<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, 1998          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 March 19, 1999, the aggregate market value of the voting shares
held by non-affiliates of the registrant was approximately $8,701,000. 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.

        1,862,776 shares of Common Stock of the registrant were outstanding at
March 19, 1999.

                       DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the registrant's Definitive Proxy Statement for its 1998
Annual Meeting of Shareholders, which will be filed on or before April 30, 1999,
are incorporated by reference in Part III of this Form 10-K.

This report includes a total of 71 pages.
Exhibit Index appears on page 70.




                                                                    Page 1 of 71
<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, 1998, the Company had total consolidated assets of
approximately $116 million, tota l consolidated net loans of approximately $87
million, total consolidated deposits of approximately $105 million and total
stockholders' equity of approximately $8.7 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 of 71
<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, 1998, the Bank had approximately 5,714 demand deposit accounts representing
aggregate deposits of approximately $32,570,000 with an average account balance
of $5,700, approximately 2,460 accounts representing approximately $27,129,000
in "NOW", super "NOW" and money market checking accounts with an average account
balance of $11,028, approximately 3,526 accounts representing approximately
$8,979,000 in savings deposits with an average account balance of $2,546 and
approximately 1,828 accounts representing approximately $36,637,000 in time
deposits ("TCD's") with an average account balance of $20,042. Of the total
deposits at December 31, 1998, $9,453,000 were in the form of TCD's in
denominations greater than $100,000 and $2,675,000 were municipal and other
governmental deposits including both time and demand.

        During the 12 months ended December 31, 1998, average demand deposits
increased by approximately $1,626,000 or 5.8%, and "NOW", super "NOW" and money
market checking accounts decreased by approximately $811,000 or 2.7%. Average
savings deposits decreased by approximately $597,000 or 6.1%, while average time
deposits decreased by approximately $4,566,000 or 11.2%, including a decrease of
$419,000 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 deposit balances, but makes the Bank less subject to the adverse
effects resulting from the loss of a substantial depositor. At December 31,
1998, 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 5% of total deposits.

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.


                                                                    Page 3 of 71
<PAGE>   4
<TABLE>
<CAPTION>
(Dollars in Thousands)                                                                Year Ended December 31,
                                                                                 1998                       1997
                                                                      -------------------------   -------------------------
                                                                       Average          Percent    Average          Percent
Assets                                                                 Balance         of Total    Balance         of Total
                                                                      ---------       ---------   ---------       ---------
<S>                                                                   <C>             <C>         <C>             <C>
      Investment Securities
          Taxable                                                     $   5,714             5.0   $   6,478             5.5
      Federal funds sold                                                  5,849             5.1       3,409             2.9
      Due from banks-time deposits                                          372             0.3         278             0.2
      Loans                                                              86,782            76.2      92,963            78.9
      Direct lease financing                                                 13             0.0          79             0.1
      Reserve for loan and lease losses                                    (661)           (0.5)       (715)           (0.6)
                                                                      ---------       ---------   ---------       ---------
                      Net Loans and Leases                               86,134            75.7      92,327            78.4
                                                                      ---------       ---------   ---------       ---------
                      Total Interest Earning Assets                      98,069            86.1     102,492            87.0
      Cash and non-interest earning deposits                              6,181             5.4       6,417             5.4
      Net premises, furniture and equipment                               6,596             5.8       6,444             5.5
      Other assets                                                        3,087             2.7       2,410             2.1
                                                                      ---------       ---------   ---------       ---------
                      Total Assets                                    $ 113,933           100.0   $ 117,763           100.0
                                                                      =========       =========   =========       =========
Liabilities and Stockholders' Equity
      Savings deposits (1)                                               37,710            33.1      39,118            33.2
      Time deposits                                                      36,292            31.9      40,858            34.7
      Short-term borrowings                                                   2             0.0         107             0.1
                                                                      ---------       ---------   ---------       ---------
                      Total Interest-bearing Liabilities                 74,004            65.0      80,083            68.0
      Demand deposits                                                    29,890            26.2      28,264            24.0
      Other liabilities                                                   1,545             1.3       1,369             1.2
                                                                      ---------       ---------   ---------       ---------
                      Total Liabilities                                 105,439            92.5     109,716            93.2
Stockholders' Equity                                                      8,494             7.5       8,047             6.8
                                                                      ---------       ---------   ---------       ---------
                      Total Liabilities and Stockholders' Equity      $ 113,933           100.0   $ 117,763           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.")

        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.


                                                                    Page 4 of 71
<PAGE>   5
<TABLE>
<CAPTION>
(Dollars in Thousands)                                                      1998                               1997
                                                              ------------------------------     -------------------------------
                                                              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)                                   $ 1,396      $   83      5.9%      $  4,108      $  239      5.8%   
          U.S. Government agencies (3)                          4,078         232      5.7%         2,171         126      5.8%
          Other securities                                        184          10      5.4%           182          10      5.5%
                                                              -------      ------                --------      ------      
                      Total Investment Securities               5,658         325      5.7%         6,461         375      5.8%
      Federal funds sold                                        5,849         300      5.1%         3,409         185      5.4%
      Due from banks - time deposits                              372          20      5.4%           278          17      6.1%
      Loans (2)                                                86,782       8,532      9.8%        92,963       8,631      9.3%
      Lease financing (1)                                          13           1      7.7%            79           7      8.9%
                                                              -------      ------                --------      ------      
                      Total Interest Earning Assets (1)       $98,674      $9,178      9.3%      $103,190      $9,215      8.9%
                                                              =======      ======                ========      ======      
Interest Bearing Liabilities
      Domestic Deposits and Borrowed Funds
          Savings deposits (4)                                 37,710         656      1.7%        39,118         686      1.8%
          Time deposits                                        36,292       1,896      5.2%        40,858       2,250      5.5%
          Short-term borrowings                                     2           0      0.0%           107           7      6.5%
                                                              -------      ------                --------      ------      
                      Total Interest Bearing Liabilities      $74,004      $2,552      3.4%      $ 80,083      $2,943      3.7%
                                                              =======      ======                ========      ======  
</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>                                                            1998        1997
(Dollars in Thousands)                                              -------     ------- 
<S>                                                                 <C>          <C>
Total interests income (1)(2)                                       $ 9,178     $ 9,215
Total interest expense(5)                                             2,552       2,943
Total interest earnings(1)(2)                                         6,626       6,272
Total average earning assets                                         98,013     102,475
Net yield on average earning assets                                    6.8%        6.1%
Net yield on average earning assets (excluding loan fees)(1)(2)        5.8%        5.5%          
</TABLE>      

(1) Interest income includes the effects of tax equivalent adjustments on tax
exempt securities and leases using tax rates which approximate 41% for 1998 and
25% for 1997.

(2) Loans, net of unearned income, include non-accrual loans but do not reflect
average reserves for probable loan losses of $661,000 in 1998 and $715,000 in
1997. Loan fees of $678,000 in 1998 and $534,000 in 1997, are included in loan
interest income. There were two non-accruing loans totaling approximately
$114,000 at December 31, 1998 and four non-accruing loans totaling approximately
$229,000 at December 31, 1997.

(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.

        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.


                                                                    Page 5 of 71
<PAGE>   6
<TABLE>
<CAPTION>
(Dollars in Thousands)                               Investment      Federal                    Direct
                                                     Securities       Funds                      Lease         Time
                                                       Taxable         Sold        Loans(2)   Financing(1)   Deposits      Total
                                                     ----------    ----------    ----------   -----------   ----------   ----------
<S>                                                  <C>           <C>           <C>          <C>           <C>          <C>        
Interest Earned On:
1998 compared to 1997
      Increase/(decrease) due to:
          Volume changes                             $      (46)   $      125    $     (871)   $       (5)  $        4   $     (793)
          Rate changes                                       (4)          (10)          772            (1)          (1)         756
                                                     ----------    ----------    ----------    ----------   ----------   ----------
                      Net Increase/(Decrease)        $      (50)   $      115    $      (99)   $       (6)  $        3   $      (37)
                                                     ==========    ==========    ==========    ==========   ==========   ==========

Interest Earned On:
1997 compared to 1996
      Increase/(decrease) due to:
          Volume changes                                   (277)           (3)          699           (27)         (29)         363
          Rate changes                                       23             9          (205)           (6)          12         (167)
                                                     ----------    ----------    ----------    ----------   ----------   ----------
                      Net Increase/(Decrease)        $     (254)   $        6    $      494    $      (33)  $      (17)  $      196
                                                     ==========    ==========    ==========    ==========   ==========   ==========
</TABLE>


(1) Interest income includes the effects of tax equivalent adjustments on direct
lease financing using tax rates which approximate 41.0 percent for 1998 and 25.0
percent for 1997.

(2) Includes increases in loan fees of $144,000 in 1998 and $67,000 in 1997.


<TABLE>
<CAPTION>
(Dollars in Thousands)                                 Savings          Time          Short-term
                                                      Deposits        Deposits       Borrowings(3)      Total
                                                     ----------      ----------       ----------     ----------
<S>                                                  <C>             <C>              <C>            <C>        
Interest Paid On:                                                                                   
1998 compared to 1997                                                                               
      Increase/(decrease) due to:                                                                   
          Volume changes                             $      (25)     $     (243)      $       (5)    $     (273)
          Rate changes                                       (5)           (111)              (2)          (118)
                                                     ----------      ----------       ----------     ----------
                      Net Increase/(Decrease)        $      (30)     $     (354)      $       (7)    $     (391)
                                                     ==========      ==========       ==========     ==========
                                                                                                    
Interest Paid On:                                                                                   
1997 compared to 1996                                                                               
      Increase/(decrease) due to:                                                                   
          Volume changes                                    (49)            127                4             82
          Rate changes                                      (17)             16                1              0
                                                     ----------      ----------       ----------     ----------
                      Net Increase/(Decrease)        $      (66)     $      143       $        5     $       82
                                                     ==========      ==========       ==========     ==========
</TABLE>


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


                                                                    Page 6 of 71
<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 accounts for
investments in accordance with 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>
                                     1998                    1997
                              Available-for-Sale      Available-for-Sale
                              ------------------      ------------------
<S>                           <C>                     <C>       
U.S. Treasury                     $      500              $    2,993
Federal agencies                       5,550                   1,512
Other securities                         187                     196
                                  ----------              ----------
                                  $    6,237              $    4,701
                                  ==========              ==========
</TABLE>


        The following table shows the maturities of investment securities at
December 31, 1998, and the weighted average yields of such securities.


<TABLE>
<CAPTION>
  (Dollars in Thousands)                                          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             $    500           5.00%        
U.S. Agencies                1,503           5.56%         $  4,047              6.99%
                          --------                         --------
                          $  2,003           5.42%         $  4,047              6.99%
                          ========                         ========
</TABLE>


LOAN PORTFOLIO

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


<TABLE>
<CAPTION>
             (Dollars in Thousands)                         December 31,
                                                    ---------------------------
                                                       1998             1997
                                                    ----------       ----------
<S>                                                 <C>              <C>       
Types of Loans
      Domestic
      Commercial, financial and agricultural        $   15,135       $   10,585
      Real estate construction                           3,825            1,960
      Real estate mortgage                              43,201           41,492
      Installment loans to individuals                  24,835           37,334
      Loans held for sale                                2,178              425
      Lease financing(1)                                                     14
      All other loans (including overdrafts)                92               31
                                                    ----------       ----------
                                                        89,266           91,841
      Less:
          Unearned income                               (1,333)          (2,727)
          Reserve for loan and lease losses               (686)            (694)
                                                    ----------       ----------
                      Total                         $   87,247       $   88,420
                                                    ==========       ==========
</TABLE>


(1) Lease financing is net of unearned income of approximately $0 for 1998 and
$1,000 for 1997.


                                                                    Page 7 of 71
<PAGE>   8
        Real estate mortgage loans are comprised of multi-family real estate
loans, SFR's and commercial real estate loans which represent 1.8%, 7.5% and
39.1% 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 54% of total
installment loans and 13% of total loan commitments. Approximately 98% 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, 1998.


<TABLE>
<CAPTION>
               (Dollars in Thousands)                                                     Maturing
                                                                   -------------------------------------------------------
                                                                     Within         One to         After
                                                                    One Year      Five Years     Five Years        Total
                                                                   ----------     ----------     ----------     ----------
<S>                                                                <C>            <C>            <C>            <C>       
Domestic
      Commercial, financial and agricultural                       $   12,664     $    2,206     $      265     $   15,135
      Real estate construction                                          3,825                                        3,825
      Real estate mortgage                                             10,568         13,472         21,339         45,379
      Installment loans to individuals                                  3,430         20,363          1,042         24,835
      Lease financing (net of unearned income)                                                                           0
      All other loans                                                      92                                           92
                                                                   ----------     ----------     ----------     ----------
                      Total                                        $   30,579     $   36,041     $   22,646     $   89,266
                                                                   ==========     ==========     ==========     ==========

Loans and leases with predetermined interest rates                      4,719         28,244         22,419         55,382
Loans and leases with floating or adjustable interest rates            25,860          7,797            227         33,884
                                                                   ----------     ----------     ----------     ----------
                      Total                                        $   30,579     $   36,041     $   22,646     $   89,266
                                                                   ==========     ==========     ==========     ==========
</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, 1998. 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 39% of its total
deposits at December 31, 1998, 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 of 71
<PAGE>   9
RISK ELEMENTS


<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 other financial institutions          $      693                                                             $      693
      Federal funds Sold                              5,815                                                                  5,815
      Investment securities                             500                    $    5,550   $      167   $       20          6,237
      Net loans and leases                           23,569     $    7,010         35,927       22,646       (1,905)        87,247
      Noninterest-bearing assets                                                                             15,871         15,871
                                                 ----------     ----------     ----------   ----------   ----------     ----------
                      Total Assets               $   30,577     $    7,010     $   41,477   $   22,813   $   13,986     $  115,863
                                                 ==========     ==========     ==========   ==========   ==========     ==========
Liabilities and Stockholders' Equity
      Noninterest-bearing deposits                                                                           32,570         32,570
      Interest-bearing deposits                      47,500         23,645          1,600                                   72,745
      Other liabilities                                                                                       1,820          1,820
Stockholders' Equity                                                                                          8,728          8,728
                                                 ----------     ----------     ----------   ----------   ----------     ----------
                      Total Liabilities and
                       Stockholders' Equity      $   47,500     $   23,645     $    1,600   $        0   $   43,118     $  115,863
                                                 ==========     ==========     ==========   ==========   ==========     ==========

Interest Rate Sensitivity Gap                    $  (16,923)    $  (16,635)    $   39,877   $   22,813   $  (29,132)    $        0
                                                 ==========     ==========     ==========   ==========   ==========     ==========
Cumulative Interest Rate Sensitivity Gap         $  (16,923)    $  (33,558)    $    6,319   $   29,132   $        0     $        0
                                                 ==========     ==========     ==========   ==========   ==========     ==========
</TABLE>


       The Company's management also utilizes the results of a dynamic
simulation model to quantify the estimated exposure of net interest income to
sustained interest rate changes. The simulation model estimates the impact of
changing interest rates on the interest income from all interest earning assets
and the interest expense paid on all interest bearing liabilities reflected on
the Company's balance sheet. This sensitivity analysis is compared to policy
limits which specify a maximum tolerance level for net interest income exposure
over a one year horizon assuming no balance sheet growth, given both a 200 basis
point upward and downward shift in interest rates. A parallel and pro rata shift
in rates over a 12-month period is assumed.

The following reflects the Company's net interest income sensitivity analysis as
of December 31, 1998:


<TABLE>
<CAPTION>
(Dollars in Thousands)

                                Estimated Net           Market Value
    Simulated                  Interest Income          ------------
   Rate Changes                  Sensitivity               Assets               Liability
   ------------                ---------------          ------------           ----------
<S>                            <C>                      <C>                    <C>       
+200 Basis Points                   0.29%                $  109,190            $  108,654
-200 Basis Points                   (.29%)               $  122,362            $  108,654
</TABLE>

        The estimated sensitivity does not necessarily represent a Company
forecast and the results may not be indicative of actual changes to the
Company's net interest income. These estimates are based upon a number of
assumptions including: the nature and timing of interest rate levels including
yield curve shape, prepayments on loans and securities, pricing strategies on
loans and deposits, replacement of asset and liability cashflows, and other
assumptions. While the assumptions used are based on current economic and local
market conditions, there is no assurance as to the predictive nature of these
conditions including how customer preferences or competitor influences might
change.


                                                                    Page 9 of 71
<PAGE>   10
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS


<TABLE>
<CAPTION>
             (Dollars in Thousands)                         December 31,
                                                        --------------------
                                                          1998        1997
                                                        --------    --------
<S>                                                     <C>         <C>     
Accruing Loans More Than 90 Days Past Due(1)
      Aggregate loan amounts
          Commercial, financial and agricultural
          Real estate                                               $    109
          Installment loans to individuals              $      1         107
      Aggregate leases
Renegotiated loans(2)
Non-accrual loans(3)
      Aggregate loan amounts
          Commercial                                         114          28
          Real estate                                                    201
                                                        --------    --------
                                                        $    115    $    445
                                                        ========    ========
</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 two loans on non-accrual status approximately totaling $114,000
at December 31, 1998, and four loans totaling approximately $229,000 at December
31, 1997. The amount of interest that would have been collected on these loans
had they remained current in accordance with their original terms was $6,000 in
1998 and $26,000 in 1997, respectively.

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, 1998, the Bank's classified loans consist of
$1,692,000 of loans classified as substandard and no loans classified as
doubtful. The Bank's $1,692,000 in loans classified as substandard consisted of
$1,577,000 of performing loans and $115,000 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.


                                                                   Page 10 of 71
<PAGE>   11
        With the exception of these loans, management is not aware of any loans
as of December 31, 1998, 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.

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.


                                                                   Page 11 of 71
<PAGE>   12
<TABLE>
<CAPTION>
(Dollars in Thousands)                                                 December 31,
                                                                --------------------------
                                                                   1998            1997
                                                                ----------      ----------
<S>                                                             <C>             <C>       
Loans and Leases Outstanding, Year-end(1)                       $   87,933      $   89,114
                                                                ==========      ==========
Average Amount of Loans and Leases Outstanding(1)               $   86,795      $   93,042
                                                                ==========      ==========

Loans and Lease Loss Reserve Balance, Beginning of year         $      695      $      728
                                                                ----------      ----------
Reserve on Loans Acquired in Business Combination
      Charge-offs
          Domestic
              Commercial, financial and agricultural                    40              34
              Real estate - construction
              Real estate - mortgage                                                    15
              Consumer loans                                           213             308
              Lease financing
                                                                ----------      ----------
                                                                       253             357
      Foreign
                                                                ----------      ----------
                                                                       253             357
                                                                ----------      ----------
      Recoveries
          Domestic
              Commercial, financial and agricultural                     8              18
              Real estate - construction
              Real estate - mortgage                                    41               6
              Consumer loans                                            52             156
              Lease financing
                                                                ----------      ----------
                                                                       101             180
      Foreign
                                                                ----------      ----------
                      Net Charge-offs/(recoveries)                     152             177
                                                                ----------      ----------
      Additions/(Reductions) charged to operations                     143             144
                                                                ----------      ----------
Loan and Lease Loss Reserve Balance, End of year                $      686      $      695
                                                                ==========      ==========
Ratio of Net Charge-offs/(Recoveries) During the Year
 to Average Loans and Leases Outstanding During the Year              0.18%           0.19%
                                                                ==========      ==========
Ratio of Reserve for Loan Losses to Loans at Year-end                 0.78%           0.78%
                                                                ==========      ==========
</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 December 31, 1998.

       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 seven
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 retains an outside 


                                                                   Page 12 of 71
<PAGE>   13
consultant to review 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,
1998, see "RISK ELEMENTS - Non-accrual, Past Due and Restructured Loans and
Potential Problem Loans."

        The Bank accounts for impaired loans in accordance with 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
or when the loan is fully secured and in process of collection. 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, 1998 and 1997, the Bank had loans amounting to
approximately $114,000 and $229,000, respectively, that were specifically
classified as impaired. The average balance of these loans amounted to
approximately $106,000 and $354,000 for the year ended December 31, 1998 and
1997, respectively. The allowance for loan losses related to these impaired
loans amounted to approximately $0 and $8,000 at December 31, 1998 and 1997,
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.


<TABLE>
<CAPTION>
(Dollars in Thousands)                                               Year Ended December 31,
                                                       ----------------------------------------------------
                                                                 1998                       1997
                                                       -----------------------     ------------------------
                                                                   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          $       56          17.0     $       20          11.5
      Real estate                                                         55.1             62          47.8
      Installment loans to individuals                        61          27.9             64          40.7
      Lease financing
Foreign
Unallocated allowance                                        569                                        549
                                                      ----------    ----------     ----------    ----------
                      Total                           $      686         100.0     $      695         100.0
                                                      ==========    ==========     ==========    ==========
</TABLE>


                                                                   Page 13 of 71
<PAGE>   14
        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.

DEPOSITS

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


<TABLE>
<CAPTION>
(Dollars in Thousands)                                                Year Ended December 31,
                                                   -------------------------------------------------------------
                                                              1998                              1997
                                                   -------------------------           -------------------------
                                                    Average          Average            Average          Average
                                                    Balance            Rate             Balance            Rate
                                                   --------          -------           --------          -------
<S>                                                <C>               <C>               <C>               <C> 
In Domestic Offices
      Noninterest bearing demand deposits          $ 29,890                            $ 28,264
      Savings deposits(1)                            37,710              1.7%            39,118              1.8%
      Time deposits                                  36,292              5.2%            42,858              5.5%
                                                   --------                            -------
                      Total Deposits               $103,892              3.4%          $110,240              2.7%
                                                   ========                            =======
</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,
                                          1998
                                      ------------
<S>                                   <C>     
Three months or less                    $  2,900
Over three through 12 months               6,453
Over one through five years                  100
                                        --------
                                        $  9,453
                                        ========
</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>
                                     1998              1997
                                  ----------        ----------
<S>                               <C>               <C>  
Return on assets                     0.39%             0.34%
Return on equity                     5.22%             5.02%
Dividend payout ratio
Equity to asset ratio                7.46%             6.83%
</TABLE>


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 


                                                                   Page 14 of 71
<PAGE>   15
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.

        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 


                                                                   Page 15 of 71
<PAGE>   16
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.

        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.


                                                                   Page 16 of 71
<PAGE>   17
        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 dec lares 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.

        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."


                                                                   Page 17 of 71
<PAGE>   18
        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%.

        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.


                                                                   Page 18 of 71
<PAGE>   19
        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.

        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, 1998.

<TABLE>
<CAPTION>
(Dollars in Thousands)                            December 31, 1998
                                            -----------------------------
                                                                Minimum
                                                Actual          Capital
                                            ---------------
                                            Amount    Ratio   Requirement
                                            --------  -----   -----------
<S>                                         <C>       <C>     <C> 
Leverage ratio                               $8,687   7.50%       4.0%
Tier 1 risk-based ratio                       8,687   9.00%       4.0%
Total risk-based ratio                        9,373   9.80%       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 


                                                                   Page 19 of 71
<PAGE>   20
                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.

        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 


                                                                   Page 20 of 71
<PAGE>   21
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.

        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 of 71
<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 of 71
<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 1998, the Financial Accounting Standards Board issued Statement
No. 133 "Accounting for Derivative Instruments and Hedging Activities." This
statement, which is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999, supercedes FASB No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." FASB No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Management has not determined the potential
impact that 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.

EMPLOYEES

        At March 19, 1999, the Company had approximately 64 full-time and 26
part-time employees. Total full-time equivalent employees at March 19, 1999,
were approximately 88. 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 L. Cole                                         Executive Vice President/
                                                          Senior Credit Administrator

   Soule Sensenbach                Secretary               Executive Vice President/
                                                            Chief Financial Officer

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


        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. Cole was appointed Executive Vice President/Senior Credit
Administrator of the Bank in November 1998, and has been with the Bank since
1997.

        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.


                                                                   Page 23 of 71
<PAGE>   24
        Mrs. Ahern was appointed as the Company's Cashier in November 1993. She
has been with the Bank since June 1993, and is currently serving as Executive
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.

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 four years and three years,
respectively. The Bank's total occupancy expense for 1998, excluding furniture
and equipment expense, approximated $624,000. 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 of 71
<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 March 19, 1999, the
Company had 647 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),(3)
                                                          -------------------------
                                                              High           Low
                                                             ------        ------
<S>                                                          <C>           <C>   
1997                                                                    
      First Quarter                                          $ 3.63        $ 3.50
      Second Quarter                                           3.63          3.63
      Third Quarter                                            4.50          3.63
      Fourth Quarter                                           5.13          4.50
                                                                        
1998                                                                    
      First Quarter                                          $ 6.25        $ 5.13
      Second Quarter                                           6.75          6.25
      Third Quarter                                            6.75          6.00
      Fourth Quarter                                           6.00          4.00
</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.

(3) There were no cash dividends paid during 1997 and 1998.


ITEM 6. SELECTED FINANCIAL DATA

        The selected financial data set forth below for the fiscal years ended
December 31, 1998, 1997 and 1996, are derived from the audited consolidated and
Bank financial statements of the Company examined by Vavrinek, Trine, Day & Co.,
LLP, 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, 1995 and 1994,
are derived from audited financial statements examined by Vavrinek, Trine, Day &
Co., LLP which are not included in this Report.


                                                                   Page 25 of 71
<PAGE>   26
<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                ---------------------------------------------------------------------------------
                                                     1998             1997             1996            1,995             1994
                                                -------------    -------------    -------------    -------------    -------------
<S>                                             <C>              <C>              <C>              <C>              <C>          
Interest Income                                 $   9,178,049    $   9,213,228    $   9,011,147    $   8,568,863    $   8,472,532
Interest Expense                                    2,551,992        2,942,507        2,860,834        2,399,588        1,919,004
Net Interest Income                                 6,626,057        6,270,721        6,150,313        6,169,275        6,553,528
(Provision)/Credit  for Loan and Lease Losses        (142,982)        (143,782)        (416,900)         429,000       (1,440,000)
Other Income                                        1,947,357        1,748,754        1,837,933        3,961,580        2,808,965
Other Expenses                                     (7,680,249)      (7,337,757)      (7,437,768)      (9,141,796)      (9,831,082)
                                                -------------    -------------    -------------    -------------    -------------
Income/(Loss) Before Taxes                            750,183          537,936          133,578        1,418,059       (1,908,589)
Income Taxes                                         (306,800)        (133,800)         (28,000)        (584,254)         370,100
                                                -------------    -------------    -------------    -------------    -------------
Net Income/(Loss)                               $     443,383    $     404,136    $     105,578    $     833,805    $  (1,538,489)
                                                =============    =============    =============    =============    =============
Earnings/(Loss) Per Share of Common Stock(1)
   Basic                                        $        0.24    $        0.22    $        0.06    $        0.45    $       (0.83)
   Diluted                                      $        0.22    $        0.21    $        0.06    $        0.44    $       (0.83)
Weighted Average Number of Shares(1)                        1
   Basic                                            1,862,776        1,862,776        1,862,776        1,862,776        1,862,776
   Diluted                                          1,994,255        1,882,986        1,874,852        1,875,104        1,862,776
Stock Splits                                             --               --               --            6 for 5             --

Balance Sheet Data
      Assets                                    $ 115,863,031    $ 111,510,812    $ 119,523,686    $ 107,559,133    $ 107,417,232
                                                =============    =============    =============    =============    =============
      Deposits                                  $ 105,314,990    $ 101,741,356    $ 106,602,789    $  98,414,447    $  98,584,479
                                                =============    =============    =============    =============    =============
      Loans and Leases/(Net)                    $  87,246,922    $  88,419,559    $  96,737,786    $  77,287,938    $  83,786,866
                                                =============    =============    =============    =============    =============
      Stockholders' Equity                      $   8,728,159    $   8,266,503    $   7,851,412    $   7,752,714    $   6,860,144
                                                =============    =============    =============    =============    =============
</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.

       For the year ended December 31, 1998, Vineyard National Bancorp on a
consolidated basis reported Net Income of $443,000 compared to $404,000 and
$106,000 in the comparable 1997 and 1996 periods. Basic Earnings Per Share were
$0.24 compared to $0.22 in 1997 and $0.06 in 1996. Diluted Earnings Per Share
were $0.22 compared to $0.21 in 1997 and $0.06 in 1996. Consolidated total
assets at December 31, 1998 were $115,863,000 compared to $111,511,000 at
December 31, 1997, an increase of approximately 4%. Total deposits also
increased from $101,741,000 as of December 31, 1997 to $105,315,000 at year-end
1998. Stockholders' equity was $8,728,000 at December 31, 1998, up from its
$8,267,000 level a year earlier, owing primarily to net income of $443,000 for
1998. Also impacting stockholders' equity was the unrealized gain on securities
available-for-sale of $34,000 which is up from the unrealized gain of $16,000 on
securities available-for-sale at December 31, 1997.

       The reserve for probable loan and lease losses, which serves as a
"buffer" against possible future losses, had losses totaling $253,000 charged
against it during 1998. Recoveries of loans previously charged-off amounted to
$101,000 which were credited back to the reserve. A provision for probable loan
and lease losses of $143,000 was recorded in 1998 compared to a provision of
$144,000 in 1997 and $417,000 in 1996.



                                                                   Page 26 of 71
<PAGE>   27
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 1998 was $6,626,000, up from the $6,271,000 reported in 1997 and
$6,150,000 reported in 1996. This represents an increase of 5.7% in 1998 and
2.0% in 1997, respectively. The components of net interest income change in
response to changes in rate, average balance and mix on both earning assets and
liabilities.

        The increase in net interest income in 1998 from 1997 was due to the
decrease in interest expense exceeding the decrease in interest income. Interest
income decreased $35,000 to $9,178,000 in 1998 from $9,213,000 in 1997 while
interest expense decreased $391,000 to $2,552,000 in 1998 from $2,943,000 in
1997. The resulting increase in net interest income can be attributed to a
number of factors. First, the Bank's average interest-earning assets decreased
4.4% from $103,190,000 in 1997 to $98,674 in 1998. This decrease is mostly
attributable to a 6.7% decrease in average loans, the Bank's highest yielding
asset. Average loans decreased from $92,963,000 in 1997 to $86,782,000 in 1998.
Average investment securities decreased from $6,461,000 in 1997 to $5,658,000 in
1998, average federal funds sold, the Bank's lowest yielding asset increased
from $3,409,000 in 1997 to $5,849,000 in 1998. Secondly, although the volume of
interest earning assets was lower on average in 1998 than in 1997, the average
yield earned on these assets increased .4% from 8.9% in 1997 to 9.3% in 1998.
Third, average interest-bearing liabilities decreased 7.6% from $80,083,000 in
1997 to $74,004,000 in 1998. This decrease 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 3.6% from $39,118,000
in 1997 to $37,710,000 in 1998 and time deposits, the Bank's highest interest
paying deposit account, decreased 11.2% from $40,858,000 in 1997 to $36,292,000
in 1997. The Bank offered higher time deposit rates at different times during
1998 and 1997. This created fluctuations in average balances due to account
maturities and the timing of promotional interest rates. Fourth, the average
yield paid on interest-bearing liabilities decreased to 3.4% in 1998 from 3.7%
in 1997.

        The increase in net interest income in 1997 from 1996 was due to the
increase in interest income exceeding the increase in interest expense. Interest
income increased $202,000 to $9,213,000 in 1997 from $9,011,000 in 1996 while
interest expense increased $83,000 to $2,943,000 in 1997 from $2,861,000 in
1996. The resulting increase in net interest income can be attributed to a
number of factors. First, the Bank's average interest-earning assets increased
2.2% from $100,960,000 in 1996 to $103,190,000 in 1997. This increase is mostly
attributable to a 9.1% increase in average loans, the Bank's highest yielding
asset. Average loans increased from $85,216,000 in 1996 to $92,963,000 in 1997.
Average investment securities decreased from $11,214,000 in 1996 to $6,461,000
in 1997, average federal funds sold, the Bank's lowest yielding asset decreased
from $3,467,000 in 1996 to $3,409,000 in 1997. Secondly, although the vol ume of
interest earning assets was higher on average in 1997 than in 1996, the average
yield earned on these assets remained at 8.9% for 1996 and 1997. Third, average
interest-bearing liabilities decreased 3.3% from $80,465,000 in 1996 to
$80,083,000 in 1997. This decrease 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 6.6% from $41,877,000 in 1996 to
$39,118,000 in 1997 while time deposits, the Bank's highest interest paying
deposit account, increased 6.0% from $38,550,000 in 1996 to $40,858,000 in 1997.
This shift was due to the Bank offering higher time deposit rates in an effort
to raise longer-term deposit levels. Fourth, the average yield paid on
interest-bearing liabilities increased to 3.7% from 3.6% in 1996.

        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.


                                                                   Page 27 of 71
<PAGE>   28
<TABLE>
<CAPTION>
(Dollars in Thousands)                                                    1998                                1997
                                                            --------------------------------    --------------------------------
                                                             Average                 Average     Average                 Average
                                                             Balance     Interest     Yield      Balance     Interest     Yield
                                                            ---------    --------    -------    ---------    --------    -------
<S>                                                         <C>          <C>         <C>        <C>          <C>         <C> 
Assets
      Loans                                                 $  86,782     $8,532        9.8%    $  92,963     $8,631        9.3%
      Lease financing                                              13          1        7.7%           79          7        8.9%
      Investment securities(3)                                  5,658        325        5.7%        6,461        375        5.8%
      Federal funds sold                                        5,849        300        5.1%        3,409        185        5.4%
      Interest-earning deposits with                                                    
       other financial institutions                               372         20        5.4%          278         17        6.1%
                                                            ---------     ------     ------     ---------     ------     ------
                      Total Interest-earning Assets            98,674      9,178        9.3%      103,190      9,215        8.9%
                                                                          ------     ------                   ------     ------
Other Assets                                                   15,864                              15,271                 
                      Less: Allowance for Loan Losses            (661)                               (715)                
                                                            ---------                           ---------   
                      Total Average Assets                  $ 113,877                           $ 117,746
                                                            =========                           =========   
                                                                                        
Liabilities and Shareholders' Equity                                                    
      Savings deposits                                         37,710        656        1.7%       39,118        686        1.8%
      Time deposits                                            36,292      1,896        5.2%       40,858      2,250        5.5%
      Other                                                         2                   0.0%          107          7        6.5%
                                                            ---------     ------     ------     ---------     ------     ------
                      Total Interest-bearing Liabilities       74,004      2,552        3.4%       80,083      2,943        3.7%
                                                                          ------     ------                   ------     ------
      Demand deposits                                          29,890                              28,264                 
      Other liabilities                                         1,521                               1,362                 
Shareholders' equity                                            8,462                               8,037                 
                                                            ---------                           --------- 
                      Total Average Liabilities                                         
                       and Shareholders' Equity             $ 113,877                           $ 117,746                 
                                                            =========                           ========= 
Net Interest Spread(1)                                                                  5.9%                                5.3%
                                                                                     ======                              ======
Net Interest Income and Net Interest Margin(2)                            $6,626        6.7%                  $6,272        6.1%
                                                                          ======     ======                   ======     ======
</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 of 71
<PAGE>   29
<TABLE>
<CAPTION>
(Dollars in Thousands)                                                              1996
                                                                --------------------------------------------
                                                                  Average                           Average
                                                                  Balance           Interest         Yield
                                                                ----------         ----------     ----------
<S>                                                             <C>                <C>            <C> 
Assets
      Loans                                                     $   85,216         $    8,137            9.5%
      Lease financing                                                  394                 31            7.9%
      Investment securities(3)                                      11,214                629            5.6%
      Federal funds sold                                             3,467                179            5.2%
      Interest-earning deposits with
       other financial institutions                                    669                 35            5.2%
                                                                ----------         ----------     ----------
                      Total Interest-earning Assets                100,960              9,011            8.9%
                                                                                   ----------     ----------
Other Assets                                                        15,803
                      Less: Allowance for Loan Losses                 (715)
                                                                ----------
                      Total Average Assets                      $  116,048
                                                                ==========

Liabilities and Shareholders' Equity
      Savings deposits                                              41,877                751            1.8%
      Time deposits                                                 38,550              2,108            5.5%
      Other                                                             38                  2            5.3%
                                                                ----------         ----------     ----------
                      Total Interest-bearing Liabilities            80,465              2,861            3.6%
                                                                                   ----------     ----------
      Demand deposits                                               26,422
      Other liabilities                                              1,469
Shareholders' equity                                                 7,692
                                                                ----------
                      Total Average Liabilities
                       and Shareholders' Equity                 $  116,048
                                                                ==========
Net Interest Spread(1)                                                                                   5.3%
                                                                                                  ==========
Net Interest Income and Net Interest Margin(2)                                     $    6,150            6.1%
                                                                                   ==========     ==========
</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.

        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.


                                                                   Page 29 of 71
<PAGE>   30
<TABLE>
<CAPTION>
(Dollars in Thousands)                                    1998 - 1997                        1997 - 1996
                                                ------------------------------      ------------------------------
                                                Volume       Rate        Total      Volume       Rate        Total
                                                ------      ------      ------      ------      ------      ------
<S>                                             <C>         <C>         <C>         <C>         <C>         <C>   
Increase/(Decrease) In
      Interest Income
          Loans(1)                              $ (871)     $  772      $  (99)     $  699      $ (205)     $  494
          Leases(2)                                 (5)         (1)         (6)        (27)         (6)        (33)
          Investment securities(2)                 (46)         (4)        (50)       (277)         23        (254)
          Deposits                                   4          (1)          3         (29)         12         (17)
          Federal funds sold                       125         (10)        115          (3)          9           6
                                                ------      ------      ------      ------      ------      ------
                                                  (793)        756         (37)        363        (167)        196
                                                ------      ------      ------      ------      ------      ------
Increase/(Decrease) In
      Interest Expense
          Savings deposits                         (25)         (5)        (30)        (49)        (17)        (49)
          Time deposits                           (243)       (111)       (354)        127          16         127
          Short-term borrowings                     (5)         (2)         (7)          4           1           4
          Note payable
                                                ------      ------      ------      ------      ------      ------
                                                  (273)       (118)       (391)         82           0          82
                                                ------      ------      ------      ------      ------      ------
                   Increase/(Decrease)
                    in Net Interest Income      $ (520)     $  874      $  354      $  281      $ (167)     $  114
                                                ======      ======      ======      ======      ======      ======
</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 $6,000 in 1998, $26,000 in
1997 and $7,000 in 1996.

(2) Interest income includes the effects of tax equivalent adjustments on tax
exempt securities and leases using tax rates which approximate 41.0% for 1998,
25.0% for 1997 and 21.0% for 1996.

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 $143,000 was recorded
in 1998. This is compared to a provision of $144,000 in 1997 and $417,000 in
1996. The provision for loan and lease losses recorded in 1998, 1997 and 1996 is
a result of management's assessment of the potential losses inherent in the loan
portfolio. The need for additional provision for loan and lease losses in 1999
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 1998, the Bank's non-accrual loans decreased from $229,000 to
$114,000. For further information regarding charge-offs, non-performing and
classified loans and the allowance for probable loan and lease losses, see
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION - "Financial Condition - Non-performing Loans" and "Reserve for
probable Loan and Lease Losses."

NON-INTEREST INCOME

        Non-interest income for 1998 totaled $1,947,000 compared to $1,749,000
in 1997 and $1,838,000 in 1996. This represents an 11.3% increase during 1998,
and a (4.9)% decrease in 1997. The increase during 1998 was due to an increase
in fees and service charges and gains on the sale of investment securities. The
decrease during 1997 was due to a decrease in fees and service charges.

        Other fee and service charge income increased to $1,709,000 during 1998
from $1,622,000 in 1997 and $1,750,000 in 1996. The increase in 1998 was mostly
attributable to a $170,000 increase in fees from the sale of real estate
warehouse loans, which increased from $87,000 in 1997 to $257,000 and a $80,000
decrease in NSF charges, 


                                                                   Page 30 of 71
<PAGE>   31
which decreased from $753,000 in 1997 to $673,000 in 1998. The decrease in 1997
is mostly attributable to a decrease in fees received from the sale of real
estate warehouse loans which decreased from $181,000 in 1996 to $80,000 in 1997.

NON-INTEREST EXPENSES

        Non-interest expense consists primarily of (i) salaries and employee
benefits, (ii) occupancy expenses of premises, (iii) furniture and equipment
expense and (iv) other expenses which include data processing costs, marketing
expenses, professional expenses, office supplies, insurance and assessments and
other loan and administrative expenses. Total non-interest expense for 1998 was
$7,680,000 compared to $7,338,000 in 1997 and $7,438,000 in 1996. The change in
1998 was due to a decrease in salaries and employee benefits which was offset by
increases in furniture and equipment expense and other expenses. The decrease in
1997 was due to a decrease in occupancy expense which was offset by an increase
in salaries and employee benefits.

        Salaries and employees benefits totaled $3,506,000 in 1998 compared to
$3,646,000 in 1997 and $3,511,000 in 1996. The decrease in 1998 was attributable
to a decrease in the number of full time equivalent employees and commissions
paid. The increase in 1997 was attributable in part to bonuses and raises paid
to employees.

        Occupancy was $624,000 in 1998 compared to $634,000 in 1997 and $814,000
in 1996. The decrease in 1997 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, reductions in lease payments on the
Diamond Bar Branch and the relocation of the Arrowhead branch to Blue Jay

        Other expenses were $2,846,000 in 1998 compared to $2,497,000 in 1997
and $2,500,000 in 1996. The majority of the increase in 1998 was due to
contributions to a new director's deferred compensation plan totaling
approximately $180,000, additions to the CEO's supplemental retirement plan of
approximately $102,000 and a settlement of a lawsuit of approximately $79,000.
The largest fluctuations in other expenses during 1997 were a $72,000 decline in
data processing costs, a $167,000 increase in professional expenses and a
$81,644 decline in loan related expenses.

        Non-interest expense as a percentage of total income was 69% in 1998 as
compared to 67% in 1997 and 69% in 1996.

INCOME TAXES

        Total income tax expense for 1998, 1997 and 1996 were $ 307,000,
$134,000 and $28,000, respectively, which approximated 40.9%, 24.9% and 21.0% of
pre-tax income, respectively.


FINANCIAL CONDITION

ASSETS

        Total consolidated assets increased $4,352,000 or 3.9% to $115,863,000
as of December 31, 1998 from $111,511,000 as of December 31, 1997. The increase
in the Company's size is mostly attributable to a $2,865,000 increase in federal
funds sold, a $693,000 increase in interest-bearing deposits in other financial
institutions, a $1,536,000 increase in investment securities, and a $981,000
increase in the cash surrender value of life insurance which was offset by
decreases in net loans, bank premises and equipment and other real estate owned
of $1,173,000, $305,000 and $205,000, respectively.


                                                                   Page 31 of 71
<PAGE>   32
LOANS

        As noted above, the Company's loan portfolio has decreased by
approximately $1,173,000 during the year ended December 31, 1998. This decrease
was primarily due to a decrease in installment loans to individuals which
decreased $12,499,000 from $37,334,000 in 1997 to $24,835,000 in 1998. This
decrease also resulted in a $1,317,000 decrease in unearned income on
installment loans. The decrease in installment loans was partially offset by a
$1,865,000 increase in real estate construction loans, a $1,709,000 increase in
real estate mortgage loans and an $4,550,000 increase in commercial, financial
and agricultural loans. The Company's installment portfolio is comprised of
predominantly auto loans, both indirectly and directly funded. Indirect auto
loans represent approximately 54% and 53% of total installment loans at December
31, 1998 and 1997, respectively. Approximately 98% of all indirect loans are "A"
paper. It is the Bank's intent to divest itself of indirect dealer installment
loans.

NON-PERFORMING LOANS

        The following table sets forth information regarding the Bank's
non-performing loans at year-end 1998 and 1997.


<TABLE>
<CAPTION>
(Dollars in Thousands)                                                 December 31,
                                                                    ------------------
                                                                     1998        1997
                                                                    ------      ------
<S>                                                                 <C>         <C>   
Accruing Loans More Than 90 Days Past Due(1)
      Aggregate Loan Amounts
          Commercial, financial and agricultural
          Real estate                                                           $  109
          Installment loans to individuals                          $    1         107
                                                                    ------      ------
                      Total Loans Past Due More Than 90 Days             1         216
                                                                    ------      ------
Renegotiated loans(2)                                                 --          --
                                                                    ------      ------
Non-accrual loans(3)
      Aggregate Loan Amounts
          Commercial, financial and agricultural                       114          28
          Real estate                                                              201
          Installment loans to individuals
                                                                    ------      ------
                      Total Non-accrual Loans                          114         229
                                                                    ------      ------
                      Total Non-performing Loans                    $  115      $  445
                                                                    ======      ======
</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
1998 and 1997.

(3) There were two loans on non-accrual status totaling approximately $114,000
at December 31, 1998, and four loans totaling approximately $229,000 at December
31, 1997.

        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 of risk to warrant classification in a substandard, doubtful or loss but
do possess credit deficiencies or potential weaknesses deserving management's
close attention.

        As of December 31, 1998, the Bank's classified loans consisted of
$1,692,000 of loans classified as substandard and no loans classified as
doubtful. The Bank's $1,692,000 in loans classified as substandard consisted of


                                                                   Page 32 of 71
<PAGE>   33
$1,577,000 of performing loans and $115,000 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, 1998,
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 December 31, 1998.

        The reserve for probable loan and lease losses at December 31, 1998, was
$686,000 or .78%, of total loans and leases, as compared to $695,000 or .78%, of
total credits at December 31, 1997. 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)                                   1998         1997
                                                        ------       ------
<S>                                                     <C>          <C>   

Allowance For Loan Losses
      Balance, Beginning of period                      $  695       $  728
                                                        ------       ------
      Charge-offs
          Commercial, financial and agricultural            40           34
          Real estate construction
          Real estate mortgage                                           15
          Consumer loans                                   213          308
          Lease financing
                                                        ------       ------
                      Total Charge-offs                    253          357
                                                        ------       ------
      Recoveries
          Commercial, financial and agricultural             8           18
          Real estate construction
          Real estate mortgage                              41            6
          Consumer loans                                    52          156
          Lease financing
                                                        ------       ------
                      Total Recoveries                     101          180
                                                        ------       ------
Net Charge-offs/(Recoveries)                               152          177
Provision/(Credit) Charged to Operations                   143          144
                                                        ------       ------
Balance, End of period                                  $  686       $  695
                                                        ======       ======
Net Charge-offs During the Year to Average Loans
 Outstanding During the Year                              0.18%        0.19%
                                                        ======       ======
Allowance For Loan Losses to Total Losses                 0.78%        0.78%
                                                        ======       ======
</TABLE>


                                                                   Page 33 of 71
<PAGE>   34
        The Bank accounts for impaired loans in accordance with SFAS No. 114 (as
amended by SFAS No. 118), "Accounting by Creditors for Impairment of a Loan."
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, 1998, 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 $60,000 and $28,000 in 1998 and
1997, respectively, and unrealized losses for the same corresponding periods of
$1,000 and $0. The Company generated gains of $49,000 during 1998 and $2,000
during 1997 and 1996, respectively.

        In accordance with 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
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

        The Bank primarily funds its assets with deposits. Total deposits at
December 31, 1998 were $105,315,000 compared with $101,741,000 in 1997. The
$3,574,000 increase represents a 3.5% increase. The mix of the Bank's deposits
showed wide fluctuations with a decrease in savings and NOW deposits of $559,000
or 2.2%, a decrease in money market deposits of $1,066,000 or 8.8%, an increase
in demand deposits of $3,115,000 or 10.6%, an increase in time deposits in
denominations of $100,000 or more of $1,930,000 or 25.7% and an increase in
other time deposits of $152,000 or .6%. The decreases in savings, NOW and money
market accounts is a result of customers transferring monies to time deposit
accounts. The Bank was offering higher interest rates on short-term time
deposits. The increase in demand deposits was a result of the Bank's effort to
increase core deposits and improve liquidity.

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 of 71
<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 weekly. 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
18% and 14% as of December 31, 1998 and 1997 respectively. The Bank's loan to
deposit ratio was 83% and 87% as of December 31, 1998 and 1997. 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%. Loan demand has decreased
$1,173,000 while deposits increased by $3,574,000.

        Liquidity has increased from $14,056,000 at December 31, 1997 to
$19,219,000 at December 31, 1998 due to a increases in cash and cash
equivalents, interest-bearing deposits in other financial institutions and
investment securities of $2,935,000, $693,000 and $1,536,000, respectively.

        While the level of liquid assets is modest, management believes it is
sufficient to meet current and anticipated funding needs. Liquid assets
represent approximately 16.6% 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 four correspondent banks
totaling $5.7 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, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.

        As of the most recent notification from the Office of the Comptroller of
the Currency (OCC), the Bank was categorized 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):


                                                                   Page 35 of 71
<PAGE>   36
<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, 1998                                                                          
      Total capital to risk-weighted assets    $9,373     9.8%   $7,687      8.0%    $9,609       10.0%
      Tier 1 capital to risk-weighted assets    8,687     9.0%    3,843      4.0%     5,765        6.0%
      Tier 1 capital to average assets          8,687     7.5%    4,633      4.0%     5,791        5.0%
                                                                                                 
As of December 31, 1997                                                                          
      Total capital to risk-weighted assets    $8,939     9.3%   $7,681      8.0%    $9,602       10.0%
      Tier 1 capital to risk-weighted assets    8,244     8.6%    3,839      4.0%     5,758        6.0%
      Tier 1 capital to average assets          8,244     7.3%    4,525      4.0%     5,656        5.0%
</TABLE>


        Capital ratios have increased between December 31, 1997 and December 31,
1998, mostly as a result of increased 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.

YEAR 2000 READINESS DISCLOSURE UNDER THE UNITED STATES YEAR 2000 INFORMATION
AND DISCLOSURE ACT

        Certain statements in this section on the Year 2000 constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995, which involve risk and uncertainties. The Company's actual results may
differ significantly from the results discussed in these forward-looking
statements. Such factors include but are not limited to the estimated costs of
remediation, the preparedness of third party vendors, timetables for
implementation of future remediation and testing, contingency plans, and
estimated future costs due to business disruption caused by affected third
parties.

        The financial institutions industry as with other industries, is faced
with year 2000 issues. These issues center around computer programs that use
only two digits for the year. If not corrected, many computer applications could
fail or create erroneous results by or at the Year 2000 or possibly earlier. The
Year 2000 issue affects the Company in that the financial services business is
highly dependent on computer applications in a variety of ways, including the
following (a) the Company relies on computer systems in almost all aspects of
its business, including the processing of deposits, loans and other service and
products offered to customers, the failure of which in connection with the Year
2000 could cause systematic disruptions and failures in the products and
services offered by the Company, (b) other banks, clearing houses and vendors
whose products and services the Company uses are at risk of systemic disruptions
and potential failures in the event that such entities have not adequately
addressed their Year 2000 issue prior to the Year 2000, (c) the creditworthiness
of borrowers of the Company might be diminished by significant disruptions of
their business as a result of their own or others failure to address adequately
the Year 2000 issues prior to the Year 2000, and (d) federal balancing agencies
have issued interagency guidance on the business-wide risk posed to financial
institutions by the Year 2000 problem pursuant to which the federal banking
agencies may take 


                                 Page 36 of 71
<PAGE>   37
supervisory action against financial institutions that fail to address
appropriately Year 2000 issues prior to the Year 2000, including formal and
informal enforcement actions, denial of applications to the federal banking
agencies, civil money penalties and a reduction in the management component
rating of the institution's composite rating.

        The Company has been working on the Year 2000 issues for the last 18
months. A committee, known as Year 2000 Bank Committee, was established to
analyze the issues and determine compliance with the requirements for Year 2000.
To facilitate a thorough and complete Year 2000 assessment and response to
identified issues; a phased management procedural approach has been adopted as
follows:

        Awareness Phase - encompassing the establishment of a budget and project
        plan.

        Assessment Phase - the actual process of identifying all of its systems
        and individual components of the systems. Mission-critical systems and
        equipment (systems and equipment critical to conducting operations) were
        identified.

        Remediation Phase - changes are made to systems and equipment. This
        phase deals primarily with the technical issues of converting existing
        systems or switching to compliant systems. During this phase, decisions
        are made on how to make the systems or processes Year 2000 compliant,
        and the required system changes are made.

        Validation / Testing Phase - the actual process of validating and
        testing the changes made during the conversion process. The development
        of test data and test scripts, the running of test scripts, and the
        review of test results are crucial for this state of the conversion
        process to be successful. If the testing results show anomalies, the
        tested area needs to be corrected and re-tested.

        To date the awareness phase, assessment phase, remediation phase,
validation phase/testing phases have been completed for all but one of the
mission critical systems. The ATM system is scheduled for the validation/testing
phase on April 30, 1999. As part of the Year 2000 process, the Company has
communicated with its vendors, upon whose services the Company relies, to ensure
Year 2000 compliance. In addition, as part of the credit review process, the
Company has communicated with its major borrowers in an effort to ensure that
such borrowers have taken appropriate steps to address their Year 2000 issues
and will not be materially affected by any Year 2000 problems. The Company is
communicating with its deposit customers as well.

        Contingency plans are being developed to protect the Company in the
event that the Company is unable to attain Year 2000 compliance in certain
applications. These plans are designed to provide minimum levels of service or
outputs until the failed system can be repaired or replaced. Most of these
contingency plans are manual effort systems, which should provide the minimum
level of service for the time needed to repair or replace failed systems. Test
results to date indicate that the original system for each mission critical
system should meet the demands of processing in the Year 2000. However, in the
case of failure, the ultimate impact on financial operations is not known, nor
is it known what impact a regional or nationwide power failure or communications
breakdown would have on the financial performance of the Company.

        The Company has created a budget specific to Year 2000 readiness. The
budget totals $50,000 and is comprised of the following components: (1) servicer
testing, (2) system upgrades, (3) construction, (4) non-computer equipment, and
(5) computer hardware and software. As of December 31, 1998, approximately
$11,000 or 22% has been spent. There is no assurance that additional amounts
will not be added to the amounts already budgeted for the Year 2000
expenditures.

        Although the Company believes that steps being taken regarding the Year
2000 are adequate to ensure that it will not be materially affected by the Year
2000 problem, there can be no assurance that the Year 2000 plan and the
Company's other Year 2000 remedial and contingency plans will fully protect the
Company from the risks associated with the Year 2000. The analysis of, and
preparation for, the Year 2000 and related problems necessarily rely on a
variety of assumptions about future events and there can be no assurance that
the Company's Management has accurately predicted such future events or the
remedial and contingency plans of the Company will adequately address such
future events. In the event that the business of the Company, of vendors of the
Company or of customers of the Company is disrupted as a result of the Year 2000
problem, such disruption could have a material adverse effect on the Company.


                                                                   Page 37 of 71
<PAGE>   38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

                                                                  Page Reference

Independent Auditors' Report                                                  39

Consolidated Balance Sheets
December 31, 1998 and 1997                                                    40

Consolidated Statements of Income
For the Years Ended December 31, 1998, 1997 and 1996                          41

Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996                          42

Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996                          43

Notes to Consolidated Financial Statements                                    45

        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 38 of 71
<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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, 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, 1998, in conformity
with generally accepted accounting principles.




Rancho Cucamonga, California
March 5, 1999


                                                                   Page 39 of 71
<PAGE>   40
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                               ASSETS
                                                                                     1998                    1997
                                                                                -------------           -------------
<S>                                                                             <C>                     <C>          
Cash and due from banks (minimum Federal Reserve
  Balance requirement at December 31, 1998 was $1,660,000)                      $   6,473,959           $   6,404,346
Federal funds sold                                                                  5,815,000               2,950,000
                                                                                -------------           -------------
                      Total Cash and Cash Equivalents                              12,288,959               9,354,346
                                                                                -------------           -------------
Interest-bearing deposits in other financial institutions                             693,000
Investment securities (Notes #1C and #2)
      Available-for-sale                                                            6,237,188               4,701,490
Loans, net of unearned income (Notes #1D and #3)                                   85,755,246              88,675,135
Loans held for sale (Notes #1E and #3)                                              2,177,692                 424,950
                                                                                -------------           -------------
                                                                                   87,932,938              89,100,085
Direct lease financing (Notes #1G and #4)                                                                      14,354
            Less:  Reserve for probable loan and lease
                         losses (Notes 1F and #5)                                    (686,016)               (694,880)
                                                                                -------------           -------------
                                                                                   87,246,922              88,419,559
Bank premises and equipment (Notes #1H and #7)                                      6,436,612               6,741,300
Accrued interest                                                                      496,093                 445,033
Cash surrender value of life insurance                                              1,801,984                 981,467
Other real estate owned (Notes #1K, #17 and #18)                                      287,354                 492,492
Other assets                                                                          374,919                 375,125
                                                                                -------------           -------------
                      Total Assets                                              $ 115,863,031           $ 111,510,812
                                                                                =============           =============
                                  LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
      Deposits
          Demand deposits                                                          32,570,373              29,455,497
          Savings and NOW deposits                                                 25,003,583              25,562,601
          Money market deposits                                                    11,103,667              12,168,373
          Time deposits in denominations of $100,000 or more                        9,452,872               7,522,574
          Other time deposits                                                      27,184,495              27,032,311
                                                                                -------------           -------------
                                                                                  105,314,990             101,741,356
      Federal funds purchased
      Accrued employee salary and benefits                                            781,629                 781,712
      Accrued interest and other liabilities                                        1,038,253                 721,241
                                                                                -------------           -------------
                      Total Liabilities                                           107,134,872             103,244,309
                                                                                -------------           -------------
Stockholders' Equity
      Contributed capital
          Common stock - authorized 15,000,000 shares, no par
            value, issued and outstanding 1,862,776 shares in
            1998 and 1997                                                           2,106,258               2,106,258
      Additional paid-in capital                                                    3,306,684               3,306,684
      Retained earnings                                                             3,280,982               2,837,599
      Accumulated other comprehensive income                                           34,235                  15,962
                                                                                -------------           -------------
                      Total Stockholders' Equity                                    8,728,159               8,266,503
                                                                                -------------           -------------
                      Total Liabilities and Stockholders' Equity                $ 115,863,031           $ 111,510,812
                                                                                =============           =============
</TABLE>

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



                                                                   Page 40 of 71
<PAGE>   41
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME
                FOR THE YEARS ENDED DECEMBER 1998, 1997 AND 1996



<TABLE>
<CAPTION>
                                                                              1998              1997              1996
                                                                          -----------       -----------       -----------
<S>                                                                       <C>               <C>               <C>        
INTEREST INCOME
      Interest and fees on loans (Note #1D)                               $ 8,531,979       $ 8,631,123       $ 8,136,925
      Interest on Investment Securities (Note #1C)
          Obligations of U.S. Treasury and Agencies                           315,532           364,779           620,061
          Other securities                                                      9,948             9,833             9,792
      Interest on deposits                                                     20,268            17,398            34,777
      Interest on Federal funds sold                                          299,538           185,151           178,734
      Direct lease financing income (Note #1G)                                    784             4,944            30,858
                                                                          -----------       -----------       -----------
                      Total Interest Income                                 9,178,049         9,213,228         9,011,147
                                                                          -----------       -----------       -----------

INTEREST EXPENSE
      Interest on savings deposits                                            206,686           216,723           221,431
      Interest on NOW and money market deposits                               448,803           468,881           529,933
      Interest on time deposits in denominations of $100,000 or more          323,822           481,436           352,970
      Interest on other time deposits                                       1,572,361         1,768,438         1,754,823
      Interest on Federal funds purchased and other interest                      320             7,029             1,677
                                                                          -----------       -----------       -----------
                      Total Interest Expense                                2,551,992         2,942,507         2,860,834
                                                                          -----------       -----------       -----------
                      Net Interest Income                                   6,626,057         6,270,721         6,150,313

PROVISION FOR LOAN AND LEASE LOSSES - (Notes #1F & #5)                       (142,982)         (143,782)         (416,900)
                                                                          -----------       -----------       -----------
                      Net Interest Income After Provision
                        for Loan and Lease Losses                           6,483,075         6,126,939         5,733,413
                                                                          -----------       -----------       -----------

OTHER  INCOME
      Fees and service charges, gain on sale of loans
        and loan servicing income (Note #11)                                1,709,063         1,622,015         1,750,110
      Net gain on sale of investment securities                                49,072             2,450             2,200
      Other income                                                            189,222           124,289            85,623
                                                                          -----------       -----------       -----------
                      Total Other Income                                    1,947,357         1,748,754         1,837,933
                                                                          -----------       -----------       -----------

OTHER EXPENSES
      Salaries and employee benefits                                        3,505,857         3,671,701         3,511,460
      Occupancy expense of premises                                           623,994           634,410           813,515
      Furniture and equipment expense                                         672,893           553,456           549,022
      Net loss on sale of other real estate owned                              31,556             7,166            63,992
      Other expenses (Note #11)                                             2,845,949         2,471,024         2,499,779
                                                                          -----------       -----------       -----------
                      Total Other Expenses                                  7,680,249         7,337,757         7,437,768
                                                                          -----------       -----------       -----------
Income Before Income Taxes                                                    750,183           537,936           133,578
Income Taxes (Notes #1J and #8)                                               306,800           133,800            28,000
                                                                          -----------       -----------       -----------
Net Income                                                                $   443,383       $   404,136       $   105,578
                                                                          ===========       ===========       ===========

Earnings Per Share (Notes #1L and #15)
       Basic                                                              $      0.24       $      0.22       $      0.06
                                                                          ===========       ===========       ===========
       Diluted                                                            $      0.22       $      0.21       $      0.06
                                                                          ===========       ===========       ===========
</TABLE>


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


                                                                   Page 41 of 71
<PAGE>   42
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED DECEMBER 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                                                          Accumulated
                                                         Number of                Additional                 Other
                                                           Shares      Common       Paid-in    Retained  Comprehensive
                                                        Outstanding     Stock       Capital    Earnings      Income       Total
                                                        -----------  ----------   ----------  ---------- -------------  -----------
<S>                                                     <C>          <C>          <C>         <C>          <C>          <C>        
BALANCE, December 31, 1995                               1,862,776   $2,106,258   $3,306,684  $2,327,885   $  11,887    $ 7,752,714
      Comprehensive income
           Net Income                                                                                        105,578        105,578
                                                                                                                        -----------
           Unrealized security holding losses                                                                 (5,142)        (5,142)
             (net of $4,518 tax)
           less reclassification adjustments for gains                                                        (1,738)        (1,738)
             (net of $462 tax)                                                                                          -----------
           Total other comprehensive income                                                                                  (6,880)
      Total Comprehensive income                                                                                             98,698
                                                         ---------   ----------   ----------  ----------   ---------    -----------
BALANCE, December 31, 1996                               1,862,776    2,106,258    3,306,684   2,433,463       5,007      7,851,412
      Comprehensive income
           Net Income                                                                            404,136                    404,136
                                                                                                                        -----------
           Unrealized security holding gains                                                                  12,792         12,792
              (net of $8,544 tax)
           less reclassification adjustments for gains                                                        (1,837)        (1,837)
              (net of $613 tax)                                                                                         -----------
           Total other comprehensive income                                                                                  10,955
      Total Comprehensive income                                                                                            415,091
                                                         ---------   ----------   ----------  ----------   ---------    -----------
BALANCE, December 31, 1997                               1,862,776    2,106,258    3,306,684   2,837,599      15,962      8,266,503
      Comprehensive income
           Net Income                                                                            443,383                    443,383
                                                                                                                        -----------
           Unrealized security holding gains
               (net of $33,840 tax)                                                                           46,735         46,735
           less reclassification adjustments for gains
               (net of $20,610 tax)                                                                          (28,462)       (28,462)
                                                                                                                        -----------
           Total other comprehensive income                                                                                  18,273
      Total Comprehensive income                                                                                            461,656
                                                         ---------   ----------   ----------  ----------   ---------    -----------
BALANCE, December 31, 1998                               1,862,776   $2,106,258   $3,306,684  $3,280,982   $  34,235    $ 8,728,159
                                                         =========   ==========   ==========  ==========   =========    ===========
</TABLE>


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


                                                                   Page 42 of 71
<PAGE>   43
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                        1998                 1997                 1996
                                                                    ------------         ------------         ------------
<S>                                                                 <C>                  <C>                  <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
      Interest and fees received                                    $  7,693,391         $  7,555,823         $ 10,382,661
      Service fees and other income received                           1,900,070            1,680,159            1,835,733
      Financing revenue received under leases                                784                4,944               30,858
      Interest paid                                                   (2,605,020)          (3,195,513)          (2,836,415)
      Cash paid to suppliers and employees                            (7,575,320)          (6,607,753)          (7,002,983)
      Income taxes paid                                                 (185,435)             (10,000)             (18,044)
                                                                    ------------         ------------         ------------
                      Net Cash Provided By/(Used In)
                        Operating Activities                            (771,530)            (572,340)           2,391,810
                                                                    ------------         ------------         ------------

CASH FLOWS FROM INVESTING ACTIVITIES
      Proceeds from maturities of investment securities,
       available-for-sale                                              4,050,000            3,350,000           13,085,000
      Proceeds from sales of investment securities,
       available-for-sale                                                549,197            6,392,159            5,011,954
      Purchase of investment securities held-to-maturity
      Purchase of investment securities available-for-sale            (6,010,595)          (8,484,567)         (10,578,602)
      Purchase of other investment securities                             (5,000)
      Net (increase)/decrease in deposits in other
       financial institutions                                           (693,000)             396,000              396,000
      Recoveries on loans previously written off                         101,283              180,559              213,798
      Net loans made to customers and principal
        collections of loans                                           2,308,108            9,480,516          (22,353,294)
      Net decrease in leases to customers                                 14,354              174,135              400,376
      Capital expenditures                                              (427,218)            (861,941)          (3,339,414)
      Proceeds from sale of property, plant and equipment                 76,198               31,404               74,727
      Proceeds from sale of OREO                                         169,182              210,547              409,861
                                                                    ------------         ------------         ------------
                      Net Cash Provided By/(Used In)
                       Investing Activities                              132,509           10,868,812          (16,679,594)
                                                                    ------------         ------------         ------------

CASH FLOWS FROM FINANCING ACTIVITIES
      Net decrease/(increase)  in demand deposits, NOW
       accounts, savings accounts, and money market deposits           1,491,152            3,151,564           (4,489,987)
      Net increase (decrease) in certificates of deposits              2,082,482           (8,012,997)          12,678,329
      Net increase/(decrease) in federal funds purchased                                   (3,700,000)           3,700,000
                                                                    ------------         ------------         ------------
                      Net Cash Provided By/(Used In)
                       Financing Activities                            3,573,634           (8,561,433)          11,888,342
                                                                    ------------         ------------         ------------

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS                   2,934,613            1,735,039           (2,399,442)

CASH AND CASH EQUIVALENTS, Beginning of year                           9,354,346            7,619,307           10,018,749
                                                                    ------------         ------------         ------------

CASH AND CASH EQUIVALENTS, End of year                              $ 12,288,959         $  9,354,346         $  7,619,307
                                                                    ============         ============         ============
</TABLE>


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


                                                                   Page 43 of 71
<PAGE>   44
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                1998                1997                1996
                                                            -----------         -----------         -----------
<S>                                                         <C>                 <C>                 <C>        
RECONCILIATION OF NET INCOME TO NET CASH
 PROVIDED BY/(USED IN) OPERATING ACTIVITIES
      Net Income                                            $   443,383         $   404,136         $   105,578
                                                            -----------         -----------         -----------
      Adjustments to Reconcile Net Income
       to Net Cash Provided by Operating Activities
          Depreciation and amortization                         650,375             538,527             499,410
          Investment securities accretion/amortization          (38,724)            (38,017)              3,777
          Provision for probable credit losses                  142,982             143,782             416,900
          Provision for probable OREO losses                      4,400                                  37,260
          (Gain)/loss on sale of equipment                        5,334              (9,309)             28,589
          Increase/(decrease) in taxes payable                  120,565             123,000              (5,044)
          Increase in other assets                             (820,311)            (98,324)           (142,586)
          Increase/(decrease) in unearned loan fees          (1,394,090)         (1,660,765)          1,259,746
          (Increase)/decrease in interest receivable            (51,060)            (41,907)            138,849
          Increase/(decrease) in interest payable               (53,028)           (253,006)             24,419
          Increase (decrease) in accrued expense and
           other liabilities                                    236,160             314,827             (36,880)
          Gain on sale of investment securities                 (49,072)             (2,450)             (2,200)
          Loss on sale of OREO                                   31,556               7,166              63,992
                                                            -----------         -----------         -----------
                      Total Adjustments                      (1,214,913)           (976,476)          2,286,232
                                                            -----------         -----------         -----------
                      Net Cash Provided By/(Used In)
                       Operating Activities                 $  (771,530)        $  (572,340)        $ 2,391,810
                                                            ===========         ===========         ===========

SUPPLEMENTARY INFORMATION
      Change in valuation allowance
       for investment securities                            $    18,373         $    10,955         $    (6,880)
                                                            ===========         ===========         ===========
      Transfer of loans to real estate owned through
         foreclosure                                               --                  --           $   612,624
                                                            ===========         ===========         ===========
</TABLE>


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


                                                                   Page 44 of 71
<PAGE>   45
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


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.

    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

    In accordance with 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 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 of 71
<PAGE>   46
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

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 discounts on installment loans are recognized as
    income over the term of the loans by the sum-of-the-month-digits method
    (Rule of 78's).

    The Bank accounts for impaired loans in accordance with SFAS No. 114, (as
    amended by SFAS No. 118), "Accounting by Creditors for Impairment of a
    Loan." 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.  Loans Held for Sale

    Loans held for sale are carried at the lower of aggregate cost or market.
    Net unrealized losses are recognized through a valuation allowance by
    charges to income.

F.  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.

G.  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.


                                                                   Page 46 of 71
<PAGE>   47
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

H.  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, 1998, 1997 and 1996,
    was approximately $650,000, $539,000 and $499,000, respectively.

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.  Earnings Per Share (EPS)

    Basic EPS excludes dilution and is computed by dividing income available to
    common stockholders by the weighted-average number of common shares
    outstanding for the period. Diluted EPS reflects the potential dilution that
    could occur if securities or other contracts to issue common stock were
    exercised or converted into common stock or resulted in the issuance of
    common stock that then shared in the earnings of the entity.

M.  Reclassifications

    Certain reclassifications have been made to the 1996 and 1997 financial
    statements to conform to 1998 classifications.

N.  New Accounting Pronouncements

    In June 1998, the Financial Accounting Standards Board issued Statement No.
    133, "Accounting for Derivative Instruments and Hedging Activities." This
    statement, which is effective for all fiscal quarters of fiscal years
    beginning after June 15, 1999, supercedes FASB No. 119, "Disclosure about
    Derivative Financial Instruments and Fair Value of Financial Instruments."
    FASB No. 133 establishes accounting and reporting standards for derivative
    instruments and for hedging activities. It requires that an entity recognize
    all derivatives as either assets or liabilities in the statement of
    financial position and measure those instruments at fair value. Management
    has not determined the potential impact that 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.


                                                                   Page 47 of 71
<PAGE>   48
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #2 - INVESTMENT SECURITIES

At December 31, 1998 and 1997, the investment securities portfolio was comprised
of securities classified as available-for-sale, in accordance with SFAS No. 115,
resulting in investment securities available-for-sale being carried at fair
value, adjusted for amortization of premiums and accretions of discounts.

The amortized cost and fair values of investment securities available-for-sale
at December 31, 1998, were:


<TABLE>
<CAPTION>
                                                         Gross             Gross
                                   Amortized          Unrealized        Unrealized
                                      Cost               Gains            Losses        Fair Value
                                  ----------          ----------        ----------      ----------
<S>                               <C>                 <C>               <C>             <C>       
U.S. Treasury securities          $  499,577          $      423                        $  500,000
U.S. Agency securities             5,491,866              59,302        $     (699)      5,550,469
Other                                186,719                                               186,719
                                  ----------          ----------        ----------      ----------
        Total                     $6,178,162          $   59,725        $     (699)     $6,237,188
                                  ==========          ==========        ==========      ==========
</TABLE>


The amortized cost and fair values of investment securities available-for-sale
at December 31, 1997, were:


<TABLE>
<CAPTION>
                                                        Gross           Gross
                                      Amortized      Unrealized       Unrealized
                                        Cost            Gains           Losses        Fair Value
                                     ----------      ----------       ----------      ----------
<S>                                  <C>             <C>              <C>             <C>       
U.S. Treasury securities             $2,989,943      $    3,338                       $2,993,281
U.S. Agency securities                1,502,180           9,695                        1,511,875
Other                                   181,844          14,490                          196,334
                                     ----------      ----------       ----------      ----------
        Total                        $4,673,967      $   27,523       $        0      $4,701,490
                                     ==========      ==========       ==========      ==========
</TABLE>


The amortized cost and fair values of investment securities available-for-sale
at December 31, 1998 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                                $2,002,354          $2,003,282
Due after one year but less than five years             3,989,089           4,047,187
                                                       ----------          ----------
                                                        5,991,443           6,050,469
Other securities                                          186,719             186,719
                                                       ----------          ----------
                             Total Securities          $6,178,162          $6,237,188
                                                       ==========          ==========
</TABLE>


                                                                   Page 48 of 71
<PAGE>   49
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #2 - INVESTMENT SECURITIES, Continued

Proceeds from sales of investment securities available-for-sale during 1998 were
$549,197. Gross gains on those sales were $49,072. There were no losses during
1998. Included in shareholders' equity at December 31, 1998 is $34,235 of net
unrealized gains (net of $24,791 estimated tax expense) on investment securities
available-for-sale.

Proceeds from sales of investment securities available-for-sale during 1997 were
$6,392,159. Gross gains and losses on those sales were $5,288 and $2,838,
respectively. Included in shareholders' equity at December 31, 1997 is $15,962
of net unrealized gains (net of $11,559 estimated tax expense) on investment
securities available-for-sale.

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.

Securities with a carrying value and fair value of $4,047,187 and $3,992,124 at
December 31, 1998 and 1997, respectively, were pledged to secure public monies
as required by law.


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>
                                                    1998                   1997
                                                ------------           ------------
<S>                                             <C>                    <C>         
Commercial, financial and agricultural          $ 15,134,834           $ 10,584,778
Real Estate - construction                         3,825,482              1,960,384
Real Estate - mortgage
      Commercial                                  34,872,740             32,622,866
      Residential                                  8,327,810              8,868,823
Installment loans to individuals                  24,835,185             37,333,936
Loans held for sale                                2,177,692                424,950
All other loans (including overdrafts)                92,098                 31,341
                                                ------------           ------------
                                                  89,265,841             91,827,078
Unearned income on installment loans                (977,920)            (2,294,624)
Deferred loan fees                                  (354,983)              (432,369)
                                                ------------           ------------
        Loans, Net of Unearned Income           $ 87,932,938           $ 89,100,085
                                                ============           ============
</TABLE>


                                                                   Page 49 of 71
<PAGE>   50
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #3 - LOANS, Continued

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>
                                                              1998              1997              1996
                                                           ----------        ----------        ----------
<S>                                                        <C>               <C>               <C>       
Recorded investment in impaired loans                      $  114,000        $  229,000        $  434,000
Related allowance for loan losses                                   0             8,000            66,000
Average recorded investment in impaired loans                 106,000           354,000           508,000
Interest income recognized for cash payments                        0             3,000             6,000
Cash receipts applied to reduce principal balance               5,000            17,000            11,000
</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 $114,000 and $229,000 at December 31,
1998 and 1997, respectively. As of December 31, 1998 and 1997, 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 $6,000, $26,000 and $7,000 in 1998, 1997 and 1996, respectively.

At December 31, 1998 and 1997, the Company had approximately $1,000 and
$216,000, respectively, in loans past due 90 days or more in interest or
principal and still accruing interest. These loans are well secured and in the
process of collection, or are secured by 1-4 single-family residences.

At December 31, 1998, no loans were classified as troubled debt restructurings.

Loans with a carrying amounts of approximately $1,895,000 have been pledged to
secure the line at the Federal Reserve Bank.

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>
                                                               1997
                                                            ----------
<S>                                                         <C>       
Lease payments receivable                                   $   15,252
Unearned income                                                   (898)
                                                            ----------
        Total Direct Lease Financing                        $   14,354
                                                            ==========
</TABLE>


The Company had no outstanding commitments relating to municipal leases at
December 31, 1998 and 1997.


                                                                   Page 50 of 71
<PAGE>   51
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #5 - RESERVE FOR PROBABLE LOAN AND LEASE LOSSES

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


<TABLE>
<CAPTION>
                                                            1998                1997                1996
                                                         ---------           ---------           ---------
<S>                                                      <C>                 <C>                 <C>      
Balance, Beginning of year                               $ 694,880           $ 727,667           $ 783,466
Recoveries on loans previously charged off                 101,283             180,559             213,798
Loans charged off                                         (253,129)           (357,128)           (686,497)
Provision/(credit) charged to operating expense            142,982             143,782             416,900
                                                         ---------           ---------           ---------
Balance, End of year                                     $ 686,016           $ 694,880           $ 727,667
                                                         =========           =========           =========
</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 1998 and 1997, is as follows:


<TABLE>
<CAPTION>
                                                    1998                  1997
                                                -----------           -----------
<S>                                             <C>                   <C>        
Outstanding Balance, Beginning of year          $ 1,823,468           $ 1,634,428
Credit granted, including renewals                1,575,755               339,992
Repayments                                         (559,988)             (150,952)
                                                -----------           -----------
Outstanding Balance, End of year                $ 2,839,235           $ 1,823,468
                                                ===========           ===========
</TABLE>


Not included in the balances outstanding at December 31, 1998 and 1997, were
undisbursed commitments to lend of approximately $275,000 and $142,000,
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 1998
and 1997.


NOTE #7 - PREMISES AND EQUIPMENT

Major classifications of Company premises and equipment are summarized as
follows:


<TABLE>
<CAPTION>
                                                                    1998                  1997
                                                                -----------           -----------
<S>                                                             <C>                   <C>        
Building                                                        $ 3,868,395           $ 3,901,215
Furniture and equipment                                           3,546,881             4,082,328
Leasehold improvements                                            1,204,983             1,172,077
                                                                -----------           -----------
                                                                  8,620,259             9,155,620
      Less:  Accumulated depreciation and amortization           (3,468,647)           (3,699,320)
Land                                                              1,285,000             1,285,000
                                                                -----------           -----------
        Total                                                   $ 6,436,612           $ 6,741,300
                                                                ===========           ===========
</TABLE>


                                                                   Page 51 of 71
<PAGE>   52
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #8 - INCOME TAXES


<TABLE>
<CAPTION>
                                                           Year Ending December 31,
                                              ------------------------------------------------
                                                 1998                1997              1996
                                              ----------          ----------        ----------
<S>                                           <C>                 <C>               <C>       
Tax provision applicable to
  income before income taxes                  $  306,800          $  133,800        $   28,000
                                              ==========          ==========        ==========

Federal Income Tax
      Current                                    330,700              29,300              --
      Deferred (credit)                          (92,200)             51,600            15,000
                                              ----------          ----------        ----------
           Total Federal Income  Tax             238,500              80,900            15,000
                                              ----------          ----------        ----------

State Franchise Tax
      Current                                     98,800              50,500            10,800
      Deferred (credit)                          (30,500)              2,400             2,200
                                              ----------          ----------        ----------
           Total State Franchise Tax              68,300              52,900            13,000
                                              ----------          ----------        ----------
           Total Income Taxes                 $  306,800          $  133,800        $   28,000
                                              ==========          ==========        ==========
</TABLE>


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>
                                                1998                          1997                         1996
                                      ------------------------       -----------------------      -----------------------
                                        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                      $ 66,100       $  1,500       $ 40,100       $  1,560      $ 21,160       $  4,600
Depreciation computed
 differently on tax returns than
 for financial statements               (25,300)         4,600        (10,800)        (2,520)        7,500            300
Deferred compensation plan              (84,400)       (26,300)       (19,700)        (4,640)      (19,900)        (4,500)
Provision for loan loss deduction
 in tax return over amount
 charged for financial
 statement purposes                     (48,600)       (10,300)        42,000          8,000         6,240          1,800
                                       --------       --------       --------       --------      --------       --------
        Total                          $(92,200)      $(30,500)      $ 51,600       $  2,400      $ 15,000       $  2,200
                                       ========       ========       ========       ========      ========       ========
</TABLE>


                                                                   Page 52 of 71
<PAGE>   53
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #8 INCOME TAXES, Continued

As a result of the following items, the total income tax expense/(credit) for
1998, 1997 and 1996 was different than the amount computed by applying the
statutory U.S. Federal income tax rate to income before taxes:


<TABLE>
<CAPTION>
                                                  1998                            1997                           1996
                                        -------------------------       -------------------------       ------------------------
                                                         Percent                         Percent                        Percent
                                                        of Pretax                       of Pretax                      of Pretax
                                          Amount          Income          Amount          Income          Amount         Income
                                        ---------       ---------       ---------       ---------       ---------      ---------
<S>                                     <C>             <C>             <C>             <C>             <C>            <C> 
Federal rate                            $ 255,062            34.0       $ 182,898            34.0       $  45,416           34.0
Changes due to State income                                                                            
   tax, net of Federal tax benefit         45,078             6.1          34,914             6.5           8,580            6.4
Exempt interest                            (2,180)           (0.3)        (51,045)           (9.5)        (28,410)         (21.2)
Other                                       8,840             1.1         (32,967)           (6.1)          2,414            1.8
                                        ---------       ---------       ---------       ---------       ---------      ---------
                      Total             $ 306,800            40.9       $ 133,800            24.9       $  28,000           21.0
                                        =========       =========       =========       =========       =========      =========
</TABLE>


The deferred tax assets and liabilities of the Company are composed of the
following tax-affected cumulative timing differences.


<TABLE>
<CAPTION>
                                                          1998            1997
                                                       ---------       ---------
<S>                                                    <C>             <C>      
Deferred Tax Assets
      Real estate owned writedowns                     $  19,000       $  14,000
      Deferred compensation                              349,000         180,000
      Deferred fees                                      146,000         170,000
      Non-deductible reserves                             47,000          72,000
      Other                                               39,000
                                                       ---------       ---------
                                                         561,000         475,000
                     Less:  Valuation allowance(1)      (475,000)       (475,000)
                                                       ---------       ---------
                                                          86,000               0
Deferred Tax Liabilities
      Reserve for loan losses                            (52,000)        (98,000)
      Unrealized gain on securities                      (28,000)        (11,000)
      Fixed assets                                      (120,000)       (128,000)
                                                       ---------       ---------
                      Net Deferred Tax Liability       $(114,000)      $(237,000)
                                                       =========       =========
</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 1998 or 1997.


                                                                   Page 53 of 71
<PAGE>   54
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


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>     
    1999                                          $104,686
    2000                                            68,693
    2001                                            60,896
    2002                                            60,896
    2003                                            11,072
                                                  -------- 
    Total                                         $306,243 
                                                  ======== 
</TABLE>


Total property and equipment expenditures charged to leases for the reporting
periods ended December 31, 1998, 1997 and 1996, were approximately $110,000,
$124,000 and $303,000, 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, 1998 and 1997, the Company had commitments to extend credit of
approximately $7,479,000 and $6,884,000 and obligations under standby letters of
credit of approximately $430,000 and $311,000.

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 OPTION PLAN

At December 31, 1998, 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


                                                                   Page 54 of 71
<PAGE>   55
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #10 - STOCK OPTION PLAN, Continued

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 share s (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.

During 1997, the Board of Directors and stockholders of Vineyard National
Bancorp elected to terminate the existing 1987 Incentive Stock Option Plan and
approve the 1997 Incentive Stock Option Plan. The new Plan authorizes an
additional 200,000 shares of the Bancorp's authorized but unissued common stock
to be combined with the 53,316 shares which remain under the 1987 Plan for a
total of 253,316 shares. Directors of the Bancorp are eligible to participate
under the new Plan. Options granted expire on such date as the Option Committee
or Board of Directors may determine, but not later than the tenth anniversary
date on which the option is granted.

The fair value of each option granted during 1998, 1997 and 1996, respectively,
were estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions; risk-free rates of 4.75%, 5.75%, and 6.28%;
dividend yield of 0.0% for all years; volatility of 28%, 25%, and 24%; expected
life of 7 years for all years presented.

A summary of the status of the Company's incentive stock option plan as of
December 31, 1998, 1997 and 1996, respectively, and changes during the years
ending on those dates is presented below:


<TABLE>
<CAPTION>
                                                          1998                                       1997
                                        ----------------------------------------    ----------------------------------------
                                             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           250,188         76,264     $     2.97        53,316         73,136     $     2.91
Additional options authorized              200,000                                                               
Cancelled                                    1,872         (1,872)    $     2.92                                 
Granted                                    (98,000)        98,000     $     6.90        (5,000)         5,000     $     3.50
                                           -------     ----------     ----------    ----------     ----------
Outstanding at end of year                 152,188        174,264     $     5.23       250,188         76,264     $     2.97
                                           =======     ==========     ==========    ==========     ==========  
                                                                                                                 
Options exercisable at year-end                            81,264                                      76,264
Weighted-average fair value of                                                                                   
   Options granted during the year                     $     2.05                                  $     1.18
</TABLE>


                                                                   Page 55 of 71
<PAGE>   56
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #10 - STOCK OPTIONS, Continued


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


The following table summarizes information about incentive stock options
outstanding at December 31, 1998:


<TABLE>
<CAPTION>
                 Options Outstanding and Exercisable
----------------------------------------------------------------------
                      Number      Weighted-Average
   Range of        Outstanding        Remaining       Weighted-Average
Exercise Prices    at 12/31/98    Contractual Life     Exercise Price
---------------    -----------    ----------------    ----------------
<S>                <C>            <C>                 <C>  
$2.91 to $3.50        76,264              7                $2.97
     $5.13             5,000              9                $5.13
</TABLE>


                                                                   Page 56 of 71
<PAGE>   57
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #11 - OTHER INCOME/EXPENSES

The following is a breakdown of fees and other servicing income and expenses for
the years ended December 31, 1998, 1997 and 1996:


<TABLE>
<CAPTION>
                                                     1998            1997            1996
                                                  ----------      ----------      ----------
<S>                                               <C>             <C>             <C>       
Fees and Other Servicing Income
      Fees and service charges                    $1,451,626      $1,534,423      $1,567,296
      Premium on sale of loans                       257,437          87,592         182,814
                                                  ----------      ----------      ----------
                      Total                       $1,709,063      $1,622,015      $1,750,110
                                                  ==========      ==========      ==========

Other Expenses
      Data processing                                663,553         683,086         754,617
      Marketing expenses                             287,876         334,662         307,233
      Professional expenses                          629,466         530,457         421,209
      Office supplies, postage and telephone         366,833         346,224         363,892
      Insurance and assessment expense               167,040         191,461         157,931
      Loan related expense                            77,022          65,897         147,541
      Administrative expense                         373,276         106,044          85,316
      Other                                          280,883         213,193         262,040
                                                  ----------      ----------      ----------
                      Total                       $2,845,949      $2,471,024      $2,499,779
                                                  ==========      ==========      ==========
</TABLE>


NOTE #12 - 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, 1998, the combined amount of funds available
from these two sources amounted to approximately $2,700,000 or 31%.


NOTE #13 - DEFERRED COMPENSATION

The Company has a 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. The Company may make matching
contributions of officers' deferrals up to a maximum of 25% and 50% of senior
officers' deferrals to a maximum of 10% of before tax compensation. 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
$70,239 ($57,770 net of income taxes), $85,911 ($51,546 net of income taxes),
and $84,535 ($66,815 net of income taxes) for the years ended December 31, 1998,
1997 and 1996, respectively.


                                                                   Page 57 of 71
<PAGE>   58
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #14 - DEFINED CONTRIBUTION PLAN

The Company has 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 $10,000 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 $15,321 ($12,563 net of income taxes),
$6,732 ($4,040 net of income taxes) and $14,862 ($11747 net of income taxes) for
the years ended December 31, 1998, 1997 and 1996, respectively.


NOTE #15 - INCOME PER COMMON AND COMMON EQUIVALENT SHARE

The following is a reconciliation of net income and shares outstanding to the
income and number of shares used to compute EPS:


<TABLE>
<CAPTION>
                                               1998                            1997                          1996
                                    --------------------------      --------------------------     ------------------------
                                        Net                             Net                            Net
                                      Income          Shares          Income          Shares         Income        Shares
                                    ----------      ----------      ----------      ----------     ----------    ----------
<S>                                 <C>             <C>             <C>             <C>            <C>           <C>      
Net income as reported              $  443,383                      $  404,136                     $  105,578
Shares outstanding at year-end                       1,862,776                       1,862,776                    1,862,776
                                    ----------      ----------      ----------      ----------     ----------    ----------
Used in Basic EPS                      443,383       1,862,776         404,136       1,862,776        105,578     1,862,776
Dilutive effect of outstanding
  stock options                                        131,479                          20,210                       12,076
                                    ----------      ----------      ----------      ----------     ----------    ----------
Used in Diluted EPS                 $  443,383       1,994,255      $  404,136       1,882,986     $  105,578     1,874,852
                                    ==========      ==========      ==========      ==========     ==========    ==========
</TABLE>


NOTE #16- 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, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.

As of 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): 


                                                                   Page 58 of 71
<PAGE>   59
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #16 - REGULATORY MATTERS, Continued


<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, 1998                                                    
Total capital to risk-weighted assets       $9,373      9.8%      $7,687       8.0%      $9,609      10.0%
Tier 1 capital to risk-weighted assets       8,687      9.0%       3,843       4.0%       5,765       6.0%
Tier 1 capital to average assets             8,687      7.5%       4,633       4.0%       5,791       5.0%
                                                                           
As of December 31, 1997                                                    
Total capital to risk-weighted assets       $8,939      9.3%      $7,681       8.0%      $9,602      10.0%
Tier 1 capital to risk-weighted assets       8,244      8.6%       3,839       4.0%       5,758       6.0%
Tier 1 capital to average assets             8,244      7.3%       4,525       4.0%       5,656       5.0%
</TABLE>


NOTE #17 - 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>
                                        1998            1997
                                     ---------       ---------
<S>                                  <C>             <C>      
Balance, Beginning of year           $ 492,492       $ 710,205
Sales                                 (200,738)       (255,578)
Valuation adjustments and other         (4,400)         37,865
                                     ---------       ---------
Balance, End of year                 $ 287,354       $ 492,492
                                     =========       =========
</TABLE>


The balances at December 31, 1998 and 1997, are shown net of reserves.


NOTE #18 - RESERVE FOR PROBABLE LOSSES ON OTHER REAL ESTATE OWNED

Transactions in the reserve for other real estate owned are summarized for 1998,
1997 and 1996:


<TABLE>
<CAPTION>
                                          1998           1997           1996
                                        --------       --------       --------
<S>                                     <C>            <C>            <C>
Balance, Beginning of year              $ 51,473       $ 89,338       $ 38,133
Provision charged to other expense         4,400                        75,125
Charge-offs and other reductions                        (37,865)       (23,920)
                                        --------       --------       --------
Balance, End of year                    $ 55,873       $ 51,473       $ 89,338
                                        ========       ========       ========
</TABLE>


                                                                   Page 59 of 71
<PAGE>   60
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #19 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instrument s," 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, 1998. 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          $12,288,959      $12,288,959
      Investment securities                6,237,188        6,237,188
      Loans receivable                    87,932,938       87,461,367
      Accrued interest receivable            496,093          496,093

Liabilities
      Non-interest bearing deposits       32,570,373       32,570,373
      Interest bearing deposits           72,744,617       72,786,772
      Accrued interest payable               359,268          359,268
</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      $7,909,000       $   79,090
</TABLE>


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.

-   Investment Securities

    Fair values are based upon quoted market prices, where available.


                                                                   Page 60 of 71
<PAGE>   61
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #19 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued

-   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.

-   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 #20 - TIME DEPOSIT LIABILITIES

At December 31, 1998, the Company had time certificates of deposit with maturity
distributions as follows:


<TABLE>
<S>                                  <C>        
Within one year                      $35,037,985
After one but within five years        1,599,382
                                     -----------
                                     $36,637,367
                                     ===========
</TABLE>


NOTE #21 - BORROWINGS

The Bank has borrowing lines with four correspondent banks totaling $5.7 million
and another line at the Federal Reserve. Loans with a carrying amount of
approximately $1,895,000 have been pledged to secure the line at the Federal
Reserve.


NOTE #22 - DIRECTOR RETIREMENT PLAN

The Company is in the process of establishing a Director Retirement Plan, which
will provide retirement benefits to one or more Directors of the Bank. During
1998 approximately $180,000 was expensed for this plan.


NOTE #23 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

The Company has established a Supplemental Executive Retirement Plan, which will
provide retirement benefits for senior officers of the Bank. Benefits under this
plan are fully vested upon participation. During 1998 approximately $72,000 was
expensed for this plan. 


                                                                   Page 61 of 71
<PAGE>   62
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #24 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP (PARENT
COMPANY)


<TABLE>
<CAPTION>
                                 BALANCE SHEETS

                                                              1998            1997            1996
                                                           ----------      ----------      ----------
<S>                                                        <C>             <C>             <C>       
ASSETS
      Cash in Vineyard National Bank                       $    7,661      $    7,496      $    7,335
      Prepaid expenses                                            489             543             570
      Investment in subsidiary                              8,721,116       8,259,625       7,844,695
                                                           ----------      ----------      ----------

           Total Assets                                    $8,729,266      $8,267,664      $7,852,600
                                                           ==========      ==========      ==========

LIABILITIES
      Due to shareholders in lieu of
       fractional shares on stock splits                        1,107           1,161           1,188
                                                           ----------      ----------      ----------

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                                     3,315,217       2,853,561       2,438,470
                                                           ----------      ----------      ----------

           Total Stockholders' Equity                       8,728,159       8,266,503       7,851,412
                                                           ----------      ----------      ----------

           Total Liabilities and Stockholders' Equity      $8,729,266      $8,267,664      $7,852,600
                                                           ==========      ==========      ==========

                              STATEMENTS OF INCOME

INCOME
      Equity in income of subsidiary                          443,218         403,975         105,420
      Interest                                                    965             961             958
                                                           ----------      ----------      ----------
                                                              444,183         404,936         106,378
                                                           ----------      ----------      ----------

INCOME TAXES                                                      800             800             800
                                                           ----------      ----------      ----------

           Net Income                                      $  443,383      $  404,136      $  105,578
                                                           ==========      ==========      ==========
</TABLE>


                                                                   Page 62 of 71
<PAGE>   63
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


NOTE #24 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP (PARENT
COMPANY), Continued


                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                            1998            1997            1996
                                                         ---------       ---------       ---------
<S>                                                      <C>             <C>             <C>      
INCREASE IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
      Interest received                                  $     965       $     961       $     958
      Income taxes paid                                       (800)           (800)           (800)
                                                         ---------       ---------       ---------
                      Net Cash Provided
                       By Operating Activities                 165             161             158
                                                         ---------       ---------       ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS                      165             161             158

CASH, Beginning of year                                      7,496           7,335           7,177
                                                         ---------       ---------       ---------

CASH, End of year                                        $   7,661       $   7,496       $   7,335
                                                         =========       =========       =========

RECONCILIATION OF NET INCOME TO NET CASH
 PROVIDED/(USED) BY OPERATING ACTIVITIES
      Net Income                                           443,383         404,136         105,578
      Adjustments to Reconcile Net Income
       to Net Cash Provided By Operating Activities
          Decrease in other assets                              54              27              99
          Undistributed earnings of subsidiary            (443,218)       (403,975)       (105,420)
          Decrease in other liabilities                        (54)            (27)            (99)
                                                         ---------       ---------       ---------
                      Net Cash Provided
                       By Operating Activities           $     165       $     161       $     158
                                                         =========       =========       =========
</TABLE>


                                                                   Page 63 of 71
<PAGE>   64
SELECTED QUARTERLY FINANCIAL DATA

       The selected quarterly data for 1998 is based on the unaudited financial
statements of the Company as presented by management.


<TABLE>
<CAPTION>
                                                                   Quarter Ended 1998
                                         -------------------------------------------------------------------------
                                            March 31            June 30           September 30        December 31
                                         -------------       -------------       -------------       -------------
<S>                                      <C>                 <C>                 <C>                 <C>          
Net Interest Income                      $   1,650,129       $   1,793,445       $   1,695,188       $   1,487,295
Provision for Loan and Lease Losses            (59,000)            (64,982)            (19,000)               --
Other Income                                   378,568             359,581             371,307       $     837,901
Other Expenses                              (1,872,452)         (1,842,754)         (1,950,054)      $  (2,014,989)
                                         -------------       -------------       -------------       -------------

Income/(Loss) Before Taxes                      97,245             245,290              97,441             310,207
Income Taxes                                   (39,000)           (101,000)            (40,000)           (126,800)
                                         -------------       -------------       -------------       -------------

Net Income/(Loss)                        $      58,245       $     144,290       $      57,441       $     183,407
                                         =============       =============       =============       =============

Earnings/(Loss) Per Share
 of Common Stock
      Basic                              $        0.03       $        0.08       $        0.03       $        0.10
                                         =============       =============       =============       =============
      Diluted                            $        0.03       $        0.08       $        0.03       $        0.09
                                         =============       =============       =============       =============

Weighted Average Shares
 in Per Share Calculation
      Basic                                  1,862,776           1,862,776           1,862,776           1,862,776
      Diluted                                1,900,328           1,905,237           1,902,982           1,986,634

Balance Sheet Data
      Assets                             $ 114,569,754       $ 111,650,476       $ 113,823,266       $ 115,863,031
                                         =============       =============       =============       =============
      Deposits                           $ 104,870,743       $ 101,900,140       $ 103,655,030       $ 105,314,990
                                         =============       =============       =============       =============
      Loans and Leases/(Net)             $  85,393,223       $  85,803,135       $  85,829,512       $  87,246,922
                                         =============       =============       =============       =============
      Stockholders' Equity               $   8,331,475       $   8,474,039       $   8,570,360       $   8,728,159
                                         =============       =============       =============       =============
</TABLE>


                                                                   Page 64 of 71
<PAGE>   65
        The selected quarterly data for 1997 is based on the unaudited financial
statements of the Company as presented by management.


<TABLE>
<CAPTION>
                                                                   Quarter Ended 1997
                                         -------------------------------------------------------------------------
                                            March 31            June 30           September 30        December 31
                                         -------------       -------------       -------------       -------------
<S>                                      <C>                 <C>                 <C>                 <C>          
Net Interest Income                      $   1,548,787       $   1,595,084       $   1,656,981       $   1,558,097
Provision for Loan and Lease Losses            (47,782)            (31,000)            (65,000)
Other Income                                   398,955             424,454             414,345       $     454,189
Other Expenses                              (1,811,053)         (1,767,311)         (1,897,588)      $  (1,893,222)
                                         -------------       -------------       -------------       -------------

Income/(Loss) Before Taxes                      88,907             252,227             142,738              54,064
Income Taxes                                   (36,000)           (103,000)            (62,000)             67,200
                                         -------------       -------------       -------------       -------------

Net Income/(Loss)                        $      52,907       $     149,227       $      80,738       $     121,264
                                         =============       =============       =============       =============

Earnings/(Loss) Per Share
 of Common Stock
      Basic                              $        0.03       $        0.08       $        0.04       $        0.07
                                         =============       =============       =============       =============
      Diluted                            $        0.03       $        0.08       $        0.04       $        0.06
                                         =============       =============       =============       =============

Weighted Average Shares
 in Per Share Calculation
      Basic                                  1,862,776           1,862,776           1,862,776           1,862,776
      Diluted                                1,875,411           1,876,496           1,883,159           1,882,986

Balance Sheet Data
      Assets                             $ 120,001,975       $ 121,944,173       $ 117,347,588       $ 111,580,095
                                         =============       =============       =============       =============
      Deposits                           $ 110,761,185       $ 112,286,679       $ 107,787,643       $ 101,741,356
                                         =============       =============       =============       =============
      Loans and Leases/(Net)             $  93,837,450       $  93,012,938       $  91,235,454       $  88,419,559
                                         =============       =============       =============       =============
      Stockholders' Equity               $   7,901,644       $   8,056,405       $   8,147,231       $   8,266,503
                                         =============       =============       =============       =============
</TABLE>


ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


                                                                   Page 65 of 71
<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, 1999, for the
Company's 1999 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, 1999, for the Company's 1999 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, 1999, for the Company's 1999 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, 1999, for the Company's 1999 annual shareholders' meeting.


                                                                   Page 66 of 71
<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 38
                        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.

        b)      Reports on Form 8-K:

                None.

        c)      Exhibits:

                See Index to Exhibits on Page 70 of this Form 10-K.


                                                                   Page 67 of 71
<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 25th day of
March 1999.


                                       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 25, 1999.


                                     President, Chief Executive Officer
/s/ STEVEN R. SENSENBACH             (Principal 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
--------------------------------


                                                                   Page 68 of 71
<PAGE>   69
               CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To Vineyard National Bancorp:

        We consent to the incorporation of our Report dated March 5, 1999, on
the consolidated financial statements of Vineyard National Bancorp as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, included in its Annual Report on Form 10-K for the year ended
December 31, 1998.





VAVRINEK, TRINE, DAY & CO., LLP
Certified Public Accountants
Rancho Cucamonga, California


                                                                   Page 69 of 71
<PAGE>   70
                                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)
          
  10.4    Vineyard National Bank Deferred Compensation Plan                  (R-1)
          
  10.5    Employment Agreement Between Vineyard National Bank and            (R-1)
          Steven R. Sensenbach
          
  10.6    1988 Extension Agreement for Employment Agreement Between          (R-1)
          Vineyard National Bank and Steven R. Sensenbach
          
  10.9    Lease Agreement Between Vineyard National Bank and Landlord        (R-1)
          Regarding 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)
          
 10.15    Buy/Sell Agreement Between Vineyard National Bank and Wells        (R-1)
          Fargo 1984
          
 10.16    Buy/Sell Agreement Between Vineyard National Bank and              (R-1)
          Arrowhead Pacific Savings Bank 1988
          
 10.20    Incentive Stock Option Plan for Vinyard National Bank 1997         (R-3)
          
    21    Subsidiaries of the Registrant                                     (R-2)
          
    23    Consent of Vavrinek, Trine, Day & Co., LLP
          
    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.

(R-3)   Incorporated by reference to registrants filing on October 17,
        1997.