<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, 1997          Commission File No. 0-20862

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


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

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

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

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

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

                           Common Stock, no par value

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

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

       As of December 31, 1997, the aggregate market value of the voting shares
held by non-affiliates of the registrant was approximately $7,610,000. Solely
for the purposes of this calculation, shares held by directors, executive
officers, and each person owning more than 10% of the outstanding Common Stock
of the registrant have been excluded.

       1,862,643 shares of Common Stock of the registrant were outstanding at
February 28, 1998.

                       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, 1998,
are incorporated by reference in Part III of this Form 10-K.



This Report includes a total of 70 pages.
Exhibit Index appears on page 69.                                   Page 1 of 70

<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, 1997, the Company had total consolidated assets of
approximately $112 million, total consolidated net loans of approximately $88
million, total consolidated deposits of approximately $102 million and total
stockholders' equity of approximately $8.3 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 70
<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,
1997, the Bank had approximately 5,894 demand deposit accounts representing
aggregate deposits of approximately $29,455,000 with an average account balance
of $4,997, approximately 2,516 accounts representing approximately $28,451,000
in "NOW", super "NOW" and money market checking accounts with an average account
balance of $11,308, approximately 3,263 accounts representing approximately
$9,280,000 in savings deposits with an average account balance of $2,844 and
approximately 1,961 accounts representing approximately $34,555,000 in time
deposits ("TCD's") with an average account balance of $17,621. Of the total
deposits at December 31, 1997, $7,523,000 were in the form of TCD's in
denominations greater than $100,000 and $2,198,000 were municipal and other
governmental deposits, both time and demand.

       During the 12 months ended December 31, 1997, average demand deposits
increased by approximately $1,842,000 or 7%, and "NOW", super "NOW" and money
market checking accounts decreased by approximately $2,589,000 or 8%. Average
savings deposits decreased by approximately $163,000 or 2%, while average time
deposits decreased by approximately $2,614,000 or 7%, including an increase of
$1,223,000 in average time certificates of deposits of $100,000 or more.

       Although there are some public depositors that carry large short-term
deposits with the Bank, the Bank is not dependent on a single customer or a few
customers for its deposits. Most of the Bank's deposits are obtained from
individuals and small-to-moderate size businesses. This results in relatively
small average deposits balances, but makes the Bank less subject to the adverse
effects which result from the loss of a substantial depositor. At December 31,
1997, 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.



                                                                    Page 3 of 70
<PAGE>   4

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY: INTEREST RATES AND
INTEREST DIFFERENTIAL

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

<TABLE>
<CAPTION>

(Dollars in Thousands)                                                          Year Ended December 31,
                                                                              1997                      1996
                                                                     ----------------------    -----------------------
                                                                      Average     Percent       Average      Percent
Assets                                                                Balance     of Total      Balance      of Total
                                                                     ---------    ---------    ---------     ---------
<S>                                                                  <C>          <C>          <C>           <C>
      Investment Securities
          Taxable                                                    $   6,478        5.5      $  11,220        9.7
      Federal funds sold                                                 3,409        2.9          3,467        3.0
      Due from banks-time deposits                                         278        0.2            669        0.6
      Loans                                                             92,963       78.9         85,216       73.4
      Direct lease financing                                                79        0.1            394        0.3
      Reserve for loan and lease losses                                   (715)      (0.6)          (715)      (0.6)
                                                                     ---------      -----      ---------      -----
                      Net Loans and Leases                              92,327       78.4         84,895       73.1
                                                                     ---------      -----      ---------      -----
                      Total Interest Earning Assets                    102,492       87.0        100,251       86.4
      Cash and non-interest earning deposits                             6,417        5.4          6,865        5.9
      Net premises, furniture and equipment                              6,444        5.5          5,675        4.9
      Other assets                                                       2,410        2.1          3,263        2.8
                                                                     ---------      -----      ---------      -----
                      Total Assets                                   $ 117,763      100.0      $ 116,054      100.0
                                                                     =========      =====      =========      =====
Liabilities and Stockholders' Equity
      Savings deposits (1)                                              39,118       33.2         41,877       36.1
      Time deposits                                                     40,858       34.7         38,550       33.2
      Short-term borrowings                                                107        0.1             38        0.0
                                                                     ---------      -----      ---------      -----
                      Total Interest-bearing Liabilities                80,083       68.0         80,465       69.3
      Demand deposits                                                   28,264       24.0         26,422       22.8
      Other liabilities                                                  1,369        1.2          1,472        1.3
                                                                     ---------      -----      ---------      -----
                      Total Liabilities                                109,716       93.2        108,359       93.4
Stockholders' Equity                                                     8,047        6.8          7,695        6.6
                                                                     ---------      -----      ---------      -----
                      Total Liabilities and Stockholders' Equity     $ 117,763      100.0      $ 116,054      100.0
                                                                     =========      =====      =========      =====
</TABLE>


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

INTEREST RATES AND DIFFERENTIALS

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


                                                                    Page 4 of 70
<PAGE>   5

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

<TABLE>
<CAPTION>
(Dollars in Thousands)                                                      1997                           1996
----------------------                                       -------------------------------    ------------------------------
                                                             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)                                  $  4,108          239     5.8%     $  6,430          370     5.8%
          U.S. Government agencies (3)                          2,171          126     5.8%        4,408          249     5.6%
          Municipal agencies (1)
          Other securities                                        182           10     5.5%          376           10     2.7%
                                                             --------     --------              --------     --------
                      Total Investment Securities               6,461          375     5.8%       11,214          629     5.6%
      Federal funds sold                                        3,409          185     5.4%        3,467          179     5.2%
      Due from banks - time deposits                              278           17     6.1%          669           35     5.2%
      Loans (2)                                                92,963        8,631     9.3%       85,216        8,137     9.5%
      Lease financing (1)                                          79            7     8.9%          394           39     9.9%
                                                             --------     --------              --------     --------
                      Total Interest Earning Assets(1)       $103,190     $  9,215     8.9%     $100,960     $  9,019     8.9%
                                                             ========     ========              ========     ========
Interest Bearing Liabilities
      Domestic Deposits and Borrowed Funds
          Savings deposits (4)                                 39,118          685     1.8%       41,877          751     1.8%
          Time deposits                                        40,858        2,250     5.5%       38,550        2,108     5.5%
          Short-term borrowings                                   107            7     6.5%           38            2     5.3%
                                                             --------     --------              --------     --------
                      Total Interest Bearing Liabilities     $ 80,083     $  2,942     3.7%     $ 80,465     $  2,861     3.6%
                                                             ========     ========              ========     ========
</TABLE>


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

<TABLE>
<CAPTION>
(Dollars in Thousands)                                                     1997                 1996
                                                                          -------              -------
<S>                                                                    <C>                <C>
Total interest income (1, 2)                                           $    9,215         $      9,019
Total interest expense (5)                                                  2,942                2,861
Total interest earnings (1, 2)                                              6,273                6,158
Total average earning assets                                              102,475              100,245
Net yield on average earning assets (1, 2)                                    6.1%                 6.1%
Net yield on average earning assets (excluding loan fees) (1, 2)              5.5%                 5.6%
</TABLE>


1      Interest income includes the effects of tax equivalent adjustments on tax
       exempt securities and leases using tax rates which approximate 25.0
       percent for 1997 and 21.0 percent for 1996.

2      Loans, net of unearned income, include non-accrual loans but do not
       reflect average reserves for probable loan losses of $715,000 in 1997 and
       $715,000 in 1996. Loan fees of $590,000 in 1997 and $523,000 in 1996, are
       included in loan interest income. There were four non-accruing loans
       totaling approximately $229,000 at December 31, 1997 and four
       non-accruing loans totaling approximately $434,000 at December 31, 1996.

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

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

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



                                                                    Page 5 of 70
<PAGE>   6

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


<TABLE>
<CAPTION>
(Dollars in Thousands)                            Investment     Federal                  Direct
                                                  Securities     Funds                    Lease        Time
                                                   Taxable       Sold        Loans (2)  Financing (1)  Deposits      Total
                                                    -----        -----        -----        -----        -----        -----
<S>                                                 <C>          <C>          <C>          <C>          <C>          <C>
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
                                                    =====        =====        =====        =====        =====        =====
Interest Earned On:
1996 compared to 1995
      Increase/(decrease) due to:
          Volume changes                            $(101)       $ (36)       $ 741        $ (60)       $  78        $ 622
          Rate changes                                (26)         (17)         (74)         (29)         (79)        (225)
                                                    -----        -----        -----        -----        -----        -----
                      Net Increase/(Decrease)       $(127)       $ (53)       $ 667        $ (89)       $  (1)       $ 397
                                                    =====        =====        =====        =====        =====        =====
</TABLE>


1      Interest income includes the effects of tax equivalent adjustments on tax
       exempt securities using tax rates which approximate 25.0 percent for 1997
       and 21.0 percent for 1996.

2      Includes an increase in loan fees of $67,000 in 1997 and an increase of
       $403,000 in 1996.

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

3      Short-term Borrowings consist of Federal Funds Purchased.


                                                                    Page 6 of 70
<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>
(Dollars in Thousands)                                1997                  1996
                                                Available-for-Sale   Available-for-Sale
                                                ------------------   ------------------
<S>                                             <C>                  <C>
U.S. Treasury                                        $2,993               $5,468
Federal agencies                                      1,512
Other securities                                        196                  432
                                                     ------               ------
                                                     $4,701               $5,900
                                                     ======               ======
</TABLE>

          The following table shows the maturities of investment securities at
December 31, 1997, 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                   $2,497        5.91%       $     496        5.70%
U.S. Agencies                                                 1,512        6.15%
Other securities                   196        5.21%
                               -------                    --------
                                $2,693        5.86%       $   2,008        6.04%
                                ======                    =========
</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,
----------------------                               --------------------------
                                                        1997             1996
                                                     ---------        ---------
<S>                                                  <C>              <C>
Types of Loans
      Domestic
      Commercial, financial and agricultural         $  10,585        $   9,737
      Real estate construction                           1,960              830
      Real estate mortgage                              41,917           40,993
      Installment loans to individuals                  37,334           50,000
      Lease financing (1)                                   14              188
      All other loans (including overdrafts)                31              105
                                                     ---------        ---------
                                                        91,841          101,853
      Less:
          Unearned income                               (2,727)          (4,387)
          Reserve for loan and lease losses               (694)            (728)
                                                     ---------        ---------
                      Total                          $  88,420        $  96,738
                                                     =========        =========

</TABLE>


1      Lease financing is net of unearned income of approximately $1,000 for
       1997 and $16,000 for 1996.


                                                                    Page 7 of 70
<PAGE>   8


       Real estate mortgage loans are comprised of construction loans, SFR's and
commercial real estate loans which represent 3.5%, 6.6% and 36.2% 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 52.4% of
total installment loans and 18.5% of total loan commitments. Approximately
95.75% 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, 1997.


<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                      $ 4,063       $ 4,935       $ 1,587       $10,585
      Real estate construction                                      1,883            77                       1,960
      Real estate mortgage                                          2,191         3,690        36,036        41,917
      Installment loans to individuals                              2,791        31,963         2,580        37,334
      Lease financing (net of unearned income)                         14             0                          14
      All other loans                                                  31             0                          31
                                                                  -------       -------       -------       -------
                      Total                                       $10,973       $40,665       $40,203       $91,841
                                                                  =======       =======       =======       =======

Loans and leases with predetermined interest rates                  4,334        35,597        17,127        57,058
Loans and leases with floating or adjustable interest rates         6,639         5,068        23,076        34,783
                                                                  -------       -------       -------       -------
                      Total                                       $10,973       $40,665       $40,203       $91,841
                                                                  =======       =======       =======       =======
</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, 1997. 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
38% of its total deposits at December 31, 1997, 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 70
<PAGE>   9

<TABLE>
<CAPTION>

(Dollars in Thousands)                         Three          Over Three      Over One
                                              Months          Through         Through         Over      Non-interest
                                              or Less         12 Months       Five Years    Five Years     Bearing         Total
                                              --------        --------        --------      --------       --------      --------
<S>                                           <C>             <C>             <C>            <C>            <C>           <C>
Assets
      Federal Funds Sold                      $  2,950                                                                    $  2,950
      Investment securities                                   $  2,497        $  2,008        $   181       $     15         4,701
      Net loans and leases                       4,800          34,089          35,597         17,127         (3,193)       88,420
      Noninterest-bearing assets                                                                              15,440        15,440
                                              --------        --------        --------       --------       --------      --------
                      Total Assets            $  7,750        $ 36,586        $ 37,605       $ 17,308       $ 12,262      $111,511
                                              ========        ========        ========       ========       ========      ========
Liabilities and Stockholders' Equity
      Noninterest-bearing deposits                                                                            29,456        29,456
      Interest-bearing deposits                 51,731          18,205           2,349                                      72,285
      Other liabilities                                                                                        1,503         1,503
Stockholders' Equity                                                                                           8,267         8,267
                                              --------        --------        --------       --------       --------      --------
                      Total Liabilities and
                       Stockholders' Equity   $ 51,731        $ 18,205        $  2,349       $      -       $ 39,226      $111,511
                                              ========        ========        ========       ========       ========      ========

Interest Rate Sensitivity Gap                 $(43,981)       $ 18,381        $ 35,256       $ 17,308       $(26,964)     $      -
                                              ========        ========        ========       ========       ========      ========
Cumulative Interest Rate Sensitivity Gap      $(43,981)       $(25,600)       $  9,656       $ 26,964       $      -      $      -
                                              ========        ========        ========       ========       ========      ========
</TABLE>


RISK ELEMENTS

NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS


<TABLE>
<CAPTION>
(Dollars in Thousands)                                          December 31,
----------------------                                       -----------------
                                                               1997    1996
                                                             -------    ------
<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                      107      $  49
      Aggregate leases
Renegotiated loans (2)
Non-accrual loans (3)
      Aggregate loan amounts
          Commercial                                              28         5
          Real estate                                            201       429
                                                             -------    ------
                                                             $   445    $  483
                                                             =======    ======

</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 four loans on non-accrual status approximately totaling
       $229,000 at December 31, 1997, and four loans totaling approximately
       $434,000 at December 31, 1996. The amount of interest that would have
       been collected on these loans had they remained current in accordance
       with their original terms was $26,000 in 1997 and $7,000 in 1996,
       respectively.


                                                                    Page 9 of 70
<PAGE>   10


POTENTIAL PROBLEM LOANS

          The policy of the Company is to review each loan in the portfolio to
identify problem credits. In addition, as an integral part of its regular
examination of the Bank, the Comptroller also identifies problem loans. There
are three classifications for problem loans: "substandard," "doubtful," and
"loss." Substandard loans have one or more defined weaknesses and are
characterized by the distinct possibility that the Bank will sustain some loss
if the deficiencies are not corrected. Doubtful loans have the weaknesses of
substandard loans with the additional characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, questionable.

          A loan classified loss is considered uncollectible and of such little
value that the continuance as an asset of the institution is not warranted.
Another category designated "special mention" is maintained for loans which do
not currently expose the Bank to a sufficient degree of risk to warrant
classification as substandard, doubtful or loss but do possess credit
deficiencies for potential weaknesses deserving management's close attention.

          As of December 31, 1997, the Bank's classified loans consist of
$1,859,000 of loans classified as substandard and $17,000 of loans classified as
doubtful. The Bank's $1,859,000 in loans classified as substandard consisted of
$1,552,000 of performing loans and $337,000 of non-accrual loans and loans
delinquent 90 days or more but still accruing.

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

          With the exception of these loans, management is not aware of any
loans as of December 31, 1997, where the known credit problems of the borrower
would cause it to have serious doubts as to the ability of such borrowers to
comply with their present loan repayment terms and which would result in such
loans being included in the non-accrual, past due and restructured loan table
set forth above at some future date. Management cannot, however, predict the
extent to which the current economic environment may persist or worsen or the
full impact such environment may have on the Bank's loan portfolio. Furthermore,
management cannot predict the results of any subsequent examinations of the
Bank's loan portfolio by the Comptroller. Accordingly, there can be no assurance
that other loans will not become included in the table above in the future.

FOREIGN OUTSTANDINGS

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

LOAN CONCENTRATIONS

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

OTHER INTEREST-BEARING ASSETS

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

                                                                   Page 10 of 70
<PAGE>   11

SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE

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

<TABLE>
<CAPTION>
(Dollars in Thousands)                                              December 31,
                                                                    ------------
                                                                 1997           1996
                                                               -------        -------
<S>                                                            <C>            <C>
Loans and Leases Outstanding, Year-end(1)                      $89,114        $97,465
                                                               =======        =======
Average Amount of Loans and Leases Outstanding(1)              $93,042        $85,610
                                                               =======        =======

Loans and Lease Loss Reserve Balance, Beginning of year        $   728        $   783
                                                               -------        -------
Reserve on Loans Acquired in Business Combination
      Charge-offs
          Domestic
              Commercial, financial and agricultural                34            101
              Real estate -- construction
              Real estate --  mortgage                              14            201
              Consumer loans                                       309            384
              Lease financing
                                                               -------        -------
                                                                   357            686
                                                               -------        -------
      Foreign
                                                                   357            686
                                                               -------        -------
      Recoveries
          Domestic
              Commercial, financial and agricultural                18            102
              Real estate - construction
              Real estate - mortgage                                 6
              Consumer loans                                       156            112
              Lease financing
                                                               -------        -------
                                                                   180            214
                                                               -------        -------
      Foreign
                      Net Charge-offs                              177            472
                                                               -------        -------
      Additions/(Reductions) charged to operations                 144            417
                                                               -------        -------
Loan and Lease Loss Reserve Balance, End of year               $   695        $   728
                                                               =======        =======
Ratio of Net Charge-offs During the Year
 to Average Loans and Leases Outstanding During the Year          0.19%          0.55%
                                                               =======        =======
Ratio of Reserve for Loan Losses to Loans at Year-end             0.78%          0.75%
                                                               =======        =======
</TABLE>

1      Net of unearned income

       The allowance for loan losses is maintained through provisions, charged
to operating expenses, at a level considered adequate to provide for potential
loan losses, based on management's evaluation of the composition of the loan
portfolio, the performance of the loans in the portfolio, evaluations of loan
collateral, prior loss experience, current economic conditions and the prospects
or worth of respective borrowers or guarantors. In addition, the Comptroller, as
an integral part of its examination process, periodically reviews the Bank's
allowance for loan losses. The Comptroller may require the Bank to recognize
additions to the allowance based upon its judgment of the information available
to it at the time of examination. The Bank was most recently examined by the
Comptroller as of September 30, 1997.



                                                                   Page 11 of 70
<PAGE>   12

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

          The Bank also maintains a program of periodic review of all existing
loans. The Bank retains an outside 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, 1997, 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, 1997 and 1996, the Bank had loans amounting to
approximately $229,000 and $434,000, respectively, that were specifically
classified as impaired. The average balance of these loans amounted to
approximately $354,000 and $508,000 for the year ended December 31, 1997 and
1996, respectively. The allowance for loan losses related to these impaired
loans amounted to approximately $8,000 and $66,000 at December 31, 1997 and
1996, respectively.

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

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

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


                                                                   Page 12 of 70
<PAGE>   13


<TABLE>
<CAPTION>
(Dollars in Thousands)                                      Year Ended December 31,
                                                 ----------------------------------------------
                                                          1997                   1996
                                                 ---------------------   ----------------------
                                                            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
                                                 ------    -----------   ------    -----------
Domestic
<S>                                              <C>          <C>       <C>          <C>
      Commercial, financial and agricultural       $ 20         9.5       $ 17         9.5
      Real estate                                    62        41.1        393        41.1
      Installment loans to individuals               64        49.2        156        49.2
      Lease financing                                           0.2                    0.2
Foreign
Unallocated Allowance                               549                    162
                                                   ----       -----       ----       -----
                      Total                        $695       100.0       $728       100.0
                                                   ====       =====       ====       =====
</TABLE>

DEPOSITS

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


<TABLE>
<CAPTION>
(Dollars in Thousands)                                  Year Ended December 31,
                                                ----------------------------------------------
                                                       1997                        1996
                                                -------------------      ---------------------
                                                 Average    Average      Average      Average
                                                 Balance      Rate       Balance       Rate
                                                 -------      ----       -------       ----
<S>                                             <C>           <C>        <C>          <C>
In Domestic Offices
      Noninterest bearing demand deposits       $ 28,264                 $ 26,422
      Savings deposits (1)                        39,118      1.8%         41,877         1.8%
      Time deposits                               42,858      5.5%         38,550         5.5%
                                                --------                 --------
                      Total Deposits            $110,240      2.7%       $106,849         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,
                                                       1997
                                                   --------
<S>                                                <C>
Three months or less                               $  3,276
Over three through 12 months                          4,147
Over one through five years                             100
                                                   --------
                                                   $  7,523
                                                   ========
</TABLE>


                                                                   Page 13 of 70
<PAGE>   14

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>
                                            1997        1996
                                            ----        ----
<S>                                         <C>         <C>
Return on assets                            0.34%       0.10%
Return on equity                            5.02%       1.38%
Dividend payout ratio
Equity to asset ratio                       6.83%       7.03%
</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
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."



                                                                   Page 14 of 70
<PAGE>   15

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 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.



                                                                   Page 15 of 70
<PAGE>   16

          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.

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

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

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

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



                                                                   Page 16 of 70
<PAGE>   17

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

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

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

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

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

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



                                                                   Page 17 of 70
<PAGE>   18

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

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

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

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

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

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



                                                                   Page 18 of 70
<PAGE>   19

          The following table presents the amounts of regulatory capital and the
capital ratios for the Bank, compared to its minimum regulatory capital
requirements, as of December 31, 1997.

<TABLE>
<CAPTION>
(Dollars in Thousands)                               December 31, 1997
                                              -----------------------------------
                                                                       Minimum
                                                      Actual          Capital
                                                 Amount     Ratio    Requirement
                                                 ------     -----    -----------
<S>                                           <C>           <C>        <C>
Leverage ratio                                $    8,244    7.29%      4.0%
Tier 1 risk-based ratio                            8,244    8.59%      4.0%
Total risk-based ratio                             8,939    9.32%      8.0%
</TABLE>



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

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

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

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

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

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

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

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



                                                                   Page 19 of 70
<PAGE>   20

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

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

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

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



                                                                   Page 20 of 70
<PAGE>   21

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

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

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

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

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



                                                                   Page 21 of 70
<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 70
<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 1997, Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." This statement, which is effective for
the year ending December 31, 1998, establishes standards of disclosure and
financial statement display for reporting comprehensive income and its
components.

          In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement changes current practice under SFAS 14 by
establishing a new framework on which to base segment reporting )referred to as
the management approach) and also requires certain related disclosures about
products and services, geographic areas and major customers. The disclosures are
required for the year ending December 31, 1998.

EMPLOYEES

          At December 31, 1997, the Company had approximately 71 full-time and
29 part-time employees. Total full-time equivalent employees at December 31,
1997, were approximately 90. The Company believes that its employee relations
are satisfactory.

EXECUTIVE OFFICERS OF THE COMPANY

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


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

      Robert J. Schoeffler                                                                Executive Vice President/
                                                                                         Senior Credit Administrator

        Soule Sensenbach                            Secretary                             Executive Vice President/
                                                                                           Chief Financial Officer

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



                                                                   Page 23 of 70
<PAGE>   24

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

       Mrs. Ahern was 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. During 1996,
the Bank acquired the corporate headquarters and main branch building. This
resulted in an increase in bank premises of approximately $2,471,000.

          The Bank also owns the land and building where its Chino and Crestline
offices are located, and leases the facilities in which its Diamond Bar and Blue
Jay offices are located under leases expiring in one years and three years,
respectively. The Bank's total occupancy expense for 1997, excluding furniture
and equipment expense, approximated $634,000. 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 70
<PAGE>   25

                                     PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

          Trading in the Company's Common Stock has been relatively inactive and
the trades that do occur from time to time cannot be characterized as
constituting an active trading market. The Common Stock is not listed on any
national or regional stock exchange or with NASDAQ. At December 31, 1997, the
Company had approximately 681 shareholders.

          The following table summarizes the high and low prices at which the
shares of Common Stock of the Company have traded during the periods indicated,
based upon trades of which management of the Company has knowledge. Quoted
prices reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.
This information has been provided by the Company's securities dealer, Sutro &
Company.


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

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
</TABLE>
--------------
(1)  Adjusted to reflect all stock splits by the Company.

(2)  Trades by directors and/or executive officers of the Company did not
     account for any of the trades reflected in the above table.


                                                                   Page 25 of 70
<PAGE>   26

ITEM 6.   SELECTED FINANCIAL DATA

          The selected financial data set forth below for the fiscal years ended
December 31, 1997, 1996 and 1995, 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, 1994 and 1993,
are derived from audited financial statements examined by Vavrinek, Trine, Day &
Co., LLP which are not included in this Report.


<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                   ----------------------------------------------------------------------------
                                                        1997            1996            1995            1994           1993
                                                   -------------   -------------   -------------   -------------   ------------
<S>                                                <C>             <C>             <C>             <C>             <C>
Interest Income                                    $   9,213,228   $   9,011,147   $   8,568,863   $   8,472,532   $  9,514,751
Interest Expense                                       2,942,507       2,860,834       2,399,588       1,919,004      2,481,123
Net Interest Income                                    6,270,721       6,150,313       6,169,275       6,553,528      7,033,628
(Provision)/Credit  for Loan and Lease Losses           (143,782)       (416,900)        429,000      (1,440,000)      (300,000)
Other Income                                           1,748,754       1,837,933       3,961,580       2,808,965      3,897,471
Other Expenses                                        (7,337,757)     (7,437,768)     (9,141,796)     (9,831,082)   (10,133,676)
                                                   -------------   -------------   -------------   -------------   ------------
Income/(Loss) Before Taxes                               537,936         133,578       1,418,059      (1,908,589)       497,423
Income Taxes                                            (133,800)        (28,000)       (584,254)        370,100       (144,800)
Income/(Loss) Before Cumulative Effect
 of Accounting Change                                    404,136         105,578         833,805      (1,538,489)       352,623
Cumulative Effect of Change in Accounting
 for Income Taxes                                                                                                       107,000
                                                   -------------   -------------   -------------   -------------   ------------
Net Income/(Loss)                                  $     404,136   $     105,578   $     833,805   $  (1,538,489)       459,623
                                                   =============   =============   =============   =============   ============
Earnings/(Loss) Per Share of Common Stock (1)
  Basic
    Income/(Loss) Before Cumulative Effect         $        0.22   $        0.06   $        0.45   $       (0.83)          0.19
    Cumulative Effect                                                                                                      0.06
                                                   -------------   -------------   -------------   -------------   ------------
    Net Income/(Loss)                              $        0.22   $        0.06   $        0.45   $       (0.83)          0.25
                                                   =============   =============   =============   =============   ============
  Diluted
    Income/(Loss) Before Cumulative Effect         $        0.21   $        0.06   $        0.44   $       (0.83)          0.19
    Cumulative Effect                                                                                                      0.06
                                                   -------------   -------------   -------------   -------------   ------------
    Net Income/(Loss)                              $        0.21   $        0.06   $        0.44   $       (0.83)          0.25
                                                   =============   =============   =============   =============   ============
Weighted Average Number of Shares (1)
  Basic                                                1,862,643       1,862,643       1,862,643       1,862,643      1,862,643
  Diluted                                              1,882,853       1,874,719       1,874,971       1,862,643      1,862,643
Stock Splits                                               --              --            6 for 5           --             --

Balance Sheet Data
      Assets                                       $ 111,510,812   $ 119,523,686   $ 107,559,133   $ 107,417,232   $120,646,469
                                                   =============   =============   =============   =============   ============
      Deposits                                     $ 101,741,356   $ 106,602,789   $  98,414,447   $  98,584,479   $111,186,106
                                                   =============   =============   =============   =============   ============
      Loans and Leases/(Net)                       $  88,419,559   $  96,737,786   $  77,287,938   $  83,786,866   $ 83,940,271
                                                   =============   =============   =============   =============   ============
      Stockholders' Equity                         $   8,266,503   $   7,851,412   $   7,752,714   $   6,860,144   $  8,446,305
                                                   =============   =============   =============   =============   ============
</TABLE>

1 Retroactively adjusted for stock splits.

                                                                   Page 26 of 70
<PAGE>   27

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, 1997, Vineyard National Bancorp on a
consolidated basis reported Net Income of $404,000 compared to $106,000 and
$834,000 in the comparable 1996 and 1995 periods. Basic Earnings Per Share were
$0.22 compared to $0.06 in 1996 and $0.45 in 1995. Diluted Earnings Per Share
were $0.21 compared to $0.06 in 1996 and $0.44 in 1995. Consolidated total
assets at December 31, 1997 were $111,511,000 compared to $119,524,000 at
December 31, 1996, down approximately 7%. Total deposits also decreased from
$106,603,000 as of December 31, 1996 to $101,741,000 at year-end 1997.
Stockholders' equity was $8,267,000 at December 31, 1997, up from its $7,851,000
level a year earlier, owing primarily to net income of $404,000 for 1997. Also
impacting stockholders' equity was the unrealized gain on securities
available-for-sale of $16,000 which is up from the unrealized gain of $5,000 on
securities available-for-sale at December 31, 1996.

          The reserve for probable loan and lease losses, which serves as a
"buffer" against possible future losses, had losses totaling $357,000 charged
against it during 1997. Recoveries of loans previously charged-off amounted to
$181,000 which were credited back to the reserve. A provision for probable loan
and lease losses of $144,000 was recorded in 1997 compared to a provision of
$417,000 in 1996 and a negative provision of $429,000 in 1995.

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 1997 was $6,271,000, up from the $6,150,000 reported in 1996 and
$6,169,000 reported in 1995. This represents an increase of 2.0% in 1997 and a
decrease of 0.3% in 1996, 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 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 $2,860,000 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 $103,207,000 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 $6,478,000
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 volume of
interest earning assets was higher on average in 1997 than in 1996, the average
yield earned on these assets increased only .1% from 8.9% in 1996 to 9.0% in
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 1998 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% in 1997
from 3.6% in 1996.



                                                                   Page 27 of 70
<PAGE>   28

          The decline in net interest income in 1996 from 1995 was due to the
increase in interest expense exceeding the increase in interest income. Interest
income increased $442,000 to $9,011,000 in 1996 from $8,569,000 in 1995 while
interest expense increased $461,000 to $2,861,000 in 1996 from $2,400,000 in
1995. The resulting decrease in net interest income can be attributed to a
number of factors. First, the Bank's average interest-earning assets increased
4.4% from $96,725,000 in 1995 to $100,960,000 in 1996. This increase is mostly
attributable to a 9.1% increase in average loans, the Bank's highest yielding
asset. Average loans increased from $78,097,000 in 1995 to $85,216,000 in 1996.
Average investment securities decreased from $12,976,000 in 1995 to $11,214,000
in 1996, average federal funds sold, the Bank's lowest yielding asset, decreased
from $4,156,000 in 1995 to $3,467,000 in 1996. Secondly, although the volume of
interest earning assets was higher on average in 1996 than in 1995, the average
yield earned on these assets remained constant at 8.9% in 1996 and 1995. Third,
average interest-bearing liabilities increased 7.2% from $75,057,000 in 1995 to
$80,465,000 in 1996. This increase is attributable to a shift in the composition
of the Bank's deposit liabilities. Average savings deposits, the Bank's lowest
interest paying deposit account, decreased 10.6% from $46,848,000 in 1995 to
$41,877,000 in 1996 while time deposits, the Bank's highest interest paying
deposit account, increased 36.7% from $28,203,000 in 1995 to $38,550,000 in
1996. This shift was due to the Bank offering higher time deposit rates in an
effort to raise deposit levels. Fourth, the average yield paid on
interest-bearing liabilities increased to 3.6% in 1996 from 3.2% in 1995.

          The following table presents the distribution of the Company's average
assets, liabilities and shareholders' equity in combination with the total
dollar amounts of interest income from average interest -earning assets and the
resultant yields without giving effect for any tax exemption, and the dollar
amounts of interest expense and average interest-bearing liabilities, expressed
both in dollars and rates. Loans include non-accrual loans whereas non-accrual
interest is excluded.


<TABLE>
<CAPTION>
(Dollars in Thousands)                                               1997                   1996
                                                   ------------------------    -----------------------------------------
                                                    Average                    Average    Average      Average
Assets                                              Balance       Interest      Yield     Balance      Interest    Yield
                                                   ---------      ---------      ---     ---------     ---------    -----
<S>                                                <C>            <C>            <C>     <C>           <C>          <C>
 Loans                                             $  92,963      $   8,720      9.4%    $  85,216     $   8,137    9.5%
 Lease financing                                          79              7      8.9%          394            31    7.9%
 Investment securities (3)                             6,461            375      5.8%       11,214           629    5.6%
 Federal funds sold                                    3,409            185      5.4%        3,467           179    5.2%
 Interest-earning deposits with
  other financial institutions                           278             17      6.1%          669            35    5.2%
                                                   ---------      ---------      ---     ---------     ---------    ---
     Total Interest-earning Assets                   103,190          9,304      9.0%      100,960         9,011    8.9%
                                                                  ---------      ---                   ---------    ---
Other Assets                                          15,271                                15,803
   Less: Allowance for Loan Losses                      (715)                                 (715)
                                                   ---------                             ---------
     Total Average Assets                          $ 117,746                             $ 116,048
                                                   =========                             =========
Liabilities and Shareholders' Equity
 Savings deposits                                     39,118            685      1.8%       41,877           751    1.8%
  Time deposits                                       40,858          2,250      5.5%       38,550         2,108    5.5%
  Other                                                  107              7      6.5%           38             2    5.3%
                                                   ---------      ---------      ---     ---------     ---------    ---
    Total Interest-bearing Liabilities                80,083          2,942      3.7%       80,465         2,861    3.6%
                                                                      -----      ---        ------         -----    ---
  Demand deposits                                     28,264                                26,422
  Other liabilities                                    1,362                                 1,469
Shareholders' equity                                   8,037                                 7,692
                                                       -----                                 -----
      Total Average Liabilities
     and Shareholders' Equity                      $ 117,746                             $ 116,048
                                                   =========                             =========
Net Interest Spread(1)                                                           5.3%                                5.3%
                                                                                 ===                                 ===
Net Interest Income and Net Interest Margin(2)                    $   6,362      6.2%                   $   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.


                                                                   Page 28 of 70

<PAGE>   29


<TABLE>
<CAPTION>
(Dollars in Thousands)                                                      1995
                                                              Average      Average
Assets                                                        Balance      Interest Yield
                                                              -------     ------      ---
<S>                                                           <C>         <C>         <C>
      Loans                                                   $78,097     $7,470      9.6%
      Lease financing                                             928         75      8.1%
      Investment securities (3)                                12,976        756      5.8%
      Federal funds sold                                        4,156        232      5.6%
      Interest-earning deposits with
       other financial institutions                               568         36      6.3%
                                                              -------     ------      ---
                      Total Interest-earning Assets            96,725      8,569      8.9%
                                                                          ------      ---
Other Assets                                                   13,683
                      Less: Allowance for Loan Losses            (967)
                      Total Average Assets                   $109,441
                                                             ========
Liabilities and Shareholders' Equity
      Savings deposits                                         46,848        839      1.8%
      Time deposits                                            28,203      1,560      5.5%
      Other                                                         6          1     12.2%
                                                              -------     ------      ---
                      Total Interest-bearing Liabilities       75,057      2,400      3.2%
      Demand deposits                                          26,082     ------     -----
      Other liabilities                                         1,047
Shareholders' equity                                            7,255
                                                                -----
                      Total Average Liabilities
                       and Shareholders' Equity              $109,441
                                                             ========
Net Interest Spread(1)                                                                5.7%
                                                                                      ===
Net Interest Income and Net Interest Margin(2)                            $6,169      6.4%
                                                                          ======      ===
</TABLE>

(1) Net interest spread represents the average yield earned on
    interest-earning assets less the average rate paid on interest-bearing
    liabilities.

(2) Net interest margin is computed by dividing net interest income by total
    average earning assets.

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


                                                                   Page 29 of 70

<PAGE>   30


          The following table sets forth changes in interest income and interest
expense for each major category of interest-earning asset and interest-bearing
liability, and the amount of change attributable to volume and rate changes for
the year indicated. The changes due to rate and volume have been allocated in
proportion to the relationship between their absolute dollar amounts.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                        1997 - 1996                   1996 - 1995
                                                       --------------------------    --------------------------
                                                       Volume     Rate      Total    Volume    Rate     Total
                                                        ----      ----      ----      ----     -----      ----
<S>                                                     <C>      <C>        <C>       <C>       <C>       <C>
Increase/(Decrease) In
      Interest Income
          Loans (1)                                     $713     $(123)     $590      $741      $(74)     $667
          Leases (2)                                     (27)       (6)      (33)      (60)      (29)      (89)
          Investment securities (2)                     (277)       23      (254)     (101)      (26)     (127)
          Deposits                                       (29)       12       (17)       78       (79)       (1)
          Federal funds sold                              (3)        9         6       (36)      (17)      (53)
                                                        ----      ----      ----      ----     -----      ----
                                                         377       (85)      292       622      (225)      397
                                                        ----      ----      ----      ----     -----      ----
Increase/(Decrease) In
      Interest Expense
          Savings deposits                               (49)      (17)      (88)      (90)        2       (88)
          Time deposits                                  127        16       143       566       (18)      548
          Short-term borrowings                            4         1         5         1         1
                                                        ----      ----      ----      ----     -----      ----
                                                          82         0        82       477       (16)      461
                                                        ----      ----      ----      ----     -----      ----
                   Increase/(Decrease)
                    in Net Interest Income              $295      $(85)     $210      $145     $(209)     $(64)
                                                        ====      ====      ====      ====     =====      ====
</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
    $26,000 in 1997, $7,000 in 1996 and $39,000 in 1995.

(2) Interest income includes the effects of tax equivalent adjustments on tax
    exempt securities and leases using tax rates which approximate 25.0% for
    1997, 21.0% for 1996 and 41.2% for 1995.

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 $144,000 was
recorded in 1997. This is compared to a provision of $417,000 in 1996 and a
negative provision of $(429,000) in 1995. The provision for loan and lease
losses recorded in 1997 and 1996 is a result of management's assessment of the
potential losses inherent in the loan portfolio. The decrease in the provision
in 1995 was primarily a result of the receipt of a large recovery on a
previously charged off loan and a substantial decrease in charge-offs recorded
from 1994 to 1995. The need for additional provision for loan and lease losses
in 1998 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 1997, the Bank's non-accrual loans decreased from $434,000 to
$229,000. For further information regarding charge-offs, non-performing and
classified loans and the allowance for probable loan and lease losses, see
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION - "Financial Condition - Non-performing Loans" and "Reserve for
probable Loan and Lease Losses."



                                                                   Page 30 of 70
<PAGE>   31

NON-INTEREST INCOME

          Non-interest income for 1997 totaled $1,749,000 compared to $1,838,000
in 1996 and $3,962,000 in 1995. This represents a (4.9)% decrease during 1997, a
(54.0)% decrease in 1996 and a 41.0% increase in 1995. The decrease during 1997
was due to a decrease in fees and service charges. The largest component of the
decrease during 1996 was due to one-time revenues received in connection with
the sale of the Bank's mortgage servicing rights. Income of $1,489,000 received
from the sale of these rights was included in non-interest income during 1995.
In addition, as a result of the sale of these rights, loan servicing income
decreased $150,000 in 1996 and $300,000 in 1995.

          Other fee and service charge income decreased to $1,622,000 during
1997 from $1,750,000 in 1996 and $2,447,000 in 1995. 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. The
decrease in 1996 is mostly attributable to the sale of certain assets and
liabilities of its Victorville branch which occurred during 1995. Total assets
sold were approximately $1,275,000, and total liabilities assumed by the buyer
were approximately $4,104,000. The transaction resulted in a gain of
approximately $23,000, which has been included in other income in 1995. The Bank
is no longer operating the branch in Victorville.

NON-INTEREST EXPENSES

          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 1997 was
$7,331,000 compared to $7,438,000 in 1996 and $9,142,000 in 1995. The decrease
in 1997 was due to a decrease in occupancy expense which was offset by an
increase in salaries and employee benefits. The decrease in 1996 was mostly due
to the savings associated with no longer operating the Victorville branch. The
savings from the sale of this branch were also reflected in the $711,000
decrease in other expense during 1996.

          Salaries and employees benefits totaled $3,672,000 in 1997 compared to
$3,511,000 in 1996 and $3,991,000 in 1995. The increase was attributable in part
to bonuses and raises paid to employees.

          Occupancy expense was $634,000 in 1997 compared to $814,000 in 1996
and $1,254,000 in 1995. 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 and reductions in lease
payments on the Diamond Bar Branch and the relocation of the Arrowhead branch to
Blue Jay

          Other expenses were $2,471,000 in 1997 compared to $2,500,000 in 1996
and $3,210,000 in 1995. 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 67% in 1997
as compared to 69% in 1996 and 73% in 1995.

INCOME TAXES

          Total income tax expense for 1997, 1996 and 1995 were $ 133,800,
$28,000 and $584,000, respectively, which approximated 24.9%, 20.1% and 41.2% of
pre-tax income, respectively.

FINANCIAL CONDITION

ASSETS

          Total consolidated assets decreased $8,013,000 or 6.7% to $111,511,000
as of December 31, 1997 from $119,524,000 as of December 31, 1996. The decrease
in the Company's size is mostly attributable to an $8,318,000 decrease in net
loans, which was offset by an increase in federal funds sold of $2,950,000 and
decreases in investment securities and cash and due from banks of $1,198,000 and
1,215,000, respectively.

                                                                   Page 31 of 70
<PAGE>   32

LOANS

          As noted above, the Company's loan portfolio has decreased by
approximately $8,351,000 during the year ended December 31, 1997. This decrease
was primarily due to a decrease in installment loans to individuals which
decreased $12,666,000 from $50,000,000 in 1996 to $37,334,000 in 1997. This
decrease also resulted in a $1,629,000 decrease in unearned income on
installment loans. The decrease in installment loans was partially offset by a
$1,130,000 increase in real estate construction loans, a $924,000 increase in
real estate mortgage loans and an $848,000 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 52.5% and 70.2% of total installment loans at
December 31, 1997 and 1996, respectively. Approximately 95.7% 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 1997 and 1996.


<TABLE>
<CAPTION>
(Dollars in Thousands)                                          December 31,
                                                                ------------
                                                                1997    1996
                                                                ----    ----
<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                       107     $49
                                                                ----    ----
                      Total Loans Past Due More Than 90 Days     216      49
                                                                ----    ----
Renegotiated loans(2)                                            --      --
                                                                ----    ----
Non-accrual loans(3)
      Aggregate Loan Amounts
          Commercial, financial and agricultural                  28       5
          Real estate                                            201     429
          Installment loans to individuals
                                                                ----    ----
                      Total Non-accrual Loans                    229     434
                                                                ----    ----
                      Total Non-performing Loans                $445    $483
                                                                ====    ====
</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 1997 and 1996.

(3)    There were four loans on non-accrual status totaling approximately
       $229,000 at December 31, 1997, and five loans totaling approximately
       $434,000 at December 31, 1996.

          The policy of the Company is to review each loan in the loan portfolio
to identify problem credits. In addition, as an integral part of its review
process of the Bank, the Comptroller also classifies problem credits. There are
three classifications for problem loans: "substandard", "doubtful" and "loss".
Substandard loans have one or more defined weaknesses and are characterized by
the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected. Doubtful loans have the weaknesses of
substandard loans with the additional characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, questionable. A loan classified as loss is considered
uncollectible and of such little value that the continuance as an asset of the
institution is not warranted. Another category designated "special mention" is
maintained for loans which do not currently expose the Bank to a significant
degree or risk to warrant classification in a substandard, doubtful or loss but
do possess credit deficiencies or potential weaknesses deserving management's
close attention.



                                                                   Page 32 of 70
<PAGE>   33

               As of December 31, 1997, the Bank's classified loans consisted of
$1,889,000 of loans classified as substandard and $17,000 of loans classified as
doubtful. The Bank's $1,552,000 of loans classified as substandard consisted of
$1,859,000 of performing loans and $337,000 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, 1997,
reflected an amount which, in management's judgment, was adequate to provide for
known and inherent loan losses. In evaluating the adequacy of the reserve,
management gives consideration to the composition of the loan portfolio, the
performance of loans in the portfolio, evaluations of loan collateral, prior
loss experience, current economic conditions and the prospects or worth of
respective borrowers or guarantors. In addition, the Comptroller, as an integral
part of its examination process, periodically reviews the Bank's allowance for
possible loan and lease losses. The Comptroller may require the Bank to
recognize additions to the allowance based upon its judgment of the information
available to it at the time of its examination. The Bank was most recently
examined by the Comptroller as of September 30, 1997.

          The reserve for probable loan and lease losses at December 31, 1997,
was $695,000 or .78%, of total loans and leases, as compared to $728,000 or
 .75%, of total credits at December 31, 1996. 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)                              1997     1996
                                                    ----     ----
<S>                                                 <C>      <C>
Allowance For Loan Losses
      Balance, Beginning of period                  $728     $783
                                                    ----     ----
      Charge-offs
          Commercial, financial and agricultural      34      101
          Real estate construction
          Real estate mortgage                        15      201
          Consumer loans                             308      384
          Lease financing
                                                    ----     ----
                      Total Charge-offs              357      686
                                                    ----     ----
      Recoveries
          Commercial, financial and agricultural      18      102
          Real estate construction
          Real estate mortgage                         6
          Consumer loans                             155      112
          Lease financing
                                                    ----     ----
                      Total Charge-offs              179      214
                                                    ----     ----
Net Charge-offs                                      178      472
Provision Charged to Operations                      144      417
                                                    ----     ----
Balance, End of period                              $694     $728
                                                    ====     ====
Net Charge-offs During the Year to Average Loans
 Outstanding During the Year                        0.19%    0.55%
                                                    ====     ====
Allowance For Loan Losses to Total Losses           0.78%    0.75%
                                                    ====     ====
</TABLE>


                                                                   Page 33 of 70
<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, 1997, 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 $28,000 and $9,000 in 1997 and
1996, respectively, and no unrealized losses for the same corresponding periods.
The Company generated gains of $2,000 during 1997 and 1996 and losses of $8,000
on sales of investment securities during 1995.

          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, 1997 were $101,741,000 compared with $106,603,000 in 1996. The
$4,862,000 decrease represents an 4.6% decrease. The mix of the Bank's deposits
showed wide fluctuations with an increase in savings and NOW deposits of
$1,293,000 or 5.3%, a decrease in money market deposits of $1,651,000 or 11.9%,
an increase in demand deposits of $3,509,000 or 13.5%, a decrease in time
deposits in denominations of $100,000 or more of $1,903,000 or 20.2% and a
decrease in other time deposits of $6,110,000 or 18.4%. The decreases in time
deposits in denominations of $100,000 or more and in other time deposits
represents the run-off from time deposits that were last offered in early 1997
at approximately 60 basis points above local market rates. 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 70
<PAGE>   35

          The Bank's Asset-Liability Management Committee (ALCO) manages the
Company's liquidity position, the parameters of which are approved by the Board
of Directors. The liquidity position of the Bank is monitored daily. Vineyard
National Bank had liquid assets (cash, deposits in other financial institutions
and investment securities) as a percent of total deposits and borrowed funds of
14% and 13% as of December 31, 1997 and 1996 respectively. The Bank's loan to
deposit ratio was 87% and 91% as of December 31, 1997 and 1996. 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
$8,351,000 while deposits decreased by only $4,862,000.

          Liquidity has increased from $10,215,000 at December 31, 1996 to
$14,056,000 at December 31, 1997 mainly due to a decrease in borrowed funds of
$3,700,000.

          While the level of liquid assets is modest, management believes it is
sufficient to meet current and anticipated funding needs. Liquid assets
represent approximately 12.6% 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 $4.7 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, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.



                                                                   Page 35 of 70
<PAGE>   36

          As of December 31, 1997, the most recent notification from the Office
of the Comptroller of the Currency (OCC) categorized the Bank as adequately
capitalized under the regulatory framework for prompt corrective action (there
are no conditions or events since that notification that management believes
have changed the Bank's category). To be categorized as well-capitalized, the
Bank must maintain minimum ratios as set forth in the table below. The following
table also sets forth the Bank's actual capital amounts and ratios (dollar
amounts in thousands):

<TABLE>
<CAPTION>
                                                                               Capital Needed
                                                                    -------------------------------------
                                                                                           To Be Well
                                                                                       Capitalized Under
                                                                       For Capital     Prompt Corrective
                                                     Actual         Adequacy Purposes     Provisions
                                                 --------------     -----------------  ------------------
                                                 Amount    Ratio    Amount     Ratio   Amount    Ratio
                                                 ------     ----    ------     ----    ------    -----
<S>                                              <C>        <C>     <C>        <C>     <C>       <C>
As of December 31, 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%

As of December 31, 1996
      Total capital to risk-weighted assets      $8,568     8.2%    $8,329     8.0%   $10,411    10.0%
      Tier 1 capital to risk-weighted assets      7,840     7.5%     4,165     4.0%     6,247     6.0%
      Tier 1 capital to average assets            7,840     6.5%     4,832     4.0%     6,040     5.0%
</TABLE>

          Capital ratios have increased between December 31, 1996 and December
31, 1997, 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

          The Company is currently working to resolve the potential impact of
the year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
preliminary information, the costs of addressing potential problems currently
are not expected to have a material adverse impact on the Company's financial
position, results of operations or liquidity in future periods. However, if the
Company is unable to resolve such processing issues in a timely manner, it could
result in a material financial risk. Accordingly, the Company plans to devote
the necessary resources to resolve all significant year 2000 issues in a timely
manner. However, even if the Company is able to resolve any such issues with
respect to its computerized information systems, there is no assurance that
customers who utilize computer information systems to effectuate banking
transactions, or the Company's vendors or financial institutions with which the
company does business, will not encounter problems that could adversely affect
the Company's business.



                                                                   Page 36 of 70
<PAGE>   37


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

<TABLE>
<CAPTION>
                                                                                    Page Reference

<S>                                                                                         <C>
Independent Auditors' Report ...........................................................    38

Consolidated Balance Sheets
December 31, 1997 and 1996 .............................................................    39

Consolidated Statements of Income
For the Years Ended December 31, 1997, 1996 and 1995 ...................................    40

Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995 ...................................    41

Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995 ...................................    42

Notes to Consolidated Financial Statements .............................................    44

</TABLE>

          All schedules omitted for the reason that they are not required, are
not applicable or the required information is shown in the Consolidated
Financial Statements or notes thereto.



                                                                   Page 37 of 70
<PAGE>   38


                          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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, 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, 1997, in conformity
with generally accepted accounting principles.




Rancho Cucamonga, California
February 6, 1998


                                                                   Page 38 of 70
<PAGE>   39


                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996




<TABLE>
<CAPTION>
                                                 ASSETS
                                                                                   1997             1996
                                                                              -------------     ------------
<S>                                                                           <C>                <C>
Cash and due from banks (there was no minimum Federal
  Reserve Balance requirement at December 31, 1997)                           $  6,404,346      $  7,619,307
Federal funds sold                                                               2,950,000
                                                                              ------------      ------------
                      Total Cash and Cash Equivalents                            9,354,346         7,619,307
                                                                              ------------      ------------
Interest-bearing deposits in other financial institutions                                            396,000
Investment securities (Notes #1C and #2)
      Available-for-sale                                                         4,701,490         5,899,729
Loans, net of unearned income (Notes #1D and #3)                                88,675,135        97,276,964
Loans held for sale (Notes #1E and #3)                                             424,950
                                                                              ------------      ------------
                                                                                89,100,085        97,276,964
Direct lease financing (Notes #1G and #4)                                           14,354           188,489
     Less:  Reserve for probable loan and lease losses (Notes #1F and #5)         (694,880)         (727,667)
                                                                              ------------      ------------
                                                                                88,419,559        96,737,786
Bank premises and equipment (Notes #1H and #7)                                   6,741,300         6,439,982
Accrued interest                                                                   445,033           403,126
Cash surrender value of life insurance                                             981,467           845,556
Other real estate owned (Notes #1K, #19 and #20)                                   492,492           710,205
Other assets                                                                       375,125           471,995
                                                                              ------------      ------------
                      Total Assets                                            $111,510,812      $119,523,686
                                                                              ============      ============
               LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
      Deposits
          Demand deposits                                                       29,455,497        25,946,157
          Savings and NOW deposits                                              25,562,601        24,269,489
          Money market deposits                                                 12,168,373        13,819,261
          Time deposits in denominations of $100,000 or more                     7,522,574         9,425,758
          Other time deposits                                                   27,032,311        33,142,124
                                                                              ------------      ------------
                                                                               101,741,356       106,602,789
      Federal funds purchased                                                                      3,700,000
      Accrued employee salary and benefits                                         781,712           466,226
      Accrued interest and other liabilities                                       721,241           903,259
                                                                              ------------      ------------
                      Total Liabilities                                        103,244,309       111,672,274
                                                                              ------------      ------------
Stockholders' Equity
      Contributed capital
          Common stock - authorized 15,000,000 shares, no par value,
             issued and outstanding 1,862,643 shares in 1997 and 1996            2,106,258         2,106,258
      Additional paid-in capital                                                 3,306,684         3,306,684
      Retained earnings                                                          2,837,599         2,433,463
      Valuation allowance for investments                                           15,962             5,007
                                                                              ------------      ------------
                      Total Stockholders' Equity                                 8,266,503         7,851,412
                                                                              ------------      ------------
                      Total Liabilities and Stockholders' Equity              $111,510,812      $119,523,686
                                                                              ============      ============

</TABLE>

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


                                                                   Page 39 of 70
<PAGE>   40

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME
                FOR THE YEARS ENDED DECEMBER 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                                 1997             1996              1995
                                                                             -----------       ----------        ----------
<S>                                                                           <C>              <C>               <C>
Interest Income
      Interest and fees on loans (Note #1D)                                   $8,631,123       $8,136,925        $7,470,066
      Interest on Investment Securities (Note #1C)
          Obligations of U.S. Government Agencies and Corporations               364,779          620,061           745,436
          Obligations of State and Political Subdivisions                                                               271
      Interest on other securities                                                 9,833            9,792             9,749
      Interest on deposits                                                        17,398           34,777            36,022
      Interest on Federal funds sold                                             185,151          178,734           232,159
                                                                             -----------       ----------        ----------
                      Total Interest Income                                    9,213,228        9,011,147         8,568,863
                                                                             -----------       ----------        ----------
Interest Expense
      Interest on savings deposits                                               216,723          221,431           258,963
      Interest on NOW and money market deposits                                  468,881          529,933           573,804
      Interest on time deposits in denominations of $100,000 or more             481,436          352,970           334,410
      Interest on other time deposits                                          1,768,438        1,754,823         1,225,710
      Interest on Federal funds purchased and other interest                       7,029            1,677             6,701
                                                                             -----------       ----------        ----------
                      Total Interest Expense                                   2,942,507        2,860,834         2,399,588
                                                                             -----------       ----------        ----------
                      Net Interest Income                                      6,270,721        6,150,313         6,169,275
(Provision)/Credit for Loan and Lease Losses --                                 (143,782)        (416,900)          429,000
                                                                             -----------       ----------        ----------
 (Notes #1F and #5)
                      Net Interest Income After (Provision)/Credit
                        for Loan and Lease Losses                              6,126,939        5,733,413         6,598,275
                                                                             -----------       ----------        ----------
Other  Income
      Fees and service charges, gain on sale of loans
        and loan servicing income (Note #12)                                   1,622,015        1,750,110         2,447,100
      Sale of mortgage servicing rights (Note #18)                                                 22,375         1,488,789
      Sale of branch office (Note #22)                                                                               22,984
      Net gain/(loss) on sale of investment securities                             2,450            2,200            (8,237)
      Other income                                                               124,289           63,248            10,944
                                                                             -----------       ----------        ----------
                      Total Other Income                                       1,748,754        1,837,933         3,961,580
                                                                             -----------       ----------        ----------
Other Expenses
      Salaries and employee benefits                                           3,671,701        3,511,460         3,991,474
      Occupancy expense of premises                                              634,410          813,515         1,253,892
      Furniture and equipment expense                                            553,456          549,022           646,499
      Net loss on sale of other real estate owned                                  7,166           63,992            39,463
      Other expenses (Note #12)                                                2,471,024        2,499,779         3,210,468
                                                                             -----------       ----------        ----------
                      Total Other Expenses                                     7,337,757        7,437,768         9,141,796
                                                                             -----------       ----------        ----------


Income Before Income Taxes                                                       537,936          133,578         1,418,059
Income Taxes (Notes #1J and #8)                                                  133,800           28,000           584,254
                                                                             -----------       ----------        ----------
Net Income                                                                   $   404,136       $  105,578        $  833,805
                                                                             ===========       ==========        ==========
Earnings Per Share (Notes #1L and #16)
       Basic                                                                 $      0.22       $     0.06        $     0.45
                                                                             ===========       ==========        ==========
       Diluted                                                               $      0.21       $     0.06        $     0.44
                                                                             ===========       ==========        ==========

</TABLE>



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



                                                                   Page 40 of 70
<PAGE>   41

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED DECEMBER 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                                                             Valuation
                                                  Number of                   Additional                     Allowance
                                                    Shares        Common       Paid-in         Retained        for
                                                 Outstanding      Stock        Capital         Earnings     Investments
                                                 -----------    ----------    -----------     ----------    -----------
<S>                                             <C>             <C>           <C>              <C>            <C>
BALANCE, JANUARY 1, 1995                          1,552,425     $2,106,258    $3,306,684      $1,494,874      $(47,672)

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

      Six-for-five stock split                      310,218

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

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

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

      Net income for the year                                                                    105,578
                                                  ---------     ----------    ----------      ----------      -------
BALANCE, DECEMBER 31, 1996                        1,862,643      2,106,258     3,306,684       2,433,463        5,007

      Change in unrealized gain
       on investment securities
       available-for-sale (net of tax)                                                                         10,955

      Net income for the year                                                                    404,136
                                                  ---------     ----------    ----------      ----------      -------
BALANCE, DECEMBER 31, 1997                        1,862,643     $2,106,258    $3,306,684      $2,837,599      $15,962
                                                  =========     ==========    ==========      ==========      =======
</TABLE>



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



                                                                   Page 41 of 70
<PAGE>   42
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                                                      1997              1996               1995
                                                                  -----------      ------------        -----------
<S>                                                               <C>                <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Interest and fees received                                  $ 7,555,823      $ 10,382,661        $ 7,543,620
      Service fees and other income received                        1,680,159         1,835,733          3,944,375
      Financing revenue received under leases                           4,944            30,858             75,160
      Interest paid                                                (3,195,513)       (2,836,415)        (2,027,170)
      Cash paid to suppliers and employees                         (6,607,753)       (7,002,983)        (8,856,917)
      Income taxes paid                                               (10,000)          (18,044)           311,393
                                                                  -----------      ------------        -----------
                      Net Cash Provided By/(Used In)
                        Operating Activities                         (572,340)        2,391,810            990,461
                                                                  -----------      ------------        -----------
CASH FLOWS FROM INVESTING ACTIVITIES
      Proceeds from maturities of investment
       securities held-to-maturity                                                                       2,797,500
      Proceeds from maturities of investment securities,
       available-for-sale                                           3,350,000        13,085,000         10,055,000
      Proceeds from sales of investment securities,
       available-for-sale                                           6,392,159         5,011,954          1,000,000
      Purchase of investment securities held-to-maturity
      Purchase of investment securities available-for-sale         (8,484,567)      (10,578,602)       (18,948,067)
      Net (increase)/decrease in deposits in other
       financial institutions                                         396,000           396,000           (693,000)
      Recoveries on loans previously written off                      180,559           213,798            894,920
      Net loans made to customers and principal
        collections of loans                                        9,480,516       (22,353,294)         5,686,829
      Net decrease in leases to customers                             174,135           400,376            716,544
      Capital expenditures                                           (861,941)       (3,339,414)          (494,129)
      Proceeds from sale of property, plant and equipment              31,404            74,727             39,161
      Proceeds from sale of branch                                                                         200,000
      Proceeds from sale of OREO                                      210,547           409,861            434,337
                                                                  -----------      ------------        -----------
                      Net Cash Provided By/(Used In)
                       Investing Activities                        10,868,812       (16,679,594)         1,689,095
                                                                  -----------      ------------        -----------
CASH FLOWS FROM FINANCING ACTIVITIES
      Net decrease in demand deposits, NOW accounts,
       savings accounts, and money market deposits                  3,151,564        (4,489,987)        (9,132,818)
      Net increase in certificates of deposits                     (8,012,997)       12,678,329          8,962,786
      Net increase/(decrease) in federal funds purchased           (3,700,000)        3,700,000         (1,000,000)
      Cash paid in lieu of fractional shares                                                                  (794)
                                                                  -----------      ------------        -----------
                      Net Cash Provided By/(Used In)
                       Financing Activities                        (8,561,433)       11,888,342         (1,170,826)
                                                                  -----------      ------------        -----------
NET (DECREASE)/INCREASE IN CASH
 AND CASH EQUIVALENTS                                               1,735,039        (2,399,442)         1,508,730
CASH AND CASH EQUIVALENTS, Beginning of year                        7,619,307        10,018,749          8,510,019
                                                                  -----------      ------------        -----------
CASH AND CASH EQUIVALENTS, End of year                            $ 9,354,346      $  7,619,307        $10,018,749
                                                                  ===========      ============        ===========
</TABLE>


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



                                                                   Page 42 of 70

<PAGE>   43


                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                      1997                  1996                    1995
                                                                 -----------             ----------             -----------
RECONCILIATION OF NET INCOME TO NET CASH
 PROVIDED BY/(USED IN) OPERATING ACTIVITIES
      Net Income                                                 $   404,136             $  105,578              $  833,805
                                                                 -----------             ----------              ----------
<S>                                                             <C>                      <C>                     <C>
      Adjustments to Reconcile Net Income
       to Net Cash Provided by Operating Activities
          Depreciation and amortization                              500,510                503,187                 249,933
          Provision/(credit) for probable credit losses              143,782                416,900                (429,000)
          Provision for probable OREO losses                                                 37,260                  49,740
          (Gain)/loss on sale of equipment                            (9,309)                28,589                    (260)
          Increase/(decrease) in taxes payable                       123,000                 (5,044)                895,647
          Increase in other assets                                   (98,324)              (142,586)               (157,491)
          Increase/(decrease) in unearned loan fees               (1,660,765)             1,259,746                (654,365)
          (Increase)/decrease in interest receivable                 (41,907)               138,849                 (53,809)
          Increase/(decrease) in interest payable                   (253,006)                24,419                 372,418
          Increase (decrease) in accrued expense and
           other liabilities                                         314,827                (36,880)               (140,873)
          Gain on sale of branch                                                                                    (22,984)
          (Gain)/loss on sale of investment securities                (2,450)                (2,200)                  8,237
          Loss on sale of OREO                                         7,166                 63,992                  39,463
                                                                 -----------             ----------              ----------
                      Total Adjustments                             (976,476)             2,286,232                 156,656
                                                                 -----------             ----------              ----------
                      Net Cash Provided By/(Used In)
                       Operating Activities                      $  (572,340)            $2,391,810              $  990,461
                                                                 ===========             ==========              ==========
SUPPLEMENTARY INFORMATION
      Change in valuation allowance
       for investment securities                                 $    10,955             $   (6,880)             $   59,559
                                                                 ===========             ==========              ==========
      Book value of investment securities transferred
       from held-to-maturity to available-for-sale                        --                     --              $2,197,960
                                                                 ===========             ==========              ==========
      Transfer of loans to real estate owned through
         foreclosure                                                      --             $  612,624              $  284,000
                                                                 ===========             ==========              ==========

</TABLE>



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



                                                                   Page 43 of 70
<PAGE>   44
                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


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 44 of 70
<PAGE>   45

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

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 is 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 45 of 70
<PAGE>   46

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


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, 1997, 1996 and 1995,
     was approximately $539,000, $499,000 and $492,000, 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.   New Accounting Pronouncements

     In June 1997, the Financial Accounting Standards Board issued Statement No.
     130, "Reporting Comprehensive Income." This statement, which is effective
     for the year ending December 31, 1998, establishes standards of disclosure
     and financial statement display for reporting comprehensive income and its
     components.

     In June 1997, the Financial Accounting Standards Board issued Statement No.
     131, "Disclosures about Segments of an Enterprise and Related Information."
     This statement changes current practice under SFAS 14 by establishing a new
     framework on which to base segment reporting (referred to as the management
     approach) and also requires certain related disclosures about products and
     services, geographic areas and major customers. The disclosures are
     required for the year ending December 31, 1998.


                                                                   Page 46 of 70
<PAGE>   47

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE #2 - INVESTMENT SECURITIES

At December 31, 1997 and 1996, 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, 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                   $4,701,490
                              ==========    =======     ==========    ==========
</TABLE>


The amortized cost and fair values of investment securities available-for-sale
at December 31, 1996, were:

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

The amortized cost and fair values of investment securities available-for-sale
at December 31, 1997, 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                               $2,493,798       $2,497,031
Due after one year but less than five years            1,998,325        2,008,125
                                                      ----------       ----------
                                                       4,492,123        4,505,156
Other securities                                         181,844          196,334
                                                      ----------       ----------
        Total Securities Available-for-Sale           $4,673,967       $4,701,490
                                                      ==========       ==========
</TABLE>


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.


                                                                   Page 47 of 70
<PAGE>   48

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


NOTE #2 - INVESTMENT SECURITIES, Continued

Proceeds from sales of investment securities available-for-sale during 1995 were
$1,000,000. Gross losses on those sales were $8,237. Included in shareholders'
equity at December 31, 1995 is $11,887 of net unrealized gains (net of $8,611
estimated tax benefit) on investment securities available-for-sale.

Securities with a carrying value and fair value of $3,992,124 and $3,826,791 at
December 31, 1997 and 1996, 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>
                                                                 1997               1996
                                                            ----------------   ----------------
<S>                                                          <C>               <C>
Commercial, financial and agricultural                          $10,584,778       $  9,737,235
Real Estate - construction                                        1,960,384            830,238
Real Estate - mortgage
      Commercial                                                 32,622,866         34,628,900
      Residential                                                 9,293,773          6,363,664
Installment loans to individuals                                 37,333,936         49,999,727
All other loans (including overdrafts)                               31,341            104,985
                                                            ----------------   ----------------
                                                                 91,827,078        101,664,749
Unearned income on installment loans                             (2,294,624)        (3,924,182)
Deferred loan fees                                                 (432,369)          (463,603)
                                                            ----------------   ----------------
                      Loans, Net of Unearned Income             $89,100,085        $97,276,964
                                                            ================   ================
</TABLE>


The following is a summary of the investment in impaired loans, the related
allowance for loan losses, and income recognized thereon as of December 31:


<TABLE>
<CAPTION>
                                                         1997           1996            1995
                                                      ------------   ------------   -------------
<S>                                                   <C>            <C>             <C>
Recorded investment in impaired loans                    $229,000       $434,000        $564,000
Related allowance for loan losses                           8,000         66,000          67,000
Average recorded investment in impaired loans             354,000        508,000         567,000
Interest income recognized for cash payments                3,000          6,000           5,000
Cash receipts applied to reduce principal balance          17,000         11,000           7,000

</TABLE>

The provisions of SFAS No. 114 and SFAS No. 118 permit the valuation allowance
reported above to be determined on a loan-by-loan basis or by aggregating loans
with similar risk characteristics. Because the loans currently identified as
impaired have unique risk characteristics, the valuation allowance was
determined on a loan-by-loan basis.

Nonaccruing loans totaled approximately $229,000 and $434,000 at December 31,
1997 and 1996, respectively. As of December 31, 1997 and 1996, 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 $26,000, $7,000 and $39,000 in 1997, 1996 and 1995, respectively.



                                                                   Page 48 of 70
<PAGE>   49

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE #3 - LOANS, Continued

At December 31, 1997 and 1996, the Company had approximately $216,000 and
$49,000, 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, 1997, no loans were classified as troubled debt restructurings.


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            1996
                                                       ------------   -------------
<S>                                                      <C>              <C>
Lease payments receivable                                $  15,252        $204,201
Unearned income                                               (898)        (15,712)
                                                       ------------   -------------
                      Total Direct Lease Financing       $  14,354        $188,489
                                                       ============   =============
</TABLE>


The Company had no outstanding commitments relating to municipal leases at
December 31, 1997 and 1996.

At December 31, 1997, future minimum lease payments receivable under direct
financing leases are as follows:

<TABLE>
<CAPTION>
      Year Ending
     December 31,
------------------------
<S>                                                            <C>
         1998                                                     $14,354
                                                               ===========
</TABLE>


NOTE #5 - RESERVE FOR PROBABLE LOAN AND LEASE LOSSES

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


<TABLE>
<CAPTION>
                                                          1997             1996             1995
                                                      --------------   --------------   --------------
<S>                                                      <C>              <C>              <C>
Balance, Beginning of year                               $  727,667       $  783,466       $1,014,433
Recoveries on loans previously charged off                  180,559          213,798          894,920
Loans charged off                                          (357,128)        (686,497)        (696,887)
Provision/(credit) charged to operating expense             143,782          416,900         (429,000)
                                                      --------------   --------------   --------------
Balance, End of year                                     $  694,880       $  727,667      $   783,466
                                                      ==============   ==============   ==============
</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.



                                                                   Page 49 of 70
<PAGE>   50

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE #6 - LOANS TO DIRECTORS AND OFFICERS, Continued

An analysis of the activity with respect to such aggregate loans to related
parties during 1997 and 1996, is as follows:

<TABLE>
<CAPTION>
                                                                          1997             1996
                                                                    ---------------   --------------
<S>                                                                 <C>               <C>
Outstanding Balance, Beginning of year                                  $1,634,428       $1,455,884
Credit granted, including renewals                                         339,992          581,404
Repayments                                                                (150,952)        (402,860)
                                                                    ---------------   --------------
Outstanding Balance, End of year                                        $1,823,468       $1,634,428
                                                                    ===============   ==============
</TABLE>


Not included in the balances outstanding at December 31, 1997 and 1996, were
undisbursed commitments to lend of approximately $142,000 and $103,000,
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 1997
and 1996.


NOTE #7 - PREMISES AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                                               1997              1996
                                                                                          ---------------   ----------------
<S>                                                                                         <C>                <C>
Building                                                                                    $  3,901,215       $  3,860,185
Furniture and equipment                                                                        4,082,328          3,398,717
Leasehold improvements                                                                         1,172,077          1,133,417
                                                                                          ---------------   ----------------
                                                                                               9,155,620          8,392,319
      Less:  Accumulated depreciation and amortization                                        (3,699,320)        (3,237,337)
Land                                                                                           1,285,000          1,285,000
                                                                                          ---------------   ----------------
                      Total                                                                 $  6,741,300       $  6,439,982
                                                                                          ===============   ================
</TABLE>


NOTE #8 - INCOME TAXES

<TABLE>
<CAPTION>
                                                                    Year Ending December 31,
                                                           --------------------------------------------
                                                               1997           1996            1995
                                                           -------------   ------------   -------------
<S>                                                        <C>             <C>              <C>
Tax provision applicable to
  income before income taxes                                   $133,800      $  28,000        $584,254
                                                           =============   ============   =============

Federal Income Tax
      Current                                                    29,300         -              -
      Deferred                                                   51,600         15,000         416,752
                                                           -------------   ------------   -------------
                                                                 80,900         15,000         416,752
                                                           -------------   ------------   -------------
State Franchise Tax
      Current                                                    50,500         10,800           2,400
      Deferred                                                    2,400          2,200         165,102
                                                           -------------   ------------   -------------
                      Total State Franchise Tax                  52,900         13,000         167,502
                                                           -------------   ------------   -------------
                      Total Income Taxes                       $133,800      $  28,000        $584,254
                                                           =============   ============   =============

</TABLE>



                                                                   Page 50 of 70
<PAGE>   51

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


NOTE #8 - INCOME TAXES, Continued

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>
                                                      1997                       1996                       1995
                                            -------------------------- -------------------------- --------------------------
                                              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                             $  40,100    $    1,560    $  21,160    $    4,600     $253,602      $118,340
Depreciation computed
 differently on tax returns than
 for financial statements                       (10,800)       (2,520)       7,500           300        2,740        (6,551)
Deferred compensation plan                      (19,700)       (4,640)     (19,900)       (4,500)      14,550         4,836
Provision for loan loss deduction
 in tax return over amount
 charged for financial
 statement purposes                              42,000         8,000        6,240         1,800      145,860        48,477
                                            ------------  ------------ ------------  ------------ ------------  ------------
                      Total                   $  51,600    $    2,400    $  15,000    $    2,200     $416,752      $165,102
                                            ============  ============ ============  ============ ============  ============

</TABLE>

As a result of the following items, the total income tax expense/(credit) for
1997, 1996 and 1995, was different than the amount computed by applying the
statutory U.S. Federal income tax rate to income before taxes:

<TABLE>
<CAPTION>
                                                         1997                     1996                      1995
                                               ------------------------- ------------------------ --------------------------
                                                              Percent                  Percent                    Percent
                                                             of Pretax                of Pretax                  of Pretax
                                                 Amount       Income       Amount      Income        Amount       Income
                                               ------------ ------------ ----------- ------------ ------------- ------------
<S>                                            <C>          <C>          <C>         <C>          <C>            <C>
Federal rate                                      $182,898          34.0    $45,416          34.0     $482,140          34.0
Changes due to State income
 tax, net of Federal tax benefit                    34,914           6.5      8,580           6.4      110,551           7.8
Exempt interest                                    (51,045)         (9.5)   (28,410)        (21.2)     (21,800)         (1.5)
Other                                              (32,967)         (6.1)     2,414           1.8       13,363           0.9
                                               ------------ ------------ ----------- ------------ ------------- ------------
                      Total                       $133,800          24.9    $28,000          21.0     $584,254          41.2
                                               ============ ============ =========== ============ ============= ============
</TABLE>


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


                                                                   Page 51 of 70
<PAGE>   52

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                    1997             1996
                                                                -------------    -------------
<S>                                                              <C>              <C>
Deferred Tax Assets
      Real estate owned writedowns                               $    14,000      $    14,000
      Deferred compensation                                          180,000          110,000
      Deferred fees                                                  170,000          130,000
      Non-deductible reserves                                         72,000           18,000
      Other                                                           39,000          203,000
                                                                -------------    -------------
                                                                     475,000          475,000
                     Less:  Valuation allowance(1)                  (475,000)        (475,000)
                                                                -------------    -------------
                                                                           0                0
Deferred Tax Liabilities
      Reserve for loan losses                                        (98,000)         (48,000)
      Unrealized gain on securities                                  (11,000)
      Fixed assets                                                  (128,000)        (135,000)
                                                                -------------    -------------
                      Net Deferred Tax Liability                   $(237,000)       $(183,000)
                                                                =============    =============

</TABLE>
---------------

(1) The valuation allowance is management's estimate of amounts more likely
    than not of being realized due to uncertainty regarding future income based
    on prior results. The allowance is largely attributable to unused losses
    previously incurred and overall limitations on other deferred tax assets.
    The allowance was not changed during the 1997 year.


NOTE #9 -- COMMITMENTS AND CONTINGENCIES

The Company is obligated under leases for equipment and property. The original
terms of the leases range from two to thirty years. The following is a schedule
of future minimum lease payments based upon obligations at year-end.

<TABLE>
<CAPTION>
      Year Ending
     December 31,
------------------------
<S>                                                       <C>
         1998                                             $ 54,862
         1999                                               23,390
         2000                                                7,797
                                                        ===========
             Total                                       $ 86,049
                                                        ===========
</TABLE>


Total property and equipment expenditures charged to leases for the reporting
periods ended December 31, 1997, 1996 and 1995, were approximately $124,000,
$303,000 and $733,000, 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, 1997 and 1996, the Company had commitments to extend credit of
approximately $6,884,000 and $5,622,000 and obligations under standby letters of
credit of approximately $311,000 and $271,000.


                                                                   Page 52 of 70
<PAGE>   53

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


NOTE #9 - COMMITMENTS AND CONTINGENCIES, Continued

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, income-producing
commercial properties, residential properties and properties under construction.

Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.

The Company is involved in various other litigation. In the opinion of
Management and the Company's legal council, the disposition of all such other
litigation pending will not have a material effect on the Company's financial
statements.


NOTE #10 - STOCK SPLIT

On August 23, 1995, the Company's Board of Directors approved a six-for-five
stock split of its common stock. The outstanding shares and related calculations
included in these financial statements reflect retroactive adjustments for this
stock split.


NOTE #11 - STOCK OPTION PLAN

At December 31, 1997, the Company has one stock-based compensation plan, which
is described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for its incentive stock option plan. Had compensation cost
for this plan been determined on the fair value at the grant dates consistent
with the method of SFAS 123, the impact would not have materially affected net
income.

An incentive stock option plan was approved by the stockholders in 1987 covering
an aggregate of 126,000 shares (after giving retroactive effect for stock
splits). The plan provides that options of the Company's unissued common stock
may be granted to officers and key employees at prices not less than the fair
market value of such shares at dates of grant. Options granted expire on such
date as the Stock Option Committee or Board of Directors may determine, but not
later than the sixth anniversary of the date on which the option is granted.

During 1994, the Board of Directors of Vineyard National Bancorp elected to
cancel all existing stock options and reissue new stock options at a price of
$3.50 per share ($2.92 per share after giving retroactive effect for the
six-for-five stock split.)

During 1996, the Board of Directors of Vineyard National Bancorp elected to
modify the existing incentive stock option plan. Under the new agreement the
options granted expire on such date as the Stock Option Committee or Board shall
determine, but not later than the seventh anniversary of the date on which the
option is granted.


                                                                   Page 53 of 70
<PAGE>   54

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


NOTE #11 -- STOCK OPTION PLAN, Continued

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 1997, 1996 and 1995, respectively,
were estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions; risk-free rates of 5.75%, 6.28%, and 5.45%;
dividend yield of 0.0% for all years; volatility of 25%, 24%, and 25%; 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, 1997, 1996 and 1995, respectively, and changes during the years
ending on those dates is presented below:


<TABLE>
<CAPTION>
                                                 1997                                       1996
                                      ------------------------------------------ -----------------------------------------
                                            Number of Shares         Weighted-         Number of Shares         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           53,316          73,136      $2.91          50,036          76,416      $2.89
Additional options authorized             200,000
Cancelled                                   1,872          (1,872)     $2.92           8,280          (8,280)     $2.92
Granted                                    (5,000)          5,000      $3.50          (5,000)          5,000      $3.13
                                      ------------ ---------------               ------------ ---------------
Outstanding at end of year                250,188          76,264      $2.97          53,316          73,136      $2.91
                                      ============ ===============               ============ ===============

Options exercisable at year-end                            76,264                                     73,136
Weighted-average fair value of
   Options granted during the year                         $ 1.18                                     $ 1.12

</TABLE>

<TABLE>
<CAPTION>
                                                                            1995
                                                               ----------------------------------------------
                                                                       Number of Shares          Weighted-
                                                               ---------------------------------
                                                               Available                          Average
                                                                  For                             Exercise
                                                                Granting       Outstanding         Price
                                                               -----------    ---------------   -------------
<S>                                                            <C>            <C>                <C>
Outstanding at beginning of year                                   46,404             80,048       $2.92
Cancelled                                                           9,632             (9,632)      $2.92
Granted                                                            (6,000)             6,000       $2.60
                                                               ------------------------------
Outstanding at end of year                                         50,036             76,416       $2.89
                                                               ===========    ===============

Options exercisable at year-end                                                       76,416
Weighted-average fair value of
   Options granted during the year                                                    $ 0.86

</TABLE>



                                                                   Page 54 of 70
<PAGE>   55

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE #11 - STOCK OPTION PLAN , Continued

The following table summarizes information about incentive stock options
outstanding at December 31, 1997:


<TABLE>
<CAPTION>
                          Options Outstanding and Exercisable
----------------------------------------------------------------------------------------
                           Number          Weighted-Average
     Range of           Outstanding            Remaining            Weighted-Average
  Exercise Prices       at 12/31/97        Contractual Life          Exercise Price
--------------------   ---------------   ----------------------   ----------------------
<S>                    <C>               <C>                      <C>
  $2.91 to $3.50               76,264              7                      $2.97

</TABLE>


NOTE #12 - OTHER INCOME/EXPENSES

The following is a breakdown of fees and other servicing income and expenses for
the years ended December 31, 1997, 1996 and 1995:



<TABLE>
<CAPTION>
                                                                               1997             1996              1995
                                                                          ---------------   --------------   ---------------
<S>                                                                        <C>              <C>               <C>
Fees and Other Servicing Income
      Fees and service charges                                                $1,622,015       $1,750,110        $2,286,071
      Gain on sale of loans                                                                                          10,614
      Loan servicing                                                                                                150,415
                                                                          ---------------   --------------   ---------------
                      Total                                                   $1,622,015       $1,750,110        $2,447,100
                                                                          ===============   ==============   ===============
Other Expenses
      Data processing                                                        $   683,086      $   754,617       $   826,520
      Marketing expenses                                                         334,662          307,233           326,605
      Professional expenses                                                      530,457          421,209           561,825
      Office supplies, postage and telephone                                     346,224          363,892           431,034
      Insurance and assessment expense                                           191,461          157,931           336,096
      Loan related expense                                                        65,897          147,541           359,095
      Administrative expense                                                     106,044           85,316            99,767
      Other                                                                      213,193          262,040           269,526
                                                                          ---------------   --------------   ---------------
                      Total                                                   $2,471,024       $2,499,779        $3,210,468
                                                                          ===============   ==============   ===============

</TABLE>

NOTE #13 - RESTRICTION ON TRANSFERS OF FUNDS TO PARENT

There are legal limitations on the ability of the Bank to provide funds to the
Company. Dividends declared by the Bank may not exceed, in any calendar year,
without approval of the Comptroller of the Currency, net income for the year and
the retained net income for the preceding two years. Section 23A of the Federal
Reserve Act restricts the Bank from extending credit to the Company and other
affiliates amounting to more than 20 percent of its contributed capital and
retained earnings. At December 31, 1997, the combined amount of funds available
from these two sources amounted to approximately $2,995,000 or 36%.



                                                                   Page 55 of 70
<PAGE>   56

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


NOTE #14 - 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 25% of officers' deferrals up to a maximum of 10% and 50% of
senior officers' deferrals to a maximum of 10%. The Company's contribution, in
the aggregate, for all Participants shall not exceed 4% of compensation of all
Company employees. Each Participant contributes a minimum of $1,000 annually to
the plan. The deferred compensation expense was $85,911 ($51,546 net of income
taxes), $84,535 ($66,815 net of income taxes), and $138,833 ($81,911 net of
income taxes) for the years ended December 31, 1997, 1996 and 1995,
respectively.


NOTE #15 - 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 $9,500 annually. The Company's contribution to
the plan is based upon an amount equal to 25% of each participant's eligible
contribution for the plan year not to exceed 4% of the employee's compensation.
The Company's matching contribution will become vested at 20% per year with full
vesting after five years. The expense was $6,732 ($4,040 net of income taxes),
$14,862 ($11,747 net of income taxes) and $36,070 ($21,281 net of income taxes)
for the years ended December 31, 1997, 1996 and 1995, respectively.


NOTE #16 - 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>
                                                 1997                         1996                          1995
                                      ---------------------------  ----------------------------  ---------------------------
                                        Income         Share         Income          Share         Income         Share
                                      ------------  -------------  ------------  --------------  ------------  -------------
<S>                                      <C>           <C>            <C>            <C>            <C>           <C>
Net Income as Reported                   $404,136      1,862,643      $105,578       1,862,643      $833,805      1,862,643
                                      ------------  -------------  ------------  --------------  ------------  -------------
            Used in Basic EPS             404,136      1,862,643       105,578       1,862,643       833,805      1,862,643
Dilutive Effect of Outstanding
  Stock Options                                           20,210                        12,076                       12,328
                                      ------------  -------------  ------------  --------------  ------------  -------------
            Used in Dilutive EPS         $404,136      1,882,853      $105,578       1,874,719      $833,805      1,874,971
                                      ============  =============  ============  ==============  ============  =============

</TABLE>


NOTE #17 - REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.




                                                                   Page 56 of 70
<PAGE>   57

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


NOTE #17 - REGULATORY MATTERS, Continued

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, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.

As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency (OCC) categorized the Bank as adequately capitalized
under the regulatory framework for prompt corrective action (there are no
conditions or events since that notification that management believes have
changed the Bank's category). To be categorized as well-capitalized, the Bank
must maintain minimum ratios as set forth in the table below. The following
table also sets forth the Bank's actual capital amounts and ratios (dollar
amounts in thousands):

<TABLE>
<CAPTION>
                                                                                           Capital Needed
                                                                          --------------------------------------------------
                                                                                                           To Be Well
                                                                                                       Capitalized Under
                                                                               For Capital             Prompt Corrective
                                                        Actual              Adequacy Purposes              Provisions
                                                -----------------------   -----------------------    -----------------------
                                                  Amount      Ratio         Amount      Ratio          Amount      Ratio
                                                ----------- -----------   -----------------------    ----------- -----------
<S>                                             <C>                <C>     <C>               <C>     <C>               <C>
As of December 31, 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%

As of December 31, 1996
      Total capital to risk-weighted assets       $  8,568           8.2%    $  8,329          8.0%     $10,411          10.0%
      Tier 1 capital to risk-weighted assets         7,840           7.5%       4,165          4.0%       6,247           6.0%
      Tier 1 capital to average assets               7,840           6.5%       4,832          4.0%       6,040           5.0%

</TABLE>

NOTE #18 - MORTGAGE LOAN SERVICING OPERATIONS

The Company originated long term first and second trust deed mortgages for
resale on the Secondary Market to Federal Home Loan Mortgage Corporation (FHLMC)
and Federal National Mortgage Association (FNMA). The gains or losses on the
sales of these loans were generally recognized at the time of sale. The Company
retained servicing rights to these loans. Servicing arrangements provided for
the Company to maintain all records related to the servicing agreement, to
assume responsibility for billing mortgagors, to collect periodic mortgage
payments, and to perform various other activities necessary to the mortgage
servicing function. The Company received as compensation a servicing fee on the
principal balance of the outstanding loans. The principal balance of loans being
serviced on behalf of others was approximately $0, $0, and $0 at December 31,
1997, 1996 and 1995. Servicing fee income amounted to approximately $0, $0, and
$150,000 in 1997, 1996, and 1995, respectively. During 1995, the Company sold
the servicing rights on loans totaling approximately $161 million. The mortgage
servicing rights were sold without recourse. The Bank received approximately $0,
$22,000 and $1,489,000 from the sale in 1997,1996 and 1995, respectively.


                                                                   Page 57 of 70
<PAGE>   58

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


NOTE #19 - OTHER REAL ESTATE OWNED

As discussed in Note #1K, Other Real Estate Owned is carried at the estimated
fair value of the real estate. An analysis of the transactions for December 31,
were as follows:

<TABLE>
<CAPTION>
                                                                1997             1996
                                                            --------------   -------------
<S>                                                           <C>             <C>
Balance, Beginning of year                                     $  710,205      $  608,694
Additions                                                                         612,624
Sales                                                            (255,578)       (459,908)
Valuation adjustments and other                                    37,865         (51,205)
                                                            --------------   -------------
Balance, End of year                                           $  492,492      $  710,205
                                                            ==============   =============
</TABLE>

The balances at December 31, 1997 and 1996, are shown net of reserves.


NOTE #20 - RESERVE FOR PROBABLE LOSSES ON OTHER REAL ESTATE OWNED

Transactions in the reserve for other real estate owned are summarized for 1997,
1996 and 1995:

<TABLE>
<CAPTION>
                                                 1997           1996            1995
                                             ------------   -----------    -------------
<S>                                          <C>            <C>          <C>
Balance, Beginning of year                     $  89,338       $38,133      $    93,263
Provision charged to other expense                              75,125           49,740
Charge-offs and other reductions                 (37,865)      (23,920)        (104,870)
                                             ------------   -----------    -------------
Balance, End of year                           $  51,473       $89,338      $    38,133
                                             ============   ===========    =============
</TABLE>


NOTE #21 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.


                                                                   Page 58 of 70
<PAGE>   59

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE #21 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued

The following table presents the carrying amounts and fair values of financial
instruments at December 31, 1997. 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                                           $9,354,346       $  9,354,346
      Investment securities                                                4,701,490          4,701,490
      Loans receivable                                                    91,131,822         90,791,234
      Accrued interest receivable                                            445,033            445,033

Liabilities
      Non-interest bearing deposits                                       29,455,497         29,455,497
      Interest bearing deposits                                           72,285,859         72,295,594
      Accrued interest payable                                               412,296            412,296

                                                                         Notional         Cost to Cede
                                                                          Amount           or Assume
                                                                       --------------    ---------------
Off-Balance Sheet Instruments
      Commitments to extend credit and standby letters of credit          $7,195,352     $       71,954
</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.

-    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.


                                                                   Page 59 of 70

<PAGE>   60

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE #21 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued

-    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 #22 - SALE OF BRANCH OFFICE

During 1995, the Company sold certain assets and liabilities of its Victorville
branch. Total assets sold were approximately $1,275,000 and total liabilities
assumed by the buyer were approximately $4,104,000. The transaction resulted in
a gain of approximately $23,000, which has been included in other income in
1995. The Bank is no longer operating the branch in Victorville.


NOTE #23 - TIME DEPOSIT LIABILITIES

At December 31, 1997, the Company had time certificates of deposit with maturity
distributions as follows:

<TABLE>
<S>                                                         <C>
Within one year                                             $32,205,516
After one but within five years                               2,349,369
                                                         ---------------
                                                            $34,554,885
                                                         ===============
</TABLE>


NOTE #24 - BORROWINGS

The Bank has borrowing lines with four correspondent banks totaling $4.7 million
and another line at the Federal Reserve. Loans with a carrying amount of
approximately $957,000 have been pledged to secure the line at the Federal
Reserve.



                                                                   Page 60 of 70
<PAGE>   61

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


NOTE #25 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP (PARENT
COMPANY)


<TABLE>
<CAPTION>
                                                      BALANCE SHEETS
                                                                               1997           1996           1995
                                                                            ----------     ----------     ----------
<S>                                                                         <C>            <C>             <C>
ASSETS
      Cash in Vineyard National Bank                                        $    7,496     $    7,335     $    7,177
      Prepaid expenses                                                             543            570            670
      Investment in subsidiary                                               8,259,625      7,844,695      7,746,154
                                                                            ----------     ----------     ----------
            Total Assets                                                    $8,267,664     $7,852,600     $7,754,001
                                                                            ==========     ==========     ==========

LIABILITIES
      Due to shareholders in lieu of
       fractional shares on stock splits                                         1,161          1,188          1,287
                                                                            ----------     ----------     ----------

STOCKHOLDERS' EQUITY
      Common stock                                                           2,106,258      2,106,258      2,106,258
      Additional paid-in capital                                             3,306,684      3,306,684      3,306,684
      Retained earnings                                                      2,853,561      2,438,470      2,339,772
                                                                            ----------     ----------     ----------
            Total Stockholders' Equity                                       8,266,503      7,851,412      7,752,714
                                                                            ----------     ----------     ----------
             Total Liabilities and Stockholders' Equity                     $8,267,664     $7,852,600     $7,754,001
                                                                            ==========     ==========     ==========

                                                   STATEMENTS OF INCOME
INCOME
      Equity in income of subsidiary                                        $  403,975     $  105,420     $  833,639
      Interest                                                                     961            958            966
                                                                            ----------     ----------     ----------
                                                                               404,936        106,378        834,605
                                                                            ----------     ----------     ----------

INCOME TAXES                                                                       800            800            800
                                                                            ----------     ----------     ----------
                      Net Income                                            $  404,136     $  105,578     $  833,805
                                                                            ==========     ==========     ==========

</TABLE>



                                                                   Page 61 of 70
<PAGE>   62

                    VINEYARD NATIONAL BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE #25 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP (PARENT
COMPANY)

<TABLE>
<CAPTION>
                                                 STATEMENTS OF CASH FLOWS
                                   FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

                                                                                 1997            1996             1995
                                                                             -------------   --------------   --------------
<S>                                                                          <C>             <C>              <C>
INCREASE IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
      Interest received                                                      $         961   $          958    $         966
      Income taxes paid                                                               (800)            (800)            (800)
                                                                             -------------   --------------   --------------
         Net Cash Flows Provided by Operating Activities                               161              158              166
                                                                             -------------   --------------   --------------
CASH FLOWS FROM FINANCING ACTIVITIES
      Cash paid for fractional shares                                                                                   (794)
                                                                             -------------   --------------   --------------
Net Increase in Cash and Cash Equivalents                                              161              158             (628)
Cash, Beginning of year                                                              7,335            7,177            7,805
                                                                             -------------   --------------   --------------
Cash, End of year                                                            $       7,496   $        7,335   $        7,177
                                                                             =============   ==============   ==============

RECONCILIATION OF NET INCOME TO NET CASH
 PROVIDED/(USED) BY OPERATING ACTIVITIES
      Net Income                                                                   404,136          105,578          833,805
      Adjustments to Reconcile Net Income to
       Net Cash Provided By Operating Activities
          (Increase)/decrease in other assets                                           27               99             (153)
          Undistributed earnings of subsidiary                                    (403,975)        (105,420)        (833,639)
          Increase/(decrease) in other liabilities                                     (27)             (99)             153
                                                                             -------------   --------------   --------------
           Net Cash Flows Provided by Operating Activities                   $         161   $          158   $          166
                                                                             =============   ==============   ==============

</TABLE>


                                                                   Page 62 of 70
<PAGE>   63
SELECTED QUARTERLY FINANCIAL DATA

       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      $   1,603,132      $   1,542,712      $   1,576,090
Provision for Loan and Lease Losses           (47,782)                --            (31,000)           (65,000)
Other Income                                  398,955            417,022            414,345            518,432
Other Expenses                             (1,811,053)        (1,767,927)        (1,897,588)        (1,861,189)
                                        -------------      -------------      -------------      -------------

Income/(Loss) Before Taxes                     88,907            252,227             28,469            168,333
Income Taxes                                  (36,000)          (103,000)            (9,000)            14,200
                                        -------------      -------------      -------------      -------------

Net Income/(Loss)                       $      52,907      $     149,227      $      19,469      $     182,533
                                        =============      =============      =============      =============

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 Used
 in Per Share Calculation
      Basic                                 1,862,643          1,862,643          1,862,643          1,862,643
      Diluted                               1,875,278          1,876,363          1,883,026          1,882,853

Balance Sheet Data
      Assets                            $ 120,001,975      $ 121,944,173      $ 117,347,588      $ 111,510,812
                                        =============      =============      =============      =============
      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>


                                                                   Page 63 of 70
<PAGE>   64


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


<TABLE>
<CAPTION>
                                                                 Quarter Ended 1996
                                        ----------------------------------------------------------------------
                                           March 31           June 30          September 30        December 31
                                        -------------      -------------      -------------      -------------
<S>                                     <C>                <C>                <C>                <C>
Net Interest Income                     $   1,442,678      $   1,516,280      $   1,609,169      $   1,582,186
Provision for Loan and Lease Losses                             (116,300)          (217,600)           (83,000)
Other Income                                  446,371            444,770            483,576            463,216
Other Expenses                             (1,982,582)        (1,967,375)        (1,770,627)        (1,717,184)
                                        -------------      -------------      -------------      -------------

Income/(Loss) Before Taxes                    (93,533)          (122,625)           104,518            245,218
Income Taxes                                                      (1,600)                              (26,400)
                                        -------------      -------------      -------------      -------------

Net Income/(Loss)                       $     (93,533)     $    (124,225)     $     104,518      $     218,818
                                        =============      =============      =============      =============

Earnings/(Loss) Per Share
 of Common Stock
      Basic                             $       (0.05)     $       (0.07)     $        0.06      $        0.12
                                        =============      =============      =============      =============
      Diluted                           $       (0.05)     $       (0.07)     $        0.06      $        0.12
                                        =============      =============      =============      =============

Weighted Average Shares Used
 in Per Share Calculation
      Basic                                 1,862,643          1,862,643          1,862,643          1,862,643
      Diluted                               1,879,754          1,874,697          1,871,279          1,874,719

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


Retroactively adjusted for stock splits.


ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

          None.


                                                                   Page 64 of 70
<PAGE>   65

                                    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, 1998, for the
Company's 1998 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, 1998, for the Company's 1998 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, 1998, for the Company's 1998 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, 1998, for the Company's 1998 annual shareholders' meeting.


                                                                   Page 65 of 70
<PAGE>   66

                                     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 69 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 69 of this Form 10-K.
                     Included among the Exhibits filed as part of this Report on
                     Form 10-K are the following Executive Compensation Plans
                     and arrangements:

              A)     Incentive Stock Option Plan for Vineyard National Bank,
                     1981. Exhibit 10.1

              B)     Incentive Stock Option Plan for Vineyard National Bank,
                     1987. Exhibit 10.2

              C)     Joinder Agreement for Employee to Participate in Vineyard
                     National Bancorp 1987 Incentive Stock Option Plan. Exhibit
                     10.3

              D)     Vineyard National Bank Deferred Compensation Plan. Exhibit
                     10.4

              E)     Employment Agreement between Vineyard National Bank and
                     Steven R. Sensenbach. Exhibit 10.5

              F)     1988 Extension Agreement for Employment Agreement between
                     Vineyard National Bank and Steven R. Sensenbach. Exhibit
                     10.6

       b)     Reports on Form 8-K:

              None.

       c)     Exhibits:

              See Index to Exhibits on Page 69 of this Form 10-K.


                                                                   Page 66 of 70
<PAGE>   67

                                   SIGNATURES


       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf of the undersigned, thereunto duly authorized, on the 24th day of
March 1998.


                                  VINEYARD NATIONAL BANCORP
                                  (Registrant)



                                  By   /s/ STEVEN R. SENSENBACH
                                      ------------------------------------------
                                        Steven R. Sensenbach,
                                        President and Chief Executive Officer

       Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 24, 1998.


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

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

/s/ FRANK S. ALVAREZ                      Director
-------------------------------

/s/ ROLAND O. NORIEGA                     Director
-------------------------------

/s/ JOEL H. RAVITZ                        Director
-------------------------------

/s/ JODIE SMITH                           Director
-------------------------------

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

                                                                   Page 67 of 70
<PAGE>   68

               CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To Vineyard National Bancorp:

       We consent to the incorporation of our Report dated February 6, 1998, on
the consolidated financial statements of Vineyard National Bancorp as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, included in its Annual Report on Form 10-K for the year ended
December 31, 1997.


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


                                                                   Page 68 of 70
<PAGE>   69

                                                        INDEX TO EXHIBITS



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

         3.2   Registrant's Bylaws                                                                            (R-1)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          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.


                                                                   Page 69 of 70