Summary of VINEYARD NATIONAL BANCORP

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 our business, financial condition, results of operations, liquidity and interest rate sensitivity. The following discussion and analysis should be read in conjunction with our quarterly unaudited Consolidated Financial Statements, and notes thereto, contained in this report, which have been prepared in accordance with GAAP, and with our Annual Report on Form 10-K for the year ended December 31, 2007 (the "2007 Form 10-K"), which is incorporated herein by reference.

General Business and Organization

VNB is a bank holding company which provides a variety of lending and depository services to businesses and individuals through our wholly-owned subsidiary, the Bank. The Bank is a national banking association headquartered in Corona, California which is located in the Inland Empire region of Southern California. The Bank operates sixteen full-service banking centers within Los Angeles, Marin, Orange, Riverside, San Bernardino and San Diego counties of California, as well as one RFC in Ventura county of California and one RFC in Los Angeles county of California, both with limited operations. RFCs are offices that operate principally with loan and/or deposit gathering functions. The Bank's deposit accounts are insured by the FDIC up to the maximum amount permitted by law. The Bank is our principal asset. The Company has a variable interest entity, the Pomona Fox Investment, which has been consolidated in accordance with FASB Interpretation No. 46(R). VNB also has ten unconsolidated statutory business Trust subsidiaries, which were created to raise capital through the issuance of trust preferred securities. At September 30, 2008, we had consolidated total assets of $2.1 billion, total deposits of $1.6 billion and consolidated stockholders' equity of $2.5 million.

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Executive Overview

We reported a net loss for the three and nine months ended September 30, 2008 of $28.6 million and $109.8 million, respectively, compared to net income of $5.5 million and $17.0 million for the same periods in 2007, respectively. Our results of operations during the three and nine months ended September 30, 2008 resulted in a loss of $2.95 and $11.39 per common share, respectively, compared with diluted earnings per common share of $0.45 and $1.46, for the same periods in 2007, respectively. The net loss for the three and nine months ended September 30, 2008 was due primarily to $21.4 million and $88.8 million, respectively, in provision for loan losses principally associated with our land and tract construction loan portfolios.

In the midst of a distressed economic environment and in response to our Consent Order, we have continued our strategy to significantly reduce our loan production levels and achieved a net contraction of our balance sheet. Overall, we have contracted our balance sheet by $384.5 million, or 15.5%, during the nine months ended September 30, 2008, from $2.5 billion at December 31, 2007 to $2.1 billion at September 30, 2008.

At September 30, 2008, we had $1.8 billion in loans, net of unearned income and $8.4 million of loans held-for-sale. Loans, net of unearned income decreased $205.2 million during the first nine months of 2008 largely as a result of $637.2 million of payoffs and principal payments and $75.4 million in charge-offs, offset by $488.2 million of disbursements, primarily on existing loans. At September 30, 2008, our gross loan portfolio, excluding loans held-for-sale was comprised of 45.5% construction and land loans, 28.2% commercial real estate loans, 10.2% residential real estate loans, 11.0% commercial loans, and 5.1% consumer loans. The majority of our loans are originated in our primary market areas throughout Southern and Northern California. The loans held-for-sale at September 30, 2008 consisted of $0.9 million of tract construction loans and $7.5 million of land loans.

Total deposits at September 30, 2008 were $1.6 billion, down $315.0 million from their $1.9 billion level at December 31, 2007. During the nine months ended September 30, 2008, money market accounts decreased by $422.6 million while we have increased our brokered time deposits by $236.4 million. Our deposit portfolio at September 30, 2008 was comprised of 77.3% in time certificate of deposits, including brokered time deposits, 13.9% in savings deposits (which include money market, NOW, and savings deposits) and 8.8% in demand deposits.

Significant Events

The following information provides an overview of significant events that occurred in the third quarter of 2008 and significant subsequent events.

Regulatory Actions

On July 22, 2008, in cooperation with and at the request of the OCC, the Bank consented to the issuance of a Consent Order. The Consent Order established timeframes for the completion of remedial measures which have been previously identified and are in process towards completion as part of the Board of Directors' internally developed and independently implemented Risk Mitigation Action Plan. Under the Consent Order, the Bank agreed to, among other things,

ЖЖЖ establish a compliance committee to monitor and coordinate compliance with the Consent Order;

ЖЖЖ identify experienced and competent individuals to serve on a permanent, full-time basis as chief executive officer and chief credit officer;

ЖЖЖ maintain capital ratios above the statutory minimums and develop a three-year capital plan;

ЖЖЖ suspend the payment of dividends without regulatory approval;

ЖЖЖ limit annual loan growth;

ЖЖЖ establish a program for the maintenance of adequate allowances for loan losses;

ЖЖЖ adopt a written asset diversification program;

ЖЖЖ review, revise and adhere to the Bank's loan policy;

ЖЖЖ ensure the use and reporting of appropriate risk rating of assets;

ЖЖЖ establish an effective, independent and ongoing loan review system;

ЖЖЖ take appropriate action to protect the Bank's interest in its problem assets;

ЖЖЖ ensure the maintenance of sufficient liquidity to sustain current operations and withstand anticipated or extraordinary demand; and

ЖЖЖ improve the management of the Bank's information technology activities and to address various deficiencies cited by the OCC.

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On September 23, 2008, VNB entered into a written agreement (the "Written Agreement") with the FRB. The Written Agreement formalizes certain of the remedial measures which have been previously identified as part of our internally developed and independently implemented Risk Mitigation Action Plan. Under the Written Agreement, we agreed to, among other things,

ЖЖЖ suspend the declaration, payment or receipt of dividends without prior approval;

ЖЖЖ suspend any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior approval;

ЖЖЖ not incur, increase, or guarantee any debt without prior approval;

ЖЖЖ not purchase or redeem any shares of stock without prior approval;

ЖЖЖ submit a written capital plan to the FRB;

ЖЖЖ have VNB serve as a source of financial strength to the Bank;

ЖЖЖ ensure that the Company and its subsidiaries comply with sections 23A and 23B of the Federal Reserve Act and Regulation W of the Board of Governors of the Federal Reserve System;

ЖЖЖ not appoint any new director or senior executive officer or change the responsibilities of any current senior executive officers without providing the FRB with 30 days prior written notice and not make any appointment or change if such is disapproved by the FRB;

ЖЖЖ not make indemnification or severance payments to, or enter into agreements providing for such indemnification or severance payments with, institution-affiliated parties, which include key employees and directors of the Company, without complying with certain statutory restrictions including prior approval of the FRB and the FDIC; and

ЖЖЖ provide quarterly written reports to the FRB concerning the actions taken by the Company to comply with the Written Agreement.

Pursuant to a requirement of the Written Agreement, we are currently deferring all interest payments on our junior subordinated debentures, but we continue to accrue the associated interest expense on our Consolidated Financial Statements.

On September 24, 2008, pursuant to the requirements of the Written Agreement, the Company received Approval from the FRB to engage in various actions required in connection with its previously announced commencement of an Offering of up to $250 million aggregate amount of "units," consisting of 10% convertible senior secured notes due in 2009 and shares of our common stock to "accredited investors" as defined in Rule 501 under the Securities Act, and outside the United States in reliance on Regulation S under the Securities Act.

Stock Purchase Agreement

On September 19, 2008, we announced our intent to commence a private placement Offering of an aggregate of $250 million of Units consisting of 10% Convertible Senior Secured Notes due in 2009 and common stock to be issued at the closing of the transaction. After several weeks of meetings with numerous prospective investors identified with the assistance of our investment bankers, two private equity firms commenced on-site due diligence, but those activities did not result in a transaction and further discussions with those investors have terminated. Further, discussions regarding the sale of certain loan and OREO assets in connection with the Offering have also terminated. As a result, VNB and its financial advisors began to explore other strategic alternatives, including a sale of the Bank. VNB and its financial advisors met with a number of qualified potential parties with respect to a sale of the Bank.

While our Offering was unsuccessful, on November 12, 2008, the Company, along with Vineyard Bancshares, Inc., the Buyer, announced the signing of a Purchase Agreement for the sale of all of the outstanding common stock of the Bank to the Buyer. The Buyer is a newly-formed corporation organized and controlled by the Company's chairman of the Board, Douglas M. Kratz, who serves as president and chief executive officer of the Buyer.

A special committee of the Company's Board of Directors composed of disinterested directors was formed to review strategic alternatives and for the purpose of considering and negotiating the terms of a potential transaction with the Buyer because certain directors of the Company would have a material financial interest in the transaction. The special committee reviewed and negotiated the proposed transaction with the Buyer and unanimously recommended to the Board of Directors of the Company the approval of the Purchase Agreement. The Board of Directors of the Company, excluding interested directors, approved the transaction based on the unanimous recommendation of the special committee.

Under the Purchase Agreement, the Buyer has agreed to purchase the Bank for up to $18.0 million, of which $10.0 million is the Initial Purchase Price. The Additional Purchase Price is payable if the Bank's loan losses for the period between October 1, 2008 and September 30, 2011 are less than $125.0 million. Of the Initial Purchase Price, VNB's Senior Lender would receive $9.0 million in full satisfaction of VNB's $48.3 million outstanding indebtedness to the Senior Lender, and the remaining $1.0 million would be paid to the Company. The Senior Lender also has the right to receive the entire Additional Purchase Price if paid.

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The transaction is structured as a sale of the Bank's stock to the Buyer. The transaction would be effected pursuant to one of the following methods, as agreed between the Buyer and the Company: (a) a direct Sale of the Bank shares to the Buyer subject to shareholders' approval, (b) Foreclosure by the Senior Lender and subsequent transfer of the Bank shares to the Buyer, or (c) a sale of the Bank shares to the Buyer pursuant to Section 363 of the U.S. Bankruptcy Code. It is unlikely that unsecured creditors of VNB, including holders of trust preferred securities, will recover their investment.

The closing of this transaction is subject to the contingency that the Buyer receive Financing for at least $125.0 million. The Buyer has agreed to use its best efforts to complete the Financing. Under the terms of the Purchase Agreement, once this condition is satisfied, the parties will choose one of the above described transaction structures. In addition to other customary conditions, the transaction is also subject to certain regulatory approvals and, depending on which of the three transaction structures is ultimately chosen, consent by the Company's shareholders in the case of the Sale, consent by the VNB's Senior Lender in the case of the Foreclosure or consent of a United States Bankruptcy Court in the case of the Bankruptcy.

The Purchase Agreement contains a "go-shop" provision under which the Company has the right to solicit competing bids for the sale of Bank, subject to the limitations described in the Purchase Agreement.

The Company or the Buyer may terminate the Purchase Agreement under certain specified circumstances, including if the Financing has not been completed within 105 days. The Company may terminate the Purchase Agreement if its Board of Directors has determined to accept a superior proposal, as defined in the Purchase Agreement. The Buyer may terminate the Purchase Agreement upon receiving the Company's disclosure schedules if the Buyer determines in its reasonable discretion that the information disclosed or a significant concern would have a material adverse effect on the Bank.

If the Company terminates the agreement to accept a superior proposal or if an alternative acquisition transaction is accepted in a Bankruptcy, the Company would be obligated to pay the Buyer a termination fee of $0.6 million plus reimbursement of the Buyer's reasonable out-of-pocket fees and expenses.

In connection with the execution of the Purchase Agreement, the Company and the Buyer entered into a Letter Agreement with the Senior Lender pursuant to which the Company agreed to pay to the Senior Lender, as described above, the Initial Payoff in full satisfaction of the Company's indebtedness and obligations under the Loan. Further, the Senior Lender may receive the Additional Purchase Price of $8.0 million if certain conditions related to loan losses are satisfied. These terms are subject to the condition that the Initial Payoff be made by March 31, 2009. In the event that the initial purchase price increases as a result of a competing bid or an increase in the amount payable by the Buyer, the Company will retain twenty-five percent (25%) of any increased initial purchase price (net of the termination fees and the Buyer's expenses) in excess of $10.0 million. The initial purchase price for this purpose means the greater of $10.0 million or the actual bid accepted for the sale of the shares of the Bank.

The Bank is not currently in compliance with the Consent Order and the Written Agreement. If the Purchase Agreement is terminated or the Buyer is not successful in raising Financing, we will not be able to become fully compliant with the provisions of the Consent Order or Written Agreement. As a result, the OCC and/or the FRB may take further enforcement action, including placing the Bank into receivership with the FDIC. In connection with the Purchase Agreement, the Senior Lender agreed to extend the maturity date to March 31, 2009, and to waive certain events of default. Therefore, if the transaction does not close before March 31, 2009, the Senior Lender may take action to foreclose on the Bank's stock. If the Bank is placed into FDIC receivership or the Senior Lender takes action to foreclose on the Bank's stock, it is highly likely that we would be required to cease operations and liquidate or seek bankruptcy protection. If we were to liquidate or seek bankruptcy protection, we do not believe that there would be any assets available to the holders of capital stock of VNB.

Further, this transaction will be subject to the review and approval of VNB's and the Bank's regulators. Therefore, given the current financial condition of VNB, if a transaction involving the sale of the Bank is not approved, VNB and the Bank may be placed into receivership by their regulators or the holders of the senior secured debt may foreclose to gain control of 100% of the Bank's stock.

The foregoing summary of the Purchase Agreement and Letter Agreement is qualified in its entirety by the full terms and conditions of such documents, copies of which have been filed as exhibits to the Company's Current Report on Form 8-K, filed with the SEC on November 13, 2008

Due to the conditions and events discussed herein, we believe substantial doubt exists as to our ability to continue as a going concern. We have determined that significant additional sources of liquidity and capital will be required for us to continue operations through 2008 and beyond. We have previously engaged financial advisors to assist the Company in its efforts to raise additional capital and explore strategic alternatives to address our current and expected liquidy and capital deficiencies. To date, those efforts have been unsuccessful. As a result of our financial condition, our regulators are continually monitoring our liquidity and capital adequacy. Based on their assessment of our ability to continue to operate in a safe and sound manner, our regulators may take other and further actions, including assumption of control of the Bank, to protect the interests of depositors insured by the FDIC.

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Line of Credit Modifications

VNB had $48.3 million and $45.3 million outstanding on our secured line of credit with the Senior Lender at September 30, 2008 and December 31, 2007, respectively. This line is collateralized by 100% of the Bank's common stock. On several occasions over the term of this facility, we have been in default due to non-compliance with certain financial and operating covenants. As a result, VNB and our Senior Lender have entered into several modifications and waivers with respect to these prior defaults.

Effective November 12, 2008, VNB and the Senior Lender entered into the Seventh Modification Agreement and Covenant Waiver which, among other things, extended the maturity date of the secured line of credit from the Senior Lender to March 31, 2009, extended the waiver by the Senior Lender of certain financial and other covenant failures of the Company, including the signing of a consent order with the OCC, the signing of a written agreement with the FRB of San Francisco and the entering into the Purchase Agreement with the Buyer, all of which constituted events of default, through March 31, 2009. The outstanding balance of the loan was $48.3 million at November 12, 2008.

Board and Management changes

On August 11, 2008, following our annual meeting of shareholders, we announced that five new directors from the alternative slate, Douglas Kratz, Glen Terry, Cynthia Harriss, Lester Strong and Harice "Dev" Ogle, and two existing directors, David Buxbaum and Charles Keagle, had been elected to our Board. On August 20, 2008, Ms. Harriss resigned from the Board and the Board appointed Perry Hansen as Chairman of the Board of the Bank and to serve as a director of the Company, subject to regulatory approval. In addition, the Board appointed James LeSieur, our former Chairman and former interim Chief Executive Officer and President, to serve as a director, subject to regulatory approval. Subsequent regulatory approval was obtained for these appointments.

On September 12, 2008, in fulfillment of one of the Consent Order measures, our new Board appointed Glen Terry as President and Chief Executive Officer of the Company and the Bank and Lucilio "Louie" Couto, our Chief Risk Officer, as Chief Credit Officer of the Bank, both subject to regulatory approval. On September 24, 2008 and October 17, 2008, respectively, we received notices from the FRB and the OCC that Mr. Terry is permitted to serve as our Chief Executive Officer and President. Further, on September 18, 2008, the Bank received a waiver for Mr. Couto to serve as the Bank's Chief Credit Officer.

Liquidity and Capital Adequacy Considerations

VNB

While the Bank's liquidity position has somewhat stabilized, the liquidity position of VNB has continued to deteriorate. As a result of recent regulatory actions, the Bank is not permitted to pay dividends or make payments to VNB. As a result of the Bank's inability to upstream money to VNB and the unsuccessful $250.0 million Offering, VNB has very little available liquidity. VNB has no borrowing availability or other sources of liquidity. As of September 30, 2008 and November 10, 2008, VNB had $4.7 million and $3.9 million in cash and cash equivalents, respectively. This amount is not sufficient to pay our creditors or to continue operations. As of November 10, 2008, VNB had $ 48.3 million in principal amount outstanding under its secured line of credit with the Senior Lender, plus $0.6 million in accrued and unpaid interest thereunder. As of that date, VNB also had $120.5 million in principal amount of unsecured indebtedness outstanding, plus approximately $3.8 million in accrued and unpaid interest thereunder.

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The restrictions on the Bank's ability to upstream funds to VNB and the lack of sources of liquidity available to VNB continue to raise substantial doubt about VNB's ability to continue as a going concern for the foreseeable future. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. See risk factors for further description of the risks affecting VNB.

Bank

Negative publicity relating to our financial results and the financial results of other financial institutions, together with the seizure of several financial institutions by federal regulators, has caused a significant amount of customer deposit withdrawals, thus affecting our liquidity and our ability to meet our obligations as they have come due. During the second quarter of 2008, we obtained $266.3 million in brokered deposits to offset run-off of savings, NOW and money market deposit accounts. As of September 30, 2008 the remaining balance was $236.7 million. As a result of the issuance of the Consent Order by the OCC on July 22, 2008, however, we can no longer accept, renew or rollover brokered deposits unless and until such time as we receive a waiver from the FDIC. The Bank's initial waiver request from the FDIC was declined, however the Bank may make waiver requests going forward. There can be no assurance that such a waiver will be granted, granted on the terms requested, or granted in time for the Bank to effectively utilize brokered deposits as a source of required liquidity. If the Bank does not receive such a waiver, we will not be able to use further brokered deposits as a source of liquidity.

Although effective April 21, 2008, the Federal Home Loan Bank ("FHLB") reduced the Bank's borrowing capacity from 40% to 30% of the Bank's total assets, the Bank's borrowing availability was limited to the amount of eligible collateral that can be pledged to secure that borrowing facility. At September 30, 2008, based on its eligible pledged loan and investment collateral, that availability was $282.0 million of which $281.0 million was outstanding; therefore, the Bank had a remaining borrowing availability of $1.0 million.

As of September 30, 2008, the Bank had $89.9 million of cash and cash equivalents and had no unsecured correspondent banking facilities with borrowing availability. However, on August 1, 2008, the Bank entered into an intercreditor agreement with the FHLB and FRB San Francisco whereby certain eligible loans pledged to the FRB San Francisco, and agreed to by the FHLB, may be utilized to support any advances from the FRB Discount Window. We have pledged loans with an aggregate principal balance of over $400 million which can be used by the FRB Discount Window in determining an available amount to us; however, the FRB Discount Window is not obligated to lend on any collateral deposited. As of November 10, 2008, the Bank had $84.4 million in cash and cash equivalents.

Critical Accounting Policies and estimates

In preparing these financial statements, we are required 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 fair value of carried securities. We base our estimates on historical experience and on various other assumptions that we consider reasonable under the circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Our significant accounting policies are described in Part II, Item 7 "Management Discussion and Analysis of Financial Condition and Results of Operations" in our 2007 Form 10-K. We believe that the policies described below are critical to our business operations and the understanding of our financial condition and operating results.

Allowance for Credit Losses and Impaired Loans

The allowance for credit losses is maintained at a level which, in our judgment based on information available at the time of determination, is adequate to absorb credit losses inherent in the loan portfolio and in undisbursed loan commitments, given the orderly resolution of credits, as opposed to the immediate liquidation of the portfolio to bulk purchasers. The allowance for credit losses is comprised of the allowance for loan losses and the allowance for unfunded commitments. It accounts for probable credit losses in both the on-balance and off-balance sheet loan portfolios. The amount of the allowance is based on our evaluation of the collectability 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 for loan losses is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries.

The reserve for unfunded commitments is increased by the provision for unfunded . . .