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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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, 2002

[   ] 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

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   [   ]

APPLICABLE TO CORPORATE ISSUER

Indicate the number of shares outstanding of the issuer’s common stock on the latest practicable date: 2,714,126 shares of common stock as of October 31, 2002.

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VINEYARD NATIONAL BANCORP

FORM 10-Q INDEX
FOR THE PERIODS ENDED SEPTEMBER 30, 2002 AND 2001,
AND DECEMBER 31, 2001

PART I — FINANCIAL INFORMATION

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, 2002 AND DECEMBER 31, 2001
(Unaudited except for December 31, 2001)

See accompanying notes to financial statements.

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VINEYARD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)

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, 2002 AND 2001
(Unaudited)

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VINEYARD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)

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NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim period presented have been included and are of a normal recurring nature. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. The results of operations for the nine month period ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year.

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

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.

The allowance for possible loan losses is maintained through provisions, charged to expenses, at a level considered adequate to provide for potential loan losses, based on management’s evaluation of the composition of the loan portfolio, the performance of the loans in the portfolio, evaluations of loan collateral, prior loss experience, current economic conditions and the prospects or worth of respective borrowers or guarantors.

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.

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

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

NOTE 2 — PARENT COMPANY ITEMS

During the second quarter ended June 30, 2001, the Company issued $3.75 million of Convertible Subordinated Debentures (the “Debentures”) in a private placement offering. The majority of the net proceeds were contributed into the Bank as additional capital to support its growth. The Debentures were due June 30, 2008, carried an interest coupon of 10% per annum, and may be converted into common stock at any time prior to maturity or redemption at a price of $5.00 per share. The Debentures were redeemable at the option of the Company beginning July 1, 2003, in whole or in part, based on pre-determined redemption prices and contingent on satisfaction of certain market price conditions. The private placement offering was marketed to institutional and accredited investors, with a minimum principal amount of $3 million to become effective.

With the issuance of the Debentures and with their convertibility feature, the company’s Diluted Earnings Per Share (“EPS”) calculations contained a measurable difference as discussed in Note 3 below. The Debentures were registered on March 13, 2002 and trade under CUSIP number 927427 AA 2.

During the third quarter of 2002, the Debentures were converted into Common stock of the Company at the redemption price of $5.00 per share. To induce the conversion of the debt, the Company offered to pay holders of the debentures an amount equivalent to the amount as if interest was payable through June 30, 2003 on those debentures. The total amount of inducement was $274,000, which was charged to noninterest expense of the Company during the third quarter ended September 30, 2002.

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

The net proceed to the statutory trust from the sale of the trust preferred securities was approximately $11.6 million after deducting offering expenses. The statutory trust subsequently invested all of the proceeds from the sale of the trust preferred securities in subordinated debentures issued by the Company. The Company infused approximately $8.0 million of the net proceeds from the sale of the subordinated debentures into Vineyard Bank to fund its operations. The remainder of the net proceeds from the sale of the subordinated debentures may be used primarily to infuse additional capital into Vineyard Bank to fund its operations and maintain its status as “well capitalized”, for general corporate purposes, acquisitions or investments.

The trustee of the statutory trust is State Street Bank & Trust Co.

In September 2002, the Company contributed $3 million in cash to its wholly owned subsidiary, Vineyard Bank, as working capital.

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NOTE 3 — EARNINGS PER SHARE AND BOOK VALUE

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

The following tables set forth the Company’s earnings per share calculations for the nine and three month periods ended September 30, 2002 and 2001 and the Company’s book value per share at September 30, 2002 and December 31, 2001. In the following table, (1) “Debentures” refer to the amount of possible shares that can be issued from the conversion of the Debentures, and (2) “Options” refer to stock options previously granted to employees of the Company and which were outstanding and exercisable at each measurement date.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Vineyard National Bancorp (the “Company”) is a one-bank holding company. Its principal asset is the common stock of, and its principal operations are those conducted by, Vineyard Bank, a state banking association (the “Bank”). The Bank is a community bank located in the Inland Empire region of Southern California. The Bank focuses on the needs of commercial businesses with annual sales of less than $10 million, retail community businesses, single family residence developers/builders, individuals and local public and private organizations. The Bank operates six full-service branches located in Rancho Cucamonga, Chino, Diamond Bar, Crestline, Blue Jay, and La Verne, in addition to a real estate loan production office in Manhattan Beach and SBA lending offices in San Diego and Beverly Hills. Effective November 12, 2002, shares of the Company’s common stock are traded on the Nasdaq National Market under the ticker symbol VNBC. Prior to November 12, 2002, shares of the Company’s common stock traded on the Nasdaq SmallCap Market under the same ticker symbol.

RESULTS OF OPERATIONS

Net earnings for the quarter ended September 30, 2002 were $808,000, or $0.35 per diluted share, compared with net earnings of $287,000, or $0.13 per diluted share, for the similar quarter ended in 2001, or an increase of 182%. Net earnings for the third quarter of 2002 included a one-time charge related to the early conversion of the Company’s Subordinated Debentures in the amount of $274,000. Absent this charge, on a tax effected basis, the Company’s net earnings would have been $967,000 for the third quarter of 2002, or $0.41 per diluted share.

The results for the third quarter of 2002 under-states the significant improvement in operating performance over the same period in 2001. Earnings before income taxes and provisions for possible loan losses in the third quarter of 2002 were $2,002,000, as compared to $609,000 for the third quarter of 2001, or an improvement of approximately 230%. Net earnings for the third quarter of 2002 produced an annualized return on average equity of 22.6% for the period, and 27.1% when the one-time charge is excluded.

For the nine months ended September 30, 2002, net earnings were $1,916,000, or $0.74 per diluted share, compared with net earnings of $918,000, or $0.44 per diluted share, for the similar nine month period in 2001, or an increase in net earnings of 109%. Excluding the one-time conversion charge from the nine month results would have produced net earnings of $2,075,000, on a tax effected basis, or $0.81 per diluted share.

Earnings before income taxes and provisions for possible loan losses for the nine months ended September 30, 2002, were $4,371,000, as compared to $1,179,000 for the same period in 2001, or an improvement of over 270%. Net earnings for the first nine months of 2002 produced an annualized return on average equity of 20.6% for the period, and 22.2% when the one-time charge is excluded.

For the quarter ended September 30, 2002, the Company’s net interest income before its provision for possible loan losses increased by $1,749,000, or 79% as compared with the same period in 2001. Other operating income for the third quarter of 2002 increased by $829,000, or 163%, as compared to the same period in 2001. Total net revenues (net interest income and other operating income) for the third quarter of 2002 increased by $2,578,000 or 94% as compared to the same period in 2001.

The Company previously issued $3.75 million in Convertible Debentures during the second quarter of 2001, with the proceeds used to support the Company’s strategic plan by infusing additional capital into Vineyard Bank. During the third quarter of 2002, the Company offered the holders of the Debentures an inducement to convert into the Company’s common stock at the predetermined price, an amount which totaled $274,000. During the third quarter, all of the Debentures were converted into the Company’s common stock, and the corresponding debt was extinguished.

The Debenture conversion will be immediately accretive to the Company’s operating income for the fourth quarter of 2002 and beyond, with the retirement of the debt service requirements, which had a cost of $0.02 per diluted share per quarter. The one-time charge related to the conversion also affected the 2002 third quarter results by an additional $0.06 per diluted share.

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The Debenture conversion will not only relieve the Company of its debt service requirements, but with the increase in stockholders’ equity related to the conversion, the Company now meets the listing requirements to qualify for the Nasdaq National Market.

For the nine months ended September 30, 2002, total assets increased by $113.6 million, or 59%, to $304.9 million over year-end 2001 results. The Company’s growth in its loan portfolio produced an increase of $78.1 million or 57% for the nine months ended September 30, 2002, bringing gross loans outstanding to $215.6 million as compared to the prior year-end 2001’s level of $137.6 million.

The Company continued to augment its liquidity position by increasing its investment portfolio by $38.4 million during the first nine months of 2002, to $68.9 million. The Company has been successful during the current year in attracting local deposit funds and has continued to enhance its liquidity. These liquid assets are further available to support the Company’s lending initiatives. During the second quarter of 2002, the Company also increased its line of credit with the Federal Home Loan Bank of San Francisco to an amount equal to 20% of the Company’s total assets, or approximately $60.0 million at September quarter-end 2002. At September 30, 2002, the Company had outstanding $20.0 million in FHLB advances to support its operations.

For the nine months ended September 30, 2002, total deposits increased by $93.5 million, or 59%, to $252.9 million, as compared to year-end 2001’s level of $159.4 million. The Company continues to seek out and develop depository relationships with both local businesses and individuals. Each of the Company’s six community banking centers has actively deployed its personnel into the local markets, and together with additional branding and marketing campaigns, continues to increase their respective market share in each community. The Company’s cost of funds of approximately 2.0% remains consistent with the levels experienced over the past two years while it has increased the total deposit base by approximately $100 million between December 31, 2001 and September 30, 2002.

The Company has been operating under a Strategic Plan for the past seven quarters, with continued emphasis on building specialty lines of business to compliment its community and business banking operations. The Company has grown by approximately 175% in assets, 170% in loans and 150% in deposits during this period. Vineyard Bank’s capital position of approximately $27.5 million continues to increase through its operations, with capital ratios far in excess of regulatory minimums to be considered “well capitalized.”

During the third quarter of 2002, the Company added three new specialty lines of businesses to its existing offerings: Small Business Administration (SBA) lending, Single Family Residence (SFR) Tract Construction financing, and Religious Financial Services. In each case, the new business produced from these specialty lines was minimal during the third quarter, though the cost of sourcing these operations was incurred during the period. The benefits derived from these three operations will become apparent beginning in the fourth quarter of 2002.

Total operating expenses for the third quarter of 2002 increased by $1,185,000 or 56% over the same period in 2001. Excluding the one-time Debenture conversion charge of $274,000, total operating expenses would have increased $911,000, or 43%. Salaries and benefits comprised the largest category, representing $1,418,000 in expenses as compared to total operating expenses of $3,309,000, or 43% of the total amount, for the third quarter of 2002.

Total operating expenses for the nine months ended September 30, 2002, increased by $1,850,000 or 31% over the same period in 2001. Excluding the one-time Debenture conversion charge, total operating expenses would have increased $1,576,000, or 26%. Salaries and benefits comprised the largest category, representing $3,693,000 in expenses as compared to total operating expenses of $7,902,000, or 47% of the total amount, for the first nine months of 2002.

As previously stated, the Company’s marketing and branding program, costs associated with resourcing its three new specialty lines, and general support for the growth initiatives contributed to the quarterly increase in operating expenses. The Company’s efficiency ratio, which measures the relationship of total operating expenses and total operating income, was 62% for the quarter ended September 30, 2002 and 57% when the Debenture conversion charge is excluded, as compared with 78% for the same period in 2001.

The Company’s continued growth of its loan portfolio necessitated a provision for possible loan losses in the amount of $610,000 for the third quarter of 2002, compared to a provision of $115,000 in the same period for 2001. This increased the allowance for possible loan losses to $2.7 million, or 1.25% of gross loans outstanding at September 30, 2002. For the nine months ended September 30, 2002, the Company’s provision for possible loan losses was $1,145,000, as compared with $415,000 for the same period in 2001.

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Asset quality remains strong, with the Company reporting only one secured, non-performing loan for approximately $110,000 and no real estate owned through foreclosure (OREO) at September 30, 2002. Net charge-offs for the third quarter were approximately $15,000, and $107,000 for the nine months ended September 30, 2002.

The Company recorded an income tax provision for the third quarter of 2002 in the amount of $584,000, as compared with $207,000 for the same period in 2001. For the nine months ended September 30, 2002, the Company’s income tax provision was $1,310,000 versus an income tax credit of $154,000 for the same period in 2001. During the first six months of 2001, the Company benefited from the release of a valuation reserve associated with a previously established deferred income tax asset. The impact of this benefit effectively neutralized the tax liability for 2001.

NET INTEREST INCOME

The operations of the Company are substantially dependent on its net interest income, which is the difference between interest income earned from its interest-earning assets and the interest expense incurred on its interest-bearing liabilities. The Company’s net interest margin is its net interest income divided by its 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 the repricing or maturity of the Company’s adjustable rate and fixed rate loans and short term investment securities and its deposits and borrowings, and (3) the magnitude of the Company’s non-interest-earning assets, including nonaccrual loans and OREO.

Though the Company is asset-sensitive, its loan portfolio is sufficiently blended in composition and complexity to weather the effects of the market rate decreases experienced over the past twenty-one months, with only a modest net interest margin compression. A substantial portion of the Company’s immediately repricable loan portfolio have reached their floor rates and do not continue to adjust downward if the Federal Reserve Bank lowers rates. The effect of this also contributed to the minimal compression experienced. Loan fee income, which is included in interest income, also stabilized interest income during a period of declining interest rates.

An additional form of funding for the Bank’s growth is debt issued by the Company which results in a higher consolidated cost of funds. For the nine months ended September 30, 2002, the average effective cost of funds for the Bank was 2.0% compared to 2.3% for the Company. The result of the increase in interest expense affects the Company’s net interest margin. The Company’s net interest margin decreased from 6.2% at year end 2001 to 5.7% at September 30, 2002. However, the Bank’s net interest margin remained consistently strong decreasing from 6.4% at year end 2001 to 6.2% at September 30, 2002, a compression of only 20 basis points principally from the effect of new lending originations and yields less than the original, existing portfolio.

The following table shows average balance sheet data, related revenues and costs, and effective weighted average yields and costs, for the three and nine months ended September 30, 2002 and 2001.

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