<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549             

                                   FORM 10-K

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

For the fiscal year ended December 31, 1996
Commission File No. 0-20862

                           VINEYARD NATIONAL BANCORP
             (Exact Name of Registrant as Specified in its Charter)


                   California                              33-0309110
         (State of other jurisdiction of                   (IRS Employer
          incorporation or organization)              Identification Number)



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


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

        Securities registered pursuant to Section 12(b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock, no par value

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

        Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.    [x]

        As of December 31, 1996, the aggregate market value of the voting
shares held by non-affiliates of the registrant was approximately $5,473,000.
Solely for the purposes of this calculation, shares held by directors,
executive officers, and each person owning more than 10% of the outstanding
Common Stock of the registrant have been excluded.

        1,862,643 shares of Common Stock of the registrant were outstanding at
February 28, 1997.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders, which will be filed on or before April 30, 1997, are
incorporated by reference in Part III of this Form 10-K.
<PAGE>   2
                                     PART I


ITEM I.  DESCRIPTION OF BUSINESS

        Vineyard National Bancorp (referred to herein on an unconsolidated
basis as "VNB" and on a consolidated basis as the "Company") is a corporation
that was incorporated under the laws of the State of California on May 18, 1988
and commenced business on December 16, 1988 when, pursuant to a reorganization,
the Bancorp acquired all of the voting stock of Vineyard National Bank (the
"Bank").  As a bank holding company, the Company is registered under and
subject to the Bank Holding Company Act of 1956, as amended.  The Company's
principal asset is the capital stock of Vineyard National Bank, a nationally
chartered bank  (the "Bank"), and the business of the Bank is carried on as a
wholly-owned subsidiary of the Company.

        VNB's principal business is to serve as a holding company for the Bank
and its subsidiaries and for other banking or banking-related subsidiaries
which the Company may establish or acquire.  Although the Company may, in the
future, consider acquiring other businesses or engaging in other activities as
permitted under Federal Reserve Board regulations, the Company has no specific
plans to do so.

        VNB's principal source of income is dividends from the Bank.  Legal
limitations are imposed  on the amount of dividends that may be paid and loans
that may be made by the Bank to VNB.  (See Item. 1 - Description of Business;
Supervision and Regulation; Restrictions of Dividends by the Company and
Transfers of Funds to the Company by the Bank)

        As of December 31, 1996, the Company had total consolidated assets of
approximately $120 million, total consolidated net loans of approximately $97
million, total consolidated deposits of approximately $107 million and total
stockholders' equity of approximately $7.9 million.

THE BANK

        The Bank was organized as a national banking association under federal
law and commenced operations under the name Vineyard National Bank on September
10, 1981.

        The Bank's deposit accounts are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to the maximum amount permitted under law.
The Bank is a member of the Federal Reserve System.

        The Bank presently operates five offices, one in each of the
communities of Rancho Cucamonga, Chino, Diamond Bar, Crestline, and Blue Jay,
California, which are located between approximately 30 to 70 miles east of Los
Angeles, California.

VINEYARD SERVICE COMPANY, INC.

        The Bank owns 100% of the capital stock of Vineyard Service Company,
Inc., which conducts operations out of the Bank's office in Rancho Cucamonga,
California.  Services which are provided to both customers of the Bank and
others, include life and disability insurance.  At present, the assets,
revenues and earnings of Vineyard Service Company, Inc., are not material in
amount compared to the Bank.

SERVICES PROVIDED BY VINEYARD NATIONAL BANK

        The Bank's organization and operations have been designed to meet the
banking needs of individuals and small-to-medium sized businesses located in
the area known as the Inland Empire in Southern California, in which the Bank
conducts its operations.  The Bank emphasizes personalized service and
convenience of banking and attracts banking customers by offering morning
through early evening and Saturday banking hours.  Drive-up or walk-up
facilities are available at all but one of its banking offices, and the Bank
has 24-hour Automated Teller Machines ("ATM's") at all five of its banking
offices.





                                                                          Page 2
<PAGE>   3
        The Bank offers a full range of commercial banking services including
the acceptance of checking and savings deposits, and the making of various
types of installment, commercial and real estate loans.  In addition, the Bank
provides safe deposit, collection, travelers checks, notary public and other
customary non-deposit banking services.  The Bank also provides lease financing
to various municipalities for the acquisition of vehicles and other equipment.

DEPOSITS OF VINEYARD NATIONAL BANK

        Deposits represent the Bank's primary source of funds.  As of December
31, 1996, the Bank had approximately 5,665 demand deposit accounts representing
aggregate deposits of approximately $25,946,000 with an average account balance
of $4,580, approximately 2,279 accounts representing approximately $28,614,000
in "NOW", super "NOW" and money market checking accounts with an average
account balance of $9,799, approximately 3,199 accounts representing
approximately $9,475,000 in savings deposits with an average account balance of
$2,962 and approximately 2,416 accounts representing approximately $42,568,000
in time deposits ("TCD's") with an average account balance of $17,619.  Of the
total deposits at December 31, 1996, $9,426,000 were in the form of TCD's in
denominations greater than $100,000 and $2,764,000 were municipal and other
governmental deposits, both time and demand.

        During the 12 months ended December 31, 1996, average demand deposits
decreased by  approximately $340,000 or 1%, and "NOW", super "NOW" and money
market checking accounts decreased by approximately $3,223,000 or 9%.  Average
savings deposits decreased by approximately $1,748,000 or 15%, while average
time deposits increased by approximately $10,347,000 or 37%, including an
increase of $367,000 in average time certificates of deposits of $100,000 or
more.

        Although there are some public depositors that carry large short-term
deposits with the Bank, the Bank is not dependent on a single customer or a few
customers for its deposits.  Most of the Bank's deposits are obtained from
individuals and small-to-moderate size businesses.  This results in relatively
small average deposits balances, but makes the Bank less subject to the adverse
effects which result from the loss of a substantial depositor.  At December 31,
1996, no individual, corporate or public depositor accounted for more than
approximately 2% of the Bank's total deposits, and the five largest deposit
accounts collectively represented 6% of total deposits.





                                                                          Page 3
<PAGE>   4
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY: INTEREST RATES
AND INTEREST DIFFERENTIAL

        The following table sets forth the Company's condensed average balances
for each principal category of assets and liabilities and also for
stockholders' equity for each of the past two years.  Average balances are
based on daily averages for the Bank and quarterly averages for VNB, since VNB
did not maintain daily average information.  Management believes that the
difference between quarterly and daily average data (where quarterly data has
been used) is not significant.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                                Year Ended December 31,
                                                              --------------------------------------
                                                                    1996                1995
                                                              Average   Percent   Average   Percent
Assets                                                        Balance   of Total  Balance   of Total
                                                              -------   --------  -------   --------
<S>                                                           <C>         <C>     <C>         <C>
      Investment Securities
          Taxable                                             $11,220      9.7    $13,015     11.9
          Non-taxable                                                      0.0          3      0.0
      Federal funds sold                                        3,467      3.0      4,156      3.8
      Due from banks-time deposits                                669      0.6        568      0.5
      Loans                                                    85,216     73.4     78,097     71.3
      Direct lease financing                                      394      0.3        928      0.8
      Reserve for loan and lease losses                          (715)    (0.6)      (967)    (0.8)
                                                             --------    -----   --------    -----  
                      Net Loans and Leases                     84,895     73.1     78,058     71.3
                                                             --------    -----   --------    -----  
                      Total Interest Earning Assets           100,251     86.4     95,800     87.5
      Cash and non-interest earning deposits                    6,865      5.9      7,148      6.5
      Net premises, furniture and equipment                     5,675      4.9      3,832      3.5
      Other assets                                              3,263      2.8      2,703      2.5
                                                             --------    -----   --------    -----  
                      Total Assets                           $116,054    100.0   $109,483    100.0
                                                             ========    =====   ========    =====
Liabilities and Stockholders' Equity
      Savings deposits(1)                                      41,877     36.1     46,848     42.8
      Time deposits                                            38,550     33.2     28,203     25.8
      Short-term borrowings                                        38      0.0          6      0.0
                                                             --------    -----   --------    -----  
                      Total Interest-bearing Liabilities       80,465     69.3     75,057     68.6
      Demand deposits                                          26,422     22.8     26,082     23.8
      Other liabilities                                         1,472      1.3      1,065      1.0
                                                             --------    -----   --------    -----  
                      Total Liabilities                       108,359     93.4    102,204     93.4
Stockholders' Equity                                            7,695      6.6      7,279      6.6
                                                             --------    -----   --------    -----  
                      Total Liabilities and Stockholders' 
                        Equity                               $116,054    100.0   $109,483    100.0
                                                             ========    =====   ========    =====
</TABLE>


(1) Includes Savings, NOW, Super NOW and Money Market Accounts.

INTEREST RATES AND DIFFERENTIALS

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





                                                                          Page 4
<PAGE>   5
        Information concerning average interest earning assets and interest
bearing liabilities, along with the average interest rates earned and paid
thereon is set forth in the following table.  Averages were computed based upon
daily balances.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                              1996                       1995
                                                         ------------------------   ------------------------
                                                         Average          Average   Average          Average
Earning Assets                                           Balance Interest  Yield    Balance Interest  Yield
--------------                                           ------- -------- -------   ------- -------- -------          
<S>                                                      <C>     <C>      <C>       <C>      <C>     <C>
      Investment Securities
          U.S. Treasury(3)                                $6,430     370     5.8%    $4,138     233     5.6%
          U.S. Government agencies(3)                      4,408     249     5.6%     8,661     512     5.9%
          Municipal agencies(1)                                                           3       1    15.8%
          Other securities                                   376      10     2.7%       174      10     5.7%
                                                        --------  ------            -------  ------        
                  Total Investment Securities             11,214     629     5.6%    12,976     756     5.8%
      Federal funds sold                                   3,467     179     5.2%     4,156     232     5.6%
      Due from banks - time deposits                         669      35     5.2%       568      36     6.3%
      Loans(2)                                            85,216   8,137     9.5%    78,097   7,470     9.6%
      Lease financing(1)                                     394      39     9.9%       928     128    13.8%
                                                        --------  ------            -------  ------        
                  Total Interest Earning Assets(1)      $100,960  $9,019     8.9%   $96,725  $8,622     8.9%
                                                        ========  ======            =======  ======
Interest Bearing Liabilities
      Domestic Deposits and Borrowed Funds
          Savings deposits(4)                             41,877     751     1.8%    46,848     839     1.8%
          Time deposits                                   38,550   2,108     5.5%    28,203   1,560     5.5%
          Short-term borrowings                               38       2     5.3%         6       1    12.2%
                                                        --------  ------            -------  ------        
                  Total Interest Bearing Liabilities     $80,465  $2,861     3.6%   $75,057  $2,400     3.2%
                                                        ========  ======            =======  ======  
</TABLE>


        The table below shows the net interest earnings and the net yield on
average earning assets (net of the reserves for probable loan losses).

<TABLE>
<CAPTION>
(Dollars in Thousands)                                                      1996       1995
                                                                          -------    -------
<S>                                                                       <C>         <C>
Total interest income(1)(2)                                                $9,019     $8,622
Total interest expense(5)                                                   2,861      2,400
Total interest earnings(1)(2)                                               6,158      6,222
Total average earning assets                                              100,245     95,758
Net yield on average earning assets(1)(2)                                     6.1%       6.5%
Net yield on average earning assets (excluding loan fees)(1)(2)               5.6%       6.1%
</TABLE>


(1) Interest income includes the effects of tax equivalent adjustments on tax
exempt securities and leases using tax rates which approximate 21.0 percent for
1996 and 41.2 percent for 1995.

(2) Loans, net of unearned income, include non-accrual loans but do not reflect
average reserves for probable loan losses of $715,000 in 1996 and $967,000 in
1995.  Loan fees of $523,000 in 1996 and $420,000 in 1995, are included in loan
interest income.  There were five non-accruing loans totaling approximately
$434,000 at December 31, 1996 and $479,000 at December 31, 1995.

(3) The yield for securities that are classified as available-for-sale is based
on historical amortized cost balances.

(4) Savings deposits includes savings, NOW, Super NOW and Money Market deposit
accounts.

(5) Includes Savings, NOW, Super NOW and Money Market Deposit Accounts, Time
Deposits and Federal Funds Purchased.





                                                                          Page 5
<PAGE>   6
        The following table sets forth the changes in interest earned,
including loan fees and interest paid.  The net increase/(decrease) is
segmented into the change attributable to variations in volume and variations
in interest rates.  Changes in the interest earned and interest paid due to
both the rate and volume have been allocated to the change due to volume and
the change due to rate in proportion to the relationship of the absolute dollar
amounts of the changes in each.

<TABLE>
<CAPTION>
(Dollars in Thousands)                    Investment Securities
                                          ---------------------  Federal            Direct
                                                       Non-       Funds             Lease         Time
                                           Taxable   Taxable(1)   Sold   Loans(2)  Financing(1)  Deposits  Total
                                          ---------  ----------  ------- --------  ------------  --------  -----
<S>                                           <C>       <C>       <C>    <C>       <C>           <C>       <C>
Interest Earned On:
1996 compared to 1995
      Increase/(decrease) due to:
          Volume changes                      ($101)              ($36)    $741       ($60)        $78      $622
          Rate changes                          (26)               (17)     (74)       (29)        (79)     (225)
                                              -----      ---      ----     ----      -----         ---      ----      
                      Net Increase/(Decrease) ($127)      $0      ($53)    $667       ($89)        ($1)     $397
                                              =====      ===      ====     ====      =====         ===      ====
Interest Earned On:
1995 compared to 1994
      Increase/(decrease) due to:
          Volume changes                       ($67)     ($1)      $53    ($137)     ($197)        $15     ($334)
          Rate changes                          150        1        67       96        119          10       443
                                              -----      ---      ----     ----      -----         ---      ----      
                      Net Increase/(Decrease)   $83       $0      $120     ($41)      ($78)        $25      $109
                                              =====      ===      ====     ====      =====         ===      ====
</TABLE>


(1) Interest income includes the effects of tax equivalent adjustments on tax
exempt securities using tax rates  which approximate 21.0 percent for 1996 and
41.2 percent for 1995.

(2) Includes an increase in loan fees of $403,000 in 1996 and a decrease of
$37,000 in 1995.

<TABLE>
<CAPTION>
(Dollars in Thousands)                              Savings     Time    Short-term
                                                    Deposits  Deposits  Borrowings(3) Total
                                                    --------  --------  ------------- -----
<S>                                                   <C>       <C>         <C>       <C>
Interest Paid On:
1996 compared to 1995
      Increase/(decrease) due to:
          Volume changes                               ($90)     $566           $1    $477
          Rate changes                                    2       (18)                 (16)
                                                      -----      ----          ---    ----
                      Net Increase/(Decrease)          ($88)     $548           $1    $461
                                                      =====      ====          ===    ====
Interest Paid On:
1995 compared to 1994
      Increase/(decrease) due to:
          Volume changes                              ($239)     $381                 $142
          Rate changes                                 (170)      509          ($1)    338
                                                      -----      ----          ---    ----
                      Net Increase/(Decrease)         ($409)     $890          ($1)   $480
                                                      =====      ====          ===    ====
</TABLE>


(3) Short-term Borrowings consist of Federal Funds Purchased.





                                                                          Page 6
<PAGE>   7
INVESTMENT PORTFOLIO

        The following table shows the book value of the portfolio of investment
securities at the end of each of the past two years.  The Bank 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 Bank 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 not classified as either held-to-maturity
or trading securities are deemed as available-for-sale and are measured at fair
value, with unrealized gains and losses, net of applicable taxes, reported in a
separate component of stockholders' equity.

<TABLE>
<CAPTION>
                                                                      1996                1995
                                                               Available-for-Sale  Available-for-Sale
                                                               ------------------  ------------------                
<S>                                                                  <C>                <C>
U.S. Treasury                                                        $5,468              $6,012
Federal agencies                                                                          7,237
Other securities                                                        432                 182
                                                                     ------             -------
                                                                     $5,900             $13,431
                                                                     ======             =======
</TABLE>


        The following table shows the maturities of investment securities at
December 31, 1996, and the weighted average yields of such securities.

<TABLE>
<CAPTION>
                                                                                     After One But
                                                                Within One Year     Within Five Years
                                                               ------------------  ------------------
                                                               Available-for-Sale  Available-for-Sale
                                                               ------------------  ------------------
                                                                Amount     Yield    Amount     Yield
                                                               --------   -------  --------   -------
<S>                                                              <C>       <C>       <C>       <C>
U.S. Treasury                                                   $2,988     5.30%    $2,480     5.13%
Other securities                                                   432     2.25%
                                                                ------              ------
                                                                $3,420     4.92%    $2,480     5.13%
                                                                ======              ======
</TABLE>


LOAN PORTFOLIO

        The following table sets forth the amount of loans outstanding for each
of the past two years.

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                         --------------------
                                                                           1996        1995
                                                                         --------    --------
<S>                                                                       <C>         <C>
Types of Loans
      Domestic
      Commercial, financial and agricultural                               $9,737     $9,257
      Real estate construction                                                830        680
      Real estate mortgage                                                 40,993     28,881
      Installment loans to individuals                                     50,000     41,723
      Lease financing 1                                                       188        589
      All other loans (including overdrafts)                                  105         69
                                                                          -------    -------
                                                                          101,853     81,199
      Less:
          Unearned income                                                  (4,387)    (3,128)
          Reserve for loan and lease losses                                  (728)      (783)
                                                                          -------    -------
                      Total                                               $96,738    $77,288
                                                                          =======    =======
</TABLE>


(1) Lease financing is net of unearned income of approximately $16,000 for 1996
and $61,000 for 1995.





                                                                          Page 7
<PAGE>   8
        Real estate mortgage loans are comprised of construction loans, SFR's
and commercial real estate loans which represent .4%, 5.6% and 34.1% of total
loan commitments respectively.  The growth of commercial real estate loans is
the result of consistent promotions and competitive pricing.

        Installment loan concentrations remain in auto loans, both indirect and
direct.  The auto financing area exhibits a good diversity in customers and
smaller loan totals.  Indirect dealer loans represent approximately 70.2% of
total installment loans and 30.8% of total loan commitments.  Approximately
96.4% of all indirect loans are "A" paper.  While the Bank goes to adequate
lengths to assess its auto dealers, the risks are evident with this type of
financing.

MATURITIES AND SENSITIVITIES TO INTEREST RATES

        The following table shows the maturities and sensitivities to changes
in interest rates on loans outstanding at December 31, 1996.

<TABLE>
<CAPTION>
                                                                        Maturing
                                                           --------------------------------
                                                             Within    One to      After
                                                            One Year  Five Years Five Years   Total
                                                           ---------  ---------- ----------  -------
<S>                                                        <C>         <C>        <C>        <C>
Domestic
      Commercial, financial and agricultural                 $4,051     $4,769       $917     $9,737
      Real estate construction                                  731         99                   830
      Real estate mortgage                                   20,003      7,652     13,338     40,993
      Installment loans to individuals                        1,829     46,152      2,019     50,000
      Lease financing (net of unearned income)                  140         48                   188
      All other loans                                            83         22                   105
                                                            -------    -------    -------   --------
                      Total                                 $26,837    $58,742    $16,274   $101,853
                                                            =======    =======    =======   ========
Loans and leases with predetermined interest rates           $5,188    $52,268    $10,789    $68,245
Loans and leases with floating or adjustable interest rates  21,649      6,474      5,485     33,608
                                                            -------    -------    -------   --------
                      Total                                 $26,837    $58,742    $16,274   $101,853
                                                            =======    =======    =======   ========
</TABLE>


ASSET/LIABILITY MANAGEMENT

        The table below sets forth information concerning the interest rate
sensitivity of the Company's consolidated assets and liabilities as of December
31, 1996.  Assets and liabilities are classified by the earliest possible
repricing date or maturity, whichever comes first.

        Generally, where rate-sensitive assets exceed rate-sensitive
liabilities, the net interest margin is expected to be positively impacted
during periods of increasing interest rates and negatively impacted during
periods of decreasing interest rates.  When rate-sensitive liabilities exceed
rate-sensitive assets generally the net interest margin will be negatively
affected during periods of increasing interest rates and positively affected
during periods of decreasing interest rates.  However, because interest rates
for different asset and liability products offered by depository institutions
respond in a different manner, both in terms of the responsiveness as well as
the extent of the responsiveness to changes in the interest rate environment,
the interest rate sensitivity gap is only a general indicator of interest rate
sensitivity.  Based upon the interest rate sensitivity gap set forth below and
the fact that the Bank's demand and savings deposits, which comprised more than
47% of its total deposits at December 31, 1996, have tended to be relatively
insensitive to rising interest rates, management believes that the Company's
net interest margin will not be significantly impacted by changes in interest
rates.





                                                                          Page 8
<PAGE>   9
<TABLE>
<CAPTION>
(Dollars in Thousands)                      Three   Over Three Over One
                                           Months    Through    Through      Over    Non-interest
                                           or Less  12 Months  Five Years Five Years   Bearing      Total
                                           -------  ---------- ---------- ---------- -----------   -------
<S>                                        <C>      <C>        <C>        <C>        <C>           <C>
Assets
      Interest-bearing deposits in banks      $396                                                    $396
      Investment securities                    182     $2,988     $2,480                   $250      5,900
      Net loans and leases                  11,679     26,684     52,268    $10,789      (4,683)    96,737
      Noninterest-bearing assets                                                         16,491     16,491
                                          --------   --------    -------    -------    --------  ---------
               Total Assets                $12,257    $29,672    $54,748    $10,789     $12,058   $119,524
                                          ========   ========    =======    =======    ========  =========   
Liabilities and Stockholders' Equity
      Noninterest-bearing deposits                                                       25,946     25,946
      Interest-bearing deposits             40,556     27,948     12,153                            80,657
      Short-term borrowings                  3,700                                                   3,700
      Other liabilities                                                                   1,370      1,370
Stockholders' Equity                                                                      7,851      7,851
                                          --------   --------    -------    -------    --------  ---------
               Total Liabilities and
               Stockholders' Equity        $44,256    $27,948    $12,153         $0     $35,167   $119,524
                                          ========   ========    =======    =======    ========  =========   
Interest Rate Sensitivity Gap             ($31,999)    $1,724    $42,595    $10,789    ($23,109 )       $0
                                          --------   --------    -------    -------    --------  ---------
Cumulative Interest Rate Sensitivity Gap  ($31,999)  ($30,275)   $12,320    $23,109          $0         $0
                                          ========   ========    =======    =======    ========  =========   
</TABLE>


RISK ELEMENTS

NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS

<TABLE>
<CAPTION>
                                                                                 December 31,
                                                                                 ------------
                                                                                 1996   1995
                                                                                 ----   ----
<S>                                                                              <C>    <C>
Accruing Loans More Than 90 Days Past Due(1)
      Aggregate loan amounts
          Commercial, financial and agricultural                                         $85
          Real estate                                                                     38
          Installment loans to individuals                                        $49    197
      Aggregate leases
Renegotiated loans(2)
Non-accrual loans(3)
      Aggregate loan amounts
          Commercial                                                                5     12
          Real estate                                                             429    467
                                                                                 ----   ----
                                                                                 $483   $799
                                                                                 ====   ====
</TABLE>


(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 discontinued) 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.

(3) There were five loans on non-accrual status approximately totaling $434,000
at December 31, 1996, and four loans totaling approximately $479,000 at
December 31, 1995.  The amount of interest that would have been collected on
these loans had they remained current in accordance with their original terms
was $7,000 in 1996 and $39,000 in 1995, respectively.





                                                                          Page 9
<PAGE>   10
POTENTIAL PROBLEM LOANS

        The policy of the Company is to review each loan in the portfolio to
identify problem credits.  In addition, as an integral part of its regular
examination of the Bank, the Comptroller also identifies problem loans.  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 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 sufficient degree of risk to warrant
classification as substandard, doubtful or loss but do possess credit
deficiencies for potential weaknesses deserving management's close attention.

        As of December 31, 1996, the Bank's classified loans consist of
$3,373,000 of loans classified as substandard.  The Bank's $3,373,000 in 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.

        Consumer loans which are 120 days or more delinquent and not insured or
guaranteed by the U.S. Government, are generally charged off.  All other loans
are charged off at such time the loan is classified as loss.  Losses are
recognized in the period in which the asset is deemed uncollectible.

        With the exception of these loans, management is not aware of any loans
as of December 31, 1996, where the known credit problems of the borrower would
cause it to have serious doubts as to the ability of such borrowers to comply
with their present loan repayment terms and which would result in such loans
being included in the non-accrual, past due and restructured loan table set
forth above at some future date.  Management cannot, however, predict the
extent to which the current economic environment may persist or worsen or the
full impact such environment may have on the Bank's loan portfolio.
Furthermore, management cannot predict the results of any subsequent
examinations of the Bank's loan portfolio by the Comptroller.  Accordingly,
there can be no assurance that other loans will not become included in the
table above in the future.

FOREIGN OUTSTANDINGS

        The Bank did not have any loans, acceptances, interest-bearing deposits
or other monetary assets of any foreign country.

LOAN CONCENTRATIONS

        The Bank does not have loans made to borrowers who are engaged in
similar activities where the aggregate amount of the loans exceeds 10% of their
loan portfolio that are not broken out as a separate category in the loan
portfolio.

OTHER INTEREST-BEARING ASSETS

        The Bank does not have any interest-bearing assets for which management
believes that recovery of the interest on and principal thereof is at
significant risk.





                                                                         Page 10
<PAGE>   11
SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE

        The following table sets forth an analysis of the Bank's loan and lease
experience, by category, for the past two years.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                                        December 31,
                                                                           -----------------
                                                                             1996      1995
                                                                           -------   -------
<S>                                                                        <C>       <C>
Loans and Leases Outstanding, Year-end(1)                                  $97,465   $78,071
                                                                           =======   =======
Average Amount of Loans and Leases Outstanding(1)                          $85,610   $79,025
                                                                           =======   =======
Loans and Lease Loss Reserve Balance, Beginning of year                       $783    $1,014
                                                                           -------   -------
Reserve on Loans Acquired in Business Combination
      Charge-offs
          Domestic
              Commercial, financial and agricultural                           101       245
              Real estate - construction
              Real estate - mortgage                                           201        69
              Consumer loans                                                   384       383
              Lease financing
                                                                           -------   -------
                                                                               686       697
      Foreign
                                                                           -------   -------
                                                                               686       697
                                                                           -------   -------
      Recoveries
          Domestic
              Commercial, financial and agricultural                           102       795
              Real estate - construction
              Real estate - mortgage                                                     100
              Consumer loans                                                   112
              Lease financing
                                                                           -------   -------
                                                                               214       895
      Foreign
                                                                           -------   -------
                      Net Charge-offs/(recoveries)                             472      (198)
                                                                           -------   -------
      Additions/(Reductions) charged to operations                             417      (429)
                                                                           -------   -------
Loan and Lease Loss Reserve Balance, End of year                              $728      $783
                                                                           =======   =======
Ratio of Net Charge-offs/(Recoveries) During the Year
 to Average Loans and Leases Outstanding During the Year                      0.55%    -0.25%
                                                                           =======   =======
Ratio of Reserve for Loan Losses to Loans at Year-end                         0.75%     1.00%
                                                                           =======   =======
</TABLE>


(1) Net of unearned income

        The allowance for loan losses is maintained through provisions, charged
to operating expenses, at a level considered adequate to provide for potential
loan losses, based on management's evaluation of the composition of the loan
portfolio, the performance of the loans in the portfolio, evaluations of loan
collateral, prior loss experience, current economic conditions and the
prospects or worth of respective borrowers or guarantors.  In addition, the
Comptroller, as an integral part of its examination process, periodically
reviews the Bank's allowance for loan 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 examination.  The Bank was most
recently examined by the Comptroller as of September 30, 1996.





                                                                         Page 11
<PAGE>   12
        The risk of non-payment of loans is an inherent feature of the banking
business.  That risk varies with the type and purpose of the loan, the
collateral which is utilized to secure payment, and, ultimately, the
creditworthiness of the borrower.  In order to minimize this credit risk, the
Bank has established lending limits for each of its officers having lending
authority, in each case based upon the officer's experience level and prior
performance.  Whenever a proposed loan by itself, or when aggregated with
outstanding extensions of credit to the same borrower, exceeds the officer's
lending limits, the loan must be approved by the Bank's lending committee which
is comprised of three directors, the President and Executive Vice
President/Credit Administrator of the Bank.  In addition, each loan officer has
primary responsibility to conduct credit documentation reviews of all loans
made by that officer.

        The Bank also maintains a program of periodic review of all existing
loans.  The Bank's Loan Review/Compliance Officer reviews all loans and leases
made, with emphasis placed on large credits.  Loans and leases are reviewed for
creditworthiness as well as documentation and compliance with the Bank's
lending policies.  Problem loans or leases identified in the review process are
scheduled for special attention and remedial action and, where appropriate,
reserves are established for such loans and leases.  For a discussion of the
Bank's problem credits as of December 31, 1996, see "RISK ELEMENTS --
Non-accrual, Past Due and Restructured Loans and Potential Problem Loans."

        Effective January 1, 1995, the Bank adopted SFAS No. 114, (as amended
by SFAS No. 118),  "Accounting by Creditors for Impairment of a Loan."  Under
SFAS No. 114, a loan is impaired when it is "probable" that the creditor will
be unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement.  All loans identified as
"impaired" are 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.  Loan impairment is evaluated on a loan-by-loan basis as
part of normal loan review procedures at the Bank.

        Loans are placed on non-accrual 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 non-accrual 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.

        At December 31, 1996 and 1995, the Bank had loans amounting to
approximately $434,000 and $564,000, respectively, that were specifically
classified as impaired.  The average balance of these loans amounted to
approximately $508,000 and $567,000 for the year ended December 31, 1996 and
1995, respectively.  The allowance for loan losses related to these impaired
loans amounted to approximately $66,000 and $67,000 at December 31, 1996 and
1995, respectively.

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

        Although the Bank does not normally allocate the reserve for probable
loan and lease losses to specific loan categories, an allocation to the major
categories has been made for the purposes of this report as set forth in the
following table.  The allocations are estimates based upon historical loss
experience and management's judgment.

        The allocation of the reserve for probable loan and lease losses should
not be interpreted as an indication that charge-offs will occur in these
amounts or proportions, or that the allocation indicates future charge-off
trends.  Furthermore, the portion allocated to each loan category is not the
total amount available for future losses that might occur within such
categories, since even in the reserve there is an unallocated portion, and, as
previously stated, the total reserve is a general reserve applicable to the
entire portfolio.





                                                                         Page 12
<PAGE>   13
<TABLE>
<CAPTION>
(Dollars in Thousands)                                      Year Ended December 31,
                                                  --------------------------------------------
                                                          1996                   1995
                                                  ---------------------  ---------------------
                                                            Percent of             Percent of
                                                             Loans in               Loans in
                                                  Reserve      Each      Reserve      Each
                                                  for Loan  Category to  for Loan  Category to
                                                   Losses   Total Loans   Losses   Total Loans
                                                  --------  -----------  --------  -----------
<S>                                                  <C>         <C>        <C>         <C>
Domestic
      Commercial, financial and agricultural          $17          9.5      $287         11.4
      Real estate                                     393         41.1       226         36.4
      Installment loans to individuals                156         49.2       150         51.5
      Lease financing                                              0.2                    0.7
Foreign
Unallocated Allowance                                 162                    120
                                                     ----        -----      ----        -----
                      Total                          $728        100.0      $783        100.0
                                                     ====        =====      ====        =====
</TABLE>


DEPOSITS

        The average amount of and the average rate paid on deposits is
summarized below:

<TABLE>
<CAPTION>
(Dollars in Thousands)                                        Year Ended December 31,
                                                      --------------------------------------  
                                                              1996               1995
                                                      ------------------  ------------------
                                                       Average   Average   Average   Average
                                                       Balance    Rate     Balance    Rate
                                                      --------   -------  --------   -------
<S>                                                   <C>         <C>     <C>         <C>
In Domestic Offices
      Noninterest bearing demand deposits              $26,422             $26,082
      Savings deposits(1)                               41,877      1.8%    46,848      1.8%
      Time deposits                                     38,550      5.5%    28,203      5.5%
                                                      --------      ---   --------      ---
                      Total Deposits                  $106,849      2.7%  $101,133      2.4%
                                                      ========      ===   ========      ===
</TABLE>


(1) Includes Savings, NOW, Super NOW and Money Market Deposit Accounts.

        Set forth below is a maturity schedule of domestic time certificates of
deposit of $100,000 or more:

<TABLE>
<CAPTION>
(Dollars In Thousands)                                                             December 31,
                                                                                       1996
                                                                                   ------------
<S>                                                                                    <C>
Three months or less                                                                   $4,051
Over three through 12 months                                                            4,974
Over one through five years                                                               400
                                                                                       ------
                                                                                       $9,425
                                                                                       ======
</TABLE>


RETURN ON EQUITY AND ASSETS

        The following table sets forth the ratios of net income to average
total assets/(return on assets), net income to average equity/(return on
equity), dividends declared per share to net income per share/(dividend payout
ratio), and average equity to average total assets/(equity to asset ratio).

<TABLE>
<CAPTION>
                                                                             1996       1995
                                                                            ------     ------
<S>                                                                          <C>       <C>
Return on assets                                                             0.10%      0.77%
Return on equity                                                             1.38%     11.46%
Dividend payout ratio
Equity to asset ratio                                                        7.03%      6.65%
</TABLE>





                                                                         Page 13
<PAGE>   14
COMPETITION

        The Bank faces substantial competition for deposits and loans
throughout its market areas.  The primary factors in competing for deposits are
interest rates, personalized services, the quality and range of financial
services, convenience of office locations and office hours.  Competition for
deposits comes primarily from other commercial banks, savings institutions,
credit unions, money market funds and other investment alternatives.  The
primary factors in competing for loans are interest rates, loan origination
fees, the quality and range of lending services and personalized services.
Competition for loans comes primarily from other commercial banks, savings
institutions, mortgage banking firms, credit unions and other financial
intermediaries.  The Bank faces competition for deposits and loans throughout
its market areas not only from local institutions but also from out-of-state
financial intermediaries which have opened loan production offices or which
solicit deposits in its market areas.  Many of the financial intermediaries
operating in the Bank's market areas offer certain services, such as trust,
investment and international banking services, which the Bank does not offer
directly.  Additionally, banks with larger capitalization and financial
intermediaries not subject to bank regulatory restrictions have large lending
limits and are thereby able to serve the needs of larger customers.  Neither
the deposits nor loans of any office of the Bank exceed 1% of the aggregate
loans or deposits of all financial intermediaries located in the counties in
which such offices are located.

EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION

        Banking is a business which depends largely on rate differentials.  In
general, the difference between the interest rate paid by the Bank on its
deposits and its other borrowings and the interest rate received by the Bank on
loans extended to its customers and securities held in the Bank's portfolio
comprise the major portion of the Company's earnings.  These rates are highly
sensitive to many factors that are beyond the control of the Bank.
Accordingly, the earnings and growth of the Company are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment.

        The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies, particularly
the Federal Reserve Board.  The Federal Reserve Board implements national
monetary policies (with objectives such as curbing inflation and combating
recession) by its open-market operations in United States Government
securities, by adjusting the required level of reserves for financial
institutions subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions.  The actions of the
Federal Reserve Board in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates charged on loans and
paid on deposits.  The nature and impact of any future changes in monetary
policies cannot be predicted.

        From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions.  Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other
financial institutions are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
For example, legislation was recently introduced in Congress that would repeal
the current statutory restrictions on affiliations between commercial banks and
securities firms.  Under the proposed legislation, bank holding companies would
be allowed to control both a commercial bank and a securities affiliate, which
could engage in the full range of investment banking activities, including
corporate underwriting.  The likelihood of any major legislative changes and
the impact such changes might have on the Company are impossible to predict.
See "ITEM 1. BUSINESS -- Supervision and Regulation."

SUPERVISION AND REGULATION

        Bank holding companies and banks are extensively regulated under both
federal and state law.  Set forth below is a summary description of certain
laws and regulations which relate to the regulation of the Company and the
Bank.  The description does not purport to be a complete summary of all such
authority and is qualified in its entirety by reference to the applicable laws
and regulations.

        The Company.  The Company, as a registered bank holding company, is
subject to regulation under the Bank Holding Company Act of 1956, as amended
(the "BHCA").  The Company is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require pursuant to the BHCA.  The Federal Reserve Board may
conduct examinations of the Company and its subsidiaries.





                                                                         Page 14
<PAGE>   15
        The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries.  The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt.  Under certain circumstances, the Company
must file written notice and obtain approval from the Federal Reserve Board
prior to purchasing or redeeming its equity securities.

        Under the BHCA and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services.  Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital.  See "ITEM 1. BUSINESS -- Supervision and Regulation -- Capital
Standards."  The Company is required to obtain the prior approval of the
Federal Reserve Board for the acquisition of more than 5% of the outstanding
shares of any class of voting securities or substantially all of the assets of
any bank or bank holding company.  Prior approval of the Federal Reserve Board
is also required for the merger or consolidation of the Company and another
bank holding company.

        The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries.  However, the Company, subject to the prior
approval of the Federal Reserve Board, may engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.  In making any such determination, the Federal Reserve
Board is required to consider whether the performance of such activities by the
Company or an affiliate can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices.  The Federal Reserve Board is also empowered to
differentiate between activities commenced de novo and activities commenced by
acquisition, in whole or in part, of a going concern.

        Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner.  In addition, it is the Federal Reserve Board's policy that in serving
as a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks.  A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both.  This doctrine has become known as the
"source of strength" doctrine.  Although the United States Court of Appeals for
the Fifth Circuit found the Federal Reserve Board's source of strength doctrine
invalid in 1990, stating that the Federal Reserve Board had no authority to
assert the doctrine under the BHCA, the decision, which is not binding on
federal courts outside the Fifth Circuit, was recently reversed by the United
States Supreme Court on procedural grounds.  The validity of the source of
strength doctrine is likely to continue to be the subject of litigation until
definitively resolved by the courts or by Congress.

        The Company is also a bank holding company within the meaning of
Section 3700 of the California Financial Code.  As such, the Company and its
subsidiaries are subject to examination by, and may be required to file reports
with, the California State Banking Department.

        Finally, the Company is subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended, including but not limited
to, filing annual, quarterly and other current reports with the Securities and
Exchange Commission.





                                                                         Page 15
<PAGE>   16
        The Bank.  The Bank, as a national banking association, is subject to
primary supervision, examination and regulation by the Office of the
Comptroller of the Currency ("Comptroller").  If, as a result of an examination
of a Bank, the Comptroller should determine that the financial condition,
capital resources, asset quality, earnings prospects, management, liquidity or
other aspects of the Bank's operations are unsatisfactory or that the Bank or
its management is violating or has violated any law or regulation, various
remedies are available to the Comptroller.  Such remedies include the power to
enjoin "unsafe or unsound practices," to require affirmative action to correct
any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct and increase in
capital, to restrict the growth of the Bank, to assess civil monetary
penalties, and to remove officers and directors.  The FDIC has similar
enforcement authority, in addition to its authority to terminate a Bank's
deposit insurance in the absence of action by the Comptroller and upon finding
that a Bank is in an unsafe or unsound condition, is engaging in unsafe or
unsound activities, or that its conduct poses a risk to the deposit insurance
fund or make prejudice the interest of its depositors.

        The deposits of the Bank are insured by the FDIC in the manner and to
the extent provided by law.  For this protection, the Bank pays a semiannual
statutory assessment.  See "ITEM 1. BUSINESS -- Supervision and Regulation
Premiums for Deposit Insurance." The Bank is also subject to certain
regulations of the Federal Reserve Board and applicable provisions of
California law, insofar as they do not conflict with or are not preempted by
federal banking law.

        Various other requirements and restrictions under the laws of the
United States and the State of California affect the operations of the Bank.
Federal and California statutes and regulations relate to many aspects of the
Bank's operations, including reserves against deposits, interest rates payable
on deposits, loans, investments, mergers and acquisitions, borrowings,
dividends, locations of branch offices, capital requirements and disclosure
obligations to depositors and borrowers.  Further, the Bank is required to
maintain certain levels of capital.  See "ITEM 1. BUSINESS -- Supervision and
Regulation -- Capital Standards."

        Restrictions on Dividends by the Company and Transfers of Funds to the
Company by the Bank.  The Company is a legal entity separate and distinct from
the Bank.  The Company's ability to pay cash dividends is limited by California
law.  Under California law, shareholders of the Company may receive dividends
when and as declared by the Board of Directors out of funds legally available
for such purpose.  With certain exceptions, a California corporation may not
pay a dividend to its shareholders unless (i) its retained earnings equal at
least the amount of the proposed dividend, or (ii) after giving effect to the
dividend, the corporation's assets would equal at least 1.25 times its
liabilities and, for corporations with classified balance sheets, the current
assets of the corporation would be at least equal to its current liabilities
or, if the average of the earnings of the corporation before taxes on income
and before interest expense for the two preceding fiscal years was less than
the average of the interest expense of the corporation for those fiscal years,
at least equal to 1.25 times its current liabilities.

        Federal Reserve Board policy prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowings or other
arrangements that might adversely affect the holding company's financial
position.  The policy further declares that a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality and
overall financial condition.  Other Federal Reserve Board policies forbid the
payment by bank subsidiaries to their parent companies of management fees which
are unreasonable in amount or exceed the fair market value of the services
rendered.

        There are statutory and regulatory limitations on the amount of
dividends which may be paid to the Company by the Bank.  The prior approval of
the Comptroller is required if the total of all dividends declared by a
national bank in any calendar year exceeds the bank's net profits (as defined)
for that year combined with its retained net profits (as defined) for the
preceding two years, less any transfers to surplus.





                                                                         Page 16
<PAGE>   17
        The Comptroller has authority to prohibit the Bank from engaging in
activities that, in the Comptroller's opinion, constitute unsafe or unsound
practices in conducting its business.  It is possible, depending upon the
financial condition of the bank in question and other factors, that the
Comptroller could assert that the payment of dividends or other payments might,
under some circumstances, be such an unsafe or unsound practice.  Further, the
Comptroller and the Federal Reserve Board have established guidelines with
respect to the maintenance of appropriate levels of capital by banks or bank
holding companies under their jurisdiction.  Compliance with the standards set
forth in such guidelines and the restrictions that are or may be imposed under
the prompt corrective action provisions of federal law could limit the amount
of dividends which the Bank or the Company may pay.  See "ITEM 1. BUSINESS --
Supervision and Regulation -- Prompt Corrective Regulatory Action and Other
Enforcement Mechanisms" and -- "Capital Standards" for a discussion of these
additional restrictions on capital distributions.

        At present, substantially all of the Company's revenues, including
funds available for the payment of dividends and other operating expenses, is,
and will continue to be, primarily dividends paid by the Bank.  The Bank is not
permitted to pay dividends to VNB without the prior written consent of the
Comptroller.

        The Bank is subject to certain restrictions imposed by federal law on
any extensions of credit to, or the issuance of a guarantee or letter of credit
on behalf of, the Company or other affiliates, the purchase of or investments
in stock or other securities thereof, the taking of such securities as
collateral for loans and the purchase of assets of the Company or other
affiliates.  Such restrictions prevent the Company and such other affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts.  Further, such secured loans and investments
by the Bank to or in the Company or to or in any other affiliate is limited to
10% of the Bank's capital and surplus (as defined by federal regulations) and
such secured loans and investments are limited, in the aggregate, to 20% of the
Bank's capital and surplus (as defined by federal regulations).  California law
also imposes certain restrictions with respect to transactions involving the
Company and other controlling persons of the Bank.  Additional restrictions on
transactions with affiliates may be imposed on the Bank under the prompt
corrective action provisions of federal law.  See "ITEM 1. BUSINESS --
Supervision and Regulation Prompt Corrective Regulatory Action and Other
Enforcement Mechanisms."

        Potential and Existing Enforcement Actions.  Commercial banking
organizations, such as the Bank, and their institution-affiliated parties,
which include the Company, may be subject to potential enforcement actions by
the Federal Reserve Board, and the Comptroller for unsafe or unsound practices
in conducting their businesses or for violations of any law, rule, regulation
or any condition imposed in writing by the agency or any written agreement with
the agency.  Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits, the imposition of civil
money penalties, the issuance of directives to increase capital, the issuance
of formal and informal agreements, the issuance of removal and prohibition
orders against institution-affiliated parties and the imposition of
restrictions and sanctions under the prompt corrective action provisions of the
FDIC Improvement Act of 1991.  Additionally, a holding company's inability to
serve as a source of strength to its subsidiary banking organizations could
serve as an additional basis for a regulatory action against the holding
company.

        Capital Standards.  The Federal Reserve Board and the Comptroller have
adopted risk-based minimum capital guidelines intended to provide a measure of
capital that reflects the degree of risk associated with a banking
organization's operations for both transactions reported on the balance sheet
as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off balance sheet items.  Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high
credit risk, such as business loans.

        A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets.  The
regulators measure risk-adjusted assets, which includes off balance sheet
items, against both total qualifying capital (the sum of Tier 1 capital and
limited amounts of Tier 2 capital) and Tier 1 capital.  Tier 1 capital consists
primarily of common stock, retained earnings, noncumulative perpetual preferred
stock (cumulative perpetual preferred stock for bank holding companies) and
minority interests in certain subsidiaries, less most intangible assets.  Tier
2 capital may consist of a limited amount of the allowance for possible loan
and lease losses, cumulative preferred stock, long term preferred stock,
eligible term subordinated debt and certain other instruments with some
characteristics of equity.  The inclusion of elements of Tier 2 capital is
subject to certain other requirements and limitations of the federal banking
agencies.  The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1
capital to risk-adjusted assets of 4%.





                                                                         Page 17
<PAGE>   18
        In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio.  For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%.  For all banking organizations not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis points above the 3%
minimum, or 4% to 5%.  In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.

        The federal banking regulators have issued a proposed rule to take
account of interest rate risk in calculating risk-based capital.  The proposed
rule includes a supervisory model for taking account of interest rate risk.
Under that model, institutions would report their assets, liabilities and off
balance sheet positions in time bands based upon their remaining maturities.
The federal banking agencies would then calculate a net risk weighted interest
rate exposure.  If that interest rate risk exposure was in excess of a certain
threshold (1% of assets), the institution could be required to hold additional
capital proportionate to that excess risk.  Alternatively, the agencies have
proposed making interest rate risk exposure a subjective factor in considering
capital adequacy.  Exposures would be measured in terms of the change in the
present value of an institution's assets minus the change in the present value
of its liabilities and off-balance sheet positions for an assumed 200 basis
point parallel shift in market interest rates.  However, the federal banking
agencies have proposed to let banks use their own internal measurement of
interest rate risk if it is declared adequate by examiners.

        Effective January 17, 1995, the federal banking agencies issued a final
rule relating to capital standards and the risks arising from the concentration
of credit and nontraditional activities.  Institutions which have significant
amounts of their assets concentrated in high risk loans or nontraditional
banking activities and who fail to adequately manage these risks, will be
required to set aside capital in excess of the regulatory minimums.  The
federal banking agencies have not imposed any quantitative assessment for
determining when these risks are significant, but have identified these issues
as important factors they will review in assessing an individual bank's capital
adequacy.

        In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to
classified assets.  The benchmark set forth by such policy statement is the sum
of (i) assets classified loss; (ii) 50 percent of assets classified doubtful;
(iii) 15 percent of assets classified substandard; and (iv) estimated credit
losses on other assets over the upcoming 12 months.

        Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with SFAS No.  109.  See
"ITEM 1. BUSINESS -- Supervision and Regulation -- Accounting Changes." The
federal banking agencies recently issued final rules governing banks and bank
holding companies, effective April 1, 1995, which limit the amount of deferred
tax assets that are allowable in computing an institutions regulatory capital.
This standard has been in effect on an interim basis since March 1993.
Deferred tax assets that can be realized for taxes paid in prior carryback
years and from future reversals of existing taxable temporary differences are
generally not limited.  Deferred tax assets that can only be realized through
future taxable earnings are limited for regulatory capital purposes to the
lesser of (i) the amount that can be realized within one year of the
quarter-end report date, or (ii) 10% of Tier 1 Capital.  The amount of any
deferred tax in excess of this limit would be excluded from Tier 1 Capital and
total assets and regulatory capital calculations.

        Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy.  Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.





                                                                         Page 18
<PAGE>   19
        The following table presents the amounts of regulatory capital and the
capital ratios for the Bank, compared to its minimum regulatory capital
requirements, as of December 31, 1996.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                                December 31, 1996
                                                                 ----------------------------
                                                                                    Minimum
                                                                 Actual             Capital
                                                                 Amount   Ratio   Requirement
                                                                 ------   -----   -----------
<S>                                                              <C>       <C>        <C>
Leverage ratio                                                   $7,840    6.49%      4.0%
Tier 1 risk-based ratio                                           7,840    7.53%      4.0%
Total risk-based ratio                                            8,568    8.23%      8.0%
</TABLE>




        Prompt Corrective Action and Other Enforcement Mechanisms.  Federal law
requires each federal banking agency to take prompt corrective action to
resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more prescribed minimum capital ratios.
The law required each federal banking agency to promulgate regulations defining
the following five categories in which an insured depository institution will
be placed, based on the level of its capital ratios: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized.

        In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal
law.  Under these regulations, an insured depository institution will be
classified In the following categories:

        -   "well capitalized" if it (i) has total risk-based capital of 10% or
            greater, Tier I risk-based capital of 6% or greater and a leverage
            ratio of 5% or greater, and (ii) is not subject to an order,
            written agreement, capital directive or prompt corrective action
            directive to meet and maintain a specific capital level for any
            capital measure;

        -   "adequately capitalized" if it has total risk-based capital of 8%
            or greater, Tier 1 risk-based capital of 4% or greater and a
            leverage ratio of 4% or greater (or a leverage ratio of 3% or
            greater if the institution is rated Composite I under the
            applicable regulatory rating system in its most recent report of
            examination);

        -   "undercapitalized" if it has total risk-based capital that is less
            than 8%, Tier 1 risk-based capital that is less than 4% or a
            leverage ratio that is less than 4% (or a leverage ratio that is
            less than 3% if the institution is rated Composite I under the
            applicable regulatory rating system in its most recent report of
            examination);

        -   "significantly undercapitalized" if it has total risk-based capital
            that is less than 6%, Tier 1 risk-based capital that is less than
            3% or a leverage ratio that is less than 3%; and

        -   "critically undercapitalized" if it has a ratio of tangible equity
            to total assets that is equal to or less than 2%.

        An institution that, based upon its capital levels, is classified as
"'well capitalized," "adequately capitalized" or "undercapitalized" may be
treated as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment.  At each successive lower capital category, an insured
depository institution is subject to more restrictions.  The federal banking
agencies, however, may not treat an institution as "critically
undercapitalized" unless its capital ratio actually warrants such treatment.





                                                                         Page 19
<PAGE>   20
        The law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions if after such transaction the institution would be
undercapitalized.  If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business.  Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized.  The appropriate federal banking agency cannot
accept a capital plan unless, among other things,  it determines that the plan
(i) specifies the steps the institution will take to become adequately
capitalized; (ii) is based on realistic assumptions; and (iii) is likely to
succeed in restoring the depository institution's capital.  In addition, each
company controlling an undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the depository
institution has been adequately capitalized on an average basis during each of
four consecutive calendar quarters and must otherwise provide adequate
assurances of performance.  The aggregate liability of such guarantee is
limited to the lesser of (a) an amount equal to 5% of the depository
institution's total assets at the time the institution became undercapitalized,
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution as of the time the
institution fails to comply with its capital restoration plan.  Finally, the
appropriate federal banking agency may impose any of the additional
restrictions or sanctions that it may impose on significantly undercapitalized
institutions if it determines that such action will further the purpose of the
prompt correction action provisions.

        An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a material
respect to implement, an acceptable capital restoration plan, is subject to
additional restrictions and sanctions.  These include, among other things (i) a
forced sale of voting shares to raise capital or, if grounds exist for
appointment of a receiver or conservator, a forced merger; (ii) restrictions on
transactions with affiliates; (iii) further limitations on interest rates paid
on deposits; (iv) further restrictions on growth or required shrinkage; (v)
modification or termination of specified activities; (vi) replacement of
directors or senior executive officers; (vii) prohibitions on the receipt of
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate federal banking agency.  Although the appropriate
federal banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose, it is required to force a
sale of voting shares or merger, impose restrictions on affiliate transactions
and impose restrictions on rates paid on deposits unless it determines that
such actions would not further the purpose of the prompt corrective action
provisions.  In addition, without the prior written approval of the appropriate
federal banking agency, a significantly undercapitalized institution may not
pay any bonus to its senior executive officers or provide compensation to any
of them at a rate that exceeds such officer's average rate of base compensation
during the 12 calendar months preceding the month in which the institution
became undercapitalized.

        Further restrictions and sanctions are required to be imposed on
insured depository institutions that are critically undercapitalized.  For
example, a critically undercapitalized institution generally would be
prohibited from engaging in any material transaction other than in the ordinary
course of business without prior regulatory approval and could not, with
certain exceptions, make any payment of principal or interest on its
subordinated debt beginning 60 days after becoming critically undercapitalized.
Most importantly, except under limited circumstances, the appropriate federal
banking agency, not later than 90 days after an insured depository institution
becomes critically undercapitalized, is required to appoint a conservator or
receiver for the institution.  The board of directors of an insured depository
institution would not be liable to the institution's shareholders or creditors
for consenting in good faith to the appointment of a receiver or conservator or
to an acquisition or merger as required by the regulator.

        In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices
in conducting their businesses or for violations of any law, rule, regulation
or any condition imposed in writing by the agency or any written agreement with
the agency.  Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted.





                                                                         Page 20
<PAGE>   21
        Safety and Soundness Standards.  On February 2, 1995, the federal
banking agencies adopted final safety and soundness standards for all insured
depository institutions.  The standards, which were issued in the form of
guidelines rather than regulations, relate to internal controls, information
systems, internal audit systems, loan underwriting and documentation,
compensation and interest rate exposure.  In general, the standards are
designed to assist the federal banking agencies in identifying and addressing
problems at insured depository institutions before capital becomes impaired.
If an institution fails to meet these standards, the appropriate federal
banking agency may require the institution to submit a compliance plan.
Failure to submit a compliance plan may result in enforcement proceedings.
Additional standards on earnings and classified assets are expected to be
issued in the near future.

        In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending.  The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate.  The policies must address
loan portfolio management, underwriting standards and loan to value limits that
do not exceed the supervisory limits prescribed by the regulations.

        Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts.  State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more.  A state
licensed appraiser is required for all other appraisals.  However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards.  Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan
or investment, including mortgage-backed securities.

        Premiums for Deposit Insurance.  Federal law has established several
mechanisms to increase funds to protect deposits insured by the Bank Insurance
Fund ("BIF") administered by the FDIC.  The FDIC is authorized to borrow up to
$30 billion from the United States Treasury; up to 90% of the fair market value
of assets of institutions acquired by the FDIC as receiver from the Federal
Financing Bank; and from depository institutions that are members of the BIF.
Any borrowings not repaid by asset sales are to be repaid through insurance
premiums assessed to member institutions.  Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance fund reserves of
$1.25 for each $100 of insured deposits.  The result of these provisions is
that the assessment rate on deposits of BIF members could increase in the
future.  The FDIC also has authority to impose special assessments against
insured deposits.

        The FDIC has adopted final regulations implementing a risk-based
premium system required by federal law.  On November 14, 1995, the FDIC issued
regulations that establish a new assessment rate schedule ranging from 0 cents
per $100 of deposit to 27 cents per $100 of deposits applicable to members of
BIF.  To determine the risk-based assessment for each institution, the FDIC
will categorize an institution as well capitalized, adequately capitalized or
undercapitalized based on its capital ratios using the same standard used by
the FDIC for its prompt corrective action regulations.  A well capitalized
institution is generally one that has at least a 10% total risk-based capital
ratio, a 6% Tier 1 risk-based capital ratio and a 5% Tier 1 leverage capital
ratio.  An adequately capitalized institution will generally have at least an
8% total risk-based capital ratio, a 4% Tier 1 risk-based capital ratio and a
4% Tier 1 leverage capital ratio.  An undercapitalized institution will
generally be one that does not meet either of the above definitions.  The FDIC
will also assign each institution to one of three subgroups based upon reviews
by the institution's primary federal or state regulator, statistical analysis
of financial statements and other information relevant to evaluating the risk
posed by the institution.  The three supervisory categories are:  financially
sound with only a few minor weaknesses (Group A), demonstrates weaknesses that
could result in significant deterioration (Group B), and poses a substantial
probability of loss (Group C).





                                                                         Page 21
<PAGE>   22
        The BIF assessment rates are set forth below for institutions based on
their risk-based assessment categorization.

<TABLE>
<CAPTION>
                                                     Assessment Rates Effective January 1, 1996*
                                                     -------------------------------------------    
                                                      Group A          Group B          Group C
                                                     ---------        ---------        ---------
<S>                                                      <C>          <C>               <C>
Well capitalized                                         0                3                17
Adequately capitalized                                   3               10                24
Undercapitalized                                        10               24                27
</TABLE>


* Assessment figures are expressed in terms of cents per $100 of deposits.

        Interstate Banking and Branching.  On September 29, 1994, the President
signed into law the Riegel-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Act").  Under the Interstate Act, beginning one year
after the date of enactment, a bank holding company that is adequately
capitalized and managed may obtain approval under the BHCA to acquire an
existing bank located in another state without regard to state law.  A bank
holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of
deposits of insured depository institutions in the United States or (b) 30% or
more of the deposits in the state in which the bank is located.  A state may
limit the percentage of total deposits that may be held in that state by any
one bank or bank holding company if application of such limitation does not
discriminate against out-of-state banks.  An out-of-state bank holding company
may not acquire a state bank in existence for less than a minimum length of
time that may be prescribed by state law except that a state may not impose
more than a five year existence requirement.

        The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank.  Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks.  The same concentration limits discussed in the preceding
paragraph apply.  The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the
laws of that state, subject to the same requirements and conditions as for a
merger transaction.

        The Interstate Act is likely to increase competition in the Company's
market areas especially from larger financial institutions and their holding
companies.  It is difficult to assess the impact such likely increased
competition will have on the Company's operations.

        In 1986, California adopted an interstate banking law.  The law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a "reciprocal" basis (i.e., provided the other
state's laws permit California banking organizations to acquire banking
organizations in that state on substantially the same terms and conditions
applicable to banking organizations solely within that state).  The law took
effect in two stages.  The first stage allowed acquisitions on a "reciprocal"
basis within a region consisting of 11 western states.  The second stage, which
became effective January 1, 1991, allows interstate acquisitions on a national
"reciprocal" basis.  California has also adopted similar legislation applicable
to savings associations and their holding companies.

        Community Reinvestment Act and Fair Lending Developments.  The Bank is
subject to certain fair lending requirements and reporting obligations
involving home mortgage lending operations and Community Reinvestment Act
("CRA") activities.  The CRA generally requires the federal banking agencies to
evaluate the record of a financial institution in meeting the credit needs of
their local communities, including low and moderate income neighborhoods.  In
addition to substantial penalties and corrective measures that may be required
for a violation of certain fair lending laws, the federal banking agencies may
take compliance with such laws and CRA into account when regulating and
supervising other activities.  In May 1995, the federal banking agencies issued
final regulations which change the manner in which they measure a bank's
compliance with its CRA obligations.  The final regulations adopt a
performance-based evaluation system which bases CRA ratings on an institution's
actual lending service and investment performance, rather than the extent to
which the institution conducts needs assessments, documents community outreach,
activities or complies with other procedural requirements.

        On March 8, 1994, the federal Interagency Task Force on Fair Lending
issued a policy statement on discrimination in lending.  The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.





                                                                         Page 22
<PAGE>   23
        Risk-Based Examinations. In accordance with the OCC's "supervision by
risk" program, the OCC's examination philosophy is a way of allocating examiner
resources to focus on those functions or activities of the bank that pose the
most risk-ultimately to capital and earnings of the bank.  The OCC has
identified nine risk categories and definitions to measure risk:  credit,
interest rate, liquidity, price, foreign exchange, transaction, compliance,
reputation and strategic.  The risk management program is not a substitute for
capital, assets, management, earnings and liquidity (CAMEL) nor is it meant to
change the way the bank manages it business.  The OCC's supervision by risk
examination procedures differentiate between large banks and community banks.
A community bank is defined as a national bank with total assets of less than
$1 billion or one that is part of a holding company where none of the bank's
assets exceed $1 billion.  Community banks can be further categorized as
complex or non-complex.  The rating system for the bank is based on the size
and complexity of the institution.  Community banks will receive only a
composite risk rating and a rating on the direction or trend of the risk.  The
community bank risk assessment system (RAS) is meant to be a less stringent
exam than the large bank exam.

ACCOUNTING CHANGES

        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, however believes that 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.

EMPLOYEES

        At December 31, 1996, the Company had approximately 72 full-time and 31
part-time employees.  Total full-time equivalent employees at December 31,1996,
were approximately 91. The Company believes that its employee relations are
satisfactory.

EXECUTIVE OFFICERS OF THE COMPANY

        Set forth below is certain information regarding the executive officers
of the Company and the Bank:


<TABLE>
<CAPTION>
           Name                    Position With Company                   Position With Bank
           ----                    ---------------------                   ------------------
   <S>                            <C>                                <C>
   Steven R. Sensenbach                President and                          President and
                                  Chief Executive Officer                Chief Executive Officer



   Robert J. Schoeffler                                                 Executive Vice President/
                                                                       Senior Credit Administrator



     Soule Sensenbach                    Secretary                      Executive Vice President/
                                                                         Chief Financial Officer



        Sara Ahern                        Cashier                    Senior Vice President/Cashier/
                                                                         Director of Operations
</TABLE>





                                                                         Page 23
<PAGE>   24
        All officers hold office at the pleasure of the Board of Directors.

        Mr. Sensenbach has served as President and Chief Executive of the
Company since its formation in December 1988.  Mr. Sensenbach has been
President and Chief Executive Officer of the Bank since 1981.

        Mr. Schoeffler was appointed Executive Vice President/Senior Credit
Administrator of the Bank in January 1993, and has been with the Bank since
1991.

        Mrs. Sensenbach has served as the Secretary of the Company since 1992
and has been with the Bank since 1988.  Mrs. Sensenbach is currently serving as
Executive Vice President/Chief Financial Officer.

        Mrs. Ahern was elected as the Company's Cashier in November 1993.  She
has been with the Bank since June 1993, and is currently serving as Senior Vice
President/Cashier/Director of Operations.


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.  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.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.





                                                                         Page 24
<PAGE>   25
                                    PART II


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.

<TABLE>
<CAPTION>
                                                     Sales Prices of
                                                   Common Stock(1)(2)
                                                   ------------------
                                                     High       Low
                                                   --------   -------
      <S>                                          <C>        <C>
   1995
      First Quarter                                  $3.50     $3.00
      Second Quarter                                  3.88      3.50
      Third Quarter                                   3.88      3.00
      Fourth Quarter                                  3.50      3.00
   1996
      First Quarter                                  $4.13     $3.50
      Second Quarter                                  3.75      3.25
      Third Quarter                                   3.38      3.25
      Fourth Quarter                                  3.50      3.25
</TABLE>


(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.





                                                                         Page 25
<PAGE>   26
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.

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                            ----------------------------------------------------------------
                                                1996         1995         1994         1993         1992
                                            ------------ ------------ ------------ ------------ ------------
<S>                                           <C>          <C>          <C>         <C>          <C>
Interest Income                               $9,011,147   $8,568,863   $8,472,532   $9,514,751  $11,135,433
Interest Expense                               2,860,834    2,399,588    1,919,004    2,481,123    3,715,864
Net Interest Income                            6,150,313    6,169,275    6,553,528    7,033,628    7,419,569
(Provision)/Credit  for Loan and Lease Losses   (416,900)     429,000   (1,440,000)    (300,000)  (2,351,800)
Other Income                                   1,837,933    3,961,580    2,808,965    3,897,471    3,995,952
Other Expenses                                (7,437,768)  (9,141,796)  (9,831,082) (10,133,676) (10,415,287)
                                            ------------ ------------ ------------ ------------ ------------
Income/(Loss) Before Taxes                       133,578    1,418,059   (1,908,589)     497,423   (1,351,566)
Income Taxes                                     (28,000)    (584,254)     370,100     (144,800)     269,200
                                            ------------ ------------ ------------ ------------ ------------
Income/(Loss) Before Cumulative Effect
 of Accounting Change                            105,578      833,805   (1,538,489)     352,623   (1,082,366)
Cumulative Effect of Change in Accounting
 for Income Taxes                                                                       107,000
                                            ------------ ------------ ------------ ------------ ------------
Net Income/(Loss)                               $105,578     $833,805  ($1,538,489)    $459,623  ($1,082,366)
                                            ============ ============ ============ ============ ============
Earnings/(Loss) Per Share of Common Stock(1)
Income/(Loss) Before Cumulative Effect             $0.06        $0.45       ($0.83)       $0.19       ($0.58)
Cumulative Effect                                                                          0.06
                                            ------------ ------------ ------------ ------------ ------------
Net Income/(Loss)                                  $0.06        $0.45       ($0.83)       $0.25       ($0.58)
                                            ============ ============ ============ ============ ============
Stock Splits                                      -         6 for 5         -            -            -

Balance Sheet Data
      Assets                                $119,523,686 $107,559,133 $107,417,232 $120,646,469 $137,835,991
                                            ============ ============ ============ ============ ============
      Deposits                              $106,602,789  $98,414,447  $98,584,479 $111,186,106 $127,715,070
                                            ============ ============ ============ ============ ============
      Loans and Leases/(Net)                 $96,737,786  $77,287,938  $83,786,866  $83,940,271  $94,815,525
                                            ============ ============ ============ ============ ============
      Stockholders' Equity                    $7,851,412   $7,752,714   $6,860,144   $8,446,305   $7,986,682
                                            ============ ============ ============ ============ ============
</TABLE>



(1) Retroactively adjusted for stock splits.


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.





                                                                         Page 26
<PAGE>   27
         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.





                                                                         Page 27
<PAGE>   28
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.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                              1996                       1995
                                                        --------------------------  --------------------------
                                                         Average           Average   Average           Average
                                                         Balance  Interest  Yield    Balance  Interest  Yield
                                                        --------- -------- -------  --------- -------- -------
<S>                                                     <C>       <C>      <C>      <C>       <C>      <C>
Assets

      Loans                                              $85,216  $8,137     9.5%   $78,097  $7,470     9.6%
      Lease financing                                        394      31     7.9%       928      75     8.1%
      Investment securities(3)                            11,214     629     5.6%    12,976     756     5.8%
      Federal funds sold                                   3,467     179     5.2%     4,156     232     5.6%
      Interest-earning deposits with 
       other financial institutions                          669      35     5.2%       568      36     6.3%
                                                        --------  ------     ---   --------  ------    ---- 
                      Total Interest-earning Assets      100,960   9,011     8.9%    96,725   8,569     8.9%
                                                                  ------     ---             ------    ---- 
Other Assets                                              15,803                     13,683
                      Less: Allowance for Loan Losses       (715)                      (967)
                                                        --------                   --------                 
                      Total Average Assets              $116,048                   $109,441
                                                        ========                   ========
Liabilities and Shareholders' Equity
      Savings deposits                                    41,877     751     1.8%    46,848     839     1.8%
      Time deposits                                       38,550   2,108     5.5%    28,203   1,560     5.5%
      Other                                                   38       2     5.3%         6       1    12.2%
                                                        --------  ------     ---   --------  ------    ---- 
                      Total Interest-bearing Liabilities  80,465   2,861     3.6%    75,057   2,400     3.2%
                                                                  ------     ---             ------    ---- 
      Demand deposits                                     26,422                     26,082
      Other liabilities                                    1,469                      1,047
Shareholders' equity                                       7,692                      7,255
                                                        --------                   --------                 
                      Total Average Liabilities
                       and Shareholders' Equity         $116,048                   $109,441
                                                        ========                   ========
Net Interest Spread(1)                                                       5.3%                       5.7%
                                                                             ===                        ===
Net Interest Income and Net Interest Margin(2)                    $6,150     6.1%            $6,169     6.4%
                                                                  ======     ===             ======     ===
</TABLE>

(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.




                                                                         Page 28
<PAGE>   29
<TABLE>
<CAPTION>
(Dollars in Thousands)                                           1994
                                                      ------------------------
                                                      Average          Average
                                                      Balance Interest  Yield
                                                      ------- -------- -------
<S>                                                   <C>      <C>      <C>
Assets
      Loans                                           $79,489  $7,511     9.4%
      Lease financing                                   1,969     166     8.4%
      Investment securities(3)                         14,930     673     4.5%
      Federal funds sold                                2,990     112     3.7%
      Interest-earning deposits with
       other financial institutions                       289      11     3.8%
                                                     --------  ------     ---
              Total Interest-earning Assets            99,667   8,473     8.6%
                                                               ------     ---
Other Assets                                           15,825
              Less: Allowance for Loan Losses          (1,152)
                                                     --------                  
              Total Average Assets                   $114,340
                                                     ========
Liabilities and Shareholders' Equity
      Savings deposits                                 59,265   1,248     2.1%
      Time deposits                                    19,423     670     3.4%
      Other                                                32       1     3.1%
                                                     --------  ------     ---
              Total Interest-bearing Liabilities       78,720   1,919     2.4%
                                                               ------     ---
      Demand deposits                                  27,150
      Other liabilities                                   883
Shareholders' equity                                    7,587
                                                     -------- 
              Total Average Liabilities
              and Shareholders' Equity               $114,340
                                                     ========
Net Interest Spread(1)                                                    6.2%
                                                                          ===
Net Interest Income and Net Interest Margin(2)                 $6,554     6.6%
                                                               ======     ===
</TABLE>


(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.





                                                                         Page 29
<PAGE>   30
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.

<TABLE>
<CAPTION>
(Dollars in Thousands)                          1996 - 1995             1995 - 1994
                                          ----------------------   ----------------------
                                          Volume    Rate   Total   Volume    Rate   Total
                                          ------    ----   -----   ------    ----   -----
<S>                                       <C>       <C>    <C>     <C>       <C>    <C>  
Increase/(Decrease) In
      Interest Income
          Loans(1)                          $741    ($74)   $667    ($137)    $96    ($41)
          Leases(2)                          (60)    (29)    (89)    (197)    119     (78)
          Investment securities(2)          (101)    (26)   (127)     (68)    151      83
          Deposits                            78     (79)     (1)      15      10      25
          Federal funds sold                 (36)    (17)    (53)      53      67     120
                                            ----   -----    ----    -----    ----   -----
                                             622    (225)    397     (334)    443     109
                                            ----   -----    ----    -----    ----   -----
Increase/(Decrease) In
      Interest Expense
          Savings deposits                   (90)      2     (88)    (239)   (170)   (409)
          Time deposits                      566     (18)    548      381     509     890
          Short-term borrowings                1               1               (1)     (1)
          Note payable                                         0                        0
                                            ----   -----    ----    -----    ----   -----
                                             477     (16)    461      142     338     480
                                            ----   -----    ----    -----    ----   -----
                   Increase/(Decrease)
                    in Net Interest Income  $145   ($209)   ($64)   ($476)   $105   ($371)
                                            ====   =====    ====    =====    ====   ===== 
</TABLE>


(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."





                                                                         Page 30
<PAGE>   31
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.





                                                                         Page 31
<PAGE>   32
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.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                                         December 31,
                                                                               ------------
                                                                               1996   1995
                                                                               ----   ----
<S>                                                                            <C>    <C>
Accruing Loans More Than 90 Days Past Due(1)
      Aggregate Loan Amounts
          Commercial, financial and agricultural                                       $85
          Real estate                                                                   38
          Installment loans to individuals                                      $49    197
                                                                               ----   ----
                      Total Loans Past Due More Than 90 Days                     49    320
                                                                               ----   ----
Renegotiated loans(2)                                                            -      -
                                                                               ----   ----
Non-accrual loans(3)
      Aggregate Loan Amounts
          Commercial, financial and agricultural                                  5     12
          Real estate                                                           429    467
          Installment loans to individuals
                                                                               ----   ----
                      Total Non-accrual Loans                                   434    479
                                                                               ----   ----
                      Total Non-performing Loans                               $483   $799
                                                                               ====   ====
</TABLE>


(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.





                                                                         Page 32
<PAGE>   33
        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.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                                       1996       1995
                                                                            ------     ------
<S>                                                                          <C>        <C>
Allowance For Loan Losses
      Balance, Beginning of period                                           $783     $1,014
                                                                             ----     ------
      Charge-offs
          Commercial, financial and agricultural                              101        245
          Real estate construction
          Real estate mortgage                                                201         69
          Consumer loans                                                      384        383
          Lease financing
                                                                             ----     ------
                      Total Charge-offs                                       686        697
                                                                             ----     ------
      Recoveries
          Commercial, financial and agricultural                              102        795
          Real estate construction
          Real estate mortgage
          Consumer loans                                                      112        100
          Lease financing
                                                                             ----     ------
                      Total Charge-offs                                       214        895
                                                                             ----     ------
Net Charge-offs/(Recoveries)                                                  472       (198)
Provision/(Credit) Charged to Operations                                      417       (429)
                                                                             ----     ------
Balance, End of period                                                       $728       $783
                                                                             ====     ======
Net Charge-offs During the Year to Average Loans
 Outstanding During the Year                                                 0.55%     (0.23)%
                                                                             ====     ======
Allowance For Loan Losses to Total Losses                                    0.75%      1.00%
                                                                             ====     ======
</TABLE>





                                                                         Page 33
<PAGE>   34
        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.





                                                                         Page 34
<PAGE>   35
        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.





                                                                         Page 35
<PAGE>   36
         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):

<TABLE>
<CAPTION>
                                                                    Capital Needed
                                                           -----------------------------------
                                                                                To Be Well
                                                                             Capitalized Under
                                                              For Capital    Prompt Corrective
                                               Actual      Adequacy Purposes     Provisions
                                           --------------  ----------------- -----------------
                                           Amount   Ratio   Amount    Ratio   Amount    Ratio
                                           ------   -----  -------   ------- --------  -------
<S>                                        <C>      <C>    <C>       <C>     <C>       <C>
As of December 31, 1996
      Total capital to risk-weighted asset $8,568     8.2%   $8,329    8.0%  $10,411    10.0%
      Tier 1 capital to risk-weighted asse  7,840     7.5%    4,165    4.0%    6,247     6.0%
      Tier 1 capital to average assets      7,840     6.5%    4,832    4.0%    6,040     5.0%

As of December 31, 1995
      Total capital to risk-weighted asset  8,518    10.2%    6,681    8.0%    8,351    10.0%
      Tier 1 capital to risk-weighted asse  7,735     9.3%    3,327    4.0%    4,990     6.0%
      Tier 1 capital to average assets      7,735     7.3%    4,238    4.0%    5,298     5.0%
</TABLE>


        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.





                                                                         Page 36
<PAGE>   37
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Index to Consolidated Financial Statements and Financial Statement
Schedules covered by Independent Auditors' Report.

<TABLE>
<CAPTION>
                                                                 Page Reference
<S>                                                                         <C>
Independent Auditors' Report                                                 39

Consolidated Balance Sheets
December 31, 1996 and 1995                                                   40

Consolidated Statements of Income
For the Years Ended December 31, 1996, 1995 and 1994                         41

Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994                         42

Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994                         43

Notes to Consolidated Financial Statements                                   45
</TABLE>

        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.





                                                                         Page 37
<PAGE>   38
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                        DECEMBER 31, 1996, 1995 AND 1994

                                    CONTENTS

<TABLE>
<S>                                                                        <C>
Independent Auditors' Report  . . . . . . . . . . . . . . . . . . . . . . . 39


Financial Statements

  Consolidated Balance Sheets
  December 31, 1996 and 1995  . . . . . . . . . . . . . . . . . . . . . . . 40

  Consolidated Statements of Income
  For the Years Ended December 31, 1996, 1995 and 1994  . . . . . . . . . . 41

  Consolidated Statements of Changes in Stockholders' Equity
  For the Years Ended December 31, 1996, 1995 and 1994  . . . . . . . . . . 42

  Consolidated Statements of Cash Flows
  For the Years Ended December 31, 1996, 1995 and 1994  . . . . . . . . . . 43


Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . 45
</TABLE>





                                                                         Page 38
<PAGE>   39
                          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





                                                                         Page 39
<PAGE>   40
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995

                           Assets
<TABLE>
<CAPTION>
                                                                  1996          1995
                                                              ------------  ------------ 
<S>                                                           <C>           <C>
Cash and due from banks (minimum Federal Reserve
  Balance at December 31, 1996 was $625,000)                    $7,619,307    $8,093,749
Federal funds sold                                                             1,925,000
                                                              ------------  ------------ 
                      Total Cash and Cash Equivalents            7,619,307    10,018,749
                                                              ------------  ------------ 
Interest-bearing deposits in other financial institutions          396,000       792,000
Investment securities (Notes #1C and #2)
      Available-for-sale                                         5,899,729    13,431,518
Loans, net of unearned income (Notes #1D and #3)                97,276,964    77,482,539
Direct lease financing (Notes #1F and #4)                          188,489       588,865
            Less:  Reserve for probable loan and lease
                     losses (Notes 1E and #5)                     (727,667)     (783,466)
                                                              ------------  ------------ 
                                                                96,737,786    77,287,938
Bank premises and equipment (Notes #1G and #7)                   6,439,982     3,703,294
Accrued interest                                                   403,126       541,975
Cash surrender value of life insurance                             845,556       741,834
Other real estate owned (Notes #1K, #19 and #20)                   710,205       608,694
Other assets                                                       471,995       433,131
                                                              ------------  ------------ 
                      Total Assets                            $119,523,686  $107,559,133
                                                              ============  ============
            Liabilities and Stockholders' Equity
Liabilities
      Deposits
          Demand deposits                                       25,946,157    25,691,559
          Savings and NOW deposits                              24,269,489    26,537,492
          Money market deposits                                 13,819,261    16,295,843
          Time deposits in denominations of $100,000 or more     9,425,758     8,932,511
          Other time deposits                                   33,142,124    20,957,042
                                                              ------------  ------------ 
                                                               106,602,789    98,414,447
      Federal funds purchased                                    3,700,000
      Accrued employee salary and benefits                         466,226       443,013
      Accrued interest and other liabilities                       903,259       948,959
                                                              ------------  ------------ 
                      Total Liabilities                        111,672,274    99,806,419
                                                              ------------  ------------ 
Stockholders' Equity
      Contributed capital
          Common stock - authorized 15,000,000 shares, no par
            value, issued and outstanding 1,862,643 shares in
            1996 and 1995                                        2,106,258     2,106,258
      Additional paid-in capital                                 3,306,684     3,306,684
      Retained earnings                                          2,433,463     2,327,885
      Valuation allowance for investments                            5,007        11,887
                                                              ------------  ------------ 
                      Total Stockholders' Equity                 7,851,412     7,752,714
                                                              ------------  ------------ 
                      Total Liabilities and Stockholders'
                        Equity                                $119,523,686  $107,559,133
                                                              ============  ============
</TABLE>




The accompanying notes are an integral part of these financial statements.

                                                                   Page 40 
<PAGE>   41
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF INCOME
                FOR THE YEARS ENDED DECEMBER 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                   1996         1995         1994
                                                                ----------   ----------   ----------
<S>                                                             <C>          <C>          <C>
INTEREST INCOME
      Interest and fees on loans (Note #1D)                     $8,136,925   $7,470,066   $7,511,170
      Interest on Investment Securities (Note #1C)
          Obligations of U.S. Government Agencies and 
            Corporatioms                                           620,061      745,436      662,282
          Obligations of State and Political Subdivisions                           271          465
      Interest on other securities                                   9,792        9,749        9,641
      Interest on deposits                                          34,777       36,022       11,235
      Interest on Federal funds sold                               178,734      232,159      112,145
      Direct lease financing income (Note #1F)                      30,858       75,160      165,594
                                                                ----------   ----------  -----------
                      Total Interest Income                      9,011,147    8,568,863    8,472,532
                                                                ----------   ----------  -----------
INTEREST EXPENSE
      Interest on savings deposits                                 221,431      258,963      378,918
      Interest on NOW and money market deposits                    529,933      573,804      856,661
      Interest on time deposits in denominations
       of $100,000 or more                                         352,970      334,410      212,361
      Interest on other time deposits                            1,754,823    1,225,710      457,673
      Interest on Federal funds purchased and other interest         1,677        6,701       13,391
                                                                ----------   ----------  -----------
                      Total Interest Expense                     2,860,834    2,399,588    1,919,004
                                                                ----------   ----------  -----------
                      Net Interest Income                        6,150,313    6,169,275    6,553,528
(PROVISION)/CREDIT FOR LOAN AND LEASE LOSSES -
 (Notes #1E and #5)                                               (416,900)     429,000   (1,440,000)
                                                                ----------   ----------  -----------
                      Net Interest Income After (Provision)/
                        Credit for Loan and Lease Losses         5,733,413    6,598,275    5,113,528
                                                                ----------   ----------  -----------
OTHER INCOME
      Fees and service charges, gain on sale of loans
        and loan servicing income (Note #12)                     1,750,110    2,447,100    2,824,731
      Sale of mortgage servicing rights (Note #18)                  22,375    1,488,789
      Sale of branch office (Note #22)                                           22,984
      Net gain (loss) on sale of investment securities               2,200       (8,237)     (29,051)
      Other income                                                  63,248       10,944       13,285
                                                                ----------   ----------  -----------
                      Total Other Income                         1,837,933    3,961,580    2,808,965
                                                                ----------   ----------  -----------
OTHER EXPENSES
      Salaries and employee benefits                             3,511,460    3,991,474    4,090,822
      Occupancy expense of premises                                813,515    1,253,892    1,209,886
      Furniture and equipment expense                              549,022      646,499      683,351
      Net loss on sale of other real estate owned                   63,992       39,463       39,286
      Other expenses (Note #12)                                  2,499,779    3,210,468    3,807,737
                                                                ----------   ----------  -----------
                      Total Other Expenses                       7,437,768    9,141,796    9,831,082
                                                                ----------   ----------  -----------
Income/(Loss) Before Income Taxes                                  133,578    1,418,059   (1,908,589)
Income Taxes (Notes #1J and #8)                                     28,000      584,254     (370,100)
                                                                ----------   ----------  -----------
Net Income/(Loss)                                                 $105,578     $833,805  $(1,538,489)
                                                                ==========   ==========  ===========
Net Income/(Loss) Per Share (Note #16)                               $0.06        $0.45       ($0.83)
                                                                ==========   ==========  ===========
</TABLE>



The accompanying notes are an integral part of these financial statements.




                                                                   Page 41 

<PAGE>   42
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CHANGES IN
                          STOCKHOLDERS' EQUITY FOR THE
                    YEARS ENDED DECEMBER 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                                                   Valuation
                                             Number of                 Additional                  Allowance
                                              Shares        Common      Paid-in      Retained         for
                                            Outstanding     Stock       Capital      Earnings     Investments
                                            -----------  -----------  -----------   -----------   -----------
<S>                                          <C>          <C>          <C>           <C>          <C>
BALANCE, January 1, 1994                     1,552,425   $ 2,106,258  $ 3,306,684   $ 3,033,363

      Unrealized loss on investment
       securities available-for-sale
       (net of tax)                                                                                $($47,672)


      Net loss for the year                                                          (1,538,489)
                                             ---------   -----------  -----------   -----------    ---------
BALANCE, December 31, 1994                   1,552,425     2,106,258    3,306,684     1,494,874      (47,672)

      Change in unrealized gain/(loss)
       on investment securities
       available-for-sale (net of tax)                                                                59,559

      Six-for-five stock split                 310,218

      Cash paid to shareholders in lieu
       of fractional shares on six-for-five
       stock split                                                                         (794)

      Net income for the year                                                           833,805
                                             ---------   -----------  -----------   -----------    ---------
BALANCE, December 31, 1995                   1,862,643     2,106,258    3,306,684     2,327,885       11,887

      Change in unrealized gain/(loss)
       on investment securities
       available-for-sale (net of tax)                                                               (6,880)

      Net income for the year                                                           105,578
                                             ---------   -----------  -----------   -----------    ---------
Balance, December 31, 1996                   1,862,643   $ 2,106,258  $ 3,306,684   $ 2,433,463    $   5,007
                                             =========   ===========  ===========   ===========    =========
</TABLE>




The accompanying notes are an integral part of these financial statements.




                                                                   Page 42
<PAGE>   43
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                  1996          1995          1994
                                                              -----------   -----------   -----------
<S>                                                           <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Interest and fees received                              $10,382,661    $7,543,620    $9,569,008
      Service fees and other income received                    1,835,733     3,944,375     2,838,016
      Financing revenue received under leases                      30,858        75,160       165,594
      Interest paid                                            (2,836,415)   (2,027,170)   (1,950,722)
      Cash paid to suppliers and employees                     (7,002,983)   (8,856,917)   (9,240,442)
      Income taxes paid                                           (18,044)      311,393       134,338
                                                              -----------   -----------   -----------
                      Net Cash Provided By Operating 
                        Activities                              2,391,810       990,461     1,515,792
                                                              -----------   -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES
      Proceeds from maturities of investment
       securities held-to-maturity                                            2,797,500     9,500,000
      Proceeds from maturities of investment securities,
       available-for-sale                                      13,085,000    10,055,000     6,000,000
      Proceeds from sales of investment securities,
       available-for-sale                                       5,011,954     1,000,000     8,955,590
      Purchase of investment securities held-to-maturity                                   (2,975,156)
      Purchase of investment securities available-for-sale    (10,578,602)  (18,948,067)   (9,866,130)
      Net (increase)/decrease in deposits in other
       financial institutions                                     396,000      (693,000)      390,000
      Recoveries on loans previously written off                  213,798       894,920       265,128
      Net loans made to customers and principal
        collections of loans                                  (22,353,294)    5,686,829    (4,229,284)
      Net decrease in leases to customers                         400,376       716,544     1,404,057
      Capital expenditures                                     (3,339,414)     (494,129)     (224,977)
      Proceeds from sale of property, plant and equipment          74,727        39,161         1,141
      Proceeds from sale of branch                                              200,000
      Proceeds from sale of OREO                                  409,861       434,337       143,334
                                                              -----------   -----------   -----------
                      Net Cash Provided By/(Used In)
                       Investing Activities                   (16,679,594)    1,689,095     9,363,703
                                                              -----------   -----------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES
      Net decrease in demand deposits, NOW accounts,
       savings accounts, and money market deposits             (4,489,987)   (9,132,818)  (13,562,350)
      Net increase in certificates of deposits                 12,678,329     8,962,786       960,723
      Net increase/(decrease) in federal funds purchased        3,700,000    (1,000,000)    1,000,000
      Cash paid in lieu of fractional shares                                       (794)
                                                              -----------   -----------   -----------
                      Net Cash Provided By/(Used In)
                       Financing Activities                    11,888,342    (1,170,826)  (11,601,627)
                                                              -----------   -----------   -----------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS           (2,399,442)    1,508,730      (722,132)

CASH AND CASH EQUIVALENTS, Beginning of year                   10,018,749     8,510,019     9,232,151
                                                              -----------   -----------   -----------
CASH AND CASH EQUIVALENTS, End of year                         $7,619,307   $10,018,749    $8,510,019
                                                              ===========   ===========   ===========
</TABLE>




The accompanying notes are an integral part of these statements.


                                                                   Page 43
<PAGE>   44
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                     1996          1995           1994
                                                                  ----------    ----------    -----------
<S>                                                               <C>           <C>            <C>
RECONCILIATION OF NET INCOME/(LOSS) TO
 NET CASH PROVIDED BY OPERATING ACTIVITIES
      Net Income/(Loss)                                             $105,578      $833,805    $(1,538,489)
                                                                  ----------    ----------    -----------
      Adjustments to Reconcile Net Income/(Loss)
       to Net Cash Provided by Operating Activities
          Depreciation and amortization                              503,187       249,933        482,375
          Provision/(credit) for probable credit losses              416,900      (429,000)     1,440,000
          Provision for possible OREO losses                          37,260        49,740        137,129
          (Gain)/loss on sale of equipment                            28,589          (260)         1,330
          Increase/(decrease) in taxes payable                        (5,044)      895,647       (235,762)
          Increase in other assets                                  (142,586)     (157,491)       (67,034)
          Increase/(decrease) in unearned loan fees                1,259,746      (654,365)     1,083,350
          (Increase)/decrease in interest receivable                 138,849       (53,809)       186,005
          Increase/(decrease) in interest payable                     24,419       372,418        (31,718)
          Decrease in accrued expense and other liabilities          (36,880)     (140,873)        (9,731)
          Gain on sale of branch                                                   (22,984)
          (Gain)/loss on sale of investment securities                (2,200)        8,237         29,051
          Loss on sale of OREO                                        63,992        39,463         39,286
                                                                  ----------    ----------    -----------
                      Total Adjustments                            2,286,232       156,656      3,054,281
                                                                  ----------    ----------    -----------
                       Net Cash Provided By Operating 
                         Activities                               $2,391,810      $990,461     $1,515,792
                                                                  ==========    ==========    ===========
SUPPLEMENTARY INFORMATION
      Change in valuation allowance for investment securities        ($6,880)      $59,559       ($47,672)
                                                                  ==========    ==========    ===========
      Book value of investment securities transferred
       from held-to-maturity to available-for-sale                        $0    $2,197,960             $0
                                                                  ==========    ==========    ===========
      Transfer of loans to real estate owned through
         foreclosure                                                $612,624      $284,000       $240,954
                                                                  ==========    ==========    ===========
</TABLE>





The accompanying notes are an integral part of these financial statements.





                                                                   Page 44
<PAGE>   45
                    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.





                                                                   Page 45 
<PAGE>   46
                    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.





                                                                   Page 46
<PAGE>   47
                    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.





                                                                   Page 47
<PAGE>   48
                    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:

<TABLE>
<CAPTION>
                                                        Gross       Gross
                                          Amortized   Unrealized  Unrealized
                                             Cost       Gains       Losses   Fair Value
                                         ----------   ----------  ---------- ----------
<S>                                      <C>            <C>          <C>     <C>
U.S. Treasury securities                 $5,459,248     $8,637               $5,467,885
Other                                       431,844                             431,844
                                         ----------     ------       --      ----------
                      Total              $5,891,092     $8,637       $0      $5,899,729
                                         ==========     ======       ==      ==========
</TABLE>



The amortized cost and fair values of investment securities available-for-sale
at December 31, 1995 were:

<TABLE>
<CAPTION>
                                                         Gross      Gross
                                         Amortized    Unrealized  Unrealized
                                           Cost          Gains      Losses   Fair Value
                                         ----------   ----------  ---------- ----------
<S>                                      <C>            <C>          <C>     <C>
U.S. Treasury securities                 $6,003,641     $8,546               $6,012,187
Obligations of other U.S. Government                    11,951
 agencies and corporations                7,225,536                           7,237,487
Other securities                            181,844                             181,844
                                         ----------    -------       --     -----------
                      Total             $13,411,021    $20,497       $0     $13,431,518
                                         ==========    =======       ==     ===========
</TABLE>


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.

<TABLE>
<CAPTION>
                                                                      Securities
                                                                  Available-for-Sale
                                                              --------------------------
                                                              Amortized
                                                                Cost          Fair Value
                                                              ----------      ----------
<S>                                                           <C>             <C>
Due in one year or less                                       $2,987,507      $2,987,572
Due after one year but less than five years                    2,471,741       2,480,313
                                                              ----------      ----------
                                                               5,459,248       5,467,885
Other securities                                                 431,844         431,844
                                                              ----------      ----------
                             Total Securities                 $5,891,092      $5,899,729
                                                              ==========      ==========
</TABLE>

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.





                                                                   Page 48
<PAGE>   49
                    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:

<TABLE>
<CAPTION>
                                                                   1996          1995
                                                               -----------   ----------- 
<S>                                                            <C>           <C>
Commercial, financial and agricultural                         $ 9,737,235   $ 9,256,985
Real Estate - construction                                         830,238       680,085
Real Estate - mortgage
      Commercial                                                34,628,900    22,299,858
      Residential                                                6,363,664     6,580,811
Installment loans to individuals                                49,999,727    41,723,355
All other loans (including overdrafts)                             104,985        69,477
                                                               -----------   ----------- 
                                                               101,664,749    80,610,571
Unearned income on installment loans                            (3,924,182)   (2,796,117)
Deferred loan fees                                                (463,603)     (331,895)
                                                               -----------   ----------- 
                      Loans, Net of Unearned Income            $97,276,964   $77,482,559
                                                               ===========   =========== 
</TABLE>

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:

<TABLE>
<CAPTION>
                                                                    1996          1995
                                                                  --------      --------
<S>                                                               <C>           <C>
Recorded investment in impaired loans                             $434,000      $564,000
Related allowance for loan losses                                   66,000        67,000
Average recorded investment in impaired loans                      508,000       567,000
Interest income recognized for cash payments                         6,000         5,000
Cash receipts applied to reduce principal balance                   11,000         7,000
</TABLE>


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.





                                                                   Page 49
<PAGE>   50
                    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:

<TABLE>
<CAPTION>
                                                                       1996       1995
                                                                     --------   --------
<S>                                                                  <C>        <C>
Lease payments receivable                                            $204,201   $649,774
Unearned income                                                       (15,712)   (60,909)
                                                                     --------   --------
                      Total Direct Lease Financing                   $188,489   $588,865
                                                                     ========   ========
</TABLE>

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:

<TABLE>
<CAPTION>
  Year Ending
  December 31,
           <S>                                                    <C>
           1997                                                    $163,652
           1998                                                      24,837
                                                                   --------
                                                                   $188,489
                                                                   ========
</TABLE>

NOTE #5 - RESERVE FOR PROBABLE LOAN AND LEASE LOSSES

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

<TABLE>
<CAPTION>
                                                                 1996            1995
                                                              ----------      ----------
<S>                                                           <C>             <C>
Outstanding Balance, Beginning of year                        $1,455,884      $1,936,581
Credit granted, including renewals                               581,404         448,007
Repayments                                                      (402,860)       (928,704)
                                                              ----------      ----------
Outstanding Balance, End of year                              $1,634,428      $1,455,884
                                                              ==========      ==========
</TABLE>


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:

<TABLE>
<CAPTION>
                                                        1996        1995        1994
                                                      --------  ----------   ----------
<S>                                                   <C>      <C>           <C>
Balance, Beginning of year                            $783,466  $1,014,433   $1,307,105
Recoveries on loans previously charged off             213,798     894,920      265,128
Loans charged off                                     (686,497)   (696,887)  (1,997,800)
Provision/(credit) charged to operating expense        416,900    (429,000)   1,440,000
                                                      --------  ----------   ----------
Balance, End of year                                  $727,667    $783,466   $1,014,433
                                                      ========  ==========   ==========   
</TABLE>





                                                                   Page 50
<PAGE>   51
                    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:

<TABLE>
<CAPTION>
                                                                    1996         1995
                                                                 ----------   ----------
<S>                                                              <C>          <C>
Building                                                         $3,860,185   $1,571,635
Furniture and equipment                                           3,398,717    3,245,193
Leasehold improvements                                            1,133,417    1,191,835
                                                                 ----------   ----------
                                                                  8,392,319    6,008,663
      Less:  Accumulated depreciation and amortization           (3,237,337)  (2,965,369)
Land                                                              1,285,000      660,000
                                                                 ----------   ----------
                      Total                                      $6,439,982   $3,703,294
                                                                 ==========   ==========
</TABLE>


NOTE #8 - INCOME TAXES

<TABLE>
<CAPTION>
                                                              Year Ending December 31,
                                                          -------------------------------
                                                             1996       1995      1994
                                                          ---------  ---------  ---------
<S>                                                       <C>        <C>        <C>
Tax provision/(credit) applicable to
 income before income taxes                               $28,000    $584,254   ($370,100)
                                                          =======    ========   =========
Federal Income Tax
      Deferred                                             15,000     416,752    (372,500)
                                                          -------    --------   ---------  
State Franchise Tax
      Current                                              10,800       2,400       2,400
      Deferred                                              2,200     165,102
                                                          -------    --------   ---------  
                      Total State Franchise Tax            13,000     167,502       2,400
                                                          -------    --------   ---------  
                      Total Income Taxes                  $28,000    $584,254   $(370,100)
                                                          =======    ========   =========
</TABLE>





                                                                   Page 51
<PAGE>   52
                    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:

<TABLE>
<CAPTION>
                                           1996               1995               1994
                                     ---------------    ----------------    ---------------
                                     Federal   State    Federal    State    Federal   State
                                     -------   -----    -------    -----    -------   -----
<S>                                  <C>       <C>     <C>        <C>      <C>         <C>
Tax Effect Of
Revenue and expenses
 reported on a different basis
 for tax purposes                    $21,160   $4,600  $253,602  $118,340  ($495,746)
Depreciation computed
 differently on tax returns than
 for financial statements              7,500      300     2,740    (6,551)    (1,670)
Deferred compensation plan           (19,900)  (4,500)   14,550     4,836     (9,344)
Provision for loan loss deduction
 in tax return over amount
 charged for financial
 statement purposes                    6,240    1,800   145,860    48,477    134,260
                                     -------   ------  --------  --------  ---------    --
                      Total          $15,000   $2,200  $416,752  $165,102  ($372,500)   $0
                                     =======   ======  ========  ========  =========    ==
</TABLE>


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:

<TABLE>
<CAPTION>
                                       1996                  1995                   1994
                                 ------------------    ------------------     -----------------
                                           Percent               Percent                Percent
                                          of Pretax             of Pretax              of Pretax
                                 Amount    Income      Amount    Income       Amount    Income
                                 ------   ---------    ------   ---------     ------   ---------
<S>                             <C>          <C>       <C>           <C>       <C>        <C>
Federal rate                     $45,416      34.0    $482,140      34.0    ($330,477)    (17.4)
Changes due to income tax,
  net of Federal tax benefit       8,580       6.4     110,551       7.8        1,584       0.1
Exempt interest                 ($28,410)    (21.2)    (21,800)     (1.5)     (54,200)     (2.8)
Other                              2,414       1.8      13,363       0.9       12,993       0.7
                                --------     -----    --------      ----    ---------     -----
                      Total      $28,000      21.0    $584,254      41.2    ($370,100)    (19.4)
                                ========     =====    ========      ====    =========     =====
</TABLE>





                                                                   Page 52 
<PAGE>   53
                    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.

<TABLE>
<CAPTION>
                                                                       1996        1995
                                        
<S>                                                                 <C>         <C>
Deferred Tax Assets
      Real estate owned writedowns                                  $  14,000   $  23,000
      Deferred compensation                                           110,000     109,000
      Deferred fees                                                   130,000     129,000
      Non-deductible reserves                                          18,000      46,000
      Net losses                                                      198,000     160,000
      Other                                                             5,000       8,000
                                                                    ---------   ---------
                                                                      475,000     475,000
                     Less:  Valuation allowance(1)                   (475,000)   (475,000)
                                                                    ---------   ---------  
                                                                            0           0
Deferred Tax Liabilities
      Reserve for loan losses                                         (48,000)    (28,000)
      Fixed assets                                                   (135,000)   (162,000)
                                                                    ---------   ---------  
                      Net Deferred Tax Liability                    $(183,000)  $(190,000)
                                                                    =========   =========
</TABLE>



(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.

<TABLE>
<CAPTION>
  Year Ending
  December 31,
      <S>    <C>                                                                <C>
      1997                                                                      $168,902
      1998                                                                        37,090
      1999                                                                        23,390
      2000                                                                        17,543
                                                                                -------- 
             Total                                                              $246,925
                                                                                ========
</TABLE>


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.





                                                                   Page 53 
<PAGE>   54
                    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.





                                                                   Page 54
<PAGE>   55
                    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:

<TABLE>
<CAPTION>
                                                  1996                            1995
                                     ------------------------------- -------------------------------
                                       Number of Shares                Number of Shares    
                                     --------------------- Weighted- --------------------- Weighted-
                                     Available              Average  Available              Average
                                        For                Exercise     For                Exercise
                                     Granting  Outstanding   Price   Granting  Outstanding   Price
                                     --------- ----------- --------- --------- ----------- ---------
<S>                                    <C>         <C>        <C>     <C>          <C>        <C>
Outstanding at beginning of year       50,036      76,416     $2.89    46,404      80,048     $2.92
Exercised
Cancelled                               8,280      (8,280)    $2.92     9,632      (9,632)    $2.92
Granted                                (5,000)      5,000     $3.13    (6,000)      6,000     $2.60
                                       ------      ------              ------      ------
Outstanding at end of year             53,316      73,136     $2.91    50,036      76,416     $2.89
                                       ======      ======              ======      ======  
Options exercisable at year-end                    73,136                          76,416
Weighted-average fair value of
   Options granted during the year                  $1.12                           $0.86
</TABLE>



<TABLE>
<CAPTION>
                                                           1994
                                               --------------------------------
                                                  Number of Shares
                                               ---------------------  Weighted-
                                               Available               Average
                                                 For                  Exercise
                                               Granting  Outstanding    Price
                                               --------- -----------  ---------
<S>                                            <C>          <C>          <C>
Outstanding at beginning of year                51,684       74,768      $5.87
Exercised
Cancelled                                       74,768      (74,768)     $5.87
Granted                                        (80,048)      80,048      $2.92
                                               -------      -------
Outstanding at end of year                      46,404       80,048      $2.92
                                               =======      =======
Options exercisable at year-end                              80,048
Weighted-average fair value of
   Options granted during the year                            $1.13
</TABLE>


The following table summarizes information about incentive stock options
outstanding at December  31, 1996:

<TABLE>
<CAPTION>
               Options Outstanding and Exercisable
--------------------------------------------------------------------
                    Number      Weighted-Average
   Range of      Outstanding       Remaining        Weighted-Average
Exercise Prices  at 12/31/96    Contractual Life     Exercise Price
---------------  -----------    ----------------    ----------------
<S>                 <C>               <C>               <C>
$2.60 to $3.13      73,136             7                 $2.91
</TABLE>





                                                                   Page 55
<PAGE>   56
                    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:

<TABLE>
<CAPTION>
                                                         1996        1995        1994
                                                     ----------  ----------  ----------
<S>                                                  <C>         <C>         <C>
Fees and Other Servicing Income
      Fees and service charges                       $1,750,110  $2,286,071  $2,283,054
      Gain on sale of loans                                          10,614      91,023
      Loan servicing                                                150,415     450,654
                                                     ----------  ----------  ----------
                      Total                          $1,750,110  $2,447,100  $2,824,731
                                                     ==========  ==========  ==========
Other Expenses
      Data processing                                  $754,617    $826,520    $875,477
      Marketing expenses                                307,233     326,605     414,098
      Professional expenses                             421,209     561,825     719,950
      Office supplies, postage and telephone            363,892     431,034     463,665
      Insurance and assessment expense                  157,931     336,096     418,795
      Loan related expense                              147,541     359,095     582,902
      Administrative expense                             85,316      99,767     129,828
      Other                                             262,040     269,526     203,022
                                                     ----------  ----------  ----------
                      Total                          $2,499,779  $3,210,468  $3,807,737
                                                     ==========  ==========  ==========
</TABLE>



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.





                                                                   Page 56
<PAGE>   57
                    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.





                                                                   Page 57
<PAGE>   58
                    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):

<TABLE>
<CAPTION>
                                                                     Capital Needed
                                                          ------------------------------------
                                                                                To Be Well
                                                                             Capitalized Under
                                                             For Capital     Prompt Corrective
                                              Actual      Adequacy Purposes     Provisions
                                          -------------   -----------------  -----------------  
                                          Amount  Ratio    Amount    Ratio    Amount    Ratio
                                          ------  -----   --------  -------  --------  -------
<S>                                       <C>     <C>      <C>       <C>   <C>       <C>
As of December 31, 1996
Total capital to risk-weighted assets     $8,568    8.2%   $8,329    8.0%    $10,411    10.0%
Tier 1 capital to risk-weighted assets     7,840    7.5%    4,165    4.0%      6,247     6.0%
Tier 1 capital to average assets           7,840    6.5%    4,832    4.0%      6,040     5.0%

As of December 31, 1995
Total capital to risk-weighted assets      8,518   10.2%    6,681    8.0%      8,351    10.0%
Tier 1 capital to risk-weighted assets     7,735    9.3%    3,327    4.0%      4,990     6.0%
Tier 1 capital to average assets           7,735    7.3%    4,238    4.0%      5,298     5.0%
</TABLE>


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:

<TABLE>
<CAPTION>
                                             1996        1995
                                           --------    -------- 
<S>                                        <C>         <C>
Balance, Beginning of year                 $608,694    $848,234
Additions                                   612,624     284,000
Sales                                      (473,853)   (578,670)
Valuation adjustments and other             (37,260)     55,130
                                           --------    -------- 
Balance, End of year                       $710,205    $608,694
                                           ========    ========
</TABLE>

The balances at December 31, 1996 and 1995 are shown net of reserves.





                                                                   Page 58
<PAGE>   59
                    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:

<TABLE>
<CAPTION>
                                                           1996       1995        1994
                                                         -------    --------     -------
<S>                                                      <C>        <C>          <C>
Balance, Beginning of year                               $38,133     $93,263      $1,300
Provision charged to other expense                        37,260      49,740     137,129
Charge-offs and other reductions                         (23,920)   (104,870)    (45,166)
                                                         -------    --------     -------
Balance, End of year                                     $51,473     $38,133     $93,263
                                                         =======    ========     =======
</TABLE>


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.

<TABLE>
<CAPTION>
                                                                Carrying
                                                                 Amount      Fair Value
<S>                                                            <C>          <C>
Assets
      Cash and cash equivalents                                $7,619,307    $7,619,307
      Interest bearing deposits                                   396,000       396,000
      Investment securities                                     5,899,729     5,899,729
      Loans receivable                                        101,125,571   100,941,571
      Accrued interest receivable                                 403,126       403,126

Liabilities
      Non-interest bearing deposits                            25,946,157    25,946,157
      Interest bearing deposits                                80,656,632    80,574,632
      Federal funds purchased                                   3,700,000     3,700,000
      Accrued interest payable                                    665,302       665,302
</TABLE>

<TABLE>
<CAPTION>
                                                                Notional    Cost to Cede
                                                                 Amount      or Assume
                                                                --------    ------------
<S>                                                               <C>           <C>
Off-Balance Sheet Instruments
      Commitments to extend credit and
        standby letters of credit                              $5,893,000      $58,930
</TABLE>





                                                                   Page 59
<PAGE>   60
                    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.





                                                                   Page 60
<PAGE>   61
                    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:

<TABLE>
    <S>                                          <C>
    1997                                         $37,105,598
    1998                                           5,185,011
    1999                                             277,273
                                                 -----------
                                                 $42,567,882
                                                 ===========
</TABLE>


NOTE #24 - BORROWINGS

The Bank has borrowing lines with three correspondent banks totaling $3.7
million and a secured line at the Federal Reserve.





                                                                   Page 61
<PAGE>   62
                    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

<TABLE>
<CAPTION>
                                                                    1996        1995        1994
<S>                                                             <C>                     <C>
Assets
      Cash in Vineyard National Bank                                $7,335      $7,177       $7,805
      Prepaid expenses                                                 570         670          517
      Investment in subsidiary                                   7,844,695   7,746,154    6,852,956
                                                                ----------  ----------  -----------
                      Total Assets                              $7,852,000  $7,754,001   $6,861,278
                                                                ==========  ==========  ===========
Liabilities
      Due to shareholders in lieu of
       fractional shares on stock splits                             1,188       1,287        1,134
                                                                ----------  ----------  -----------
Stockholders' Equity
      Common stock                                               2,106,258   2,106,258    2,106,258
      Additional paid-in capital                                 3,306,684   3,306,684    3,306,684
      Retained earnings                                          2,438,470   2,339,772    1,447,202
                                                                ----------  ----------  -----------
                   Total Stockholders' Equity                    7,851,412   7,752,714    6,860,144
                                                                ----------  ----------  -----------
                   Total Liabilities and Stockholders' Equity   $7,852,600  $7,754,001   $6,861,278
                                                                ==========  ==========  ===========
                   STATEMENTS OF INCOME

INCOME
      Equity in income/(loss) of subsidiary                       $105,420    $833,639  $(1,538,664)
      Interest                                                         958         966          975
                                                                ----------  ----------  -----------
                                                                   106,378     834,605   (1,537,689)
                                                                ----------  ----------  -----------
INCOME TAXES                                                           800         800          800
                                                                ----------  ----------  -----------
                      Net Income/(Loss)                           $105,578    $833,805  $(1,538,489)
                                                                ==========  ==========  ===========
</TABLE>





                                                                   Page 62
<PAGE>   63
                    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

<TABLE>
<CAPTION>
                                                        1996         1995         1994
                                                        ----         ----         ----
<S>                                                     <C>          <C>          <C>
INCREASE IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
      Interest received                                  $958         $966         $975
      Income taxes paid                                  (800)        (800)        (800)
                                                     --------     --------    ---------
                      Net Cash Provided
                       By Operating Activities            158          166          175
                                                     --------     --------    ---------


CASH FLOWS FROM FINANCING ACTIVITIES
      Cash paid for fractional shares                                 (794)
                                                     --------     --------    ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS                 158         (628)         175

CASH, Beginning of year                                 7,177        7,805        7,630
                                                     --------     --------    ---------
CASH, End of year                                      $7,335       $7,177       $7,805
                                                     ========     ========    =========   
RECONCILIATION OF NET INCOME/(LOSS) TO NET CASH
 PROVIDED/(USED) BY OPERATING ACTIVITIES
      Net Income/(Loss)                               105,578      833,805   (1,538,489)
      Adjustments to Reconcile Net Income/(Loss)
       to Net Cash Provided By Operating Activities
          (Increase)/decrease in other assets              99         (153)          18
                                                     --------     --------    ---------
          Undistributed (earnings)/loss of subsidia  (105,420)    (833,639)   1,538,664
          Increase/(decrease) in other liabilities        (99)         153          (18)
                                                     --------     --------    ---------
                      Net Cash Provided
                       By Operating Activities           $158         $166         $175
                                                     ========     ========    =========
</TABLE>





                                                                   Page 63
<PAGE>   64



SELECTED QUARTERLY FINANCIAL DATA

        The selected quarterly data for 1996 is based on the unaudited
financial statements of the Company as presented by management.

<TABLE>
<CAPTION>
                                                      Quarter Ended 1996
                                    ------------------------------------------------------    
                                      March 31      June 30     September 30   December 31
                                    ------------  ------------  ------------  ------------
<S>                                <C>            <C>            <C>          <C>
Net Interest Income                   $1,442,678    $1,516,280    $1,609,169    $1,582,186
Provision for Loan and Lease Losses                   (116,300)     (217,600)      (83,000)
Other Income                             446,371       444,770       483,576       463,216
Other Expenses                        (1,982,582)   (1,967,375)   (1,770,627)   (1,717,184)
                                    ------------  ------------  ------------  ------------
Income/(Loss) Before Taxes               (93,533)     (122,625)      104,518       245,218
Income Taxes                                            (1,600)                    (26,400)
                                    ------------  ------------  ------------  ------------
Net Income/(Loss)                       ($93,533)    ($124,225)     $104,518      $218,818
                                    ============  ============  ============  ============ 
Earnings/(Loss) Per Share
 of Common Stock
      Net Income/(Loss)                   ($0.05)       ($0.07)        $0.06         $0.12
                                    ============  ============  ============  ============ 
Number of Shares Used
 in Per Share Calculation              1,862,643     1,862,643     1,862,643     1,862,643

Balance Sheet Data
      Assets                        $111,697,167  $117,761,821  $119,454,829  $119,523,686
                                    ============  ============  ============  ============ 
      Deposits                      $102,920,152  $109,126,820  $111,826,825  $106,602,789
                                    ============  ============  ============  ============ 
      Loans and Leases/(Net)         $79,889,798   $85,942,038   $92,754,609   $96,737,786
                                    ============  ============  ============  ============ 
      Stockholders' Equity            $7,653,294    $7,508,043    $7,628,004    $7,851,412
                                    ============  ============  ============  ============ 
</TABLE>





                                                                   Page 64
<PAGE>   65



        The selected quarterly data for 1995 is based on the unaudited
financial statements of the Company as presented by management.

<TABLE>
<CAPTION>
                                                    Quarter Ended 1995
                                    ------------------------------------------------------
                                       March 31      June 30    September 30  December 31
                                    ------------  ------------  ------------  ------------
<S>                                <C>             <C>           <C>           <C>
Net Interest Income                   $1,603,894    $1,495,232    $1,549,014    $1,521,135
Provision for Loan and Lease Losses                                  300,000       129,000
Other Income                             677,415     1,994,645       632,289       617,768
Other Expenses                        (2,270,509)   (2,409,878)   (2,277,470)   (2,144,476)

Income/(Loss) Before Taxes                10,800     1,079,999       203,833       123,427
Income Taxes                              (1,600)     (445,400)       43,746      (181,000)
                                    ------------  ------------  ------------  ------------
Net Income/(Loss)                         $9,200      $634,599      $247,579      $(57,573)
                                    ============  ============  ============  ============ 
Earnings/(Loss) Per Share
 of Common Stock 1
      Net Income/(Loss)                    $0.49         $0.34         $0.13        $(0.03)
                                    ------------  ------------  ------------  ------------
Number of Shares Used
 in Per Share Calculation 1            1,862,643     1,862,643     1,862,643     1,862,643
Stock Splits                                                        6 for5

Balance Sheet Data
      Assets                        $109,607,887  $112,914,128  $113,817,164  $107,559,133
                                    ============  ============  ============  ============ 
      Deposits                      $102,022,637  $104,587,762  $105,095,300   $98,414,447
                                    ============  ============  ============  ============ 
      Loans and Leases/(Net)         $77,770,173   $76,052,523   $79,204,435   $77,287,938
                                    ============  ============  ============  ============ 
      Stockholders' Equity            $6,885,581    $7,531,617    $7,783,165    $7,752,714
                                    ============  ============  ============  ============ 
</TABLE>


1 Retroactively adjusted for stock splits.


ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.





                                                                   Page 65
<PAGE>   66



                                    PART III


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.  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.  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.  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.





                                                                   Page 66
<PAGE>   67



                                    PART IV


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.





                                                                   Page 67 
<PAGE>   68



                                   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.


<TABLE>
<S>                                                 <C>
                                                    President, Chief Executive Officer (Principal
/s/ STEVEN R. SENSENBACH                            Executive Officer) and Director





                                                    Executive Vice President, Chief Financial
/s/ SOULE SENSENBACH                                Officer, (Principal Financial and Accounting
                                                    Officer)





/s/ LESTER STROH, M.D.                              Chairman of the Board of Directors





/s/ FRANK S. ALVAREZ                                Director





/s/ ROLAND O. NORIEGA                               Director





/s/ JOEL H. RAVITZ                                  Director





/s/ JODIE SMITH                                     Director





/s/ RENNY V. THOMAS                                 Director
</TABLE>





                                                                   Page 68
<PAGE>   69



                               INDEX TO EXHIBITS



<TABLE>
<CAPTION>
 Exhibit                                 Description                                   Sequentially
  Number                                                                              Numbered Page
    <S>     <C>                                                                           <C>
      3.1   Registrant's Articles of Incorporation                                        (R-1)

      3.2   Registrant's Bylaws                                                           (R-1)

      3.3   Plan of Reorganization and Agreement of Merger                                (R-1)

      4.0   Specimen Common Stock Certificate of Registrant                               (R-1)

     10.1   Incentive Stock Option Plan for Vineyard National Bank 1981                   (R-1)

     10.2   Incentive Stock Option Plan for Vineyard National Bank 1987                   (R-1)

     10.3   Joinder Agreement for Employee to Participate in Vineyard National            (R-1)
            Bancorp 1987 Incentive Stock Option Plan

     10.4   Vineyard National Bank Deferred Compensation Plan                             (R-1)

     10.5   Employment Agreement Between Vineyard National Bank and Steven R.             (R-1)
            Sensenbach

     10.6   1988 Extension Agreement for Employment Agreement Between Vineyard            (R-1)
            National Bank and Steven R. Sensenbach

     10.7   Lease Agreement Between Vineyard National Bank and Landlord Regarding         (R-1)
            Rancho Cucamonga Office 1987

     10.8   Lease Agreement Between Vineyard National Bank and Landlord Regarding         (R-1)
            Chino Office 1988

     10.9   Lease Agreement Between Vineyard National Bank and Landlord Regarding         (R-1)
            Diamond Bar Office 1987

    10.10   Addendum to Lease Agreement Ref 10.9                                          (R-1)

    10.11   Addendum to Lease Agreements Refs 10.9 and 10.10                              (R-1)

    10.12   Lease Agreement Regarding Lake Arrowhead Office 1988                          (R-1)

    10.13   Estoppel Certificate to Lease Agreement Ref 10.12 Between Vineyard            (R-1)
            National Bank and Landlord 1988

    10.14   Lease Agreement Between Vineyard National Bank and Landlord Regarding         (R-1)
            Additional Rancho Cucamonga Office Space 1988

    10.15   Buy/Sell Agreement Between Vineyard National Bank and Wells Fargo             (R-1)
            1984

    10.16   Buy/Sell Agreement Between Vineyard National Bank and Arrowhead               (R-1)
            Pacific Savings Bank 1988

    10.17   Change in Terms and Conditions Between Vineyard National Bank and             (R-1)
            Landlord Regarding Rancho Cucamonga Office 1989

    10.18   Lease Agreement Between Vineyard National Bank and Landlord Regarding         (R-1)
            Victorville Office 1989

    10.19   Lease Agreement Between Vineyard National Bank and Landlord Regarding         (R-2)
            Additional Victorville Office Space 1989

       21   Subsidiaries of the Registrant                                                (R-2)

       23   Consent of Vavrinek, Trine, Day & Company

       27   Data Schedule
</TABLE>

(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.





                                                                   Page 69