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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 ENDED SEPTEMBER 30, 2003

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
    
    33-0309110(State or other jurisdiction of
incorporation or organization)
    
    (IRS employer
identification number)9590 Foothill BoulevardRancho Cucamonga, California
    
    91730(Address of principal executive offices)
    
    (Zip Code)


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

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

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

APPLICABLE TO CORPORATE ISSUER

Indicate the number of shares outstanding of the issuers common stock on the
latest practicable date: 2,976,740 shares of common stock as of November 7,
2003.

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TABLE OF CONTENTS



|                            |                                                                                               |                                                                                                                  |  |  |  |  |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I                     
|                            | ITEM I. FINANCIAL STATEMENTS                                                                 
|                            |                                                                                               | CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2002                      
|                            |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002               
|                            |                                                                                               | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
|                            |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002                     
|                            |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                      
|                            | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                            | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                            | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION
|                            | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                            | ITEM 2. CHANGES IN SECURITIES                                                                
|                            | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                            | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                            | ITEM 5. OTHER INFORMATION                                                                    
|                            | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                 
|EXHIBIT 10.1               
|EXHIBIT 10.2               
|EXHIBIT 10.3               
|EXHIBIT 31.1               
|EXHIBIT 31.2               
|EXHIBIT 32                 



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##### Table of Contents



VINEYARD NATIONAL BANCORP
FORM 10-Q INDEX
FOR THE PERIODS ENDED SEPTEMBER 30, 2003 AND 2002,
AND DECEMBER 31, 2002

PART I  FINANCIAL INFORMATIONITEM 1.
    
    Financial Statements
Consolidated Statements of Financial Condition
at September 30, 2003 and December 31, 2002
    
    
    4Consolidated Statements of Income
for the Nine and Three Months Ended September 30, 2003 and 2002
    
    
    5Consolidated Statements of Changes in Stockholders Equity
for the Nine Months Ended September 30, 2003 and 2002
    
    
    6Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2003 and 2002
    
    
    7Notes to Consolidated Financial Statements
    
    
    8ITEM 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
    
    
    32PART II  OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    
    33ITEM 2.
    
    Changes in Securities
    
    
    33ITEM 3.
    
    Defaults upon Senior Securities
    
    
    33ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    33ITEM 5.
    
    Other Information
    
    
    33ITEM 6.
    
    Exhibits and Reports on Form 8-K
    
    
    34Signatures
    
    
    35


Exhibits



|             |                                                           
|------------ | ----------------------------------------------------------
|Exhibit 10.1 | Floating Rate Junior Subordinated Debt Securities Due 2033



|             |                                                                          
|------------ | -------------------------------------------------------------------------
|Exhibit 10.2 | Amended and Restated Declaration of Trust of Vineyard Statutory
Trust III



|             |                    
|------------ | -------------------
|Exhibit 10.3 | Guarantee Agreement



|             |                                                                                             
|------------ | --------------------------------------------------------------------------------------------
|Exhibit 31.1 | Certification of Chief Executive Officer under Section 302 of
the Sarbanes-Oxley Act of 2002



|             |                                                                                             
|------------ | --------------------------------------------------------------------------------------------
|Exhibit 31.2 | Certification of Chief Financial Officer under Section 302 of
the Sarbanes-Oxley Act of 2002



|           |                                                                                                                               
|---------- | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit 32 | Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act 0f 2002

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FORWARD-LOOKING STATEMENTS

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

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PART I




ITEM I. FINANCIAL STATEMENTS




VINEYARD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(Unaudited except for December 31, 2002)

Dollars in ThousandsSeptember 30,
    
    December 31,2003
    
    2002AssetsCash and due from banks
    
    $
    19,199
    
    
    $
    17,533Federal funds sold
    
    
    
    
    
    
    15,829Total Cash and Cash Equivalents
    
    
    19,199
    
    
    
    33,362Investment securities, available-for-sale
    
    
    245,879
    
    
    
    87,553Loans, net of unearned income
    
    
    487,280
    
    
    
    251,139Loans held for sale
    
    
    1,414
    
    
    
    2,112Less: Allowance for possible loan losses
    
    
    (6,002
    )
    
    
    (3,003
    )Net Loans
    
    
    482,692
    
    
    
    250,248Bank premises and equipment, net
    
    
    7,885
    
    
    
    5,600Accrued interest
    
    
    2,940
    
    
    
    1,487Federal Home Loan Bank and other stock, at cost
    
    
    8,270
    
    
    
    2,270Deferred income tax asset
    
    
    5,836
    
    
    
    2,328Other assets
    
    
    6,276
    
    
    
    2,454Total Assets
    
    $
    778,977
    
    
    $
    385,302Liabilities and Stockholders EquityLiabilities
Deposits
Non-interest bearing
    
    $
    90,291
    
    
    $
    61,906Interest-bearing
    
    
    445,619
    
    
    
    225,606Total Deposits
    
    
    535,910
    
    
    
    287,512Federal Home Loan Bank advances
    
    
    155,000
    
    
    
    45,000Other borrowings
    
    
    2,200
    
    
    
    5,000Subordinated debentures
    
    
    5,000
    
    
    
    5,000Company obligated preferred securities of subsidiary trust holding
floating rate junior subordinated deferrable interest debentures
    
    
    27,000
    
    
    
    17,000Accrued interest and other liabilities
    
    
    3,962
    
    
    
    5,832Total Liabilities
    
    
    729,072
    
    
    
    365,344Stockholders EquityContributed capitalPerpetual preferred stock  authorized 10,000,000 shares;Series A  no par value, issued and outstanding 50 shares
in 2003 and 2002
    
    
    2,450
    
    
    
    2,450Series B  no par value, issued and outstanding 1,150,000
and 0 shares in 2003 and 2002, respectively
    
    
    26,549
    
    
    
    Common stock  no par value, authorized 15,000,000 shares;
issued and outstanding 2,983,040 and 2,849,680 shares in
2003 and 2002, respectively
    
    
    10,083
    
    
    
    6,052Additional paid-in capital
    
    
    3,307
    
    
    
    3,307Stock dividends to be distributed
    
    
    
    
    
    
    2,026Retained earnings
    
    
    11,215
    
    
    
    6,014Accumulated other comprehensive (loss) income
    
    
    (3,699
    )
    
    
    109Total Stockholders Equity
    
    
    49,905
    
    
    
    19,958Total Liabilities and Stockholders Equity
    
    $
    778,977
    
    
    $
    385,302


See accompanying notes to financial statements.

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VINEYARD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)

Dollars in Thousands (except per share amount)Nine Months Ended September 30,
    
    Three Months Ended September 30,2003
    
    2002
    
    2003
    
    2002Interest IncomeInterest and fees on loans
    
    $
    20,645
    
    
    $
    11,932
    
    
    $
    8,587
    
    
    $
    4,816Interest on investment securities
    
    
    5,469
    
    
    
    1,761
    
    
    
    2,384
    
    
    
    676Interest on federal funds sold
    
    
    90
    
    
    
    73
    
    
    
    21
    
    
    
    34Total Interest Income
    
    
    26,204
    
    
    
    13,766
    
    
    
    10,992
    
    
    
    5,526Interest ExpenseInterest on savings deposits
    
    
    52
    
    
    
    93
    
    
    
    19
    
    
    
    25Interest on NOW and money market deposits
    
    
    2,545
    
    
    
    1,009
    
    
    
    984
    
    
    
    481Interest on time deposits in denominations of $100,000 or more
    
    
    1,629
    
    
    
    955
    
    
    
    672
    
    
    
    354Interest on other time deposits
    
    
    1,445
    
    
    
    938
    
    
    
    602
    
    
    
    320Interest on other borrowings
    
    
    2,045
    
    
    
    1,038
    
    
    
    787
    
    
    
    374Total Interest Expense
    
    
    7,716
    
    
    
    4,033
    
    
    
    3,064
    
    
    
    1,554Net Interest Income
    
    
    18,488
    
    
    
    9,733
    
    
    
    7,928
    
    
    
    3,972Provision for Possible Loan Losses
    
    
    (2,210
    )
    
    
    (1,145
    )
    
    
    (460
    )
    
    
    (610
    )Net Interest Income After Provision
for Possible Loan Losses
    
    
    16,278
    
    
    
    8,588
    
    
    
    7,468
    
    
    
    3,362Other IncomeFees and service charges
    
    
    1,787
    
    
    
    1,105
    
    
    
    639
    
    
    
    365Net gain on sale of SBA loans
    
    
    750
    
    
    
    
    
    
    
    256
    
    
    
    Net gain on sale of investment securities
    
    
    1,571
    
    
    
    745
    
    
    
    
    
    
    
    566Litigation recovery
    
    
    
    
    
    
    540
    
    
    
    
    
    
    
    360Other income
    
    
    155
    
    
    
    150
    
    
    
    55
    
    
    
    48Total Other Income
    
    
    4,263
    
    
    
    2,540
    
    
    
    950
    
    
    
    1,339Other ExpenseSalaries and employee benefits
    
    
    5,902
    
    
    
    3,693
    
    
    
    2,404
    
    
    
    1,418Occupancy expense of premises
    
    
    976
    
    
    
    626
    
    
    
    434
    
    
    
    236Furniture and equipment
    
    
    779
    
    
    
    570
    
    
    
    322
    
    
    
    211Other
    
    
    3,743
    
    
    
    3,013
    
    
    
    1,345
    
    
    
    1,444Total Other Expense
    
    
    11,400
    
    
    
    7,902
    
    
    
    4,505
    
    
    
    3,309Income Before Income Taxes
    
    
    9,141
    
    
    
    3,226
    
    
    
    3,913
    
    
    
    1,392Income Tax Provision
    
    
    3,744
    
    
    
    1,310
    
    
    
    1,605
    
    
    
    584Net Income
    
    $
    5,397
    
    
    $
    1,916
    
    
    $
    2,308
    
    
    $
    808Basic Earnings Per Share
    
    $
    1.81
    
    
    $
    0.92
    
    
    $
    0.74
    
    
    $
    0.36Diluted Earnings Per Share
    
    $
    1.64
    
    
    $
    0.71
    
    
    $
    0.67
    
    
    $
    0.33


See accompanying notes to financial statements.

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VINEYARD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)

Dollars in ThousandsCommon Stock
    
    
    
    
    
    Stock
    
    
    
    
    
    
    
    
    
    AccumulatedPerpetual
    
    
    
    Additional
    
    Dividend
    
    
    
    
    
    
    
    
    
    OtherPreferred
    
    Number of
    
    
    
    
    
    Paid-in
    
    To Be
    
    Comprehensive
    
    Retained
    
    ComprehensiveStock
    
    Shares
    
    Amount
    
    Capital
    
    Distributed
    
    Income
    
    Earnings
    
    (Loss) Income
    
    TotalBalance, December 31, 2001
    
    $
    
    
    
    
    1,969,932
    
    
    $
    2,151
    
    
    $
    3,307
    
    
    $
    
    
    
    
    
    
    
    $
    5,032
    
    
    $
    (35
    )
    
    $
    10,455Stock options exercised
    
    
    
    
    
    
    38,150
    
    
    
    145
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145Conversion of convertible debentures
    
    
    
    
    
    
    787,500
    
    
    
    3,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,750Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,916
    
    
    
    1,916
    
    
    
    
    
    
    
    1,916Unrealized security holding
gains (net of $464 tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    640
    
    
    
    
    
    
    
    640
    
    
    
    640Less reclassification adjustment
for realized gains (net of $313
tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (432
    )
    
    
    
    
    
    
    (432
    )
    
    
    (432
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,124Balance, September 30, 2002
    
    $
    
    
    
    
    2,795,582
    
    
    $
    6,046
    
    
    $
    3,307
    
    
    $
    
    
    
    
    
    
    
    $
    6,948
    
    
    $
    173
    
    
    
    16,474


Common Stock
    
    
    
    
    
    Stock
    
    
    
    
    
    
    
    
    
    AccumulatedPerpetual
    
    
    
    Additional
    
    Dividend
    
    
    
    
    
    
    
    
    
    OtherPreferred
    
    Number of
    
    
    
    
    
    Paid-in
    
    To Be
    
    Comprehensive
    
    Retained
    
    ComprehensiveStock
    
    Shares
    
    Amount
    
    Capital
    
    Distributed
    
    Income
    
    Earnings
    
    (Loss) Income
    
    TotalBalance, December 31, 2002
    
    $
    2,450
    
    
    
    2,849,680
    
    
    $
    6,052
    
    
    $
    3,307
    
    
    $
    2,026
    
    
    
    
    
    
    $
    6,014
    
    
    $
    109
    
    
    $
    19,958Issuance of common stock
    
    
    
    
    
    
    166,212
    
    
    
    3,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,200Issuance of preferred stock
    
    
    26,549
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,549Stock options exercised
    
    
    
    
    
    
    43,750
    
    
    
    227
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    227Purchase of treasury stock
    
    
    
    
    
    
    (76,602
    )
    
    
    (1,420
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,420
    )Stock dividends distributed
    
    
    
    
    
    
    
    
    
    
    2,024
    
    
    
    
    
    
    
    (2,024
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash paid for fractional shares for stock
dividend distribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Cash dividends paid on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    
    
    
    
    (59
    )Cash dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )
    
    
    
    
    
    
    (137
    )Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,397
    
    
    
    5,397
    
    
    
    
    
    
    
    5,397Unrealized security holding losses
(net of $2,002 tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,881
    )
    
    
    
    
    
    
    (2,881
    )
    
    
    (2,881
    )Less reclassification adjustment
for realized gains (net of $644
tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (927
    )
    
    
    
    
    
    
    (927
    )
    
    
    (927
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,589Balance, September 30, 2003
    
    $
    28,999
    
    
    
    2,983,040
    
    
    $
    10,083
    
    
    $
    3,307
    
    
    $
    
    
    
    
    
    
    
    $
    11,215
    
    
    $
    (3,699
    )
    
    $
    49,905


See accompanying notes to financial statements.

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VINEYARD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)

Dollars in ThousandsSeptember 30,
    
    September 30,2003
    
    2002Reconciliation of Net Income to
Net Cash Provided by Operating ActivitiesNet Income
    
    $
    5,397
    
    
    $
    1,916Adjustments to Reconcile Net Income
to Net Cash Provided by Operating ActivitiesDepreciation
    
    
    576
    
    
    
    582Loss on disposal of property, plant & equipment
    
    
    27
    
    
    
    Investment securities accretion/amortization
    
    
    317
    
    
    
    275Provision for possible loan losses
    
    
    2,210
    
    
    
    1,145Adjustment to allowance for possible loan losses relating to acquired loans
    
    
    
    
    
    
    197Increase in deferred taxes
    
    
    (942
    )
    
    
    (Decrease)/increase in taxes payable
    
    
    (1,134
    )
    
    
    1,111Increase in other assets, net of acquired amounts
    
    
    (1,738
    )
    
    
    (192
    )Decrease in cash surrender value of life insurance policies
    
    
    14
    
    
    
    Gain on sale of investment securities
    
    
    (1,571
    )
    
    
    (745
    )Decrease in loans held for sale
    
    
    698
    
    
    
    3,522Increase/(decrease) in unearned loan fees
    
    
    1,393
    
    
    
    (345
    )Increase in interest receivable
    
    
    (1,453
    )
    
    
    (386
    )Increase/(decrease) in interest payable
    
    
    92
    
    
    
    (285
    )(Decrease)/increase in other liabilities, net of acquired amounts
    
    
    (1,132
    )
    
    
    30Total Adjustment
    
    
    (2,643
    )
    
    
    4,909Net Cash Provided By Operating Activities
    
    
    2,754
    
    
    
    6,825Cash Flows From Investing Activities
Proceeds from sales of investment securities/mortgage-backed securities
available-for-sale
    
    
    176,843
    
    
    
    80,798

Proceeds from maturities/calls of investment securities available-for-sale
    
    
    20,000
    
    
    
    13,500Proceeds from principal reductions/maturities of mortgage-backed securities
    
    
    14,543
    
    
    
    4,796Purchase of investment securities available-for-sale
    
    
    (30,002
    )
    
    
    (36,004
    )Purchase of mortgage-backed securities available-for-sale
    
    
    (344,913
    )
    
    
    (100,626
    )Purchase of Federal Home Loan Bank and other stock
    
    
    (5,946
    )
    
    
    (1,432
    )Net cash provided by acquisition
    
    
    12,766
    
    
    
    Recoveries on loans previously written off
    
    
    20
    
    
    
    132Net loans made and principal collection of loans, net of acquired amounts
    
    
    (217,027
    )
    
    
    (81,480
    )Capital expenditures
    
    
    (2,861
    )
    
    
    (689
    )Net Cash Used By Investing Activities
    
    
    (376,577
    )
    
    
    (121,005
    )Cash Flows From Financing ActivitiesNet increase in demand deposits, NOW accounts,
savings accounts, and money market deposits, net of acquired amounts
    
    
    114,359
    
    
    
    9,442Net increase in certificates of deposits, net of acquired amounts
    
    
    102,943
    
    
    
    84,070Net change in Federal Home Loan Bank advances
    
    
    110,000
    
    
    
    17,000Decrease in other borrowings
    
    
    (2,800
    )
    
    
    Net proceeds from issuance of series B preferred stock
    
    
    26,549
    
    
    
    Proceeds from issuance of trust preferred securities
    
    
    10,000
    
    
    
    Purchase of treasury stock
    
    
    (1,420
    )
    
    
    Dividends paid on perpetual preferred stock
    
    
    (137
    )
    
    
    Dividends paid on common stock
    
    
    (61
    )
    
    
    Stock options exercised
    
    
    227
    
    
    
    145Net Cash Provided By Financing Activities
    
    
    359,660
    
    
    
    110,657Net Decrease in Cash and Cash Equivalents
    
    
    (14,163
    )
    
    
    (3,523
    )Cash and Cash Equivalents, Beginning of year
    
    
    33,362
    
    
    
    14,710Cash and Cash Equivalents, End of quarter
    
    $
    19,199
    
    
    $
    11,187Supplemental InformationChange in valuation allowance for investment securities
    
    $
    (6,458
    )
    
    $
    359Interest paid
    
    $
    7,140
    
    
    $
    4,318Income tax paid
    
    $
    7,210
    
    
    $
    46Conversion of convertible debentures
    
    $
    
    
    
    $
    3,750


See accompanying notes to financial statements.

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Note #1  Nature of Business and Summary of Significant Accounting Policies

The accounting and reporting policies of Vineyard National Bancorp (the
Company) and its subsidiaries 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, 2003 and results of cash flows for the nine
months ended September 30, 2003 and 2002 and the results of operations for the
nine and three months ended September 30, 2003 and 2002.

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 2002 Annual
Report to shareholders. The results for the nine months ended September 30,
2003 and 2002 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
subsidiaries, Vineyard Bank (the Bank), Vineyard Statutory Trust I, Vineyard
Statutory Trust II and Vineyard Statutory Trust III. Intercompany balances and
transactions have been eliminated.

Nature of Operations

The Company is organized as a single reporting segment and operates several
full-service branches and loan production offices within San Bernardino,
Riverside, Orange, San Diego and Los Angeles counties in California. The
Company provides a variety of financial services to individuals and
small-to-medium sized businesses and offers a full range of commercial banking
services including the acceptance of checking and savings deposits, and
originating various types of installment, commercial and real estate loans.

Use of Estimates

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

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

While management uses available information to recognize losses on loans,
future additions to the allowances may be necessary based on changes in local
economic conditions. In addition, bank 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 may change.

Comprehensive Income

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

Reclassifications

Certain reclassifications have been made to the 2002 financial statements to
conform to 2003 classifications.

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Current Accounting Pronouncements

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

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

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based
CompensationTransition and Disclosure, an amendment of FASB Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 and Accounting Pronouncement Board
(APB) Opinion No. 28, Interim Financial Reporting, to require disclosure in
the summary of significant accounting policies of the effects of an entitys
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of SFAS No. 123 or the intrinsic value method of
APB Opinion No. 25. The provisions of SFAS No. 148 are effective for annual
financial statements for fiscal years ending after December 15, 2002, and for
financial reports containing condensed financial statements for interim period
beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a
material impact on the financial condition or operating results of the Company.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and loan commitments that relate to the
origination of mortgage loans held for sale, and for hedging activities under
SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into
or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a
material impact on the financial condition or operating results of the Company.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances.) Many of those
instruments were previously classified as equity. SFAS No. 150 is generally
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a
material impact on the financial condition or operating results of the Company.

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Note #2  Trust Preferred Securities

On December 18, 2001, Vineyard Statutory Trust I (Trust I), a wholly owned
subsidiary of the Company, issued $12.0 million of Floating Rate Trust
Securities (Trust Securities). The Trust I invested the gross proceeds from
the offering in Floating Rate Junior Subordinated Deferrable Interest
Debentures (Floating Rate Subordinated Debentures I) issued by the Company.
The Floating Rate Subordinated Debentures I were issued concurrent with the
issuance of the Trust Securities. The Company will pay the interest on the
Floating Rate Subordinated Debentures I to the Trust I, which represents the
sole revenue and sole source of dividend distributions by the Trust I to the
holders of the Trust Securities. The Company has guaranteed, on a subordinated
basis, payment of the Trust Is obligation. The Company has the right,
assuming no default has occurred, to defer payments of interest on the Floating
Rate Subordinated Debentures I at any time for a period not to exceed 20
consecutive quarters. The Trust Securities will mature on December 18, 2031
but can be called at any time commencing on December 18, 2006, at par.

On December 19, 2002, Vineyard Statutory Trust II (Trust II), a wholly owned
subsidiary of the Company, issued $5.0 million of Floating Rate Capital
Securities (Capital Securities II). The Trust II invested the gross proceeds
from the offering in Floating Rate Junior Subordinated Deferrable Interest
Debentures (Floating Rate Subordinated Debentures II) issued by the Company.
The Floating Rate Subordinated Debentures II were issued concurrent with the
issuance of the Capital Securities II. The Company will pay the interest on
the Floating Rate Subordinated Debentures II to the Trust II, which represents
the sole revenue and sole source of dividend distributions by the Trust II to
the holders of the Capital Securities II. The Company has guaranteed, on a
subordinated basis, payment of Trust IIs obligation. The Company has the
right, assuming no default has occurred, to defer payments of interest on the
Floating Rate Subordinated Debentures II at any time for a period not to exceed
20 consecutive quarters. The Capital Securities II will mature on December 26,
2032, but can be called at any time commencing on December 26, 2007, at par.

On September 25, 2003, Vineyard Statutory Trust III (Trust III), a wholly
owned subsidiary of the Company, issued $10.0 million of Floating Rate Capital
Securities (Capital Securities III). The Trust III invested the gross
proceeds from the offering in Floating Rate Junior Subordinated Deferrable
Interest Debentures (Floating Rate Subordinated Debentures III) issued by the
Company. The Floating Rate Subordinated Debentures III were issued concurrent
with the issuance of the Capital Securities III. The Company will pay the
interest on the Floating Rate Subordinated Debentures III to the Trust III,
which represents the sole revenue and sole source of dividend distributions by
the Trust III to the holders of the Capital Securities III. The Company has
guaranteed, on a subordinated basis, payment of Trust IIIs obligation. The
Company has the right, assuming no default has occurred, to defer payments of
interest on the Floating Rate Subordinated Debentures III at any time for a
period not to exceed 20 consecutive quarters. The Capital Securities III will
mature on October 8, 2033, but can be called one time on October 8, 2008, at
par.

Note #3  Convertible Debentures

On April 30, 2001, the Company issued $3.8 million in 10% convertible
debentures which were convertible into shares of the Companys common stock at
any time before maturity or redemption, at a conversion price of $5.00 per
share. The debentures could be redeemed at the Companys option, in whole or
in part at any time after July 1, 2003 and were due June 30, 2008. Interest on
the debentures was due quarterly at an annual rate of 10%. During 2002, the
Company offered the holders of the convertible debentures an incentive to
convert. This incentive totaled $0.3 million and is included in other
expenses. All debentures were converted in the third quarter of 2002. Total
interest expense for such debentures recorded for the three months ended
September 30, 2003 and 2002 was $0 and $0.1 million, respectively. Total
interest expense for such debentures recorded for the nine months ended
September 30, 2003 and 2002 was $0 and $0.3 million, respectively.

Note #4  Perpetual Preferred Stock

On December 18, 2002, the Company issued 50 shares of 7.0% Series A Preferred
Stock (Series A Preferred) at $50,000 per share to eight individual investors
for aggregate proceeds of $2.5 million. Each share of Series A Preferred is
entitled to a noncumulative, annual dividend of 7.0%, payable quarterly. The
Series A Preferred is not convertible into common stock and is redeemable at
the option of the Company at face value, plus any unpaid dividends declared.
The Series A Preferred qualifies as Tier I capital under the regulations of the
Federal Reserve Board. With each share of Series A Preferred, the Company
issued a warrant to purchase 2,000 shares of the Companys common stock at
$15.00 per share. The total number of shares issuable pursuant to the warrants
was increased to 105,000 shares and the per share exercise price has been
adjusted to $14.29 to reflect the 5% stock dividend declared by the Company on
December 23, 2002. Each warrant must be exercised prior to December 18, 2005
or it will expire pursuant to its terms. The Series A Preferred were offered
and sold pursuant to an exemption from the registration requirements under
Section 4(2) of the Securities Act of 1933, as amended.

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On September 19, 2003, the Company issued 1,150,000 shares of 5.6%
noncumulative convertible Series B Preferred Stock (Series B Preferred) at
$25.00 per share for aggregate proceeds of $28.8 million. Each share of Series
B Preferred is entitled to a noncumulative, annual dividend of 5.6%, payable
quarterly. Each share of Series B Preferred is convertible at the
shareholders option at any time into shares of the Companys common stock at a
conversion price of $34.88 per share of common stock. The Series B Preferred
is redeemable at the option of the Company at $25.00 per share, plus any unpaid
dividends declared, on or after September 19, 2005. The Series B Preferred is
also redeemable at the option of the Company prior to September 19, 2005, in
whole or in part, at $25.00 per share if the last reported sale price of the
Companys common stock has equaled or exceeded 125% of the Series B Preferred
conversion price of $34.88 per share for at least 30 consecutive trading days.
If all of the holders of the Series B Preferred convert their shares of Series
B Preferred into shares of the Companys common stock, it would increase the
Companys outstanding common stock by approximately 825,000 shares, assuming a
conversion price of $34.88. The Series B Preferred is traded on the American
Stock Exchange under the symbol VLP PrB.

Note #5  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, 2003 and December 31, 2002, the amounts of the Companys
undisbursed loan funds were approximately $315.0 million and $131.9 million,
respectively, and obligations under standby and commercial letters of credit of
approximately $0.9 million and $0.4 million, respectively. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based on
managements credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, income-producing
commercial properties, residential properties and properties under
construction.

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

In December 2001 and 2002 and September 2003, the Company issued trust
preferred securities through Trust I, Trust II and Trust III, respectively. In
connection with the issuance of these securities, the Company committed to
irrevocably and unconditionally guarantee the following payments or
distributions with respect to these securities to the holders thereof to the
extent that Trust I, Trust II and Trust III has not made such payments or
distributions and has the funds therefore: (i) accrued and unpaid
distributions, (ii) the redemption price, and (iii) upon a dissolution or
termination of the trust, the lesser of the liquidation amount and all accrued
and unpaid distributions and the amount of assets of the trust remaining
available for distribution.

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

Note #6  Dividends

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

In July 2003, the Company initiated the payment of a quarterly cash dividend
and declared a $0.02 per share cash dividend payable on August 26, 2003 to
shareholders of record as of August 11, 2003.

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Note #7  Earnings Per Share and Book Value

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

The EPS was adjusted to reflect a 5% stock dividend declared in December 2002.

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

For the Nine Months Ended September 30,
    
    For the Three Months Ended September 30,2003
    
    2002
    
    2003
    
    2002Income
    
    Shares
    
    Income
    
    Shares
    
    Income
    
    Shares
    
    Income
    
    SharesNet income as reported
    
    $
    5,397
    
    
    
    
    
    
    $
    1,916
    
    
    
    
    
    
    $
    2,308
    
    
    
    
    
    
    $
    808Less: common stock dividend
    
    
    (59
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    
    
    
    
    Less: preferred stock dividend
    
    
    (137
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44
    )
    
    
    
    
    
    
    Shares outstanding at end of period
    
    
    
    
    
    
    2,983,040
    
    
    
    
    
    
    
    2,795,582
    
    
    
    
    
    
    
    2,983,040
    
    
    
    
    
    
    
    2,795,582Impact of weighting shares issued/
(purchased) during the period
    
    
    
    
    
    
    (110,149
    )
    
    
    
    
    
    
    (709,716
    )
    
    
    
    
    
    
    (15,822
    )
    
    
    
    
    
    
    (520,740
    )Used in Basic EPS
    
    $
    5,201
    
    
    
    2,872,891
    
    
    $
    1,916
    
    
    
    2,085,866
    
    
    $
    2,205
    
    
    
    2,967,218
    
    
    $
    808
    
    
    
    2,274,842Plus: Interest on Convertible Debentures
assuming conversion (after tax)
    
    
    
    
    
    
    
    
    
    
    148Dilutive effect of outstanding
stock options and warrants
    
    
    
    
    
    
    293,309
    
    
    
    
    
    
    
    137,885
    
    
    
    
    
    
    
    321,881
    
    
    
    
    
    
    
    175,916Dilutive effect of convertible
debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    689,192Used in diluted EPS
    
    $
    5,201
    
    
    
    3,166,200
    
    
    $
    2,064
    
    
    
    2,912,943
    
    
    $
    2,205
    
    
    
    3,289,099
    
    
    $
    808
    
    
    
    2,450,758


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The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition of SFAS No. 123,
Accounting for Stock Based Compensation, to stock based employee compensation
(dollar amounts in thousands, except per share data):

For the Nine Months Ended
    
    For the Three Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net income:As reported
    
    $
    5,397
    
    
    $
    1,916
    
    
    $
    2,308
    
    
    $
    808Less: Common stock dividend
    
    
    (59
    )
    
    
    
    
    
    
    (59
    )
    
    
    Less: Preferred stock dividend
    
    
    (137
    )
    
    
    
    
    
    
    (44
    )
    
    
    Stock-based compensation using the intrinsic value method
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation that would have been reported
using the fair value method of SFAS 123
    
    
    (186
    )
    
    
    (309
    )
    
    
    (18
    )
    
    
    (46
    )Pro Forma Net Income  Used in Basic Earnings Per Share
    
    
    5,015
    
    
    
    1,607
    
    
    
    2,187
    
    
    
    762Add: interest expense on convertible debt
    
    
    
    
    
    
    148
    
    
    
    
    
    
    
    Pro Forma Net Income  Used in Diluted Earnings Per Share
    
    $
    5,015
    
    
    $
    1,755
    
    
    $
    2,187
    
    
    $
    762Weighted Average Shares Outstanding  Basic
    
    
    2,872,891
    
    
    
    2,085,866
    
    
    
    2,967,218
    
    
    
    2,274,842Weighted Average Shares Outstanding  Diluted
    
    
    3,166,200
    
    
    
    2,912,943
    
    
    
    3,289,099
    
    
    
    2,450,758Basic Earnings per shareAs reported
    
    $
    1.81
    
    
    $
    0.92
    
    
    $
    0.74
    
    
    $
    0.36Pro forma
    
    $
    1.75
    
    
    $
    0.77
    
    
    $
    0.74
    
    
    $
    0.33Earnings per share  assuming dilutionAs reported
    
    $
    1.64
    
    
    $
    0.71
    
    
    $
    0.67
    
    
    $
    0.33Pro forma
    
    $
    1.58
    
    
    $
    0.60
    
    
    $
    0.66
    
    
    $
    0.31


The following table sets forth the information that was used in calculating the
Companys book value per common share as of September 30, 2003 and December 31,
2002:

September 30,
    
    December 31,2003
    
    2002Period-end shares outstandingBasic
    
    
    2,983,040
    
    
    
    2,849,680Dilutive Warrants
    
    
    0
    
    
    
    0Dilutive Options
    
    
    0
    
    
    
    0Used in book value per
common share
    
    
    2,983,040
    
    
    
    2,849,680Book value per common share
    
    $
    7.01
    
    
    $
    6.11


Note #8  Acquisition of Southland Business Bank

On July 4, 2003, the Bank acquired Southland Business Bank, a
California-chartered commercial bank (Southland) located in Irwindale,
California. The shareholders of Southland received total consideration of $3.2
million for the 527,906 shares of Southland common stock outstanding which was
paid in 166,212 newly issued shares of common stock of the Company.

The Bank accounted for the acquisition as a purchase using the accounting
standards No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. The accounting rules require that the goodwill arising
from the purchase method of accounting not be amortized, however, it must be
tested for impairment at least

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annually.

The estimated fair values of assets acquired and liabilities assumed at July 4,
2003 are as follows (dollar amounts in thousands):

Cash
    
    $
    12,766Loans, net
    
    
    19,736Other assets
    
    
    2,098Total assets acquired
    
    
    34,600Demand, NOW, savings and
money market deposits
    
    
    23,007Time deposits
    
    
    8,089Other liabilities
    
    
    304Total liabilities assumed
    
    
    31,400Net assets acquired
    
    $
    3,200


Note #9  Subsequent Events

In October 2003, the Company announced the declaration of a cash dividend of
$0.03 per share payable on November 17, 2003 to shareholders of record as of
November 7, 2003.

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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.

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

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, 2003, the Company had
consolidated total assets of $779.0 million, total deposits of $535.9 million
and consolidated stockholders equity of $49.9 million. The Companys common
stock is publicly traded on the Nasdaq National Market under the symbol VNBC.
In July 2003, the Company completed the acquisition of Southland Business
Bank, a California-chartered commercial bank, (Southland) located in
Irwindale, California. At July 4, 2003, the date of acquisition, Southland had
total assets of $33.0 million, total deposits of $31.2 million and total
stockholders equity of $1.6 million. In September 2003, the Company completed
its offering of Series B Preferred. The Company sold 1,150,000 shares of the
Series B Preferred at $25.00 per share. The Company received approximately
$26.5 million in net proceeds from the offering.

The Bank, which is the Companys primary asset, 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 branch offices
located in each of the communities of Rancho Cucamonga, Chino, Diamond Bar, La
Verne, Crestline, Blue Jay, Irwindale, Corona and Manhattan Beach, all of which
are located within Los Angeles, Riverside and San Bernardino counties,
California, and currently has three loan production offices located in Irvine,
San Diego and Beverly Hills, California.

The Companys Strategic Plan

Since the hiring of the Companys president and chief executive officer in
October 2000, the Company has experienced significant growth pursuant to the
execution of the Companys strategic business plan, which emphasizes growth
through the expansion of the Companys lending products and deposit services.
As the Company 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 Companys new management team has focused its efforts into developing a
customer-oriented service philosophy, while expanding the Companys lending
products by creating various specialty lending groups. The Company 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 Company has targeted these markets because of the Companys experience and
knowledge of, as well as the anticipated continued growth and potential for
development in, these markets.

Expanded Product Offering.During the last two 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 higher-end market
single-family construction loans within the coastal community of Los
Angeles County, California (primarily Manhattan Beach, Hermosa
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Beach, Palos Verdes and Redondo Beach) where the Company believes
it has significant market share. These types of construction
loans typically range from $0.8 million to $2.5 million. The
Banks single-family residential coastal construction loans
amounted to $178.6 million at September 30, 2003 and $89.5 million
at December 31, 2002.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 $7.5 million. The Banks
single-family residential tract construction loans amounted to $86.1
million at September 30, 2003 and $14.2 million at December 31,
2002.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In 2002, the Bank also began originating Small Business
Administration (SBA) loans and religious loans, which are
compromised of loans to churches and private schools, throughout its
market area. SBA loans amounted to $7.2 million at September 30,
2003 and $3.5 million at December 31, 2002. Religious loans
amounted to $10.0 million at September 30, 2003. The Company did
not have any outstanding religious loans at December 31, 2002. The
Company anticipates significantly increasing the origination of
these types of loans.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In 2003, the Bank began offering private banking services
targeted to high-income individuals in the coastal communities
surrounding Los Angeles.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In the third quarter of 2003, the Bank established a new
income property lending division to service the growing commercial
and apartment building market in Southern California.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In order to expand the Banks core deposit franchise, the
Bank has focused on introducing additional products and services to
obtain money market and time deposits by bundling them with other
consumer services. 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
Banks core deposit franchise has been built around the community
banking system, which has resulted in deposit growth of 86.4% for
the nine months ended September 30, 2003 and 80.4% for the year
ended December 31, 2002. At September 30, 2003, total deposits of
the Bank amounted to $542.4 million and non-interest bearing demand
deposits amounted to $96.7 million.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Each of the foregoing specialty lending groups and depository services bring
diversity to the Banks existing product lines, offering its customers greater
flexibility while providing additional opportunities for the Bank to serve new
customers within its primary market areas. The Banks total loan growth
amounted to 92.3% for the nine months ended September 30, 2003 compared to
84.1% for the year ended December 31, 2002.

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. The Company
believes that relationship banking is best delivered in well-appointed and
efficient banking centers that provide the appropriate tools and environment
for the Companys customers. To that end, the Banks facilities are being
redesigned to incorporate user-friendly technology and personal service to
facilitate the Companys 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. The Company will
continue to expand its branch network through new offices in selected markets
and opportunistic acquisitions. The Company opened a new branch office in
Corona, California in the second quarter of 2003 and converted its loan
production office in Manhattan Beach, California into a full-service branch
office during the third quarter of 2003. In addition, the Bank opened an
additional loan production office in Irvine, California during the third
quarter of 2003. As a result of the Southland acquisition, the Company
acquired a branch office in Irwindale, California.

Asset Growth.The Companys total assets as of September 30, 2003 were $779.0
million as compared to $110.8 million as of December 31, 2000. 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 the Company believes provide for a rigorous underwriting of all
loans originated by the Bank. At September 30, 2003, the Bank had $0.3 million
of non-performing loans and no other real estate owned.

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Results of Operations

Net income for the three months ended September 30, 2003 and 2002, was $2.3
million and $0.8 million, respectively, representing an increase of 188% for
the three months ended September 30, 2003 as compared to the same period in
2002. The increase in net income is primarily due to an increase in interest
income generated from a higher level of loans and investment securities
partially offset by an increase in interest expense incurred from a higher
level of deposits. On a per diluted share basis, net income was $0.67 and
$0.33 for the three months ended September 30, 2003 and 2002, respectively.

Net income for the nine months ended September 30, 2003 and 2002, was $5.4
million and $1.9 million, respectively, representing an increase of 184% for
the nine months ended September 30, 2003 as compared to the same period in
2002. The increase in net income is primarily due to an increase in interest
income generated from a higher level of loans and investment securities
partially offset by an increase in interest expense incurred from a higher
level of deposits. On a per diluted share basis, net income was $1.64 and
$0.71 for the nine months ended September 30, 2003 and 2002, respectively.

Operating results demonstrated a significant increase in the first nine months
of 2003 over the same period in 2002 as the volume of earning assets increased.
The growth in earning assets was primarily funded by the growth in deposits
and other borrowings. The catalyst for the Companys growth continues to be
its efforts to attract stable, core deposits from within the Banks community
markets.

The Companys net interest income before its provision for possible loan losses
increased by $4.0 million or 100% for the three months ended September 30, 2003
as compared with the third quarter of 2002. Non-interest income decreased by
$0.4 million or 29% in the third quarter of 2003 as compared to the same period
in 2002. Thus, total net revenue (net interest income and non-interest income)
for the three months ended September 30, 2003 increased by $3.6 million or 67%
as compared to the same period in 2002.

The Companys net interest income before its provision for possible loan losses
increased by $8.8 million or 90% for the nine months ended September 30, 2003
as compared with the first nine months of 2002. Non-interest income increased
by $1.7 million or 68% in the first nine months of 2003 as compared to the same
period in 2002. Thus, total net revenue for the nine months ended September
30, 2003 increased by $10.5 million or 85% as compared to the same period in
2002.

Total non-interest expense was $4.5 million and $3.3 million for the three
months ended September 30, 2003 and 2002, respectively. This represents an
increase of $1.2 million or 36%. The largest item contributing to non-interest
expense was salaries and benefits which represented approximately 50% of total
non-interest expense for each of those periods. In order to support its
growth, the Company hired additional employees for business development and
several experienced managers in fiscal 2002 and 2003. The Companys efficiency
ratio, however, which is a measure of non-interest expense divided by net
interest income plus non-interest income, improved from 62% for the three
months ended September 30, 2002 to 51% for the three months ended September 30,
2003 due to the Company achieving efficiencies of scale as it continues to
grow.

Total non-interest expense was $11.4 million and $7.9 million for the nine
months ended September 30, 2003 and 2002, respectively. This was an increase
of $3.5 million or 44%. The primary reason for the increase in non-interest
expense was the increase in salaries and benefits associated with the opening
of new branch offices and adding new lines of businesses. Although the
Companys non-interest expense increased during the period, the Companys
efficiency ratio improved from 64% for the nine months ended September 30, 2002
to 50% for the nine months ended September 30, 2003.

The quality of the Companys loan portfolio continued to perform well as
compared to peer group standards, producing net charge-offs of $120,000 and
$106,000 in the three and nine months ended September 30, 2003, respectively,
as compared to $15,000 and $107,000 in net loan charge-offs for the same
periods in 2002, respectively. The provision for possible loan losses was $0.5
million and $2.2 million for the three and nine months ended September 30,
2003, respectively. This compares to a provision for possible loan losses in
the amount of $0.6 million and $1.1 million for the three and nine months ended
September 30, 2002, respectively. The provision for possible loan losses was
increased to support the increasing loan balances for each of the periods
presented as well as to reflect the increased risk of the higher yielding loans
that the Company has emphasized during the periods. The allowance for possible
loan losses at September 30, 2003 was $6.0 million or 1.22% of total loans as
compared to $2.7 million or 1.24% of total loans at September 30, 2002. At
September 30, 2003, the Company reported $0.3 million of impaired or
non-performing loans and $0 of other real estate owned through foreclosure as
compared to $0.1 million and $0 at September 30, 2002.

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Beginning in early 2001, the Company began to implement an asset/liability
management strategy that was built around the risk elements of interest rate,
asset duration and funding risks. A component of this strategy was to deploy
excess liquidity previously invested in federal funds into higher yielding
mortgage-backed securities with relatively short duration and high cash flow
components. The Company increased the investment portfolio accordingly, which
enhanced the Companys overall yields and better addressed the risk elements
identified above. The investment portfolio is classified as held-for-sale and
securities can be sold at any time. The Company recorded gains on sale of
investments of $0 and $1.6 million for the three and nine months ended
September 30, 2003, respectively. This compares to gains on sale of investment
securities of $0.6 million and $0.7 million for the quarter and nine months
ended September 30, 2002, respectively. The Companys investment securities
increased by $177.0 million to $245.9 million at September 30, 2003, as
compared to $68.9 million at September 30, 2002. The increase in investment
securities provided an increase of $1.7 million and $3.7 million in interest
income for the three and nine month periods ended September 30, 2003,
respectively, as compared to the same periods in 2002. Interest income from
investment securities for the three months ended September 30, 2003 and 2002
was $2.4 million and $0.7 million, respectively. Interest income from
investment securities for the nine months ended September 30, 2003 and 2002 was
$5.5 million and $1.8 million, respectively.

At September 30, 2003, the Banks equity was $74.6 million. As a result, the
Bank exceeded the required capital levels to be considered well capitalized.
Pursuant to regulatory guidelines under prompt corrective action rules, a bank
must have total risk-based capital of 10% or greater, Tier 1 capital of 6% or
greater and a leverage ratio of 5% or greater to be considered well
capitalized. At September 30, 2003, the Banks total risk-based capital, Tier
1 capital and leverage ratios were 15.0%, 14.0% and 11.0%, 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, 2003, the Companys total
risk-based capital, Tier 1 capital and leverage ratios were 16.3%, 12.7%, and
10.0%, respectively.

Net Interest Income

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

Total interest income for the three months ended September 30, 2003 and 2002
was $11.0 million and $5.5 million, respectively, while total interest expense
was $3.1 million and $1.5 million, respectively, during the same periods.
Therefore, the net interest income was $7.9 million and $4.0 million for the
quarters ended September 30, 2003 and 2002, respectively.

Total interest income for the nine months ended September 30, 2003 and 2002 was
$26.2 million and $13.7 million, respectively, while total interest expense was
$7.7 million and $4.0 million, respectively, during the same periods.
Therefore, the net interest income was $18.5 million and $9.7 million for the
nine months ended September 30, 2003 and 2002, respectively.

The net interest margin for the three month period ended September 30, 2003 was
4.7% as compared to 5.9% for the third quarter of 2002 which is a decrease of
120 basis points. At January 31, 2002, the national prime rate was 4.75%.
During the fourth quarter of 2002, the Federal Reserve Bank 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 4.00%. Primarily as a result of the interest rate environment, the Company
has experienced some compression in its net interest margin as new loans are
generated, or existing loans are repriced, at a lower interest rate. Interest
yield on loans decreased from 9.2% for the quarter ended September 30, 2002 to
7.6% for the quarter ended September 30, 2003. Although the Bank has many
loans that have reached their floor rates and have not continued to adjust
downwards as interest rates declined, certain higher rate loans that paid off
were replaced with new loans originated at lower market rates. Loan fees, which
are included in interest income, also contributed to interest income.
Construction loans and commercial real estate loans generate the bulk of all
loan fee income. As the Company continues its emphasis in single-family
coastal and tract home construction loans, the volume of construction fees has
increased since the third quarter of 2002. Loan fees are deferred and
amortized over the life of the loans. 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 will increase as a result. For the three
months ended September 30, 2003, loan fee income represented $1.3

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million or 16% of the $8.6 million in interest and fees on loans. For the
three months ended September 30, 2002, loan fee income was $1.1 million or 22%
of the $4.8 million in interest and fees on loans.

The net interest margin for the nine month period ended September 30, 2003 was
4.7% as compared to 5.7% for the nine months ended September 30, 2002 which is
a decrease of 100 basis points. Interest yield on loans decreased from 9.2%
for the nine months ended September 30, 2002 to 7.7% for the same period in
2003. For the nine months ended September 30, 2003, loan fee income
represented $2.9 million or 14% of the $20.6 million in interest and fees on
loans. For the nine months ended September 30, 2002, loan fee income was $2.4
million or 20% of the $11.9 million in interest and fees on loans.

Total interest expense was $3.1 million and $1.6 million for the three months
ended September 30, 2003 and 2002, respectively, for a total increase of $1.5
million. Interest expense on deposits totaled $2.3 million during the three
months ended September 30, 2003 compared to $1.2 million during the three
months ended September 30, 2002 representing an increase of $1.1 million. The
decrease in interest rates partially offset the increase in interest expense
associated with an increase in the Companys interest-bearing deposits during
the periods. The cost of funds of deposits includes non-interest bearing
deposits. Average non-interest bearing deposits increased from $57.2 million
for the quarter ended September 30, 2002 to $85.9 million for the quarter ended
September 30, 2003.

The average interest rate on Federal Home Loan Bank (FHLB) and other
borrowings decreased from 1.9% for the quarter ended September 30, 2002 to 1.5%
for the quarter ended September 30, 2003 as market rates decreased during the
period, as discussed above. The average interest rate on these borrowings
decreased from 1.9% for the nine months ended September 30, 2002 to 1.6% for
the nine months ended September 30, 2003.

An additional form of funding for the Banks growth is debt issued by the
Company which resulted in a higher consolidated cost of funds beyond that of
deposits and FHLB borrowings. In September 2003 and December 2002 and 2001,
the Company issued trust preferred securities of $10.0 million, $5.0 million
and $12.0 million, respectively. Additionally, the Company issued $5.0 million
in subordinated debt in December 2002. In September 2003, the Company paid off
its $5.0 million line of credit with a portion of the proceeds raised in the
Companys offering of its Series B Preferred. Those instruments bear variable
interest rates indexed to LIBOR and adjust on a quarterly basis. The
consolidated cost of funds for the Company for the three months ended September
30, 2003 was 2.1%, down from 2.9% for the same period ended September 30, 2002.
As market rates have decreased, the interest on these variable notes has
decreased. The consolidated cost of funds for the Company for the nine months
ended September 30, 2003 was 2.3%, down from 3.0% for the same period ended
September 30, 2002.

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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,
2003 and 2002.

Dollars in ThousandsFor the Three Months Ended September 30,2003
    
    2002Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Yield/Cost
    
    Balance
    
    Interest
    
    Yield/CostAssetsLoans
    
    $
    449,458
    
    
    $
    8,587
    
    
    
    7.6
    %
    
    $
    206,942
    
    
    $
    4,816
    
    
    
    9.2
    %Investment securities1
    
    
    208,791
    
    
    
    2,312
    
    
    
    4.4
    %
    
    
    50,350
    
    
    
    642
    
    
    
    5.0
    %Federal funds sold
    
    
    8,986
    
    
    
    21
    
    
    
    0.9
    %
    
    
    8,061
    
    
    
    34
    
    
    
    1.7
    %Other investments
    
    
    7,171
    
    
    
    72
    
    
    
    4.0
    %
    
    
    1,601
    
    
    
    34
    
    
    
    8.4
    %Total Interest-earning assets
    
    
    674,406
    
    
    
    10,992
    
    
    
    6.5
    %
    
    
    266,954
    
    
    
    5,526
    
    
    
    8.2
    %Other assets
    
    
    29,353
    
    
    
    
    
    
    
    
    
    
    
    19,670Less: allowance for possible loan
losses
    
    
    (5,718
    )
    
    
    
    
    
    
    
    
    
    
    (2,260
    )Total average assets
    
    $
    698,041
    
    
    
    
    
    
    
    
    
    
    $
    284,364Liabilities and Stockholders EquitySavings deposits
    
    $
    220,785
    
    
    
    1,003
    
    
    
    1.8
    %
    
    $
    98,790
    
    
    
    506
    
    
    
    2.0
    %Time deposits
    
    
    192,008
    
    
    
    1,274
    
    
    
    2.6
    %
    
    
    76,911
    
    
    
    674
    
    
    
    3.5
    %Subordinated debt
    
    
    5,000
    
    
    
    52
    
    
    
    4.1
    %
    
    
    
    
    
    
    
    
    
    
    Convertible debentures
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    3,650
    
    
    
    91
    
    
    
    9.9
    %Trust Preferred Securities
    
    
    17,543
    
    
    
    201
    
    
    
    4.5
    %
    
    
    12,000
    
    
    
    170
    
    
    
    5.6
    %FHLB and other borrowings
    
    
    145,808
    
    
    
    534
    
    
    
    1.5
    %
    
    
    23,874
    
    
    
    113
    
    
    
    1.9
    %Total interest-bearing liabilities
    
    
    581,144
    
    
    
    3,064
    
    
    
    2.1
    %
    
    
    215,225
    
    
    
    1,554
    
    
    
    2.9
    %Demand deposits
    
    
    86,064
    
    
    
    
    
    
    
    
    
    
    
    57,225Other liabilities
    
    
    4,940
    
    
    
    
    
    
    
    
    
    
    
    1,564Total average liabilities
    
    
    672,148
    
    
    
    
    
    
    
    
    
    
    
    274,014Stockholders equity
    
    
    25,893
    
    
    
    
    
    
    
    
    
    
    
    10,350Total liabilities and
Stockholders equity
    
    $
    698,041
    
    
    
    
    
    
    
    
    
    
    $
    284,364Net interest spread 2
    
    
    
    
    
    
    
    
    
    
    4.4
    %
    
    
    
    
    
    
    
    
    
    
    5.3
    %Net interest income
and net interest margin 3
    
    
    
    
    
    $
    7,928
    
    
    
    4.7
    %
    
    
    
    
    
    $
    3,972
    
    
    
    5.9
    %


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For the Nine Months Ended September 30,2003
    
    2002Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Yield/Cost
    
    Balance
    
    Interest
    
    Yield/CostAssetsLoans
    
    $
    360,820
    
    
    $
    20,645
    
    
    
    7.7
    %
    
    $
    173,593
    
    
    $
    11,932
    
    
    
    9.2
    %Investment securities 1
    
    
    151,236
    
    
    
    5,299
    
    
    
    4.7
    %
    
    
    46,584
    
    
    
    1,718
    
    
    
    4.9
    %Federal funds sold
    
    
    10,946
    
    
    
    90
    
    
    
    1.1
    %
    
    
    5,929
    
    
    
    73
    
    
    
    1.6
    %Other investments
    
    
    5,065
    
    
    
    170
    
    
    
    4.5
    %
    
    
    1,044
    
    
    
    43
    
    
    
    5.5
    %Total Interest-earning assets
    
    
    528,067
    
    
    
    26,204
    
    
    
    6.6
    %
    
    
    227,150
    
    
    
    13,766
    
    
    
    8.1
    %Other assets
    
    
    26,371
    
    
    
    
    
    
    
    
    
    
    
    19,326Less: allowance for possible loan
losses
    
    
    (4,304
    )
    
    
    
    
    
    
    
    
    
    
    (1,838
    )Total average assets
    
    $
    550,134
    
    
    
    
    
    
    
    
    
    
    $
    244,638Liabilities and Stockholders EquitySavings deposits
    
    $
    180,851
    
    
    
    2,597
    
    
    
    1.9
    %
    
    
    77,278
    
    
    
    1,102
    
    
    
    1.9
    %Time deposits
    
    
    144,509
    
    
    
    3,074
    
    
    
    2.8
    %
    
    
    68,596
    
    
    
    1,893
    
    
    
    3.7
    %Subordinated debt
    
    
    5,000
    
    
    
    162
    
    
    
    4.3
    %
    
    
    
    
    
    
    
    
    
    
    Convertible debentures
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    3,650
    
    
    
    278
    
    
    
    10.2
    %Trust preferred securities
    
    
    17,183
    
    
    
    616
    
    
    
    4.8
    %
    
    
    12,000
    
    
    
    507
    
    
    
    5.6
    %FHLB and other borrowings
    
    
    105,966
    
    
    
    1,267
    
    
    
    1.6
    %
    
    
    18,004
    
    
    
    253
    
    
    
    1.9
    %Total interest-bearing liabilities
    
    
    453,509
    
    
    
    7,716
    
    
    
    2.3
    %
    
    
    179,528
    
    
    
    4,033
    
    
    
    3.0
    %Demand deposits
    
    
    70,008
    
    
    
    
    
    
    
    
    
    
    
    51,997Other liabilities
    
    
    4,854
    
    
    
    
    
    
    
    
    
    
    
    1,306Total average liabilities
    
    
    528,371
    
    
    
    
    
    
    
    
    
    
    
    232,831Stockholders equity
    
    
    21,763
    
    
    
    
    
    
    
    
    
    
    
    11,807Total liabilities and
Stockholders equity
    
    $
    550,134
    
    
    
    
    
    
    
    
    
    
    $
    244,638Net interest spread 2
    
    
    
    
    
    
    
    
    
    
    4.3
    %
    
    
    
    
    
    
    
    
    
    
    5.1
    %Net interest income
and net interest margin 3
    
    
    
    
    
    $
    18,488
    
    
    
    4.7
    %
    
    
    
    
    
    $
    9,733
    
    
    
    5.7
    %




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

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Provision for Possible Loan Losses

For the three months ended September 30, 2003 and 2002, the provision for loan
losses was $0.5 million and $0.6 million, respectively. Total provision for
possible loan losses was $2.2 million for the nine month period ended September
30, 2003 as compared to $1.1 million for the same period in 2002. The provision
for loan losses has increased to support the significant growth in loans
experienced during such periods and to reflect the increased risk of the higher
yielding loans that the Company has emphasized during the periods.

The Companys allowance for possible loan losses was $6.0 million or 1.22% of
gross loans at September 30, 2003 compared to $2.7 million or 1.24% of gross
loans at September 30, 2002. At December 31, 2002, the allowance for possible
loan losses was $3.0 million or 1.18% of gross loans. Additions to the reserve
are effected through the provision for possible loan losses. Also affecting
the reserve are loans charged off and loans recovered. Net loan charge-offs
for the three months ended September 30, 2003 were $120,000 whereas net loan
charge-offs for the three months ended September 30, 2002 were $15,000. Net
loan charge-offs for the nine months ended September 30, 2003 were $106,000
whereas net loan charge-offs for the same period in 2002 were $107,000. Also,
a further addition to the allowance for possible loan losses during the nine
months ended September 30, 2003, was an adjustment of $895,000 relating to the
purchased allowance for possible loan losses of Southland. An addition to the
allowance for possible loan losses during the nine months ended September 30,
2002, was an adjustment of $197,000 relating to the purchased allowance for
possible loan losses on an acquired loan portfolio.

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

Non-Interest Income

Non-interest income for the three and nine months ended September 30, 2003 was
$1.0 million and $4.3 million, respectively, as compared to $1.3 million and
$2.5 million for the same respective periods of 2002. This represents a
decrease of $0.3 million or 29% and an increase of $1.8 million or 68%,
respectively. The three and nine month periods ended September 30, 2002
include $0.4 million and $0.5 million, respectively, for a litigation recovery
from the Companys former commercial insurance carriers.

In the fourth quarter of 2002, the Company began its SBA lending department.
The guaranteed portions of the SBA loans originated are eventually sold. The
sale of the guaranteed portion of the SBA loans generated income of $0.3
million and $0.8 million for the three and nine months ended September 30,
2003, respectively.

For the three and nine months ended September 30, 2003, net gains from the sale
of investment securities amounted to $0 and $1.6 million, respectively, as
compared to $0.6 million and $0.7 million for the same periods in 2002,
respectively. The gains were a result of the sale of investment securities in
order to manage liquidity needs, interest rate risk, and strategic planning in
meeting capital requirements during a period when market rates were favorable.

Income from fees and service charges also increased $0.3 million and $0.7
million for the three and nine months ended September 30, 2003 as compared to
the same periods in 2002 as the volume of loans and deposits have increased.

Non-Interest Expenses

The Companys non-interest expense for the three and nine months ended
September 30, 2003 was $4.5 million and $11.4 million, respectively, as
compared to $3.3 million and $7.9 million for the same periods in 2002,
respectively. The increases for the three and nine months ended September 30,
2003 as compared to the same periods in 2002 were $1.2 million or 36% and $3.5
million or 44%, respectively. Non-interest expense consists primarily of (i)
salaries and other employee expenses, (ii) occupancy expenses, (iii) furniture
and equipment expenses, and (iv) data processing, marketing, professional fees,
office supplies, postage and telephone, insurance and assessments,
administrative, and other non-interest expense.

Salaries and employee benefits are 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

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following areas, a seasoned and experienced individual has been recruited from
other local financial institutions to head their respective area: credit
administration, loan operations and construction support, SFR construction
business development, marketing, information technology, community banking,
finance and human resources. Additional personnel have been placed in business
development capacities for commercial and community banking. With the addition
of these individuals to the Companys existing personnel, the Company has been
able to produce significant growth in deposits and loans in 2003 and 2002,
while providing the infrastructure needed to support longer-term growth. The
Companys salaries and employee benefits expense increased by $2.2 million or
60% to $5.9 million for the nine months ended September 30, 2003 from $3.7
million for the nine months ended September 30, 2002.

Occupancy expense increased $0.2 million or 84% and $0.4 million or 56% for the
three and nine months ended September 30, 2003, respectively, from $0.2 million
and $0.6 million in the same periods of 2002, respectively. In 2002, the loan
production office in Manhattan Beach expanded into a larger facility to
accommodate additional staff as the single family coastal construction loan
production increased. The Company also entered into new office leases in San
Diego and Beverly Hills for the production of SBA loans as the Company began
its SBA lending department in the fourth quarter of 2002. In addition, the
Corona branch location was opened early in the second quarter of 2003 and the
Irvine and Irwindale locations were added in the third quarter of 2003.
Correspondingly, expenses related to furniture and fixtures increased $0.1
million or 53% and $0.2 million or 37% in the three and nine months ended
September 30, 2003, respectively, as compared to the same periods in 2002.

Other non-interest expense decreased $0.1 million or 7% and increased $0.7
million or 24% for the three and nine months ended September 30, 2003 as
compared to the respective prior periods in 2002. The decrease for the three
month period ended September 30, 2003, versus the three month period ended
September 30, 2002, was due to the one-time debenture conversion expense of
$0.3 million in the third quarter of 2002. Other non-interest expenses
increased significantly due primarily to the Companys implementation of its
strategy to grow the Company. All categories of other non-interest expense,
with the exception of data processing, increased including marketing,
professional services, office supplies, postage and telephone, insurance and
administrative expenses due to increases in the number of employees and the
volume of loan and deposit production. In particular, the Companys marketing
expense increased significantly from $0.5 million in the first nine months of
2002 to $0.9 million in the first nine months of 2003 as the Company increased
its advertising and promotional campaigns in its communities.

The following is a breakdown of other non-interest expense for the nine and
three months ended September 30, 2003 and 2002 (in thousands):

Nine Months Ended September 30,
    
    Three Months Ended September 30,2003
    
    2002
    
    2003
    
    2002Other non-interest expense:Data processing
    
    $
    489
    
    
    $
    513
    
    
    $
    170
    
    
    $
    157Marketing expenses
    
    
    915
    
    
    
    463
    
    
    
    298
    
    
    
    192Professional expenses
    
    
    494
    
    
    
    426
    
    
    
    195
    
    
    
    210Office supplies, postage and telephone
    
    
    451
    
    
    
    410
    
    
    
    147
    
    
    
    156Insurance and assessment expense
    
    
    243
    
    
    
    136
    
    
    
    96
    
    
    
    51Administrative expense
    
    
    105
    
    
    
    33
    
    
    
    46
    
    
    
    37Debenture conversion
    
    
    
    
    
    
    274
    
    
    
    
    
    
    
    274Other
    
    
    1,046
    
    
    
    758
    
    
    
    393
    
    
    
    367Total other non-interest expense
    
    $
    3,743
    
    
    $
    3,013
    
    
    $
    1,345
    
    
    $
    1,444


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Financial Condition

Assets

At September 30, 2003, total assets increased $393.7 million or 102% to $779.0
million from $385.3 million at December 31, 2002. Assets were comprised
primarily of $490.7 million in gross loans and $245.9 million in investment
securities at September 30, 2003. This represents an increase of $236.8
million or 93% in gross loans and $158.3 million or 181% in investment
securities from December 31, 2002. The increase in loans and investments was
partially offset by a decrease of $15.8 million in fed funds sold between
December 31, 2002 and September 30, 2003.

Investments

The Company increased its securities portfolio during the first nine months of
2003 through the purchase of mortgage-backed securities, which are typically
insured by U.S. Government-backed agencies. The Companys securities portfolio
amounted to $245.9 million, or 32% of total assets, at September 30, 2003 and
$87.6 million, or 23% of total assets, at December 31, 2002. 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 accretions
of discounts.

The amortized cost and fair values of investment securities available-for-sale
at September 30, 2003, were (in thousands):

Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    Fair ValueMortgage-backed securities
    
    $
    241,950
    
    
    $
    707
    
    
    $
    (6,248
    )
    
    $
    236,409U.S. agency securities
    
    
    10,197
    
    
    
    
    
    
    
    (727
    )
    
    
    9,470Total
    
    $
    252,147
    
    
    $
    707
    
    
    $
    (6,975
    )
    
    $
    245,879


The amortized cost and fair values of investment securities available-for-sale
at December 31, 2002, were (in thousands):

Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    Fair ValueMortgage-backed securities
    
    $
    87,364
    
    
    $
    189
    
    
    $
    
    
    
    $
    87,553


The amortized cost and fair values of investment securities available-for-sale
at September 30, 2003, by expected maturities are shown below (in thousands).
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.

Securities Available-for-Saleat September 30, 2003AmortizedCost
    
    Fair ValueDue after 10 years
    
    $
    252,147
    
    
    $
    245,879


Proceeds from sales of mortgage-backed 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 September 30,
2003 is $3.7 million of net unrealized losses, net of tax benefits, on
investment securities available-for-sale.

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Proceeds from sales of mortgage-backed securities available-for-sale during the
nine months ended September 30, 2002 were $80.8 million. Gross gains on those
sales were $0.7 million. Included in stockholders equity at December 31, 2002
is $109,000 of net unrealized gains, net of taxes, on investment securities
available-for-sale.

Securities with a carrying value and fair value of $245.9 million and $87.6
million at September 30, 2003 and December 31, 2002, respectively, were pledged
to secure public monies as required by law, Treasury, tax and loan deposits,
and FHLB advances.

Loans

The Company continued to have significant growth in its loan portfolio,
increasing its gross loans during the first nine months of 2003 by $236.8
million or 93% from $253.2 million at December 31, 2002 to $490.7 million at
September 30, 2003. All the Banks loans, commitments, and commercial and
standby letters of credit have been granted to customers in the Companys
market area, which includes Riverside, San Diego, San Bernardino, Los Angeles,
and Orange counties in California. The concentrations of credit by type of
loan are set forth below (in thousands):

September 30,
    
    December 31,2003
    
    2002Commercial, financial and agricultural
    
    $
    36,500
    
    
    $
    19,232Real Estate  construction
    
    
    279,748
    
    
    
    110,212Real Estate  mortgage
Commercial
    
    
    122,477
    
    
    
    93,122Residential
    
    
    45,594
    
    
    
    23,480Installment loans to individuals
    
    
    4,959
    
    
    
    5,659All other loans (including overdrafts)
    
    
    21
    
    
    
    60489,299
    
    
    
    251,765Unearned income
    
    
    (2,019
    )
    
    
    (626
    )Loans, Net of Unearned Income
    
    $
    487,280
    
    
    $
    251,139Loans held for sale
    
    $
    1,414
    
    
    $
    2,112


Mortgage loans held for sale in the secondary market are carried at the lower
of cost or estimated market value in the aggregate market. The Company
currently sells substantially all of the permanent single-family residential
loans that it originates. Net unrealized losses are recognized through a
valuation allowance by charges to income. Gains or losses realized on the
sales are recognized at the time of sale and are determined by the difference
between the net proceeds and the carrying value of the loans sold. Gains and
losses on sales of loans are included in non-interest income.

At September 30, 2003, the Bank had approximately $68.1 million in loans
pledged to secure FHLB borrowings.

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Allowance for Loan and Lease Losses

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

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

September 30,
    
    December 31,2003
    
    2002Balance, beginning of year
    
    $
    3,003
    
    
    $
    1,450Credit from purchase of loan portfolio
    
    
    
    
    
    
    197Credit from acquisition of Southland Business Bank
    
    
    895
    
    
    
    Recoveries on loans previously charged off
    
    
    20
    
    
    
    167Loans charged off
    
    
    (126
    )
    
    
    (241
    )Provision charged to operating expense
    
    
    2,210
    
    
    
    1,430Balance, end of period
    
    $
    6,002
    
    
    $
    3,003


The provisions of SFAS No. 114 and SFAS No. 118 permit the valuation allowance
for 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. The Bank recognizes interest income on
impaired loans based on its existing methods of recognizing interest income on
nonaccrual and troubled debt restructured loans.

The Bank had impaired loans of $0.3 million and $0 as of September 30, 2003 and
December 31, 2002, respectively.

The following is a summary of information pertaining to impaired loans as of
September 30, 2003 and December 31, 2002 (in thousands).

September 30,
    
    December 31,2003
    
    2002Average investment in impaired loans
    
    
    82
    
    
    
    22Interest income recognized on impaired loans
    
    
    
    
    
    
    Interest income recognized on a cash basis
for impaired loans
    
    
    
    
    
    
    


Nonperforming Assets

At September 30, 2003, the Bank had non-accrual loans or loans classified as
troubled debt restructurings of $0.3 million as compared to $0 at December 31,
2002. At September 30, 2003 and December 31, 2002, the Bank had no loans past
due 90 days or more in interest or principal and still accruing interest.

Deposits

Deposits represent the Banks primary source of funds for funding the Banks
loan activities. The Bank increased its deposits by $248.4 million or 86%
from $287.5 million at December 31, 2002 to $535.9 million at September 30,
2003.

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The increase is primarily due to the increase of $101.9 million or 105% in
money market accounts and $111.0 million or 116% in time certificates of
deposit.

At September 30, 2003, the composition of the average deposit portfolio was 18%
in non-interest bearing deposits, 46% in money market, NOW and savings
deposits, and 36% in time certificates of deposit, while the composition was
26%, 41%, and 33%, respectively, at December 31, 2002.

At September 30, 2003, the scheduled maturities of time certificates of deposit
in denominations of $100,000 or more are as follows (in thousands):

September 30,2003Three months or less
    
    $
    17,677Over three through six months
    
    
    23,245Over six through twelve months
    
    
    54,829Over twelve months
    
    
    9,153$
    104,904


Borrowings

At September 30, 2003, FHLB advances were $155.0 million as compared to $45.0
million at December 31, 2002. The increase in FHLB advances was part of the
Companys strategic plan to fund the growth of earning assets.

Pursuant to collateral agreements with the FHLB, advances are secured by all
capital stock in FHLB, certain investment securities, and certain qualifying
loans. FHLB advances consist of the following as of September 30, 2003
(dollars in thousands):

WeightedAverageMaturity
    
    Rate
    
    Amount2003
    
    
    1.19
    %
    
    $
    45,0002004
    
    
    1.29
    %
    
    
    95,0002005
    
    
    1.98
    %
    
    
    15,0001.33
    %
    
    $
    155,000


In June 2003, the Company obtained a $10.0 million line of credit from a
correspondent financial institution of which $5.0 million was outstanding
through September 19, 2003. The funds were drawn and held at the Company as
working capital. The Company paid off the line of credit with a portion of the
net proceeds from the Series B Preferred Stock offering and terminated the
credit facility.

In September 2003 and December 2002 and 2001, the Company issued trust
preferred securities of $10.0 million, $5.0 million and $12.0 million,
respectively. See Note #2 in Item 1 hereof. 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. A total of approximately $25.0
million of the net proceeds from the trust preferred securities offerings in
September 2003 and the Series B Preferred offering was downstreamed to the Bank
as additional capital.

The Bank has $2.2 million outstanding on unsecured lines of credit with five
correspondent banks totaling $37.0 million at September 30, 2003.
Additionally, the Bank has a borrowing line at the FHLB totaling $272.1
million, with $155.0 million outstanding at September 30, 2003, representing
35% of total assets of the Bank.

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Stockholders Equity

At September 30, 2003 and December 31, 2002, stockholders equity was $49.9
million and $20.0 million, respectively. The increase in stockholders equity
was due primarily to the net income for the first nine months of 2003 of $5.4
million, the issuance of common stock of $3.2 million in connection with the
acquisition of Southland and the net proceeds from the issuance of the Series B
Preferred stock of approximately $26.5 million partially offset by common stock
repurchases and dividends paid on preferred stock.

Liquidity

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

The Banks Asset-Liability Management Committee manages the Companys liquidity
position, the parameters of which are approved by the Board of Directors. The
liquidity position of the Bank is monitored daily. The Banks loan to deposit
and borrowing ratio was 70% and 75% as of September 30, 2003 and December 31,
2002, respectively. The Banks policy is to strive for a loan to deposit and
borrowing ratio between 70% and 90%.

Management believes the level of liquid assets is sufficient to meet current
and anticipated funding needs. Liquid assets represent approximately 8.9% of
total assets at September 30, 2003. The liquidity contingency process outlines
authorities and a reasonable course of action in case of unexpected liquidity
needs. At September 30, 2003, the Bank has $2.2 million outstanding on
borrowing lines with five correspondent banks totaling $37.0 million as well as
an Advance Line with the FHLB allowing the Bank to borrow up to 35% of its
total assets as of September 30, 2003. This advance line is collateralized by
investment securities and/or eligible loans.

Capital Resources

Neither the Company nor the Bank has any significant commitments for capital
expenditures.

The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Companys and the Banks
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action 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 classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors. Prompt corrective action provisions are not applicable to bank
holding companies.

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of September
30, 2003, that the Company and the Bank meet all applicable capital adequacy
requirements.

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

Capital NeededTo Be WellCapitalized UnderFor Capital
    
    Prompt CorrectiveActual Regulatory
    
    Adequacy Purposes
    
    Action ProvisionsCapital
    
    
    
    
    
    Capital
    
    
    
    
    
    CapitalAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of September 30, 2003Total capital to risk-weighted
assets:Bank
    
    $
    83,603
    
    
    
    15.0
    %
    
    $
    44,495
    
    
    
    8.0
    %
    
    $
    55,618
    
    
    
    10.0
    %Company
    
    $
    90,874
    
    
    
    16.3
    %
    
    $
    44,560
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 to risk-weighted assets:Bank
    
    $
    77,601
    
    
    
    14.0
    %
    
    $
    22,247
    
    
    
    4.0
    %
    
    $
    33,371
    
    
    
    6.0
    %Company
    
    $
    70,496
    
    
    
    12.7
    %
    
    $
    22,280
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 capital to average assets:Bank
    
    $
    77,601
    
    
    
    11.0
    %
    
    $
    28,111
    
    
    
    4.0
    %
    
    $
    35,139
    
    
    
    5.0
    %Company
    
    $
    70,496
    
    
    
    10.0
    %
    
    $
    28,172
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/AAs of December 31, 2002Total capital to risk-weighted
assets:Bank
    
    $
    41,789
    
    
    
    15.0
    %
    
    $
    22,364
    
    
    
    8.0
    %
    
    $
    27,955
    
    
    
    10.0
    %Company
    
    $
    44,838
    
    
    
    16.0
    %
    
    $
    22,454
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 to risk-weighted assets:Bank
    
    $
    38,786
    
    
    
    13.9
    %
    
    $
    11,182
    
    
    
    4.0
    %
    
    $
    16,773
    
    
    
    6.0
    %Company
    
    $
    26,452
    
    
    
    9.4
    %
    
    $
    11,227
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 capital to average assets:Bank
    
    $
    38,786
    
    
    
    11.6
    %
    
    $
    13,353
    
    
    
    4.0
    %
    
    $
    16,691
    
    
    
    5.0
    %Company
    
    $
    26,452
    
    
    
    7.9
    %
    
    $
    13,412
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/A


Economic Concerns

The financial condition of the Bank has been, and is expected to continue to
be, affected by the overall general economic conditions and the real estate
market in California. The future success of the Bank is dependent, in large
part, upon the quality of its assets.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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



| |  | loan delinquencies may increase;
|- |  | --------------------------------



| |  | problem assets and foreclosures may increase;
|- |  | ---------------------------------------------



| |  | demand for the Companys products and services may decline; and
|- |  | ---------------------------------------------------------------



| |  | collateral for loans made by the Company, especially real estate,
may decline in value, in turn reducing a clients borrowing power, and
reducing the value of assets and collateral associated with its loans
held for investment.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A downturn in the California real estate market could hurt its business.The
Companys business activities and credit exposure are concentrated in
California. A downturn in the California real estate market could hurt the
Companys business because many of its loans are secured by real estate located
within California. As of September 30, 2003, most of the Companys loans held
for investment consisted of loans secured by real estate located in California.
If there is a significant decline in real estate values, especially in
California, the collateral for the Companys loans will provide less security.
As a result, the Companys ability to recover on defaulted loans by selling the
underlying real estate would be diminished, and the Company would be more
likely to suffer losses on defaulted loans. Real estate values in California
could be affected by, among other things, earthquakes and other natural
disasters particular to California.

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

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

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

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



| |  | inflation;
|- |  | ----------



| |  | slow or stagnant economic growth or recession;
|- |  | ----------------------------------------------



| |  | unemployment;
|- |  | -------------



| |  | money supply and the monetary policies of the Federal Reserve Board;
|- |  | --------------------------------------------------------------------



| |  | international disorders; and
|- |  | ----------------------------



| |  | instability in domestic and foreign financial markets.
|- |  | ------------------------------------------------------

The Company is vulnerable to an increase in interest rates because its
interest-earning assets generally have longer maturities than its
interest-bearing liabilities. Under such circumstances, material and prolonged
increases in interest

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rates will negatively affect the Companys net interest income. In addition,
loan volume and yields are affected by market interest rates on loans, and
rising interest rates generally are associated with a lower volume of loan
originations. In addition, an increase in the general level of interest rates
may adversely affect the ability of certain borrowers to pay the interest on
and principal of their obligations. Accordingly, changes in levels of market
interest rates could materially and adversely affect the Companys net interest
spread, asset quality, loan origination volume, securities portfolio, and
overall profitability. Although the Company attempts to manage its interest
rate risk, the Company cannot assure you that it can minimize its interest rate
risk.

Interest Rates and Differentials

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

Asset/Liability Management

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

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

A sudden and substantial increase or decrease in interest rates may adversely
impact the Companys income to the extent that the interest rates associated
with the assets and liabilities do not change at the same speed, to the same
extent, or on the same basis. The Company has adopted formal policies and
practices to monitor its interest rate risk exposure. As a part of its risk
management practices, the Company uses the Economic Value of Equity (EVE) or
Earnings at Risk (EAR) to monitor its interest rate risk.

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

The table below shows the estimated impact of changes in interest rates on EVE
and EAR on September 30, 2003, assuming shifts of 100 to 200 basis points in
both directions (in thousands):

Economic Value of Equity
    
    Earnings at RiskSimulated
    
    Cumulative Dollar
    
    Percentage
    
    Cumulative Dollar
    
    PercentageRate Changes
    
    Change
    
    Change
    
    Change
    
    Change+ 200
    
    
    (17,294
    )
    
    
    -18.6
    
    
    
    1,964
    
    
    
    5.5+ 100
    
    
    (7,059
    )
    
    
    -7.6
    
    
    
    636
    
    
    
    1.8- 100
    
    
    (6,690
    )
    
    
    -7.2
    
    
    
    (1,026
    )
    
    
    -2.9- 200
    
    
    (10,188
    )
    
    
    -10.9
    
    
    
    (4,115
    )
    
    
    -11.4


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

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deposits, replacement of asset and liability cashflows, and other assumptions.
While the assumptions used are based on current economic and local market
conditions, there is no assurance as to the predictive nature of these
conditions including how customer preferences or competitor influences might
change.

At September 30, 2003, the Companys estimated changes in EVE and EAR were
within the ranges established by the Board of Directors.




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
Executive 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 quarter covered by this report. Based upon that evaluation,
the Companys Chief Executive Officer along with the Companys Executive Vice
President and Chief Financial Officer concluded that the Companys disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Companys periodic SEC filings. There have been
no significant changes in the Companys internal 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 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 Executive Vice President
and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.

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PART II  OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

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




ITEM 2. CHANGES IN SECURITIES

On September 19, 2003, the Company completed its offering of 1,150,000 shares
of Series B Preferred. The Series B Preferred is traded on the American Stock
Exchange under the symbol VLP PrB. The Company received approximately $26.5
million in net proceeds from the offerings. The Series B Preferred is the
Companys second series of preferred stock issued and outstanding; the Company
has 50 shares of Series A Preferred issued and outstanding. The Series B
Preferred ranks on parity with the Series A Preferred with respect to dividend
rights and rights upon liquidation, winding-up or dissolution of the Company.
The Series B Preferred ranks senior to shares of the Companys common stock
with respect to dividend rights and rights upon liquidation, winding-up or
dissolution of the Company.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None




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

None




ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|a) |  | Exhibits
|-- |  | --------



|10.1 |  | Floating Rate Junior Subordinated Debt Securities Due 2033
|---- |  | ----------------------------------------------------------



|10.2 |  | Amended and Restated Declaration of Trust of Vineyard Statutory
Trust III
|---- |  | -------------------------------------------------------------------------



|10.3 |  | Guarantee Agreement
|---- |  | -------------------



|31.1 |  | Certification of Chief Executive Officer under Section 302 of
the Sarbanes-Oxley Act of 2002
|---- |  | --------------------------------------------------------------------------------------------



|31.2 |  | Certification of Chief Financial Officer under Section 302 of
the Sarbanes-Oxley Act of 2002
|---- |  | --------------------------------------------------------------------------------------------



|32 |  | Section 906 Certification by the Chief Executive Officer and
the Chief Financial Officer
|-- |  | ----------------------------------------------------------------------------------------



|b) |  | Reports on Form 8-K:
|-- |  | --------------------



| |  | The following reports on Form 8-K were filed by the Company during
the quarter ended September 30, 2003:
| |  | --------------------------------------------------------------------------------------------------------



|i) |  | July 7, 2003  announcing the completion of
the merger with Southland Business Bank
|-- |  | -----------------------------------------------------------------------------------



|ii) |  | July 8, 2003  announcing the press release
of the Companys earnings for the second quarter of 2003
|--- |  | ----------------------------------------------------------------------------------------------------



|iii) |  | July 24, 2003  announcing the initiation
of a quarterly cash dividend on the Companys common stock
|---- |  | ----------------------------------------------------------------------------------------------------



|iv) |  | September 26, 2003  announcing the
issuance of Trust Preferred Securities
|--- |  | --------------------------------------------------------------------------

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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 7th day of November 2003.

VINEYARD NATIONAL BANCORPBy:
    /s/ Norman Morales

Norman Morales
President and Chief Executive OfficerBy
    /s/ Gordon Fong

Gordon Fong
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)


Page 35 of 35