ITEM 2. PROPERTIES
The Company's executive offices are located at the Bank's main banking office at 9590 Foothill Boulevard, Rancho Cucamonga, California. During 1996, the Bank acquired the corporate headquarters and main branch building. This resulted in an increase in bank premises of approximately $2,471,000.
The Bank also owns the land and building where its Chino and Crestline offices are located, and leases the facilities in which its Diamond Bar and Blue Jay offices are located under leases expiring in two years and fours years, respectively. The Bank's total occupancy expense for 1996, excluding furniture and equipment expense, approximated $843,000. Management believes that the Bank's present facilities are adequate for its present purposes.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation. 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 condition.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Trading in the Company's Common Stock has been relatively inactive and the trades that do occur from time to time cannot be characterized as constituting an active trading market. The Common Stock is not listed on any national or regional stock exchange or with NASDAQ. At December 31, 1996, the Company had approximately 795 shareholders.
The following table summarizes the high and low prices at which the shares of Common Stock of the Company have traded during the periods indicated, based upon trades of which management of the Company has knowledge. Quoted prices reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. This information has been provided by the Company's securities dealer, Sutro & Company.
(1) Adjusted to reflect all stock splits by the Company.
(2) Trades by directors and/or executive officers of the Company did not account for any of the trades reflected in the above table.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years ended December 31, 1996, 1995 and 1994, are derived from the audited consolidated and Bank financial statements of the Company examined by Vavrinek, Trine, Day & Co., Certified Public Accountants, included elsewhere in this Report and should be read in conjunction with those consolidated financial statements. The selected financial data for the fiscal years ended December 31, 1993 and 1992, are derived from audited financial statements examined by Vavrinek, Trine, Day & Co. which are not included in this Report.
(1) Retroactively adjusted for stock splits.
ITEM 7.

ITEM 7. 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 financial condition, results of operations, liquidity and interest rate sensitivity. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company.
Vineyard National Bancorp is operating as a bank holding company whose only operating subsidiary is Vineyard National Bank. The Bank was acquired by the holding company on December 16, 1988, and comprises substantially all of the Company's revenues and expenses. Accordingly, management's discussion and analysis is focused on and results from the financial condition and operations of the Bank.
For the year ended December 31, 1996, Vineyard National Bancorp on a consolidated basis reported Net Income/(Loss) of $106,000 compared to $834,000 and $(1,538,000) in the comparable 1995 and 1994 periods. Net Income/(Loss) Per Share was $0.06 compared to $0.45 in 1995 and $(0.83) in 1994. Consolidated total assets at December 31, 1996 were $119,524,000 compared to $107,559,000 at December 31, 1995, up approximately 11%. Total deposits also increased from $98,414,000 as of December 31, 1995 to $106,603,000 at year-end 1996. Stockholders' equity was $7,851,000 at December 31, 1996, up from its $7,753,000 level a year earlier, owing primarily to net income of $106,000 for 1996. Also impacting stockholders' equity was the unrealized gain on securities available-for-sale of $5,000 which is down from the unrealized gain of $12,000 on securities available-for-sale at December 31, 1995.
The reserve for probable loan and lease losses, which serves as a "buffer" against possible future losses, had losses totaling $686,000 charged against it during 1996. Recoveries of loans previously charged-off amounted to $214,000 which were credited back to the reserve. A provision for probable loan and lease losses of $417,000 was recorded in 1996 compared to a negative provision of $(429,000) in 1995 and a provision of $1,440,000 in 1994.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income represents the difference between interest and fees generated on all earning assets and interest paid on interest bearing liabilities which include customer deposits and borrowed funds. Net Interest Income for 1996 was $6,150,000, down from the $6,169,000 reported in 1995 and $6,554,000 reported in 1994. This represents decreases of .3% in 1996 and 5.9% in 1995, respectively. The components of net interest income change in response to both change in rate, average balance and mix on both earning assets and liabilities.
The decline in net interest income in 1996 from 1995 was due to the increase in interest expense exceeding the increase in interest income. Interest income increased $442,000 to $9,011,000 in 1996 from $8,569,000 in 1995 while interest expense increased $461,000 to $2,861,000 in 1996 from $2,400,000 in 1995. The resulting decrease in net interest income can be attributed to a number of factors. First, the Bank's average interest-earning assets increased 4.4% from $96,725,000 in 1995 to $100,960,000 in 1996. This increase is mostly attributable to a 9.1% increase in average loans, the Bank's highest yielding asset. Average loans increased from $78,097,000 in 1995 to $85,216,000 in 1996. Average investment securities decreased from $12,976,000 in 1995 to $11,214,000 in 1996, average federal funds sold, the Bank's lowest yielding asset, decreased from $4,156,000 in 1995 to $3,467,000 in 1996. Secondly, although the volume of interest earning assets was higher on average in 1996 than in 1995, the average yield earned on these assets remained constant at 8.9% in 1996 and 1995. Third, average interest-bearing liabilities increased 7.2% from $75,057,000 in 1995 to $80,465,000 in 1996. This increase is attributable to a shift in the composition of the Bank's deposit liabilities. Average savings deposits, the Bank's lowest interest paying deposit account, decreased 10.6% from $46,848,000 in 1995 to $41,877,000 in 1996 while time deposits, the Bank's highest interest paying deposit account, increased 36.7% from $28,203,000 in 1995 to $38,550,000 in 1996. This shift was due to the Bank offering higher time deposit rates in an effort to raise deposit levels. Fourth, the average yield paid on interest-bearing liabilities increased to 3.6% in 1996 from 3.2% in 1995.
The decline in net interest income in 1995 from 1994 was due to the increase in interest expense exceeding the increase in interest income. Interest income increased to $8,569,000 in 1995 from $8,473,000 in 1994. This increase resulted primarily from a change in the composition of the Bank's interest-earning assets. The Bank's average interest-earning assets declined 2.8% in 1995 compared to 1994. Average loans, the Bank's highest yielding asset, declined 1.8% from $79,489,000 during 1994 to $78,097,000 in 1995 and average federal funds sold, the Bank's lowest yielding asset, increased from $2,990,000 during 1994 to $4,156,000 during 1995.
The following table presents the distribution of the Company's average assets, liabilities and shareholders' 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. Loans include non-accrual loans whereas non-accrual interest is excluded.
(1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities
(2) Net interest margin is computed by dividing net interest income by total average earning assets.
(3) The yield for securities that are classified as available-for-sale is based on historical amortized cost balances.
(1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities
(2) Net interest margin is computed by dividing net interest income by total average earning assets.
(3) The yield for securities that are classified as available-for-sale is based on historical amortized cost balances.
The following table sets forth changes in interest income and interest expense for each major category of interest-earning asset and interest- bearing liability, and the amount of change attributable to volume and rate changes for the year indicated. The changes due to rate and volume have been allocated in proportion to the relationship between their absolute dollar amounts.
(1) Does not include interest income which would have been earned on non-accrual loans. The amount that would have been collected on these loans had they remained current in accordance with their terms was $7,000 in 1996, $39,000 in 1995 and $13,000 in 1994.
(2) Interest income includes the effects of tax equivalent adjustments on tax exempt securities and leases using tax rates which approximate 21.0% for 1996, 41.2% for 1995 and 19.4% for 1994.
PROVISION FOR PROBABLE LOAN AND LEASE LOSSES
The provision for probable loan and lease losses, which is an operating expense of the Company, creates an allowance for estimated future loan and lease losses. When losses occur they are charged against the allowance for probable loan and lease losses.
A provision for probable loan and lease losses of $417,000 was recorded in 1996. This is compared to a negative provision of $(429,000) in 1995 and a large provision of $1,440,000 in 1994. The provision for loan and lease losses recorded in 1996 is a result of management's assessment of the potential losses inherent in the loan portfolio. The decrease in the provision in 1995 was primarily a result of the receipt of a large recovery on a previously charged off loan and a substantial decrease in charge-offs recorded from 1994 to 1995. The large provision recorded in 1994 reflects management's assessment of the impact that the continuing general economic slowdown and declining real estate market in California has had on the Bank's loan portfolio. Charge-offs recorded in 1994 were $1,998,000. The need for additional provision for loan and lease losses in 1997 will be contingent upon management's on-going analysis of the adequacy of the reserve for probable loan and lease losses. While management believes it to be adequately funded at the present time, the appropriate value can fluctuate in response to economic conditions and the subjective decisions which must be made in response to those conditions.
During 1996, the Bank's non-accrual loans decreased from $479,000 to $434,000. For further information regarding charge-offs, non- performing and classified loans and the allowance for probable loan and lease losses, see MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - "Financial Condition - Non-performing Loans" and "Reserve for probable Loan and Lease Losses."
NON-INTEREST INCOME
Non-interest income for 1996 totaled $1,838,000 compared to $3,962,000 in 1995 and $2,809,000 in 1994. This represents a (46)% decrease during 1996, a 42% increase in 1995 and a (29)% decrease in 1994. The largest component of the decrease during 1996 was due to one- time revenues received in connection with the sale of the Bank's mortgage servicing rights. Income of $1,489,000 received from the sale of these rights was included in non-interest income during 1995. In addition, as a result of the sale of these rights, loan servicing income decreased $150,000 in 1996 and $300,000 in 1995. The large decrease during 1994 was due to the increases in mortgage interest rates over the previous year which had directly affected the mortgage loan market, particularly as it related to refinancing of home mortgages. Accordingly, the Company realized a significant decrease in the volume of mortgage loans for sale and servicing.
Other fee and service charge income decreased to $1,750,000 during 1996 from $2,447,000 in 1995 and $2,825,000 in 1994. The decrease in 1996 is mostly attributable to the sale of certain assets and liabilities of its Victorville branch which occurred during 1995. Total assets sold were approximately $1,275,000, and total liabilities assumed by the buyer were approximately $4,104,000. The transaction resulted in a gain of approximately $23,000, which has been included in other income in 1995. The Bank is no longer operating the branch in Victorville.
NON-INTEREST EXPENSES
Total non-interest expense for 1996 was $7,438,000 compared to $9,142,000 in 1995 and $9,831,000 in 1994. Salaries and employees benefits totaled $3,511,000 in 1996 compared to $3,991,000 in 1995 and $4,091,000 in 1994. The decrease was mostly due to the savings associated with no longer operating the Victorville branch. The savings from the sale of this branch were also reflected in the $711,000 decrease in other expense during 1996. Other expenses were $2,500,000 in 1996 compared to $3,210,000 in 1995 and $3,808,000 in 1994. Three of the largest declines in other expenses during 1996 were a $141,000 decline in professional expenses, a $178,000 decline in insurance and assessment expense and a $212,000 decline in loan related expenses.
Occupancy expense was $814,000 in 1996 compared to $1,254,000 in 1995 and $1,210,000 in 1994. The decrease in 1996 was mostly attributable to the elimination of lease payments due to the acquisition of the Bank's main branch building and administrative headquarters during 1996.
Non-interest expense decreased in absolute terms from $9,831,000 in 1994 to $9,142,000 in 1995 which equates to a 7% decline. Occupancy expense of premises were up but were more than offset by the decrease in salaries and employee benefits and furniture and equipment and other expenses.
Non-interest expense as a percentage of total income was 69% in 1996 as compared to 73% in 1995 and 87% in 1994.
INCOME TAXES
Total income tax expense for 1996 and 1995 were $28,000 and $584,000, respectively, which approximated 20.1% and 41.2% of pre-tax income. Due to the loss incurred in 1994, the Company realized an income tax credit of $370,000 which represented approximately 19% of the loss before said credit. The Company has a significant amount of federally tax exempt interest income in its portfolio which resulted in the less than statutory effective rates of tax for the applicable years.
FINANCIAL CONDITION
ASSETS
Total consolidated assets increased $11,965,000 or 1.1% to $119,524,000 as of December 31, 1996 from $107,559,000 as of December 31, 1995. The increase in the Company's size is mostly attributable to a $20,654,000 increase in gross loans, a $2,737,000 increase in bank premises and equipment which was offset by a decrease in federal funds sold of $1,925,000 and a decrease in investment securities of $7,532,000.
LOANS
As noted above, the Company's loan portfolio has increased by approximately $20,654,000 during the year ended December 31, 1996. The two largest increases were in real estate mortgages which increased $12,112,000 from $28,881,000 in 1995 to $40,993,000 in 1996 and in installment loans to individuals which increased $8,277,000 from $41,723,000 in 1995 to $50,000,000 in 1996. As the economy in Southern California has begun to improve, real estate prices and sales activity have increased allowing for more opportunity to originate loans to finance real estate transactions. The Company's installment portfolio is comprised of predominantly auto loans, both indirectly and directly funded. The increase in these loans were due to the Company's aggressive marketing of it's pricing of indirect auto rates.
NON-PERFORMING LOANS
The following table sets forth information regarding the Bank's non-performing loans at year-end 1996 and 1995.
(1) Reflects loans for which there has been no payment of interest and/or principal for 90 days or more. Ordinarily, loans are placed on non- accrual status (accrual of interest is discounted) when the Bank has reason to believe that continued payment of interest and principal is unlikely.
(2) Renegotiated loans are those which have been renegotiated to provide a deferral of interest or principal. The Bank had no renegotiated loans during 1996 and 1995.
(3) There were five loans on non-accrual status totaling approximately $434,000 at December 31, 1996, and four loans totaling approximately $479,000 at December 31, 1995.
The policy of the Company is to review each loan in the loan portfolio to identify problem credits. In addition, as an integral part of its review process of the Bank, the Comptroller also classifies problem credits. There are three classifications for problem loans: "substandard", "doubtful" and "loss". Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, questionable. A loan classified as loss is considered uncollectible and of such little value that the continuance as an asset of the institution is not warranted. Another category designated "special mention" is maintained for loans which do not currently expose the Bank to a significant degree or risk to warrant classification in a substandard, doubtful or loss but do possess credit deficiencies or potential weaknesses deserving management's close attention.
As of December 31, 1996, the Bank's classified loans consisted of $3,373,000 of loans classified as substandard. The Bank's $3,373,000 of loans classified as substandard consisted of $2,890,000 of performing loans and $483,000 of non-accrual loans and loans delinquent 90 days or more but still accruing.
RESERVE FOR PROBABLE LOAN AND LEASE LOSSES
The reserve for probable loan and lease losses is a general reserve established by Management to absorb potential losses inherent in the entire portfolio. The level of and ratio of additions to the reserve are based on a continuous analysis of the loan and lease portfolio and, at December 31, 1996, reflected an amount which, in management's judgment, was adequate to provide for known and inherent loan losses. In evaluating the adequacy of the reserve, management gives consideration to the composition of the loan portfolio, the performance of loans in the portfolio, evaluations of loan collateral, prior loss experience, current economic conditions and the prospects or worth of respective borrowers or guarantors. In addition, the Comptroller, as an integral part of its examination process, periodically reviews the Bank's allowance for possible loan and lease losses. The Comptroller may require the Bank to recognize additions to the allowance based upon its judgment of the information available to it at the time of its examination. The Bank was most recently examined by the Comptroller as of September 30, 1996.
The reserve for probable loan and lease losses at December 31, 1996, was $728,000 or .75%, of total loans and leases, as compared to $783,000 or 1.00%, of total credits at December 31, 1995. Additions to the reserve are effected through the provision for loan and lease losses which is an operating expense of the Company.
The following table provides certain information with respect to the Company's allowance for loan losses as well as charge-off and recovery activity.
The Bank adopted SFAS No. 114 (as amended by SFAS No. 118), "Accounting by Creditors for Impairment of a Loan" on January 1, 1995. The statement generally requires those loans identified as "impaired" to be measured on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is impaired when it is probable the creditor will not be able to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Loan impairment is evaluated on a loan-by-loan basis as part of normal loan review procedures of the Bank.
INVESTMENT SECURITIES
The Company's investment portfolio primarily consists of U.S. Treasury Securities. As of December 31, 1996, the Company categorized their investment securities as available-for-sale (which requires continual mark to market adjustments to the Company's capital account, but no impact on the income statement). The Company holds no securities that should be classified as trading securities and has determined that since its securities may be sold prior to maturity because of interest rate changes, to meet liquidity needs, or to better match the repricing characteristics of funding sources, its entire portfolio should be classified as available-for-sale. No securities are classified as held-to- maturity.
The Company had unrealized gains of $9,000 and $20,000 in 1996 and 1995, respectively, and no unrealized losses for the same corresponding periods. The Company generated gains of $2,000 during 1996 and losses of $8,000 and $29,000 on sales of investment securities during 1995 and 1994.
The Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which addresses the accounting for investments in equity securities that have readily determinable fair values and for investments in all debt securities. Securities are classified in three categories and accounted for as follows: debt and equity securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and securities are measured at amortized cost; debt and equity securities bought and held principally for the purpose of selling in the near term are classified as trading securities and are measured at fair value, with unrealized gains and losses included in earnings; debt and equity securities not classified as either held-to-maturity or trading securities are deemed as either available-for-sale and are measured at fair value, with unrealized gains and losses, reported as a separate component of stockholders' equity.
SOURCES OF FUNDS
While the Bank is competitive with major banks in terms of its structure of interest rates on deposit products offered, it was more aggressive during 1996 in terms of paying higher rates to attract additional deposits. Given the current increase in loan demand and the Bank's decreased liquidity, Management felt the need to be especially aggressive on the rates being paid. As a result, total deposits increased during 1996 to $106,603,000 from $98,414,000 in 1995. The $8,189,000 increase represents an 8.3% increase. The mix of the Bank's deposits showed a wide fluctuation with a decrease in savings and NOW deposits of $2,268,000 or 8.6%, a decrease in money market deposits of $2,477,000 or 15.2%, an increase in demand deposits of $255,000 or 1%, an increase in time deposits in denominations of $100,000 or more of $493,000 or 5.5% and an increase in other time deposits of $12,185,000 or 41.9%.
LIQUIDITY
The Company relies on asset-liability management to assure adequate liquidity and maintain an appropriate balance between interest sensitive earning assets and interest-bearing liabilities. Liquidity management and interest sensitivity management are key factors in asset-liability management. 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 (ALCO) 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. Vineyard National Bank had liquid assets (cash, deposits in other financial institutions and investment securities) as a percent of total deposits and borrowed funds of 13% and 25% as of December 31, 1996 and 1995, respectively. The Bank's loan to deposit ratio was 91% and 79% as of December 31, 1996 and 1995. This means that there are more deposits invested in the loan portfolio, which tends to be a less liquid asset than a typical investment security. The Bank's policy is to strive for a loan to deposit ratio between 70% and 90%. Increased loan demand has resulted in a decline in liquidity. This increase was funded to a large extent by an increase in borrowed funds of $3,700,000 and an increase in TCD's under $100,000 of approximately $12,185,000 between December 31, 1995 and December 31, 1996. TCD's under $100,000 represent 28% of total deposits resulting in an imbalance in the Bank's deposit base. Management closely monitors these TCD's and intends to replace them with core deposits.
While liquidity has declined, management believes it is sufficient to meet current and anticipated funding needs. Liquid assets represent approximately 12% of total assets. The liquidity contingency process outlines authorities and a reasonable course of action in case of unexpected liquidity needs. The Bank has borrowing lines with three correspondent banks totaling $3.7 million and a secured line at the Federal Reserve.
Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Vineyard National 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 evenly in order to minimize or eliminate any impact from interest rate changes.
CAPITAL RESOURCES
Neither the Company nor the Bank has any significant commitments for capital expenditures. The Bank is 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 Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require 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 December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of the Comptroller of the Currency (OCC) categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank's category). To be categorized as well-capitalized, the Bank must maintain minimum ratios as set forth in the table below. The following table also sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):
Capital ratios have declined between December 31, 1995 and December 31, 1996, as a result of asset growth and a decline in earnings.
ECONOMIC CONCERNS
The Bank concentrates on marketing to, and serving the needs of, small and medium-sized businesses, professionals and individuals located in San Bernardino County and the Western portion of Los Angeles County of Southern California. The general economy in this market area, and particularly the real estate market, is suffering from the effects of a prolonged recession that has negatively impacted the ability of certain borrowers of the Bank to perform their obligations to the Bank.
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. Although management of the Bank has devoted substantial time and resources to the identification, collection and workout of non-performing assets, the real estate markets and the overall economy in California are likely to have a significant effect on the Bank's assets in future periods and, accordingly, the Company's financial condition and results of operations.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedules covered by Independent Auditors' Report.
All schedules omitted for the reason that they are not required, are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
DECEMBER 31, 1996, 1995 AND 1994
CONTENTS
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Vineyard National Bancorp and Subsidiary
We have audited the accompanying consolidated balance sheets of Vineyard National Bancorp and Subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income and changes in stockholders' equity and statements of cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vineyard National Bancorp and Subsidiary as of December 31, 1996 and 1995, the results of their operations and changes in their stockholders' equity and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
Rancho Cucamonga, California March 7, 1997
VINEYARD NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
Assets
The accompanying notes are an integral part of these financial statements. VINEYARD NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 1996, 1995 AND 1994
The accompanying notes are an integral part of these financial statements.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 1996, 1995 AND 1994
The accompanying notes are an integral part of these financial statements.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 1996, 1995 AND 1994
The accompanying notes are an integral part of these statements.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 1996, 1995 AND 1994
The accompanying notes are an integral part of these financial statements.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Vineyard National Bancorp (the Company) and Subsidiary conform to generally accepted accounting principles and to general practices within the banking industry. A summary of the Company's significant accounting and reporting policies consistently applied in the preparation of the accompanying financial statements follows:
A. Principles of Consolidation
The consolidated financial statements include the Company and its wholly owned subsidiary, Vineyard National Bank. Intercompany balances and transactions have been eliminated.
B. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowances for losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowances for losses on loans and foreclosed real estate may change.
C. Investment Securities
The Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which addresses the accounting for investments in equity securities that have readily determinable fair values and for investments in all debt securities. Securities are classified in three categories and accounted for as follows: debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are measured at amortized cost; debt and equity securities bought and held principally for the purpose of selling in the near term are classified as trading securities and are measured at fair value, with unrealized gains and losses included in earnings; debt and equity securities are deemed as either available-for-sale and are measured at fair value, with unrealized gains and losses, reported in a separate component of stockholders' equity. Gains or losses on sales of investment securities are determined on the specific identification method. Premiums and discounts on investment securities are amortized or accreted using the interest method over the expected lives of the related securities.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
D. Loans and Interest on Loans
Loans are stated at unpaid principal balances, less the reserve for probable loan losses and net deferred loan fees and unearned discounts. Interest income is accrued monthly as earned on all loans not discounted. The Bank recognizes loan origination fees to the extent they represent reimbursement for initial direct costs, as income at the time of loan boarding. The excess of fees over costs, if any, is deferred and credited to income over the term of the loan. Unearned discounted on installment loans is recognized as income over the term of the loans by the sum-of-the-month-digits method (Rule of 78's).
The Bank adopted SFAS No. 114, (as amended by SFAS No. 118), "Accounting by Creditors for Impairment of a Loan" on January 1, 1995. The statement generally requires those loans identified as "impaired" to be measured on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is impaired when it is probable the creditor will not be able to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement.
Loans are placed on nonaccrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance.
All loans on nonaccrual are measured for impairment. The Bank applies the measurement provision of SFAS No. 114 to all loans in its portfolio except for installment loans which are charged off after 120 days of delinquency. All other loans are generally charged off at such time the loan is classified loss.
E. Reserve for Probable Loan and Lease Losses
The reserve for probable 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 reserve 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 reserve is increased by a provision for loan and lease losses, which is charged to expense and reduced by charge-offs, net of recoveries.
F. Direct Lease Financing
The investment in lease contracts is recorded using the finance method of accounting. Under the finance method, an asset is recorded in the amount of the total lease payments receivable and estimated residual value, reduced by unearned income. Income, represented by the excess of the total receivable over the cost of the related asset, is recorded in income in decreasing amounts over the term of the contract based upon the principal amount outstanding. The financing lease portfolio consists of buses and relocatable buildings, with terms from three to seven years.
G. Bank Premises, Equipment and Leasehold Improvements
The Company's furniture, equipment and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method. Rates of depreciation are based on the following depreciable lives: furniture, two to fifteen years; leasehold improvements, fifteen years; and equipment, five to twenty years. Total depreciation expense for the reporting periods ending December 31, 1996, 1995 and 1994, was approximately $499,000, $492,000 and $490,000, respectively.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
H. Reclassifications
Certain reclassifications have been made to the 1994 and 1995 financial statements to conform to 1996 classifications.
I. Consolidated Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and Federal funds sold. Generally, Federal funds are purchased and sold for one-day periods.
J. Income Taxes
Provisions for income taxes are based on amounts reported in the statements of income (after exclusion of non-taxable income such as interest on state and municipal securities) and include deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred taxes are computed on the liability method as prescribed in SFAS No. 109, "Accounting for Income Taxes."
K. Other Real Estate Owned
Other real estate owned, which represents real estate acquired through foreclosure, is stated at the lower of the carrying value of the loan or the estimated fair value less estimated selling costs of the related real estate. Loan balances in excess of the fair value of the real estate acquired at the date of acquisition are charged against the allowance for loan losses. Any subsequent declines in estimated fair value less selling costs, operating expenses or income and gains or losses on disposition of such properties are charged to current operations.
L. New Accounting Pronouncements
In June of 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125", establishing accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of the financial-components approach. This approach requires the recognition of financial assets when control is surrendered, and the derecognition of liabilities when they are extinguished. Specific criteria are established for determining when control has been surrendered in the transfer of financial assets. Liabilities and derivatives incurred or obtained by transferors in conjunction with the transfer of financial assets are required to be measured at fair value, if practicable. Servicing assets and other retained interests in transferred assets are required to be measured by allocating the previous carrying amount between the assets sold, if any, and the interest that is retained, if any, based on the relative fair values of the assets on the date of the transfer. Servicing assets retained are subsequently subject to amortization and assessment for impairment. Management has not determined the potential impact this statement will have on the financial statements, however believes there will be no material effect on the Bank's financial condition or results of operations. SFAS No. 125 is effective for transactions occurring after December 31, 1996.
NOTE #2 - INVESTMENT SECURITIES
At December 31, 1996 and 1995, the investment securities portfolio was comprised of securities classified as available-for-sale, in conjunction with the adoption of SFAS No. 115, resulting in investment securities available-for-sale being carried at fair value, adjusted for amortization of premiums and accretions of discounts.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
The amortized cost and fair values of investment securities available-for-sale at December 31, 1996 were:
The amortized cost and fair values of investment securities available-for-sale at December 31, 1995 were:
The amortized cost and fair values of investment securities available-for-sale at December 31, 1996, by expected maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales of investment securities available-for-sale during 1996 were $5,011,954. Gross gains and losses on those sales were $2,761 and $561, respectively. Included in shareholders' equity at December 31, 1996 is $5,007 of net unrealized gains (net of $3,629 estimated tax expense) on investment securities available-for-sale.
Proceeds from sales of investment securities available-for-sale during 1995 were $1,000,000. Gross losses on those sales were $8,237. Included in shareholders' equity at December 31, 1995 is $11,887 of net unrealized gains (net of $8,611 estimated tax benefit) on investment securities available-for-sale.
Proceeds from sales of investment securities available-for-sale during 1994 were $8,955,590. Gross gains and losses on those sales were $3,816 and $(32,867), respectively. Included in shareholders' equity at December 31, 1994, is $47,672 of net unrealized losses (net of $34,520 estimated tax benefit) on investment securities available-for-sale.
Securities with a carrying value and fair value of $3,826,791 and $3,802,906 at December 31, 1996 and 1995, respectively, were pledged to secure public monies as required by law.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
During 1995, the Company transferred $2,197,960 of securities at amortized cost from held-to-maturity to available-for-sale based on FASB's "Special Report - A Guide to Implementation of Statement No. 115 on Accounting For Certain Investments in Debt and Equity Securities - Questions and Answers." The unrealized gain on transferred securities available-for-sale was $41,019 at the date of transfer.
NOTE #3 - LOANS
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 the counties of San Bernardino and Los Angeles. These loans are collateralized in accordance with Company policy. The concentrations of credit by type of loan are outlined as follows:
The following is a summary of the investment in impaired loans, the related allowance for loan losses, and income recognized thereon as of December 31:
The provisions of SFAS No. 114 and SFAS No. 118 permit the valuation allowance reported above to be determined on a loan-by-loan basis or by aggregating loans with similar risk characteristics. Because the loans currently identified as impaired have unique risk characteristics, the valuation allowance was determined on a loan-by-loan basis.
Nonaccruing loans totaled approximately $434,000 and $479,000 at December 31, 1996 and 1995, respectively. As of December 31, 1996 and 1995, all loans on nonaccrual were classified as impaired. If interest on nonaccrual loans had been recognized at the original interest rates, interest income would have increased approximately $7,000, $39,000 and $13,000 in 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the Company had approximately $49,000 and $320,000, respectively, in loans past due 90 days or more in interest or principal and still accruing interest. There loans are well secured and in the process of collection, or are secured by 1-4 single family residences.
At December 31, 1996, loans totaling approximately $125,000 were classified as troubled debt restructurings.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #4 - DIRECT LEASE FINANCING
The Company leases buses and relocatable buildings to parties under agreements which range generally from three to seven years. Executory costs are paid by the lessee and leases do not include any contingent rental features. The net investment in direct lease financing consists of the following:
The Company had no outstanding commitments relating to municipal leases at December 31, 1996 and 1995.
At December 31, 1996, future minimum lease payments receivable under direct financing leases are as follows:
NOTE #5 - RESERVE FOR PROBABLE LOAN AND LEASE LOSSES
Transactions in the reserve for loan and lease losses are summarized as follows:
NOTE #6 - LOANS TO DIRECTORS AND OFFICERS
In the ordinary course of business, the Company has granted loans to certain directors and officers and the companies with which they are associated. All such loans were made under the terms which are consistent with the Bank's normal lending policies.
An analysis of the activity with respect to such aggregate loans to related parties during 1996 and 1995, is as follows:
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
Not included in the balances outstanding at December 31, 1996 and 1995, were undisbursed commitments to lend of approximately $103,000 and $119,000, respectively. There were no non-accruing loans to Directors and Officers and loans classified by the Company's regulatory agency or by the Company in 1996 and 1995.
NOTE #7 - PREMISES AND EQUIPMENT
Major classifications of Company premises and equipment are summarized as follows:
NOTE #8 - INCOME TAXES
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
Deferred tax expense/(credits) result from timing differences in the recognition of revenues and expenses for tax and financial statement purposes. The sources of these differences and the tax effect of each are as follows:
As a result of the following items, the total income tax expense/(credit) for 1996, 1995 and 1994, was different than the amount computed by applying the statutory U.S. Federal income tax rate to income before taxes:
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
The deferred tax assets and liabilities of the Company are composed of the following tax-affected cumulative timing differences.
(1) The valuation allowance is management's estimate of amounts more likely than not of being realized due to uncertainty regarding future income based on prior results. The allowance is largely attributable to unused losses previously incurred and overall limitations on other deferred tax assets. The allowance was not changed during the 1996 year.
NOTE #9 - COMMITMENTS AND CONTINGENCIES
The Company is obligated under leases for equipment and property. The original terms of the leases range from two to thirty years. The following is a schedule of future minimum lease payments based upon obligations at year-end.
Total property and equipment expenditures charged to leases for the reporting periods ended December 31, 1996, 1995 and 1994, were approximately $303,000, $733,000 and $725,000, respectively.
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 standby letters of credit. To varying degrees, these instruments involve elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. The Company's exposure to credit loss in the event of non-performance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. At December 31, 1996 and 1995, the Company had commitments to extend credit of approximately $5,622,000 and $5,113,000 and obligations under standby letters of credit of approximately $271,000 and $294,000.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
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. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
The Company is involved in various other litigation. In the opinion of Management and the Company's legal council, the disposition of all such other litigation pending will not have a material effect on the Company's financial statements.
NOTE #10 - STOCK SPLIT
On August 23, 1995, the Company's Board of Directors approved a six-for-five stock split of its common stock. The outstanding shares and related calculations included in these financial statements reflect retroactive adjustments for this stock split.
NOTE #11 - STOCK OPTION PLAN
At December 31, 1996, the Company has one stock-based compensation plan, which is described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its incentive stock option plan. Had compensation cost for this plan been determined on the fair value at the grant dates consistent with the method of SFAS 123, the impact would not have materially affected net income.
An incentive stock option plan was approved by the stockholders in 1987 covering an aggregate of 126,000 shares (after giving retroactive effect for stock splits). The plan provides that options of the Company's unissued common stock may be granted to officers and key employees at prices not less than the fair market value of such shares at dates of grant. Options granted expire on such date as the Stock Option Committee or Board of Directors may determine, but not later than the sixth anniversary of the date on which the option is granted.
During 1994, the Board of Directors of Vineyard National Bancorp elected to cancel all existing stock options and reissue new stock options at a price of $3.50 per share ($2.92 per share after giving retroactive effect for the six-for-five stock split.)
During 1996, the Board of Directors of Vineyard National Bancorp elected to modify the existing incentive stock option plan. Under the new agreement the options granted expire on such date as the Stock Option Committee or Board shall determine, but not later than the seventh anniversary of the date on which the option is granted.
The fair value of each option granted during 1996, 1995 and 1994, respectively, were estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions; risk-free rates of 6.28%, 5.45% and 5.38%; dividend yield of 0.0% for all years; volatility of 24%, 25% and 24%; expected life of 7 years for all years presented.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
A summary of the status of the Company's incentive stock option plan as of December 31, 1996, 1995 and 1994, respectively, and changes during the years ending on those dates is presented below:
The following table summarizes information about incentive stock options outstanding at December 31, 1996:
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #12 - OTHER INCOME/EXPENSES
The following is a breakdown of fees and other servicing income and expenses for the years ended December 31, 1996, 1995 and 1994:
NOTE #13 - RESTRICTION ON TRANSFERS OF FUNDS TO PARENT
There are legal limitations on the ability of the Bank to provide funds to the Company. Dividends declared by the Bank may not exceed, in any calendar year, without approval of the Comptroller of the Currency, net income for the year and the retained net income for the preceding two years. Section 23A of the Federal Reserve Act restricts the Bank from extending credit to the Company and other affiliates amounting to more than 20 percent of its contributed capital and retained earnings. At December 31, 1996, the combined amount of funds available from these two sources amounted to approximately $969,000 or 12.4%.
NOTE #14 - DEFERRED COMPENSATION
During 1987, the Company established a non-qualified, unfunded deferred compensation plan for certain key management personnel and non-employee directors whereby they may defer compensation which will then provide for certain payments upon retirement, death or disability. The plan provides for payments for fifteen years commencing upon retirement, death or disability. The plan provides for reduced benefits upon early retirement, disability or termination of employment. Effective September 1, 1990, the Company adopted a new deferred compensation plan with similar provisions of the 1987 plan except that the Company may make matching contributions of 25% of officers' deferrals up to a maximum of 10% and 50% of senior officers' deferrals to a maximum of 10%. The Company's contribution, in the aggregate, for all Participants shall not exceed 4% of compensation of all Company employees. Each Participant contributes a minimum of $1,000 annually to the plan. The deferred compensation expense was $84,535 ($66,815 net of income taxes), $138,833 ($81,911 net of income taxes) and $107,057 ($81,214 net of income taxes) for the years ended December 31, 1996, 1995 and 1994, respectively.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #15 - DEFINED CONTRIBUTION PLAN
Effective August 1, 1990, the Company established a qualified defined contribution plan (401(k) Retirement Savings Plan) for all eligible employees. Employees contribute from 1% to 15% of their compensation with a maximum of $9,500 annually. The Company's contribution to the plan is based upon an amount equal to 25% of each participant's eligible contribution for the plan year not to exceed 4% of the employee's compensation. The Company's matching contribution will become vested at 20% per year with full vesting after five years. The expense was $14,862 ($11,747 net of income taxes) and $36,070 ($21,281 net of income taxes) and $34,533 ($26,197 net of income taxes) for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE #16 - INCOME/(LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
The calculation of the income/(loss) per common share was computed by dividing net income/(loss) by the weighted average number of shares of common stock outstanding during each period, retroactively adjusted for the six-for-five stock split. Stock options granted and warrants issued do not have a dilutive effect, and they have been excluded from the calculation of income/(loss) per share.
The weighted average number of shares used to compute income/(loss) per common share was 1,862,643 in 1996, 1995 and 1994.
NOTE #17 - REGULATORY MATTERS
The Bank is 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 Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require 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 December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
As of December 31, 1996, the most recent notification from the Office of the Comptroller of the Currency (OCC) categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank's category). To be categorized as well-capitalized, the Bank must maintain minimum ratios as set forth in the table below. The following table also sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):
NOTE #18 - MORTGAGE LOAN SERVICING OPERATIONS
The Company originated long term first and second trust deed mortgages for resale on the Secondary Market to Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA). The gains or losses on the sales of these loans were generally recognized at the time of sale. The Company retained servicing rights to these loans. Servicing arrangements provided for the Company to maintain all records related to the servicing agreement, to assume responsibility for billing mortgagors, to collect periodic mortgage payments, and to perform various other activities necessary to the mortgage servicing function. The Company received as compensation a servicing fee on the principal balance of the outstanding loans. The principal balance of loans being serviced on behalf of others was approximately $0, $0 and $168,204,000 at December 31, 1996, 1995 and 1994. Servicing fee income amounted to approximately $0, $150,000 and $436,000 in 1996, 1995, and 1994, respectively. During 1995, the Company sold the servicing rights on loans totaling approximately $161 million. The mortgage servicing rights were sold without recourse. The Bank received approximately $22,000 and $1,489,000 from the sale in 1996 and 1995, respectively.
NOTE #19 - OTHER REAL ESTATE OWNED
As discussed in Note #1K, Other Real Estate Owned is carried at the estimated fair value of the real estate. An analysis of the transactions for December 31, were as follows:
The balances at December 31, 1996 and 1995 are shown net of reserves.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #20 - RESERVE FOR PROBABLE LOSSES ON OTHER REAL ESTATE OWNED
Transactions in the reserve for other real estate owned are summarized for 1996, 1995 and 1994:
NOTE #21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank.
The following table presents the carrying amounts and fair values of financial instruments at December 31, 1995. FASB Statement 107, "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
The following methods and assumptions were used by the Bank in estimating fair value disclosures:
- - Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values due to the short-term nature of the assets.
- - Interest Bearing Deposits
Fair values for time deposits are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits.
- - Investment Securities
Fair values are based upon quoted market prices, where available.
- - Loans
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate commercial real estate and rental property mortgage loans and commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The carrying amount of accrued interest receivable approximates its fair value.
- - Deposits
The fair values disclosed for demand deposits (for example, interest-bearing checking accounts and passbook accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits. The carrying amount of accrued interest payable approximates fair value.
- - Federal Funds Purchased
The carrying values reported in the balance sheet approximate the fair values of those instruments due to their short-term nature.
- - Off-balance Sheet Instruments
Fair values of loan commitments and financial guarantees are based upon fees currently charged to enter similar agreements, taking into account the remaining terms of the agreement and the counterparties' credit standing.
NOTE #22 - SALE OF BRANCH OFFICE
During 1995, the Company sold certain assets and liabilities of its Victorville branch. Total assets sold were approximately $1,275,000 and total liabilities assumed by the buyer were approximately $4,104,000. The transaction resulted in a gain of approximately $23,000, which has been included in other income in 1995. The Bank is no longer operating the branch in Victorville.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #23 - TIME DEPOSIT LIABILITIES
At December 31, 1996, the Company had time certificates of deposit with maturity distributions as follows:
NOTE #24 - BORROWINGS
The Bank has borrowing lines with three correspondent banks totaling $3.7 million and a secured line at the Federal Reserve.
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #25 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP (PARENT COMPANY)
BALANCE SHEETS
VINEYARD NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #25 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP (PARENT COMPANY)
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
SELECTED QUARTERLY FINANCIAL DATA
The selected quarterly data for 1996 is based on the unaudited financial statements of the Company as presented by management.
The selected quarterly data for 1995 is based on the unaudited financial statements of the Company as presented by management.
1 Retroactively adjusted for stock splits.
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for information regarding the Registrant's executive officers which is included in Part I of this Report, the information called for by Item 10 is incorporated herein by reference from the Company's definitive proxy statement to be filed with the Commission on or before April 30, 1997, for the Company's 1997 annual shareholders' meeting.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference from the Company's definitive proxy statement to be filed with the Commission on or before April 30, 1997, for the Company's 1997 annual shareholders' meeting.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference from the Company's definitive proxy statement to be filed with the Commission on or before April 30, 1997, for the Company's 1997 annual shareholders' meeting.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference from the Company's definitive proxy statement to be filed with the Commission on or before April 30, 1997, for the Company's 1997 annual shareholders' meeting.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
a) The following documents are filed as part of this Form 10-K:
1) Financial Statements:
See Index to Financial Statements in Item 8 on Page 70 of this Report.
2) All schedules are omitted as the information is not required, is not material or is otherwise furnished.
3) Exhibits:
See Index to Exhibits on Page 70 of this Form 10-K. Included among the Exhibits filed as part of this Report on Form 10-K are the following Executive Compensation Plans and arrangements:
A) Incentive Stock Option Plan for Vineyard National Bank, 1981. Exhibit 10.1
B) Incentive Stock Option Plan for Vineyard National Bank, 1987. Exhibit 10.2
C) Joinder Agreement for Employee to Participate in Vineyard National Bancorp 1987 Incentive Stock Option Plan. Exhibit 10.3
D) Vineyard National Bank Deferred Compensation Plan. Exhibit 10.4
E) Employment Agreement between Vineyard National Bank and Steven R. Sensenbach. Exhibit 10.5
F) 1988 Extension Agreement for Employment Agreement between Vineyard National Bank and Steven R. Sensenbach. Exhibit 10.6
b) Reports on Form 8-K:
None.
c) Exhibits:
See Index to Exhibits on Page 70 of this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf of the undersigned, thereunto duly authorized, on the 24th day of March 1997.
VINEYARD NATIONAL BANCORP (Registrant)
By /s/ STEVEN R. SENSENBACH Steven R. Sensenbach, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 24, 1997.
INDEX TO EXHIBITS
(R-1) Incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988.
(R-2) Incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989.