VINEYARD NATIONAL BANCORP - 10-Q Quarterly Report

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

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

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.

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


PART I – FINANCIAL INFORMATION
ITEM 1.	Financial Statements Consolidated Statements of Financial Condition at September 30, 2003 and December 31, 2002	4
	Consolidated Statements of Income for the Nine and Three Months Ended September 30, 2003 and 2002	5
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2003 and 2002	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002	7
	Notes to Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	30
ITEM 4.	Controls and Procedures	32
PART II – OTHER INFORMATION
ITEM 1.	Legal Proceedings	33
ITEM 2.	Changes in Securities	33
ITEM 3.	Defaults upon Senior Securities	33
ITEM 4.	Submission of Matters to a Vote of Security Holders	33
ITEM 5.	Other Information	33
ITEM 6.	Exhibits and Reports on Form 8-K	34
Signatures		35


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


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

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.

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


					Dollars in Thousands

					September 30,			December 31,
					2003			2002

Assets
Cash and due from banks					$	19,199		$	17,533
Federal funds sold						—			15,829

				Total Cash and Cash Equivalents		19,199			33,362

Investment securities, available-for-sale						245,879			87,553
Loans, net of unearned income						487,280			251,139
Loans held for sale						1,414			2,112
	Less: Allowance for possible loan losses					(6,002	)		(3,003	)

				Net Loans		482,692			250,248
Bank premises and equipment, net						7,885			5,600
Accrued interest						2,940			1,487
Federal Home Loan Bank and other stock, at cost						8,270			2,270
Deferred income tax asset						5,836			2,328
Other assets						6,276			2,454

				Total Assets	$	778,977		$	385,302

				Liabilities and Stockholders’ Equity
Liabilities Deposits Non-interest bearing					$	90,291		$	61,906
	Interest-bearing					445,619			225,606

				Total Deposits		535,910			287,512
Federal Home Loan Bank advances						155,000			45,000
Other borrowings						2,200			5,000
Subordinated debentures						5,000			5,000
Company obligated preferred securities of subsidiary trust holding floating rate junior subordinated deferrable interest debentures						27,000			17,000
Accrued interest and other liabilities						3,962			5,832

				Total Liabilities		729,072			365,344
Stockholders’ Equity
	Contributed capital
		Perpetual preferred stock – authorized 10,000,000 shares;
			Series A – no par value, issued and outstanding 50 shares in 2003 and 2002			2,450			2,450
			Series 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			6,052
	Additional paid-in capital					3,307			3,307
	Stock dividends to be distributed					—			2,026
	Retained earnings					11,215			6,014
	Accumulated other comprehensive (loss) income					(3,699	)		109

				Total Stockholders’ Equity		49,905			19,958

				Total Liabilities and Stockholders’ Equity	$	778,977		$	385,302

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			2002

Interest Income
	Interest and fees on loans				$	20,645		$	11,932		$	8,587		$	4,816
	Interest on investment securities					5,469			1,761			2,384			676
	Interest on federal funds sold					90			73			21			34

			Total Interest Income			26,204			13,766			10,992			5,526

Interest Expense
	Interest on savings deposits					52			93			19			25
	Interest on NOW and money market deposits					2,545			1,009			984			481
	Interest on time deposits in denominations of $100,000 or more					1,629			955			672			354
	Interest on other time deposits					1,445			938			602			320
	Interest on other borrowings					2,045			1,038			787			374

			Total Interest Expense			7,716			4,033			3,064			1,554

			Net Interest Income			18,488			9,733			7,928			3,972
Provision 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			3,362

Other Income
	Fees and service charges					1,787			1,105			639			365
	Net gain on sale of SBA loans					750			—			256			—
	Net gain on sale of investment securities					1,571			745			—			566
	Litigation recovery					—			540			—			360
	Other income					155			150			55			48

				Total Other Income		4,263			2,540			950			1,339

Other Expense
		Salaries and employee benefits				5,902			3,693			2,404			1,418
		Occupancy expense of premises				976			626			434			236
		Furniture and equipment				779			570			322			211
		Other				3,743			3,013			1,345			1,444

				Total Other Expense		11,400			7,902			4,505			3,309

Income Before Income Taxes						9,141			3,226			3,913			1,392
Income Tax Provision						3,744			1,310			1,605			584

Net Income					$	5,397		$	1,916		$	2,308		$	808

Basic Earnings Per Share					$	1.81		$	0.92		$	0.74		$	0.36

Diluted Earnings Per Share					$	1.64		$	0.71		$	0.67		$	0.33

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


			Dollars in Thousands

					Common Stock						Stock							Accumulated
			Perpetual						Additional		Dividend							Other
			Preferred		Number of				Paid-in		To Be		Comprehensive			Retained		Comprehensive
			Stock		Shares		Amount		Capital		Distributed		Income			Earnings		(Loss) Income			Total

Balance, December 31, 2001			$	—		1,969,932	$	2,151	$	3,307	$	—				$	5,032	$	(35	)	$	10,455
Stock options exercised						38,150		145														145
Conversion of convertible debentures						787,500		3,750														3,750
	Comprehensive income
		Net income											$	1,916			1,916					1,916
		Unrealized security holding gains (net of $464 tax)												640					640			640
		Less reclassification adjustment for realized gains (net of $313 tax)												(432	)				(432	)		(432	)

		Total comprehensive income											$	2,124


Balance, September 30, 2002			$	—		2,795,582	$	6,046	$	3,307	$	—				$	6,948	$	173			16,474



					Common Stock								Stock									Accumulated
			Perpetual								Additional		Dividend									Other
			Preferred		Number of						Paid-in		To Be			Comprehensive			Retained			Comprehensive
			Stock		Shares			Amount			Capital		Distributed			Income			Earnings			(Loss) Income			Total

Balance, December 31, 2002			$	2,450		2,849,680		$	6,052		$	3,307	$	2,026					$	6,014		$	109		$	19,958
Issuance of common stock						166,212			3,200																	3,200
Issuance of preferred stock				26,549																						26,549
Stock options exercised						43,750			227																	227
Purchase 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 income
		Net income														$	5,397			5,397						5,397
		Unrealized 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														$	1,589


Balance, September 30, 2003			$	28,999		2,983,040		$	10,083		$	3,307	$	—					$	11,215		$	(3,699	)	$	49,905

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


			Dollars in Thousands

			September 30,			September 30,
			2003			2002

Reconciliation of Net Income to Net Cash Provided by Operating Activities
	Net Income		$	5,397		$	1,916
	Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
		Depreciation		576			582
		Loss on disposal of property, plant & equipment		27			—
		Investment securities accretion/amortization		317			275
		Provision for possible loan losses		2,210			1,145
		Adjustment to allowance for possible loan losses relating to acquired loans		—			197
		Increase in deferred taxes		(942	)		—
		(Decrease)/increase in taxes payable		(1,134	)		1,111
		Increase 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			3,522
		Increase/(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	)		30

		Total Adjustment		(2,643	)		4,909

		Net Cash Provided By Operating Activities		2,754			6,825




Cash 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			13,500
	Proceeds from principal reductions/maturities of mortgage-backed securities			14,543			4,796
	Purchase 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			132
	Net 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 Activities
	Net increase in demand deposits, NOW accounts, savings accounts, and money market deposits, net of acquired amounts			114,359			9,442
	Net increase in certificates of deposits, net of acquired amounts			102,943			84,070
	Net change in Federal Home Loan Bank advances			110,000			17,000
	Decrease 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			145

		Net Cash Provided By Financing Activities		359,660			110,657

	Net Decrease in Cash and Cash Equivalents			(14,163	)		(3,523	)
	Cash and Cash Equivalents, Beginning of year			33,362			14,710

Cash and Cash Equivalents, End of quarter			$	19,199		$	11,187

Supplemental Information
	Change in valuation allowance for investment securities		$	(6,458	)	$	359
	Interest paid		$	7,140		$	4,318
	Income tax paid		$	7,210		$	46
	Conversion of convertible debentures		$	—		$	3,750

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:

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.

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.

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.

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.

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

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.

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.

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.

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.

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.”

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.

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.

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 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						2002

	Income			Shares			Income		Shares			Income			Shares			Income		Shares

Net income as reported	$	5,397					$	1,916				$	2,308					$	808
Less: 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					2,795,582
Impact 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		2,274,842
Plus: Interest on Convertible Debentures assuming conversion (after tax)								148
Dilutive effect of outstanding stock options and warrants					293,309					137,885						321,881					175,916
Dilutive effect of convertible debentures										689,192

Used in diluted EPS	$	5,201			3,166,200		$	2,064		2,912,943		$	2,205			3,289,099		$	808		2,450,758

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 Ended
		September 30,						September 30,

		2003			2002			2003			2002

Net income:
	As reported	$	5,397		$	1,916		$	2,308		$	808
	Less: 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			762
	Add: interest expense on convertible debt		—			148			—			—

	Pro Forma Net Income — Used in Diluted Earnings Per Share	$	5,015		$	1,755		$	2,187		$	762

Weighted Average Shares Outstanding — Basic			2,872,891			2,085,866			2,967,218			2,274,842
Weighted Average Shares Outstanding — Diluted			3,166,200			2,912,943			3,289,099			2,450,758
Basic Earnings per share
	As reported	$	1.81		$	0.92		$	0.74		$	0.36
	Pro forma	$	1.75		$	0.77		$	0.74		$	0.33
Earnings per share — assuming dilution
	As reported	$	1.64		$	0.71		$	0.67		$	0.33
	Pro 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:

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

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

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.

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.

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.

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

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.

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.

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.

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

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.

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 Thousands

			For the Three Months Ended September 30,

			2003								2002

			Average					Average			Average					Average
			Balance			Interest		Yield/Cost			Balance			Interest		Yield/Cost

Assets
	Loans		$	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								19,670
		Less: allowance for possible loan losses		(5,718	)							(2,260	)

		Total average assets	$	698,041							$	284,364

Liabilities and Stockholders’ Equity
	Savings 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								57,225
	Other liabilities			4,940								1,564

Total average liabilities				672,148								274,014
Stockholders’ equity				25,893								10,350

		Total liabilities and Stockholders’ equity	$	698,041							$	284,364

Net interest spread ²									4.4	%							5.3	%

Net interest income and net interest margin ³						$	7,928		4.7	%				$	3,972		5.9	%


			For the Nine Months Ended September 30,

			2003								2002

			Average					Average			Average					Average
			Balance			Interest		Yield/Cost			Balance			Interest		Yield/Cost

Assets
	Loans		$	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								19,326
		Less: allowance for possible loan losses		(4,304	)							(1,838	)

		Total average assets	$	550,134							$	244,638

Liabilities and Stockholders’ Equity
	Savings 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								51,997
	Other liabilities			4,854								1,306

Total average liabilities				528,371								232,831
Stockholders’ equity				21,763								11,807

		Total liabilities and Stockholders’ equity	$	550,134							$	244,638

Net 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.

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 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.

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

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):

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.

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):

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

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.

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.

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.

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):

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.

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):

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).

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 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.

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):

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):

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.

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.

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.

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.

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 Needed

												To Be Well
												Capitalized Under
							For Capital					Prompt Corrective
		Actual Regulatory					Adequacy Purposes					Action Provisions

		Capital					Capital					Capital
		Amount		Ratio			Amount		Ratio			Amount		Ratio

As of September 30, 2003
Total 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/A

Tier 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/A

Tier 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/A

As of December 31, 2002
Total 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/A

Tier 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/A

Tier 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

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.

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:

•

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:

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

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

The Company’s 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.

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):

The amount and percentage changes represent the cumulative dollar and percentage change in each rate change scenario from the base case. These estimates are based upon a number of assumptions, including: the nature and timing of interest rate levels including yield curve, prepayments on loans and securities, pricing strategies on loans and

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

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

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.

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.

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.

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

Section 906 Certification by the Chief Executive Officer and the Chief Financial Officer

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

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

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.


California		33-0309110
(State or other jurisdiction of incorporation or organization)		(IRS employer identification number)

9590 Foothill Boulevard
Rancho Cucamonga, California		91730
(Address of principal executive offices)		(Zip Code)


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


Cash			$	12,766
Loans, net				19,736
Other assets				2,098

	Total assets acquired			34,600
Demand, NOW, savings and money market deposits				23,007
Time deposits				8,089
Other liabilities				304

	Total liabilities assumed			31,400
		Net assets acquired	$	3,200


				Gross		Gross
		Amortized		Unrealized		Unrealized
		Cost		Gains		Losses			Fair Value

Mortgage-backed securities		$	241,950	$	707	$	(6,248	)	$	236,409
U.S. agency securities			10,197		—		(727	)		9,470

	Total	$	252,147	$	707	$	(6,975	)	$	245,879


			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value

Mortgage-backed securities	$	87,364	$	189	$	—	$	87,553

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


Exhibit 10.1	Floating Rate Junior Subordinated Debt Securities Due 2033


	Securities Available-for-Sale
	at September 30, 2003

	Amortized
	Cost		Fair Value

Due after 10 years	$	252,147	$	245,879


	September 30,
	2003

Three months or less	$	17,677
Over three through six months		23,245
Over six through twelve months		54,829
Over twelve months		9,153

	$	104,904


	Weighted
	Average
Maturity	Rate			Amount

2003		1.19	%	$	45,000
2004		1.29	%		95,000
2005		1.98	%		15,000

		1.33	%	$	155,000


	Economic Value of Equity					Earnings at Risk

Simulated	Cumulative Dollar			Percentage		Cumulative Dollar			Percentage
Rate 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


	VINEYARD NATIONAL BANCORP

	By:	/s/ Norman Morales Norman Morales President and Chief Executive Officer

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


Exhibit 10.3	Guarantee Agreement