<PAGE>

                             SECURITIES AND EXCHANGE COMISSION
                                   WASHINGTON, D.C. 20549

                                        FORM 10-QSB


                         QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                           OF THE SECURITIES EXCHANGE ACT OF 1934
                       For the quarterly period ended March 31, 1999



                                VALLEY NATIONAL CORPORATION
                       (Name of small business issuer in its charter)


                              IRS Employer ID. NO. 33-0825336


                     1234 EAST MAIN STREET, EL CAJON, CALIFORNIA 92021
                          (Address of principal executive offices)


               Issuer's telephone number, including area code: (619) 593-3330


Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months and (2) has
been subject to such filing requirements for the past 90 days. Yes / X / No /  /


As of May 10, 1999, there were 2,650,462 shares of Common Stock ($0.0001 par
value) outstanding.


Transitional Small Business Disclosure Format: Yes /   /  No / X /


<PAGE>


                           VALLEY NATIONAL CORPORATION

                                 Balance Sheets

                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                            March 31,            December 31,
Assets                                                                         1999                  1998
                                                                        -------------------   -------------------

<S>                                                                   <C>                   <C>                  
Cash and due from banks                                               $      12,820,000     $      11,704,000    
Federal funds sold                                                            9,240,000            11,890,000    
Interest-earning deposits                                                     6,399,000             6,396,000    
Securities:
     Available-for-sale                                                      23,625,000            23,609,000    
     Held-to-maturity                                                        23,136,000            22,953,000    
Federal Reserve Bank stock                                                      445,000               445,000    
Loans, net                                                                  154,360,000           149,708,000    
Premises and equipment, net                                                   4,878,000             4,978,000    
Other real estate owned, net                                                  1,065,000             1,103,000    
Accrued interest receivable                                                   1,582,000             1,617,000    
Other assets                                                                  3,282,000             2,397,000    
                                                                       -------------------   -------------------
                 Total assets                                          $    240,832,000      $    236,800,000    
                                                                       -------------------   -------------------
                                                                       -------------------   -------------------

Liabilities And Stockholders' Equity

Deposits:
     Non-interest bearing                                              $      47,320,000     $      44,015,000    
     Savings                                                                 114,918,000           115,940,000    
     Time deposits under $100,000                                             37,979,000            37,891,000    
     Time deposits of $100,000 or more                                        19,341,000            18,547,000    
                                                                       -------------------   -------------------
                 Total deposits                                              219,558,000           216,393,000    

Long-term debt                                                                    44,000                52,000    
Accrued expenses and other liabilities                                         1,341,000               945,000    
                                                                       -------------------   -------------------
                 Total liabilities                                           220,943,000           217,390,000    
                                                                       -------------------   -------------------

Stockholders' equity:
     Common stock, $.0001 par value; authorized 10,000,000 shares;
        issued and outstanding 2,650,000 and 2,646,000 shares as of
        March 31, 1999 and December 31, 1998, respectively                    14,893,000            14,874,000    
     Accumulated other comprehensive income - unrealized gains on
        securities available-for-sale, net                                        25,000               142,000    
     Retained earnings                                                         4,971,000             4,394,000    
                                                                       -------------------   -------------------
                 Total stockholders' equity                                   19,889,000            19,410,000    
                                                                       -------------------   -------------------
                 Total liabilities and stockholders' equity            $     240,832,000     $     236,800,000    
                                                                       -------------------   -------------------
                                                                       -------------------   -------------------
</TABLE>


See accompanying notes to consolidated financial statements.




                                       2

<PAGE>

                           VALLEY NATIONAL CORPORATION

                             Statements of Earnings
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                          For the three months ended
                                                                   March 31,
                                                          1999                  1998
                                                    ------------------    ------------------

<S>                                                 <C>                   <C> 
Interest income:
     Interest and fees on loans                     $   3,689,000         $   3,511,000    
     Interest on securities
        Taxable                                           428,000               357,000    
        Exempt from federal income taxes                  205,000               163,000    
     Interest on federal funds sold                       164,000               198,000    
     Interest on interest-earning deposits                 87,000                66,000    
                                                    ------------------    ------------------
                                                        4,573,000             4,295,000    
                                                    ------------------    ------------------
Interest expense:
     Time deposits of $100,000 or more                    209,000               194,000    
     Other deposits                                     1,185,000             1,363,000    
                                                    ------------------    ------------------
                                                        1,394,000             1,557,000    
                                                    ------------------    ------------------
Net interest income before provision for
     loan losses                                        3,179,000             2,738,000    

Provision for loan losses                                 150,000               181,000    
                                                    ------------------    ------------------
                 Net interest income after
                    provision for loan losses           3,029,000             2,557,000    
                                                    ------------------    ------------------
Other operating income:
     Service charges on deposit accounts                  412,000               400,000    
     Merchant processing fees                             151,000               109,000    
     Mortgage brokerage fees                               64,000                44,000    
     Gain on sale of loans                                 30,000                    --    
     Other                                                145,000                97,000    
                                                    ------------------    ------------------
                                                          802,000               650,000    
                                                    ------------------    ------------------
Other operating expenses:
     Compensation and employee benefits                 1,364,000             1,327,000    
     Occupancy expense                                    305,000               284,000    
     Furniture and equipment                              183,000               154,000    
     Other                                                988,000               762,000    
                                                    ------------------    ------------------
                                                        2,840,000             2,527,000    
                                                    ------------------    ------------------
Income before income taxes                                991,000               680,000    

Income tax expense                                        347,000               232,000    
                                                    ------------------    ------------------
                 Net earnings                       $     644,000         $     448,000    
                                                    ------------------    ------------------
                                                    ------------------    ------------------
Basic earnings per share                            $        0.23         $        0.16    
                                                    ------------------    ------------------
                                                    ------------------    ------------------
Diluted earnings per share                          $        0.21         $        0.15    
                                                    ------------------    ------------------
                                                    ------------------    ------------------
</TABLE>


See accompanying notes to consolidated financial statements.


                                       3




<PAGE>

                           VALLEY NATIONAL CORPORATION

                            Statements of Cash Flows

                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                                 For the three months ended
                                                                                           March 31,
                                                                                 1999                  1998
                                                                           ------------------    ------------------

<S>                                                                        <C>                   <C>
Cash flows from operating activities:
     Net earnings                                                          $     644,000         $     448,000    
     Adjustments to reconcile net earnings to net cash
        provided by operating activities:
           Gain on sale of loans                                                 (30,000)                   --    
           Depreciation and amortization                                         256,000               232,000    
           Gain on sale of other real estate owned                                (8,000)                   --    
           Provision for loan losses                                             150,000               181,000    
           Provision for losses on other real estate owned                        15,000                15,000    
           Increase in accrued interest receivable and
                 other assets                                                   (773,000)             (138,000)   
           Increase in accrued expenses and other liabilities                    422,000               299,000    
                                                                           ------------------    ------------------
                 Net cash provided by operating activities                       676,000             1,037,000    
                                                                           ------------------    ------------------
Cash flows from investing activities:
     Purchases of securities held-to-maturity                                   (202,000)           (1,012,000)   
     Maturities of securities available-for-sale                               1,597,000             4,534,000    
     Purchases of securities available-for-sale                               (1,827,000)           (1,003,000)   
     Net additions to interest-earning deposits                                   (3,000)                   --    
     Net (increase) decrease in loans outstanding                             (5,134,000)            2,891,000    
     Purchases of bank premises and equipment                                   (117,000)             (164,000)   
     Proceeds from sale of loans                                                 362,000                    --    
     Proceeds from sale of other real estate owned                                31,000                    --    
                                                                           ------------------    ------------------
                 Net cash used in investing activities                        (5,293,000)            5,246,000    
                                                                           ------------------    ------------------
Cash flows from financing activities:
     Net increase in deposits                                                  3,165,000             8,327,000    
     Payments on long-term debt                                                   (8,000)               (7,000)   
     Proceeds from exercise of stock options                                      19,000               152,000    
     Cash dividends paid                                                         (93,000)              (73,000)   
                                                                           ------------------    ------------------
                 Net cash provided by financing activities                     3,083,000             8,399,000    
                                                                           ------------------    ------------------
Net increase (decrease) in cash and cash equivalents                          (1,534,000)           14,682,000    

Cash and cash equivalents at beginning of period                              23,594,000            19,293,000    
                                                                           ------------------    ------------------
Cash and cash equivalents at end of period                                 $  22,060,000         $  33,975,000    
                                                                           ------------------    ------------------
                                                                           ------------------    ------------------
Supplemental disclosure of cash flow information:
     Cash paid during the period for interest                              $   1,379,000         $   1,562,000    
     Cash paid during the period for income taxes                          $      68,000         $      60,000    
</TABLE>



See accompanying notes to consolidated financial statements.



                                       4



<PAGE>

                                VALLEY NATIONAL CORPORATION
                         Notes to Consolidated Financial Statements
                                        (Unaudited)

ITEM 1. (CONTINUED)

(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       (a)        NATURE OF OPERATIONS

              The interim financial statements included herein have been
              prepared by Valley National Corporation (the "Corporation")
              without audit, pursuant to the rules and regulations of the
              Securities and Exchange Commission ("SEC"). The Corporation is a
              bank holding company, which does substantially all of its business
              through its wholly owned subsidiary Valle de Oro Bank, N.A. (the
              "Bank"). A discussion of the Corporation is a discussion of the
              Bank. Certain information and footnote disclosures, normally
              included in the consolidated financial statements prepared in
              accordance with generally accepted accounting principles have been
              condensed or omitted pursuant to such SEC rules and regulations.
              These consolidated financial statements should be read in
              conjunction with the audited financial statements and notes
              thereto included in the Corporation's latest Annual Report. In the
              opinion of management, all adjustments, including normal recurring
              adjustments necessary to present fairly the financial position of
              the Corporation with respect to the interim financial statements
              and the results of its operations for the interim period ended
              March 31, 1999, have been included. Certain reclassifications may
              have been made to prior year amounts to conform to the 1998
              presentation. The results of operations for interim periods are
              not necessarily indicative of results for the full year.

              The Corporation operates six offices in San Diego County,
              California. The Corporation's primary source of revenue is
              interest from real estate and commercial loans to individuals and
              small to middle-market businesses. The accounting and reporting
              policies of the Corporation conform to generally accepted
              accounting principles and to general practices within the banking
              industry.
              The following is a description of the more significant policies.

       (b)        CASH AND CASH EQUIVALENTS

              For purposes of the statements of cash flows, cash and cash
              equivalents consist of cash, due from banks and Federal funds
              sold. Generally, Federal funds are sold for one-day periods. The
              Corporation keeps $350,000 on deposit at the Federal Reserve Bank
              in accordance with a compensating balance arrangement.

       (c)        SECURITIES

              Management determines the appropriate classification of securities
              at the time of purchase. If management has the intent and the
              Corporation has the ability at the time of purchase to hold
              securities until maturity, they are classified as
              held-to-maturity. Securities held-to-maturity are stated at cost,
              adjusted for amortization of premiums and accretion of discounts
              over the period to call or maturity of the related security using
              the interest method. Securities to be held for indefinite periods
              of time, but not necessarily to be held-to-maturity or on a
              long-term basis, are classified as available-for-sale and carried
              at fair value with unrealized gains or losses, net of tax,
              reported as a separate component of other comprehensive income
              until realized. Realized gains or losses on the sale of securities
              available-for-sale, if any, are determined using the amortized
              cost of the specific securities sold. Securities
              available-for-sale include securities that

                                     5

<PAGE>

              management intends to use as part of its asset/liability
              management strategy and that may be sold in response to changes
              in interest rates, prepayment risk and other related factors.
              Securities are individually evaluated for appropriate
              classification, when acquired; consequently, similar types of
              securities may be classified differently depending on factors
              existing at the time of purchase.

              When a security is sold, the realized gain or loss, determined on
              a specific-identification basis, is included in earnings. To the
              extent a security has a decline in fair value, which is determined
              by the Corporation as other than temporary, the adjusted cost
              basis is written down to fair value and the amount of the
              write-down is charged to earnings.

       (d)        LOANS AND LOAN FEES

              Loans are stated at the amount of principal outstanding. Interest
              income is accrued daily on the outstanding loan balances using the
              simple-interest method. Loans are generally placed on nonaccrual
              status when the borrowers are past due 90 days and when payment in
              full of principal or interest is not expected. At the time a loan
              is placed on nonaccrual status, any interest income previously
              accrued but not collected is reversed against current period
              interest income. Income on nonaccrual loans is subsequently
              recognized only to the extent cash is received and the loan's
              principal balance is deemed collectible. Loans are restored to
              accrual status when the loans become both well secured and are in
              process of collection.

              Nonrefundable fees and related direct costs associated with the
              origination of loans are deferred and netted against outstanding
              loan balances. Net deferred fees and costs are recognized in
              interest income over the terms of the loans using the interest
              method. The amortization of loan fees is discontinued on
              nonaccrual loans.

       (e)        ALLOWANCE FOR LOAN LOSSES

              An allowance for loan losses is maintained at a level deemed
              appropriate by management to adequately provide for known and
              inherent risks in the loan portfolio and other extensions of
              credit, including off-balance sheet credit extensions. The
              allowance is based upon a continuing review of the portfolio, past
              loan loss experience, current economic conditions that may affect
              the borrowers' ability to pay, and the underlying collateral value
              of the loans. When a loan or portion of a loan is determined to be
              uncollectible, the portion deemed uncollectible is charged off and
              deducted from the allowance. The provision for loan losses and
              recoveries on loans previously charged off are added to the
              allowance.

              A loan is considered impaired when it is probable that a creditor
              will be unable to collect all amounts due according to the
              original contractual terms of the loan agreement. If the measure
              of the impaired loan is less than the recorded investment in the
              loan, a valuation allowance is established with a corresponding
              charge to the provision for loan losses. Since substantially all
              of the Corporation's loans are collateral dependent, the
              calculation of the allowance for losses on impaired loans is
              generally based on the fair value of the collateral, less
              estimated costs of disposal.

              The allowance for loan losses is subjective and may be adjusted in
              the future because of changes

                                     6

<PAGE>

              in economic conditions and the repayment abilities of the
              borrowers. In addition, various regulatory agencies, as an
              integral part of their examination process, periodically review
              the Corporation's allowance. These agencies may require the
              Corporation to recognize additions to the allowance based on
              their judgments related to information available to them at the
              time of their examinations.

       (f)        PREMISES AND EQUIPMENT

              Premises and equipment are stated at cost, less accumulated
              depreciation. Depreciation is charged to operating expense using
              the straight-line method over the estimated useful lives of
              depreciable assets, which range from 3 to 30 years. Leasehold
              improvements are capitalized and amortized to operating expense
              over the term of the respective lease or the estimated useful life
              of the improvement, whichever is shorter.

       (g)        OTHER REAL ESTATE OWNED

              Real estate properties acquired through loan foreclosure or
              through acceptance of a deed-in-lieu of foreclosure are initially
              recorded at fair value, less estimated selling costs at the date
              of foreclosure. Once real estate properties are acquired,
              valuations are periodically obtained by management and an
              allowance for losses is established by a charge to operations if
              the carrying value of a property exceeds its fair value, less
              estimated costs of disposal. Real estate properties held for sale
              are carried at the lower of cost, including the cost of
              improvements and amenities incurred subsequent to acquisition, or
              fair value, less estimated selling costs. Costs related to
              development and improvement of properties are capitalized, whereas
              costs relating to holding the properties are expensed.

       (h)        INCOME TAXES

              Income taxes are accounted for under the asset and liability
              method. Deferred tax assets and liabilities are recognized for the
              future tax consequences attributable to differences between the
              financial statement carrying amounts of existing assets and
              liabilities and their respective tax bases. Deferred tax assets
              and liabilities are measured using enacted tax rates expected to
              apply to taxable income in the years in which those temporary
              differences are expected to be recovered or settled. The effect on
              deferred tax assets and liabilities of a change in tax rates is
              recognized in earnings in the period that includes the enactment
              date.

       (i)        EARNINGS PER SHARE

              Basic earnings per share is computed by dividing net earnings by
              the weighted-average number of shares of common stock outstanding
              during the period. Diluted earnings per share is computed by
              dividing net earnings by the weighted-average number of shares of
              common stock, common stock equivalents and other potentially
              dilutive securities outstanding during the period.

              The weighted-average number of shares used for the basic earnings
              per share calculations was 2,782,000 and 2,722,000 as of March 31,
              1999 and 1998. The weighted-average number of shares used for the
              diluted earnings per share calculations was 3,012,000 and
              2,973,000 as of March 31, 1999 and 1998, respectively. These
              calculations reflect the 5% stock dividend declared April 21,
              1999.

                                    7

<PAGE>

        (j)       USE OF ESTIMATES

              Management of the Corporation has made a number of estimates and
              assumptions relating to the reporting of assets and liabilities
              and the disclosure of contingent assets and liabilities at the
              date of the consolidated financial statements and the reported
              amounts of revenue and expenses during the reporting period to
              prepare these financial statements in conformity with generally
              accepted accounting principles. Actual results could differ from
              those estimates.

       (k)        COMPREHENSIVE INCOME

              On January 1, 1998, the Corporation adopted Statement of Financial
              Accounting Standards No. 130, "Reporting Comprehensive Income"
              ("Statement 130"). Statement 130 establishes standards for the
              reporting and display of comprehensive income and its components
              in a full set of general-purpose financial statements; it does not
              change the display or components of present-day net earnings.

              Comprehensive income for the three months ended March 31, 1999 and
              1998 is as follows:

<TABLE>
<CAPTION>
                                                                                       March 31,
                                                                                 1999             1998
                                                                            ----------------- ----------------
              <S>                                                           <C>                <C>
              Net earnings                                                        $644,000         $448,000
              Change in unrealized gains (losses) on securities                     
                available-for-sale                                                (194,000)          30,000
              Income tax benefit (loss)                                             77,000          (13,000)
                                                                            ----------------- ----------------
              Comprehensive net income                                            $527,000         $465,000
                                                                            ----------------- ----------------
                                                                            ----------------- ----------------
</TABLE>


       (l)       YEAR 2000

              The Corporation has developed a remediation plan and is in the
              process of converting computer systems and applications for the
              Year 2000. Expenditures related to Year 2000 issues are expensed
              as incurred.

       (m)       RECLASSIFICATIONS

              Certain prior year amounts have been reclassified to conform to
              the current year's presentation.

                                     8

<PAGE>


 (2)     SECURITIES AVAILABLE-FOR-SALE

         The amortized cost, gross unrealized gains and losses and fair value of
         securities available-for-sale as of March 31, 1999 and December 31,
         1998 are as follows:

<TABLE>
<CAPTION>

                                                            GROSS            GROSS
                                     AMORTIZED COST       UNREALIZED        UNREALIZED            FAIR
                                                            GAINS            LOSSES              VALUE
                                    ----------------    --------------   ---------------    ----------------
<S>                                <C>                 <C>              <C>                <C>
MARCH 31, 1999:
U.S. Treasury notes and U.S.
    agency securities                   $14,571,000     $   80,000        $  (59,000)         $ 14,592,000
Obligations of states and
    political subdivisions                8,711,000        106,000           (83,000)            8,734,000
    Corporate obligations                   301,000             --            (2,000)              299,000
                                    ----------------    --------------   ---------------    ----------------
                                        $23,583,000     $  186,000        $ (144,000)         $ 23,625,000
                                    ----------------    --------------   ---------------    ----------------
                                    ----------------    --------------   ---------------    ----------------
<CAPTION>
                                                             GROSS             GROSS
                                     AMORTIZED COST       UNREALIZED        UNREALIZED            FAIR
                                                             GAINS            LOSSES              VALUE
                                     ----------------    --------------   ----------------   ----------------
<S>                                  <C>                 <C>              <C>                <C>
DECEMBER 31, 1998:
U.S. Treasury notes and U.S.
    agency securities                   $  14,655,000    $     155,000     $    (55,000)      $     14,755,000
Obligations of states and
    political subdivisions                  8,417,000          162,000          (23,000)             8,556,000
Corporate obligations                         301,000               --           (3,000)               298,000
                                     ----------------    --------------   ----------------   ----------------
                                        $  23,373,000    $     317,000     $    (81,000)      $     23,609,000
                                     ----------------    --------------   ---------------    ----------------
                                     ----------------    --------------   ---------------    ----------------
</TABLE>

       The maturity distribution based on amortized cost and fair value as of
       March 31, 1999, by contractual maturity, is 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>
                                                                              AMORTIZED                FAIR
                                                                                COST                   VALUE
                                                                            -------------             --------
            <S>                                                          <C>                    <C>
            Due in one year or less                                         $       2,094,000      $     2,098,000
            Due after one year through five years                                  14,072,000           14,082,000
            Due after five years through ten years                                  5,807,000            5,791,000
            Due after ten years                                                     1,610,000            1,654,000
                                                                            -----------------      ---------------
                                                                            $      23,583,000      $    23,625,000
                                                                            -----------------      ---------------
                                                                            -----------------      ---------------
</TABLE>

       As of March 31, 1999, securities held-to-maturity with an amortized cost
       of $2,655,000 and securities

                                  9

<PAGE>

              available-for-sale with a fair value of $1,566,000 totaling
              $4,221,000 were pledged as security for public deposits and other
              purposes as required by various statutes and agreements.

(3)    SECURITIES HELD-TO-MATURITY

       The amortized cost, gross unrealized gains and losses and fair value of
       securities held-to-maturity as of March 31, 1999 and December 31, 1998
       are as follows:

<TABLE>
<CAPTION>
                                                                     GROSS              GROSS
                                              AMORTIZED COST       UNREALIZED        UNREALIZED            FAIR
                                                                     GAINS             LOSSES             VALUE
                                             -----------------   ---------------    --------------   -----------------
      <S>                                    <C>                 <C>                <C>              <C>
      MARCH 31, 1999:
      U.S. Treasury notes and U.S.
          government agencies                $      7,497,000    $       49,000      $   (56,000)     $     7,490,000
      Obligations of states and                                                                   
          political subdivisions                   15,173,000           460,000          (29,000)          15,604,000
      Corporate obligations                           466,000             2,000                 -             468,000

                                             -----------------   ---------------    --------------   -----------------
                                             $     23,136,000    $      511,000      $   (85,000)     $    23,562,000
                                             -----------------   ---------------    --------------   -----------------
                                             -----------------   ---------------    --------------   -----------------
<CAPTION>
                                                                     GROSS              GROSS
                                              AMORTIZED COST       UNREALIZED        UNREALIZED            FAIR
                                                                     GAINS             LOSSES             VALUE
                                             -----------------   ---------------    --------------   -----------------
      <S>                                    <C>                 <C>                <C>              <C>
      DECEMBER 31, 1998:
      U.S. Treasury notes and U.S.
          government agencies                $      7,499,000    $     85,000      $     (17,000)    $      7,567,000
      Obligations of states and
          political subdivisions                   14,986,000         609,000                 --           15,595,000
      Corporate obligations                           468,000           2,000                 --              470,000

                                             -----------------   ---------------    --------------   -----------------
                                             $     22,953,000    $    696,000      $     (17,000)    $     23,632,000
                                             -----------------   ---------------    --------------   -----------------
                                             -----------------   ---------------    --------------   -----------------
</TABLE>

       The maturity distribution based on amortized cost and fair value as of
       March 31, 1999, by contractual maturity, is 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>
                                                                              AMORTIZED                 FAIR
                                                                                 COST                  VALUE
                                                                             -----------             ----------
            <S>                                                          <C>                    <C>
            Due in one year or less                                      $          1,166,000   $        1,172,000
            Due after one year through five years                                   9,827,000            9,877,000
            Due after five years through ten years                                  9,653,000            9,855,000
            Due after ten years                                                     2,490,000            2,658,000
                                                                         ---------------------  -------------------
                                                                         $         23,136,000   $       23,562,000
                                                                         ---------------------  -------------------
                                                                         ---------------------  -------------------

</TABLE>

                                           10

<PAGE>

(4)    LOANS

       The composition of the Corporation's loan portfolio is as follows:
<TABLE>
<CAPTION>
                                                                                  MARCH 31,            DECEMBER 31,
                                                                                     1999                  1998
                                                                                 ----------           --------------
            <S>                                                            <C>                      <C>
            Construction                                                     $      7,557,000        $       7,960,000
            Real estate                                                            77,508,000               66,850,000
            Commercial and industrial loans                                        56,742,000               62,341,000
            Installment                                                            14,941,000               14,754,000
            All other loans (including overdrafts)                                    290,000                  308,000
                                                                             ------------------       ------------------
                                                                                  157,038,000             152,213,000

            Less allowance for loan losses                                         (1,832,000)              (1,687,000)
            Less deferred loan fees                                                  (846,000)                (818,000)
                                                                             ------------------       ------------------
                                                                             $    154,360,000         $    149,708,000
                                                                             ------------------       ------------------
                                                                             ------------------       ------------------
</TABLE>

       Although the Corporation seeks to avoid undue concentrations of loans to
       a single industry or based upon a single class of collateral, the
       Corporation's loan portfolio consists primarily of loans to borrowers
       within San Diego County and, as a result, the Corporation's loan and
       collateral portfolios are to some degree concentrated. The portfolio is
       well diversified in both project type and area within the San Diego
       County region. The Corporation evaluates each credit on an individual
       basis and determines collateral requirements accordingly. When real
       estate is taken as collateral, advances are generally limited to a
       certain percentage of the appraised value of the collateral at the time
       the loan is made, depending on the type of loan, the underlying property
       and other factors.

       The Corporation has established a monitoring system for its loans in
       order to identify potential problem loans and to permit the periodic
       evaluation of impairment and the adequacy of the allowance for loan
       losses in a timely manner. Impaired loans included in the Corporation's
       loan portfolio as of March 31, 1999 and December 31, 1998 were $143,000
       and $92,000, respectively, which have aggregate specific related
       allowance amounts of $35,000 and $9,000, respectively. For the three
       months ended March 31, 1999, the average balance of impaired loans was
       $130,000. For the three months ended March 31, 1999, no interest was
       recognized on these loans during the period of impairment.

                                         11

<PAGE>


       A summary of the activity in the allowance for loan losses for the three
       months ended March 31, is as follows:

<TABLE>
<CAPTION>
                                                                                         MARCH 31,
                                                                               1999                      1998
                                                                           -----------               ------------
       <S>                                                              <C>                       <C>
       Balance, beginning of period                                      $          1,687,000      $         1,342,000
       Provision for loan losses charged to expense                                   150,000                  181,000
       Loans charged off to the allowance                                             (6,000)                 (44,000)
       Recoveries credited to the allowance                                             1,000                   15,000
                                                                         ---------------------     --------------------
       Balance, end of period                                            $          1,832,000      $         1,494,000
                                                                         ---------------------     --------------------
                                                                         ---------------------     --------------------
</TABLE>

       Loans on nonaccrual amounted to $478,000, and $92,000 as of March 31,
       1999 and December 31, 1998, respectively. Interest income of $12,000
       would have been recorded for the three months ended March 31, 1999 if
       nonaccrual loans had been on a current basis, in accordance with their
       original terms. No interest income was recognized on loans subsequently
       transferred to nonaccrual status during the three months ended March 31,
       1999. Loans contractually past due greater than 90 days and still
       accruing interest totaled approximately $4,000 and $437,000, as of March
       31, 1999 and December 31, 1998, respectively.

       In the normal course of business, the Corporation has granted loans to
       certain directors and their affiliates under terms which Corporation
       management believes are consistent with the Corporation's general lending
       policies. An analysis of this activity for the three months ended March
       31, 1999 is as follows:

<TABLE>
<CAPTION>
                                                                                  MARCH 31,
                                                                                    1999
                                                                                -------------
            <S>                                                             <C>
            Balance, beginning of period                                      $          1,113,000
            Loans granted, including renewals                                               12,000
            Repayments                                                                     (60,000)
                                                                              --------------------
            Balance, end of period                                            $          1,065,000
                                                                              --------------------
                                                                              --------------------
</TABLE>

       The Corporation had additional commitments for loans of $1,905,000 to
       these individuals as of March 31, 1999.

                                   12

<PAGE>

(5)    PREMISES AND EQUIPMENT

       Premises and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                                MARCH 31,             DECEMBER 31,
                                                                                   1999                  1998
                                                                               -----------           -------------
            <S>                                                              <C>                    <C>
            Land                                                               $      746,000        $     746,000
            Buildings                                                               1,510,000            1,500,000
            Leasehold improvements                                                  3,330,000            3,318,000
            Furniture, fixtures and equipment                                       3,972,000            3,888,000
                                                                               ---------------        --------------
                                                                                    9,558,000            9,452,000
            Less accumulated depreciation and amortization                         (4,680,000)          (4,474,000)
                                                                               ---------------        --------------
                                                                               $    4,878,000         $   4,978,000
                                                                               ---------------        --------------
                                                                               ---------------        --------------
</TABLE>

(6)    OTHER REAL ESTATE OWNED

       A summary of the changes in the allowance for possible losses on other
real estate owned is as follows:

<TABLE>
<CAPTION>
                                                                              MARCH 31,
                                                                        1999            1998
                                                                       ------          ------
           <S>                                                   <C>                 <C>
           Balance, beginning of period                             $   300,000     $   235,000
           Provision charged to expense                                  15,000          15,000
           Charge-offs                                                        -           5,000
                                                                    ------------    ------------
           Balance, end of period                                   $   315,000     $   255,000
                                                                    ------------    ------------
                                                                    ------------    ------------

</TABLE>

(7)    DEPOSITS

       The maturity distribution of time deposits as of March 31, 1999 is as
follows:

<TABLE>
            <S>                                                 <C>
            Three months or less                                  $  22,574,000
            Over three through six months                            15,511,000
            Over six through twelve months                           13,967,000
            Over twelve months                                        5,268,000
                                                                  --------------
                          Total                                   $  57,320,000
                                                                  --------------
                                                                  --------------
</TABLE>

                                        13

<PAGE>

(8)    LONG-TERM DEBT

       Long-term debt of $44,000 and $52,000 at March 31, 1999 and December 31,
       1998, respectively, consisted of a mortgage note payable in monthly
       installments of $3,100 through July 2000, including interest at a fixed
       rate of 8.5%. Future maturities of long-term debt are as follows:

<TABLE>
            <S>                                                 <C>
            1999                                                $        26,000
            2000                                                         18,000
                                                                ---------------
                                                                $        44,000
                                                                ---------------
                                                                ---------------
</TABLE>

(9)      COMMITMENTS AND CONTINGENCIES

         The Corporation is a party to financial instruments with
         off-balance-sheet risk in the normal course of business to meet the
         financing needs of its customers and to reduce its own exposure to
         fluctuations in interest rates. These financial instruments include
         commitments to extend credit and standby letters of credit. Those
         instruments involve, to varying degrees, elements of credit and
         interest rate risk in excess of the amount recognized in the balance
         sheets. The contract or notional amounts of those instruments reflect
         the extent of involvement the Corporation has in particular classes of
         financial instruments.

         The Corporation's exposure to credit loss in the event of
         nonperformance by the counterparty to the financial instrument for
         commitments to extend credit and standby letters of credit is
         represented by the contractual amount of those instruments. The
         Corporation uses the same credit policies in making commitments and
         conditional obligations as it does for on-balance-sheet instruments.

         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. Commitments to extend credit amounting to $49,059,000 and
         $43,138,000 were outstanding as of March 31, 1999 and December 31,
         1998, respectively. Of these commitments to extend credit, $7,899,000
         and $7,747,000 represent home equity lines of credit at March 31, 1999
         and December 31, 1998, respectively, which will be repaid over a ten
         year period if drawn upon. The Corporation evaluates each customer's
         credit-worthiness on a case-by-case basis. The amount of collateral
         obtained by the Corporation, if deemed necessary upon extension of
         credit, is based on management's credit evaluation of the counterparty.
         Collateral held varies but may include certificates of deposit,
         accounts receivable, inventory, property, plant and equipment,
         residential real estate and income-producing commercial properties.

         Standby letters of credit are conditional commitments issued by the
         Corporation to guarantee the performance of a customer to a third
         party. Those guarantees are primarily issued to support public and
         private borrowing arrangements, including commercial paper, bond
         financing and similar transactions. The credit risk involved in issuing
         letters of credit is essentially the same as that involved in extending
         loan facilities to customers. The Corporation holds various types of
         collateral

                                     14

<PAGE>

         (primarily certificates of deposit) to support those commitments
         for which collateral is deemed necessary. The Corporation had
         approximately $488,000 in standby letters of credit outstanding
         as of both March 31, 1999 and December 31, 1998, respectively.
         Most of the letters of credit expire within twelve months.

         Management does not anticipate any material losses will arise from
         additional fundings of the aforementioned lines of credit or letters of
         credit.

         As of March 31, 1999, the Corporation had lines of credit in the amount
         of $11,500,000 from correspondent banks, of which no amounts were
         outstanding. These lines are renewable annually. The availability of
         the lines of credit, as well as adjustments in deposit programs,
         provides for liquidity in the event that the level of deposits should
         fall abnormally low. These sources provide that funding thereof may be
         withdrawn depending upon the financial strength of the Corporation.

         Because of the nature of its activities, the Corporation is at all
         times subject to pending and threatened legal actions that arise out of
         the normal course of its business. In the opinion of management, the
         disposition of these matters will not have a material adverse effect on
         the Corporation's financial position or results of operations.

(10)   REGULATORY MATTERS

       The Corporation and the Bank are subject to various regulatory capital
       requirements administered by the Federal banking agencies. 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 I capital (as defined in the
       regulations) to risk-weighted assets (as defined), and of Tier I capital
       (as defined) to average assets (as defined). Management believes, as of
       March 31, 1999, that the Bank meets all capital adequacy requirements to
       which it is subject.

       As of March 31, 1999, the most recent notification from the Federal
       Deposit Insurance Corporation categorized the Bank as well capitalized
       under the regulatory framework for prompt corrective action. To be
       categorized as well capitalized the Bank must maintain minimum total
       risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
       the table. There are no conditions or events since that notification that
       management believes have changed the Bank's category.

                                       15

<PAGE>




       The Bank's actual capital amounts and ratios are also presented in the
following table.

<TABLE>
<CAPTION>
                                                                                                            TO BE WELL
                                                                                                           CAPITALIZED
                                                                     FOR CAPITAL                          UNDER PROMPT
                                                                      ADEQUACY                          CORRECTIVE ACTION
                                            ACTUAL                    PURPOSES                              PROVISIONS
                                   AMOUNT       RATIO           AMOUNT        RATIO                  AMOUNT             RATIO
                                  -------       -----          --------       -----                  -------            ------
      <S>                       <C>             <C>         <C>               <C>                  <C>             <C>
      As of March 31, 1999:

         Total Capital (to 
         Risk-Weighted Assets)  $21,696,000     12.31%      $ 14,095,000  (greater than)8.0%       $17,619,000  (greater than)10.0%

         Tier I Capital (to
         Risk-Weighted          $19,864,000     11.27%      $  7,048,000  (greater than)4.0%      $10,571,000   (greater than)6.0%

         Tier I Capital (to
         Average Assets)        $19,864,000      8.25%      $  9,630,000  (greater than)4.0%       $12,037,000  (greater than)5.0%
 </TABLE>

         Under Federal banking law, dividends declared by the Bank in any
         calendar year may not, without the approval of the Comptroller of the
         Currency (OCC), exceed its net earnings for that year combined with its
         retained income from the preceding two years. However, the OCC has
         previously issued a bulletin to all national banks outlining new
         guidelines limiting the circumstances under which national banks may
         pay dividends even if the banks are otherwise statutorily authorized to
         pay dividends. The limitations impose a requirement or in some cases
         suggest that prior approval of the OCC should be obtained before a
         dividend is paid if a national bank is the subject of administrative
         action or if the payment could be viewed by the OCC as unsafe or
         unusual.

                                         16
<PAGE>

(11)     OTHER EXPENSES

         Other expenses are as follows for the three months ended March 31:


<TABLE>
<CAPTION>

                                                               MARCH 31,
                                                  ---------------------------------------
                                                        1999                 1998
                                                  ------------------   ------------------
      <S>                                         <C>                  <C>    
      Stationery and supplies                     $           77,000   $           58,000
      Telephone, courier and postage                          95,000               87,000
      Data processing                                        150,000              137,000
      Merchant processing expense                            110,000               78,000
      Promotional expenses                                    68,000               71,000
      Professional services                                  106,000               36,000
      Insurance                                               43,000               51,000
      FDIC and regulatory assessments                         23,000               21,000
      Other real estate owned expenses                         2,000               21,000
      Other                                                  314,000              202,000
                                                  ------------------   ------------------
                                                  $          988,000   $          762,000
                                                  ------------------   ------------------
                                                  ------------------   ------------------
</TABLE>

                                            17

<PAGE>



        ITEM 2. Management's Discussion and Analysis or Plan of Operation

Statements made in this report that state the intentions, beliefs, expectations
or predictions of the future by the Corporation or its management are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Corporation's actual results could differ
materially from those projected in such forward-looking statements.

LIQUIDITY

Cash and cash equivalents, primarily federal funds sold, decreased $1.5 million
during the three month period ended March 31, 1999 primarily as a result of
increased lending and slower deposit growth. Net loans increased $4.7 million
during the first three months of 1999 as a result of a strong local economy and
improved loan demand, especially for commercial real estate. Total deposits, by
comparison, grew at a slower rate in the first quarter of 1999 resulting in a
decrease in federal funds sold. Beginning in the latter part of 1998, the
Corporation began reducing interest rates on deposits to improve its net
interest margin. As a result, deposit growth slowed.

By comparison, cash and cash equivalents, especially federal funds sold,
increased $14.7 million during the three month period ended March 31, 1998.
During this period, deposits grew $8.3 million while net loans declined as a
result of loan payoffs coupled with a competitive market for new loans.
Securities available-for-sale declined during this period due to maturing
securities that were not re-invested.

As of March 31, 1999 available-for-sale securities totaled $23.6 million. Of
this amount, $2.1 million mature in one year or less. In addition, the
Corporation invests in interest-earning deposits with other financial
institutions, a majority of which mature in one year or less. Both securities
available-for-sale and interest-earning deposits act as secondary sources of
liquidity, if needed.

The Corporation also maintains lines of credit with correspondent banks for the
purchase of overnight funds in amounts up to $11.5 million, subject to
availability. The Corporation also has the ability to borrow funds from the
Federal Reserve's discount window. Historically, the Corporation has used these
facilities infrequently.

CAPITAL RESOURCES

The ability of the Corporation to obtain funds for the payment of dividends and
for other cash requirements is largely dependent upon the amount of dividends
that may be declared by the Bank. Generally, a national banking association may
declare a dividend without the approval of the Office of the Comptroller of the
Currency as long as the total of dividends declared by the bank in a calendar
year does not exceed the total of its net profits for that year combined with
its retained profits for the preceding two years. In addition, dividends paid by
a national bank are regulated by the Office of the Comptroller of the Currency
under its general supervisory authority as it relates to a bank's requirement to
maintain adequate capital.

Valle de Oro Bank continues to be classified, under the federal banking
agencies' regulatory requirements, as "well" capitalized. The Bank maintains a
margin of capital in excess of the minimum requirements, which will allow for
future growth (see Note 10 to the unaudited consolidated financial statements).
Historically, the Bank has increased capital primarily through the generation
and retention of net earnings.

                                       18

<PAGE>

The Corporation's quarterly cash dividend was increased in the third quarter of
1998 to $0.07 per share from $0.06 per share. This increase reflected the
Corporation's continuing rise in net earnings, and is not expected to adversely
affect the Corporation's level of capital.

RESULTS OF OPERATIONS

Net earnings for the three months ended March 31, 1999 were $644,000 compared to
$448,000 for the same period in 1998. Basic earnings per share for the three
months ended March 31, 1999 was $0.23 compared to $0.16 per share for the same
period in 1998. Diluted earnings per share for the period ended March 31, 1999
was $0.21 compared to $0.15 per share for the same period in 1998. The increase
in net earnings was the result of higher net interest income due to the
increased amount of earning assets, and higher other operating income, but
offset, somewhat, by higher operating expenses due to the growth of the
Corporation.

For the first three months of 1999 the Corporation's earning assets continued to
grow. As a result, net interest income before provision for loan losses
increased to $3.2 million compared to $2.7 million in the first three months of
1998. In the first quarter of 1999 average-earning assets increased to $216.4
million compared to $190.0 million in the same period in 1998. Between these two
periods, average loans increased $14.6 million. In recent months, the
Corporation's commercial real estate lending activity has been strong, followed
by increases in multi-family real estate and home equity credit lines. In
addition to the growth in average loans, average securities increased followed
by interest-earning deposits. Average federal funds sold remained the same.



                    Analysis of Net Interest Earned and Paid

<TABLE>
<CAPTION>

                                                               For the three months ended March 31,
                                                          1999                                1998
                                                       -----------                         -----------
                                             Average   Int Earned/              Average    Int Earned/
(In thousands)                                Amount      Paid        Yield     Amount        Paid         Yield
                                           ----------  -----------  --------  -----------  -----------  -----------
<S>                                        <C>          <C>          <C>       <C>         <C>            <C>
Loans, net                                 $  148,793   $  3,689     9.92%     $ 134,167   $   3,511       10.47%
Securities:
   Taxable                                     29,724        428     5.76%        23,318         357        6.12%
   Exempt from federal income taxes            17,461        205     7.83%        13,294         163        8.17%
Federal funds sold                             14,101        164     4.65%        14,736         198        5.37%
Interest-earnings deposits                      6,373         87     5.46%         4,500          66        5.87%
                                           -----------  ----------  --------  -----------  -----------  -----------
  Total                                    $  216,452   $  4,573     8.45%     $ 190,015   $   4,295        9.04%

Time deposits of $100,000 or more          $   17,519   $    209     4.77%     $  14,413   $     194        5.38%
All other interest-bearing deposits           155,731      1,185     3.04%       140,801       1,363        3.87%
                                           -----------  ----------  --------  -----------  -----------  -----------
  Total                                    $  173,250   $  1,394     3.22%     $ 155,214   $   1,557        4.01%

Interest income/earning assets                          $  4,573     8.45%                 $   4,295        9.04%
Interest expense/earning assets                            1,394     2.58%                     1,557        3.28%
                                                        ----------                         ----------   -----------
Net interest income                                     $  3,179     5.87%                 $   2,738        5.76%
                                                        ----------                         ----------
                                                        ----------                         ----------
</TABLE>

Interest on tax-exempt securities is stated on a fully tax-equivalent basis.

In the first quarter of 1998, net interest income before provision for loan
losses increased as a result of the growth of average earning assets, especially
loans and tax-exempt securities. Average federal funds sold and taxable
securities declined during this period. However, the decline in average federal
funds sold was offset

                                        19

<PAGE>

by the rise in average yield.

The yield on earning assets declined in the first quarter of 1999 to 8.45%, on a
tax-equivalent basis, from 9.04% in the same period of 1998. However, interest
expense to average earning assets fell at a faster rate from 3.28% in the first
quarter of 1998 to 2.58% in the first quarter of 1999. This resulted in an
increase in the net yield on interest-earning assets from 5.76% to 5.87%. The
combination of both the increased volume of earning assets and increased net
interest margin was a factor for the increased net earnings during the first
quarter of 1999.


                         Changes Due to Volume and Rate

<TABLE>
<CAPTION>

v                                                           1999 Change due to                         1998 Change due to
(In thousands)                                      Volume           Rate        Total         Volume       Rate          Total
                                                 -----------     ----------    ---------      ---------   --------      ---------
<S>                                              <C>             <C>          <C>            <C>         <C>            <C>
Loans, net                                       $       363     $    (185)    $     178      $     460   $  (92)       $    368
Securities:
   Taxable                                                92           (21)           71             (2)       -              (2)
   Exempt from federal income taxes                       49            (7)           42             45        -              45
Federal funds sold                                        (7)          (27)          (34)            (5)      13               8
Interest-earnings deposits                                26            (5)           21              8        -               8
                                                 -----------     ------------  ----------     ----------  ---------     ---------
  Total                                          $       523     $    (245)    $     278      $     506   $  (79)       $     427

Time deposits of $100,000 or more                $        37     $     (22)    $      15      $      (2)  $    2        $       -
All other deposits                                       114          (292)         (178)           146       33              179
                                                 -----------     ------------  ----------     ----------  ---------     ---------
  Total                                          $       151     $    (314)    $    (163)     $     144   $   35        $     179
                                                 -----------     ------------  ----------     ----------  ---------     ---------
                                                 -----------     ------------  ----------     ----------  ---------     ---------
Net interest income                              $       372     $      69     $     441      $     362   $ (114)       $     248
                                                 -----------     ------------  ----------     ----------  ---------     ---------
                                                 -----------     ------------  ----------     ----------  ---------     ---------
</TABLE>


In the first quarter of 1998, yields on average earning assets declined while
interest expense increased. This increase in interest expense, especially, other
interest-bearing deposits, offset some of the increases in net interest income
attributable to the volume increases in average earning assets.

PROVISION FOR LOAN LOSSES

When determining the provision for loan losses, management considers such
factors as loan growth, historical loan losses, delinquencies, current economic
factors, collateral values, and potential risks identified in the portfolio. As
a result of lower loan delinquencies and net loan losses, the provision for loan
losses declined in the first quarter of 1999 compared to the first quarter of
1998. Net loan losses were $5,000 for the quarter ended March 31, 1999 compared
to $29,000 for the same period in 1998. However, loans on nonaccrual status
increased from $92,000 as of December 31, 1998 to $478,000 as of March 31, 1999.

OTHER OPERATING INCOME

Service charges on deposit accounts increased to $412,000 in the first three
months of 1999 compared to $400,000 in the same period in 1998 as a result of
the growth in deposits and the increased number of accounts subject to charge.
The Corporation has not changed its service charge fees in several years. The
Corporation continues to implement new products such as "PC Banking and Bill
Pay" to expand its services and improve fee income.

                                     20

<PAGE>


Merchant processing fees increased as a result of raising merchant transaction
fees and new customers.

Mortgage brokerage fees have increased due to low mortgage rates and the
resulting increased real estate sales and refinancing activity.

Gain on sale of loans is the result of sales of the guaranteed portion of SBA
loans. Other income increased primarily as a result of increased commissions
earned on the sale of mutual funds, annuities and other nondeposit investment
products.

OTHER OPERATING EXPENSE

Compensation and employee benefits increased $37,000 to $1,364,000 in the first
three months of 1998 compared to $1,327,000 for the same period in 1998.
Staffing levels have remained fairly steady over the past year and expense
controls have been effective.

Occupancy expense increased $21,000 to $305,000 and furniture and equipment
expense increased $29,000 to $183,000 in the first three months of 1999 compared
to the same period in 1998 primarily due to higher depreciation resulting from
acquisitions of additional equipment and to increases in the operating and
maintenance costs of premises and equipment.

Other operating expense increased $226,000 in the first quarter of 1999 compared
to the first quarter of 1998. Data processing, merchant processing expense,
stationery, telephone and postage increased as a result of the growth of the
Corporation. Professional services and other operating expenses increased as a
result of costs related to the formation of Valley National Corporation, which
was completed on March 31, 1999.

INFLATION

There were no adverse effects on the operations of the Corporation as a result
of inflation during the three month period ended March 31, 1999. Inflation, in
the form of substantially higher interest rates or operating costs, has not been
a significant factor in the operations of the Corporation.

YEAR 2000

The Year 2000 ("Y2K") issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Corporation's programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
variety of system miscalculations, operating problems and system failures.

The Corporation is addressing its year 2000 ("Y2K") issues using a five phase
program. The five phases are awareness, assessment, renovation, validation, and
implementation. A brief description of each phase and the Corporation's progress
toward completing each phase follows.

The awareness phase identifies potential Y2K problems, develops an overall
strategy for addressing the issues, obtains support from the board of directors
and management, appoints a project team of employees to direct the Corporation's
activities, and implements an internal and external communication program to
raise awareness of the problems and issues. The Corporation completed this phase
as of March 31, 1998.

                                      21

<PAGE>

The assessment phase identifies all information technology systems i.e.,
hardware, software, networks, ATMs, etc., and non-information technology systems
such as alarm and security systems, and environmental controls, etc. This phase
also develops a system to evaluate and assess borrower and vendor preparedness,
including a tracking and monitoring system to identify potential problems.

The Corporation's program to assess borrower preparedness includes commercial,
real estate and consumer borrowers. The program is designed to evaluate each
borrower's exposure to Y2K issues, the borrower's preparedness in addressing
this exposure, and an assessment of the borrower's ability to meet its
obligations under a worst case Y2K scenario. Based on this assessment,
additional amounts are specifically allocated, as necessary, to cover potential
losses for borrowers considered having a high Y2K risk rating. In addition,
funds have been allocated to cover potential Y2K related losses, in general,
without regard to specific borrowers.

The Corporation has completed all of its information and non-information
technology system assessments. In addition, it has communicated with borrowers
and vendors, established a monitoring system, logged responses, and assigned
risk factors. The Corporation has begun quantifying the Y2K risk factors
associated with its borrowers and assigned preliminary allocations of the
allowance for loan losses. This allocation process will be reviewed and revised
on a quarterly basis through, at least, the first quarter of 2000. Accordingly,
monitoring and communication with borrowers and vendors is ongoing.

The Corporation has also made initial assessments of its liquidity position in
relation to the Y2K impact on large depositors and the deposit base, in general.
At this time, the Corporation does not see a high level of concern by customers
regarding their ability to conduct normal banking activities. However, the
Corporation has made an initial assessment of its projected level of cash and
cash-equivalents for the upcoming 1999 year-end, and is taking appropriate steps
to ensure adequate funds will be available to meet customer needs, should the
need arise. Such steps include adjusting the maturity date of certain assets to
fall in the latter part of the fourth quarter of 1999 and offering attractive
rates on time deposits for terms of one year or more. The Corporation plans to
review and appraise this issue on a quarterly basis and more frequently after
June 1999.

The renovation phase involves making the necessary information technology and
non-information technology changes and upgrades necessary to be Y2K compliant.
The Corporation has installed new item processing equipment, new voice response
hardware and software, and new local area network servers. It has upgraded its
communication system, purchased new security and alarm systems, and installed
three new automated teller machines. The Corporation considers the renovation
phase on all mission critical systems to be complete.

The validation phase is the testing phase. The Corporation uses a third party
data processing vendor whose software is Y2K compliant. During the first quarter
of 1999, proxy testing was completed with no significant Y2K issues found. The
Corporation has finished testing its other internal specialized systems.

The implementation phase introduces system changes into its operating
environment. Once tested, Y2K compliant systems are ready to be introduced into
the Corporation's operating environment. The target date for implementation of
all systems is September 30, 1999.

Contingency planning has begun. The board of directors has appointed business
resumption contingency planning project manager. A workgroup has been
established, and an outside consulting firm was engaged to help prepare a Y2K
business resumption contingency plan. A business resumption contingency planning
outline has been developed which provides a guided approach to assessing
possible Y2K disruption risk,

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<PAGE>

determines a logical course of action to fix the problem, or a plan to implement
an alternative procedure. The Corporation is currently in the process of
identifying Y2K disruption risks and preparing written operating procedures. The
Corporation intends to complete a full business resumption plan by June 30,
1999. The process of validating contingency procedures will be performed in the
second and third quarters of 1999.

With respect to the cost of preparing for Y2K, the Corporation's use of a
third-party data processor and its policy of periodically upgrading in-house
hardware and software systems have mitigated its direct expenses for Y2K. In
1998 the Corporation spent approximately $30,000, not including the cost of a
significant amount of Corporation staff time, on assessing, renovating and
testing its various systems. In the first quarter of 1999, the Corporation has
spent approximately $9,000 on its Y2K efforts. The Corporation's operating
budget related to Y2K matters is $50,500 in 1999 and $13,500 in 2000. In 1999,
its capital budget related to Y2K matters has recently been increased to
$100,000, including the cost of a generator that was approved and ordered in the
first quarter for installation in the second quarter of 1999.

Although significant steps are being taken to alleviate many of the Y2K
concerns, management still considers the most likely worst case Y2K scenario
will involve the inability of the Corporation's utility and telephone service
providers to furnish consistent, uninterrupted power and telecommunication
services to the Corporation in the early weeks of 2000. This view continues to
be based solely on a lack of meaningful disclosure provided to the Corporation
by these companies. The correspondence the Corporation has received to date has
been somewhat general in nature, and lacking the specific steps they have taken
and still need to take to become fully compliant. Due to the complexity of
today's power and telecommunication systems, management feels that there may be
a good chance of occasional power outages, or loss of telephone service that may
last for several hours or even several days.

If the Corporation lost telephone service for a few hours, it would be
disruptive and certainly change normal operations but, most likely, the
Corporation would not close its doors. The Corporation has undertaken a plan to
receive and use data in hardcopy form and use cellular or digital wireless
communications in the event of telephone service disruptions.

Electrical service is a vital part of the Corporation's operation. If the
Corporation lost power for more than a few hours it, most likely, would have to
close its doors and discontinue normal operations. For this type of contingency,
the Corporation has approved and ordered an electrical generator at a cost of
approximately $50,000 to provide power to one of its offices. If a loss of power
occurs for an extended period of time, the Corporation would consolidate
operations at this office. The generator has the capacity to provide consistent,
uninterrupted power for 5 days. Management feels this will keep the Corporation
operating, with limited services, under a worst-case electrical disruption.

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<PAGE>

PART II-OTHER INFORMATION


ITEM 1.  Legal Proceedings

                  None.

ITEM 2.  Changes in Securities

                  None.

ITEM 3.  Defaults upon Senior Securities

                  None.

ITEM 4.  Submission of Matters to a Vote of Security Holders

                  None.

ITEM 5.  Other Information

                  None.

ITEM 6.  Exhibits and Reports on Form 8-K

                  The Corporation filed no reports on Form 8-K during the
                  quarter.

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<PAGE>


                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

VALLEY NATIONAL CORPORATION
---------------------------
       Registrant


DATE:  MAY 12, 1999
-------------------



/S/  PAUL M. CABLE 
-------------------------------------------------
Paul M. Cable,
Senior Vice President and Chief Financial Officer


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