respectively. This represents an increase of $0.5 million or 59.8%. The increase in non-interest income was primarily due to the increased gains on the sale of SBA loans and broker fee income. Non-interest income for the nine months ended September 30, 2004 and 2003 was $4.1 million and $4.3 million, respectively. This represents a decrease of $0.2 million or 5.3%. The decrease in non-interest income was primarily due to a decrease in net gains from sale of investment securities, which was partially offset by an increase in gain on the sale of SBA loans and broker fee income.





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 $1.1 million and $0.5 million for the three months ended September 30, 2004 and 2003, respectively. Gain on SBA loan sales and broker fee income totaled $2.3 million and $1.4 million for the nine months ended September 30, 2004 and 2003, respectively.





Income from fees and service charges was $0.4 million for the three months ended September 30, 2004 and 2003, and $1.4 million and $1.1 million for the nine months ended September 30, 2004 and 2003, respectively. The increase in income from fees and service charges is primarily due to the increased volume of loans and deposits.





For the three and nine months ended September 30, 2004, net gains from the sale of investment securities amounted to $0 and $0.2 million, respectively, and totaled $0 and $1.6 million for the same periods in 2003, respectively. In 2003, investments were sold to adjust the yield and cash flow speeds of the mortgage-backed securities investment portfolio in a decreasing interest rate environment. In 2004, the portfolio has been performing as expected and there was no need to adjust the portfolio.





*Non-Interest Expenses*





The Companys non-interest expense for the three months ended September 30, 2004 and 2003 was $8.1 million and $4.5 million, respectively. This represents an increase of $3.6 million or 81.0%. For the nine months ended September 30, 2004 and 2003, non-interest amounted to $20.7 million and $11.3 million, respectively, representing an increase of $9.4 million or 82.4%. 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 and other non-interest expense.




·
Salaries and employee benefits is the largest component of non-interest expense. Beginning with the appointment of the Companys current Chief Executive Officer in the fourth quarter of 2000, management has implemented several structural changes within the operations of the Company in order to support its strategic plan initiatives. In each of the following areas, a seasoned and experienced individual has been recruited from other local financial institutions to head their respective area: credit administration, loan operations and construction support, 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 three 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 $2.5 million or 103.7% to $4.9 million for the three months ended September 30, 2004 as compared to the same period in 2003 and by $5.7 million or 94.8% to $11.6 million for the nine months ended September 30, 2004 as compared to the same period in 2003. 
 ·
Occupancy expense amounted to $0.7 million and $1.8 million for the three and nine months ended September 30, 2004, respectively, in comparison to $0.4 million and $1.0 million for the same periods in 2003. This represents an increase of $0.3 million or 59.0% and $0.8 million or 82.7% over the same prior periods, respectively. The increase in occupancy expense is primarily due to the Companys expansion. The Bank opened a banking center in Corona, California during the second quarter of 2003 and converted its loan production office in Manhattan Beach, California into a full-service banking center in the fourth quarter of 2003. In the third quarter of 2003, the Bank opened a loan production office in Irvine, California and acquired a banking center in Irwindale, California from an acquisition. In addition, the lease for the Beverly Hills SBA loan production office was replaced by a new lease for an office located in Anaheim, California in the first quarter of 2004. Additionally, in early 2004, the Company entered into a lease agreement for an office building in San Rafael, California, as part of the Company's strategic plan to facilitate administrative office functions in that local region. 
 
 22
 
 
 ·
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 $0.3 million for the three months ended September 30, 2004 and 2003, respectively, which represents an increase of $0.4 million or 106.2% over the prior period. Furniture and equipment expenses amounted to $1.7 million and $0.8 million for the nine months ended September 30, 2004 and 2003, respectively. This represents an increase of $0.9 million or 115.8% over the prior period. 
 ·
Other non-interest expense was $1.8 million and $1.3 million for the three months ended September 30, 2004 and 2003, respectively. This represents an increase of $0.5 million or 39.9% over the prior period. Other non-interest expense was $5.6 million and $3.6 million for the nine months ended September 30, 2004 and 2003, respectively. This represents an increase of $2.0 million or 54.6% over the prior period. The increase is due primarily to the Companys implementation of its strategy to grow its business. All categories of other non-interest expense increased, including marketing, data processing, professional services, office supplies, insurance, telephone and administrative expenses due to the increases in the number of employees and the volume of loan and deposit production.  The following is a breakdown of other non-interest expense for the nine and three months ended September 30, 2004 and 2003:





(Dollars in Thousands)

Nine Months Ended September 30,

Three Months Ended September 30,2004

2003

2004

2003Other non-interest expense:Data processing

$
552

$
489

$
183

$
170Marketing expenses


701


356


173


128Professional expenses


966


673


311


217Office supplies, postage and telephone


1,044


677


327


241Insurance and assessment expense


370


243


179


96Administrative expense


379


215


118


91Other


1,577


962


529


358Total other non-interest expense

$
5,589

$
3,615

$
1,820

$
1,301








**Financial Condition**





*Assets*





At September 30, 2004, total assets increased $410.8 million or 46.3% to $1.3 billion from $887.8 million at December 31, 2003. Assets were comprised primarily of $1.0 billion in loans, net of unearned income, and $216.4 million in investment securities, available-for-sale at September 30, 2004. This represents an increase of $423.5 million or 70.9% in loans, net of unearned income, and an increase of $14.4 million or 7.1% in investment securities, available-for-sale from December 31, 2003. The increase in loans and investments was offset by a decrease of $37.4 million in federal funds sold between December 31, 2003 and September 30, 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 $216.4 million or 16.7% of total assets at September 30, 2004 and $202.1 million or 22.8% of total assets at December 31, 2003. The Companys securities portfolio increased during the nine months ended September 30, 2004 as a result of purchases, net of sales and principal paydowns of securities.





The amortized cost and fair values of investment securities, available-for-sale at September 30, 2004 were as follows:







(Dollars in Thousands)



Gross

GrossAmortized

Unrealized

UnrealizedCost

Gains

Losses

Fair ValueU.S. agency securities

$
10,858

$
-

$
(744
)
$
10,114Mortgage-backed securities


207,300


409


(3,410
)

204,299Mutual funds


2,024


9


-


2,033Total

$
220,182

$
418

$
(4,154
)
$
216,446





|
|
|
|

The amortized cost and fair values of investment securities, available-for-sale at December 31, 2003 were as follows:





|(Dollars in Thousands)     |  |           |         | Gross      |   | Gross      |  |            |       
|-------------------------- |  | --------- | ------- | ---------- | - | ---------- |  | ---------- | ------
|                           |  | Amortized |         | Unrealized |   | Unrealized |  |            |       
|                           |  | Cost      |         | Gains      |   | Losses     |  | Fair Value |       
|U.S. agency securities     |  | $         | 10,359  |            | $ | -          |  | $          | (454  
|Mortgage-backed securities |  |           | 194,943 |            |   | 287        |  |            | (5,067
|Mutual funds               |  |           | 2,000   |            |   | -          |  |            | -     
|Total                      |  | $         | 207,302 |            | $ | 287        |  | $          | (5,521




The amortized cost and fair values of investment securities, available-for-sale at September 30, 2004, 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.





(Dollars in Thousands)



**Securities****Available-for-Sale****Amortized****Maturity**

**Cost**

**Fair Value**Mortgage-backed securities

5-10 years

$
30,321

$
30,526After 10 years


176,979


173,773U.S. agency securities

5-10 years


-


-After 10 years


10,858


10,114Mutual funds




2,024


2,033$
220,182

$
216,446





Proceeds from sales of investment securities, available-for-sale during the nine months ended September 30, 2004 were $26.0 million. Gross gains on those sales were $0.2 million. Included in stockholders equity at September 30, 2004 is $2.2 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 nine months ended September 30, 2003 were $176.8 million. Gross gains on those sales were $1.6 million. Included in stockholders equity at December 31, 2003 is $3.1 million of net unrealized losses, net of tax benefits, on investment securities, available-for-sale.




Securities with fair value of $214.4 million and $200.1 million at September 30, 2004 and December 31, 2003, respectively, were pledged to secure public monies as required by law and FHLB borrowings.





*Loans*





The Company continued to experience significant growth in its loan portfolio during the third quarter of 2004. Loans, net of unearned income, increased by $423.5 million or 70.9% from $597.0 million at December 31, 2003 to $1.0 billion at September 30, 2004. 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 and Los Angeles counties in California. The concentrations of credit by type of loan are set forth below:





(Dollars in Thousands)

As ofSeptember 30, 2004

December 31, 2003Commercial, financial and agricultural

$
32,235

$
26,827Real estate construction:Singe-family coastal


311,590


212,727Singe-family tract


135,503


104,511Commercial


34,430


20,947Real estate mortgage:Commercial


204,494


153,632Multi-family residential


184,579


27,986Land


50,728


15,030All other residential


65,664


32,856Installment loans to individuals


3,516


4,887All other loans (including overdrafts)


137


291,022,876


599,432Unearned premium (discount) on loans


589


(5
)Deferred loan fees


(2,975
)

(2,420
)Loans, Net of Unearned Income

$
1,020,490

$
597,007


24




During the nine months ended September 30, 2004, the income-property lending division purchased an apartment loan pool in the amount of $85.0 million which contributed to the increase in multi-family residential real estate mortgage loans.





The Bank originates SBA loans and generally sells the guaranteed portion of SBA loans to governmental agencies and institutional investors. At September 30, 2004 and December 31, 2003, SBA loans totaled $12.2 million and $15.1 million, respectively, net of unpaid principal balance of SBA loans sold in the amount of $27.0 million and $12.9 million, respectively.





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 September 30, 2004 and December 31, 2003, was $1.7 million and $0.8 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)

Nine months ended

Year endedSeptember 30, 2004

December 31, 2003Servicing rights capitalized

$
1,065

$
721Servicing rights amortized

$
194

$
82Valuation allowances

$
-

$
-





The Bank had approximately $273.4 million and $67.5 million in loans pledged to secure FHLB borrowings at September 30, 2004 and December 31, 2003, 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.





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





(Dollars in Thousands)

Nine months ended

Year endedSeptember 30, 2004

December 31, 2003Balance, beginning of year

$
7,537

$
3,003Credit from acquisition of Southland Business Bank


-


895Recoveries on loans previously charged off


105


72Loans charged off


(345
)

(143
)Provision charged to operating expense


4,833


3,710Balance, end of period

$
12,130

$
7,537





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.





25




*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 ofSeptember 30,

December 31,2004

2003**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

$
152

$
173Real estate


-


-Installment loans to individuals


-


-Total non-accrual loans

$
152

$
173Total non-performing loans

$
152

$
173





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




(Dollars in Thousands)

As ofSeptember 30,

December 31,2004

2003Impaired loans with a specific valuation allowance

$
139

$
-Impaired loans without a specific valuation allowance


13


173Total impaired loans

$
152

$
173Valuation allowance related to impaired loans

$
42

$
-





(Dollars in Thousands)

Nine months ended

Year endedSeptember 30, 2004

December 31, 2003Average recorded investment in impaired loans

$
244

$
97Cash receipts applied to reduce principal balance

$
100

$
-Interest income recognized for cash payments

$
-

$
-





If interest on non-accrual loans had been recognized at the original interest rates, interest income would have increased approximately $7,000, $27,000, and $11,000 for the three and nine months ended September 30, 2004 and for the year ended December 31, 2003, respectively.





*Deposits*





Deposits represent the Banks primary source of funds for funding the Banks loan activities. The Bank increased its deposits by $327.9 million or 54.3% from $603.3 million at December 31, 2003 to $931.2 million at September 30, 2004. The increase was primarily due to an increase of $182.6 million or 76.9% in money market accounts and an increase of $114.8 million or 49.9% in time deposits (TCDs) over the period.





As of September 30, 2004, the Companys deposits were comprised of 12.9% in non-interest bearing deposits, 50.0% in money market, NOW and savings deposits, and 37.0% in TCDs, while the composition of deposits was 17.1%, 45.8% and 37.1%, respectively, at December 31, 2003.


26




At September 30, 2004, 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

$
30,426Over three through twelve months


118,165Over one through five years


33,143$
181,734





*Borrowings*





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





In March 2004, the Company obtained a $15.0 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 a $12.0 million outstanding balance under the credit facility as of September 30, 2004. In addition, the Bank has $56.0 million of unsecured borrowing lines with five correspondent banks. Under these borrowing lines, the Bank had no federal funds purchased at September 30, 2004 and December 31, 2003.
 
 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 September 30, 2004. 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 $210.4 million and $182.0 million at September 30, 2004 and December 31, 2003, 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 September 30, 2004:
 
 (Dollars in Thousands)

WeightedAverageMaturity

Rate

Amount2004


1.4%

$
95,4252005


1.3%


100,0002006


2.6%


15,0001.4%

$
210,425
 
 In May and March 2004, the Company issued $12.4 million and $10.3 million of junior subordinated debentures through Vineyard Statutory Trust VI and Vineyard Statutory Trust V, respectively, which increased the total junior subordinated debentures balance from $38.1 million at December 31, 2003 to $60.8 million at September 30, 2004. See Note #2 in Item 1 herein. Junior subordinated debentures as of September 30, 2004 consisted of the following:
 
 (Dollars in Thousands)



Effective Interest RateMaturity

as of September 30, 2004

AmountVineyard Statutory Trust I


December 18, 2031


5.1
%
$
12,372Vineyard Statutory Trust II


December 26, 2032


5.0
%

5,155Vineyard Statutory Trust III


October 8, 2033


4.7
%

10,310Vineyard Statutory Trust IV


January 23, 2034


4.5
%

10,310Vineyard Statutory Trust V


April 23, 2034


4.5
%

10,310Vineyard Statutory Trust VI


July 23, 2034


4.5
%

12,372$
60,829
 Additionally, in December 2002, the Company issued $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 September 30, 2004 was 4.6%. The outstanding balance of this subordinated debt was $5.0 million at September 30, 2004 and December 31, 2003.





*Stockholders Equity*





Stockholders equity was $66.2 million and $52.2 million at September 30, 2004 and December 31, 2003, respectively. The increase in stockholders equity was due primarily to a capital issuance of $15.2 million, net of fees and expenses, and net income for the nine months ended September 30, 2004 of $9.9 million, which was partially offset by Series A Preferred Stock redemption costs of $2.5 million, Series B Preferred Stock redemption and conversion costs of approximately $78,000, and open-market purchases of 149,000 shares of common stock by the ESOP, which increased to 298,000 shares due to the 2 for 1 stock split paid in August 2004, totaling $7.0 million. For descriptions of the capital issuance, preferred stock redemptions, and ESOP funding, see Notes #8, #7, and #6 in Item 1 herein, respectively.


27




**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 87.9% and 75.4% at September 30, 2004 and December 31, 2003, 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 September 30, 2004, the Company has a $12.0 million outstanding balance on its $20.0 million of credit facility with a correspondent bank and no outstanding balance on its $56.0 million of unsecured borrowing lines with five 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 September 30, 2004, the Bank has a total borrowing capacity from FHLB of approximately $517.4 million and an outstanding advance balance of $210.4 million. The FHLB advance line is collateralized by the Companys capital stock investment in FHLB, investment securities and eligible loans.








**Capital Resources**





In the first quarter of 2004, the Company entered into a ten-year lease commencing upon completion of an office building located in Corona, California to house its administrative functions. Under the terms of the lease, the Company has an option to purchase the premises any time during the second year of the lease. Other than this lease, the Company or the Bank does not have any other significant commitments for capital expenditures as of September 30, 2004.





During June 2004, the Company sold 400,000 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 to purchase up to 80,000 additional shares of common stock. The warrants, which expire on June 21, 2011, have an exercise price of $50.00. As of September 30, 2004, no warrants had been exercised. As of September 30, 2004, due to the 2 for 1 stock split paid in August 2004, there are 160,000 warrants outstanding with an exercise price of $25.00 per share. 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 will be used by the Company for general corporate purposes.





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 September 30, 2004, that the Company and the Bank meet all applicable capital adequacy requirements.





Following a regular joint examination by the FDIC and DFI in November 2003, the Banks Board of Directors approved and signed a voluntary agreement with the FDIC and DFI on July 7, 2004. Due 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 existing three-year strategic plan and capital adequacy plan called for a measured growth. The Bank continues to maintain capital ratios in excess of regulatory requirements. In accordance with the agreement, the Bank will notify the FDIC and DFI of any deviations beyond its strategic plan and add two new directors by December 31, 2004.





As of the most recent formal notification from the Federal Deposit Insurance Corporation, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. 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 September 30, 2004, the Banks total risk-based capital, Tier 1 capital and leverage ratios were 13.3%, 12.3% and 11.5%, 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 September 30, 2004, the Companys total risk-based capital, Tier 1 capital and leverage ratios were 12.3%, 7.7%, and 7.2%, respectively.


28  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 September 30, 2004**Total capital to risk-weighted assets:Bank

$
154,591


13.3
%
$
93,000


8.0
%
$
116,200


10.0
%Consolidated

$
143,719


12.3
%
$
93,200


8.0
%

N/A


N/ATier 1 capital to risk-weighted assets:Bank

$
142,461


12.3
%
$
46,500


4.0
%
$
69,800


6.0
%Consolidated

$
90,119


7.7
%
$
46,600


4.0
%

N/A


N/ATier 1 capital to average assets:Bank

$
142,461


11.5
%
$
49,700


4.0
%
$
62,100


5.0
%Consolidated

$
90,119


7.2
%
$
49,900


4.0
%

N/A


N/A**As of December 31, 2003**Total capital to risk-weighted assets:Bank

$
93,311


13.9
%
$
53,911


8.0
%
$
67,411


10.0
%Consolidated

$
105,439


15.6
%
$
54,189


8.0
%

N/A


N/ATier 1 capital to risk-weighted assets:Bank

$
85,774


12.7
%
$
26,974


4.0
%
$
40,424


6.0
%Consolidated

$
73,007


10.8
%
$
27,107


4.0
%

N/A


N/ATier 1 capital to average assets:Bank

$
85,774


10.3
%
$
33,174


4.0
%
$
41,474


5.0
%Consolidated

$
73,007


8.8
%
$
33,307


4.0
%

N/A


N/A


29




****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 September 30, 2004, approximately 94.8% 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.
|- | ------------------------------------------------------




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.


30  **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 September 30, 2004, assuming shifts of 100 to 200 basis points in both directions:


(Dollars in Thousands)**Economic Value of Equity**

**Earnings at Risk****Simulated**

**Cumulative**

**Cumulative**

**Cumulative**

**Cumulative****Rate Changes**

**Dollar Change**

**Percentage Change**

**Dollar Change**

**Percentage Change**200

$
(12,728
)

-6.0
%
$
4,427


7.8
%100

$
(6,389
)

-3.0
%
$
2,083


3.7
%-100

$
4,117


1.9
%
$
2,515


4.4
%-200

$
5,326


2.5
%
$
6,396


11.3
%





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.





The Company has established operating limits for changes in EVE and EAR in each rate change scenario from the base rate. At September 30, 2004, 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.


31


****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.


32


****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 September 30, 2004, management is not aware of any 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 September 30, 2004.


**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**July 1 - 31, 2004


17,000

$
21.52


17,000

$
2,119,000August 1 - 31, 2004


-


N/A


-

$
2,119,000September 1 - 30, 2004


-


N/A


-

$
2,119,000Total


17,000

$
21.52


17,000 ____________________


(1)
In July 2002, the Company adopted a stock repurchase program in the initial amount of $2.0 million. In December 2003, the Company approved an increase in its stock repurchase program of $5.0 million for a total amount of $7.0 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.









****ITEM 3.**  DEFAULTS UPON SENIOR SECURITIES**





None








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





None








****ITEM 5**.  OTHER INFORMATION**





None


33


****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)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

Employment Agreement between Vineyard National Bancorp, Vineyard Bank and Norman A. Morales (6)*10.6

Securities Purchase Agreement (5)10.7

Vineyard National Bancorp 2003 Restricted Share Plan *10.8

Vineyard National Bancorp 2004 Restricted Share Plan (7)*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 of 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.(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 Proxy Statement for an annual meeting held on May 22, 2003 filed with the Commission on April 14, 2003.*
Management contract or compensatory plan or arrangement.





34


****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 10th day of November 2004.




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


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