<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                  FORM 10-KSB

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the Fiscal Year Ended September 30, 1998

                                       OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                        Commission File Number: 0-26556

 
                        LEXINGTON B & L FINANCIAL CORP.
    -----------------------------------------------------------------------
       (Exact name of small business issuer as specified in its charter)

             Missouri                                  43-173955
---------------------------------                  ----------------
(State or other jurisdiction                       (I.R.S. Employer
 of incorporation or organization)                   I.D. Number)

 
919 Franklin Avenue, Lexington, Missouri                 64067
-----------------------------------------           ----------------
 (Address of principal executive offices)              (Zip Code)
 
Registrant's telephone number, including area code:  (660) 259-2247
                                                     --------------

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

Securities registered pursuant to 
Section 12(g) of the Act:                Common Stock, par value $.01 per share
                                         --------------------------------------
                                                        (Title of Class)

     Check whether the Registrant:  (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 
           -----       ------     

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this Form
10-KSB or any amendments to this Form 10-KSB.     X
                                               -------

     The Registrant's revenues for the fiscal year under report were $7.3
million.

     As of December 23, 1998, there were issued and outstanding 1,008,685 shares
of the Registrant's Common Stock.  The Common Stock is listed for trading on the
Nasdaq SmallCap Market under the symbol "LXMO."  Based on the bid and ask
prices, the aggregate value of the Common Stock outstanding held by the
nonaffiliates of the Registrant on December 23, 1998 was $11,473,792 (1,008,685
shares at $11.375 per share). For purposes of this calculation, officers and
directors of the Registrant are considered nonaffiliates of the Company.

                      DOCUMENTS INCORPORATED BY REFERENCE

     1.  Portions of Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1998 ("Annual Report") (Parts I and II).

     2.  Portions of Definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders (Part III).
<PAGE>
 
                                     PART I
ITEM 1.  BUSINESS
-----------------

GENERAL

     Lexington B & L Financial Corp. ("Company"), a Missouri corporation, was
organized on November 29, 1995 for the purpose of becoming the holding company
for B & L Bank (formerly The Lexington Building and Loan Association, F.A.) upon
its conversion from a federal mutual savings and loan association to a federal
stock savings bank ("Conversion").  The Conversion was completed on June 5,
1996.

     B&L Bank was originally chartered in 1887 as a Missouri-chartered mutual
savings and loan association under the name "The Lexington Building and Loan
Association," and converted to a federal charter and adopted the name "The
Lexington Building and Loan Association, F.A." in June 1995.  B&L Bank is
regulated by the Office of Thrift Supervision ("OTS"), its primary federal
regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the insurer
of its deposits.  B&L Bank's deposits are federally insured by the FDIC under
the Savings Association Insurance Fund ("SAIF").  B&L Bank is a member of the
Federal Home Loan Bank ("FHLB") System.

     On October 1, 1997, the Company acquired Lafayette County Bank of
Lexington/Wellington ("Lafayette County Bank") through the merger of Lafayette
County Bank's parent corporation, Lafayette Bancshares, Inc., with the Company.
All outstanding shares of Lafayette Bancshare's common stock were converted into
$.92 in cash plus .0851 share of the Company's common stock.  A total of 96,111
shares of the Company's common stock were issued from treasury shares and
$1,039,284 was  paid to Lafayette Bancshares' shareholders.  The Company also
paid  $195,939 for the minority interest of Lafayette County Bank.  The
acquisition was accounted for as a purchase under generally accepted accounting
principles.

     Lafayette County Bank is a Missouri state chartered bank whose deposits are
insured up to applicable limits by the Bank Insurance Fund ("BIF") of the FDIC.
Lafayette County Bank conducts its business from its main office in Lexington,
Missouri and its branch offices in Wellington and Callao, Missouri.

     The Company's banking subsidiaries are community oriented financial
institutions that engage primarily in the business of attracting deposits from
the general public and using these funds to originate one- to four-family
residential mortgages, commercial, agricultural and consumer loans within their
market areas.  The Company is a portfolio lender and generally does not sell the
mortgage loans that it originates.

          The Company also incorporated a mortgage banking subsidiary, B&L
Mortgage, Inc., in November 1998. B&L Mortgage offices are located in Odessa,
Missouri. Its primary business is the origination of 1-4 family mortgages for
sale in the secondary market.

Market Area

     Lexington, Missouri is located on the southern bank of the Missouri River
approximately 45 miles east of Kansas City, Missouri.  Lexington, estimated
population of 4,900, is the county seat and the largest town in Lafayette
County.  Lafayette County is predominately rural and contains several small
towns, although the western portions are becoming bedroom communities for
commuters to jobs in the Kansas City metropolitan area.  The Company considers
its market area for loans and deposits to encompass Lafayette County and the
bordering areas of three surrounding counties (southern Ray County, northern
Johnson County and western Jackson County) and the area surronding its Callao
office which encompasses all of Macon County.

     The economy encompassing the Company's market area has its roots in
agriculture, although agriculture has declined as a source of revenue over the
decades.  Most of the employment today is primarily based in services, light
manufacturing, state and local government and retail trade. Tourism is also
part of the local economy as Lexington has historic ties to the Civil War.

                                      -1-
<PAGE>
 
LENDING ACTIVITIES

     GENERAL.  The principal lending activity of the Company is the origination
of conventional mortgage loans for the purpose of purchasing, constructing or
refinancing owner-occupied, one- to four-family residential property.  The
Company also originates multi-family, commercial real estate, land, commercial,
agricultural and consumer loans.  The Company's net loans receivable totalled
$62.3 million at September 30, 1998, representing 66.5% of consolidated total
assets.

     LOAN PORTFOLIO ANALYSIS.  The following table sets forth the composition of
the Company's loan portfolio by type of loan as of the dates indicated.  The
Company had no concentration of loans exceeding 10% of total gross loans other
than as set forth below.
<TABLE>
<CAPTION>
                                                   At September 30, 
                              ------------------------------------------------------
                                     1998              1997                1996
                              ----------------   -----------------  ----------------
                              Amount   Percent   Amount   Percent   Amount   Percent
                              -------  --------  -------  --------  -------  --------
                                                   (Dollars in Thousands)
<S>                           <C>      <C>       <C>      <C>       <C>      <C>
Type of Loan:
-------------
 
Mortgage loans:
  One- to four-family.......  $42,318    66.99%  $39,721    85.48%  $40,537      88.51%
  Commercial real estate                                                        
  and multi-family..........    3,690     5.84     1,553     3.34     1,120       2.45
  Land......................      653     1.03       536     1.15       489       1.07
  Construction..............      626      .99     1,101     2.37       613       1.34
                              -------   ------   -------   ------   -------     ------
    Total mortgage loans....   47,287    74.85    42,911    92.34    42,759      93.37
 Commercial loans...........    4,042     6.40        --       --        --         --
 Agriculture loans..........    3,171     5.02        --       --        --         --
Consumer and other loans:                                                       
 Home equity................      790     1.25       608     1.31       486       1.06
 Loans on savings accounts..    1,986     3.14     1,101     2.37     1,210       2.64
 Automobile loans...........    4,968     7.86     1,446     3.11     1,090       2.38
 Other......................      933     1.48       401     0.87       253       0.55
                              -------   ------   -------   ------   -------     ------
   Total other loans........   15,890    25.15     3,556     7.66     3,039       6.63
                              -------   ------   -------   ------   -------     ------
   Total loans..............   63,177   100.00%   46,467   100.00%   45,798     100.00%
                                        ======             ======               ======
Add net deferred:
 Loan origination fees             18                 15                 --
Less:
 Loans in process...........      281                373                249
 Allowance for possible
  loan losses...............      599                221                201
                              -------            -------            -------
  Loans receivable, net.....  $62,315            $45,888            $45,348
                              =======            =======            =======
 
</TABLE>

    The following table sets forth at September 30, 1998 certain information
regarding the dollar amount of loans maturing in the Company's portfolio based
on contractual terms to maturity, but does not include scheduled payments or
potential prepayments.  Demand loans (loans having no stated repayment schedule
and no stated maturity) and overdrafts are reported as due in one year or less.
Mortgage loans which have adjustable interest rates are reported as maturing at
their next maturity date.  Loan balances do not include undisbursed loan
proceeds, unearned discounts, and allowance for loan losses.

                                      -2-
<PAGE>
 
<TABLE>
<CAPTION>
               
                                                                       After    After    After    After
                                                                      One Year 3 Years  5 Years   10 Years
                                                             Within   Through  Through  Through   Through    After
                                                            One Year  3 Years  5 Years  10 Years  15 Years  15 Years  Total
                                                            --------  -------  -------  --------  --------  --------  ------
                                                                                    (In thousands)
<S>                                                         <C>       <C>      <C>      <C>       <C>       <C>       <C>
Mortgage loans:
 One- to four-family .....................................   $ 3,278  $ 6,884   $5,862   $11,703   $ 8,394    $6,197  $42,318  
 Commercial real estate                                                                                             
 and multi-family.........................................     1,072      751      461       725       375       306    3,690
 Land.....................................................        38       79      135       227       117        57      653
 Construction.............................................       626       --       --        --        --        --      626
                                                             -------  -------  -------   -------    ------   -------  ------
  Total mortgage loans....................................     5,014    7,714    6,458    12,655     8,886     6,560   47,287
Commercial loans..........................................     3,369      628       12        33        --        --    4,042
Agriculture loans.........................................     2,787      282      102        --        --        --    3,171
Consumer and other loans..................................     3,801    3,648    1,066       139        18         5    8,677
                                                             -------  -------  -------   -------    ------   -------  -------
   Total loans............................................   $14,971  $12,272   $7,638   $12,827    $8,904    $6,565  $63,177
                                                             =======  =======  =======   =======    ======   =======  ======= 
</TABLE>
     The following table sets forth the dollar amount of all loans due after
September 30, 1999, which have fixed interest rates and have floating or
adjustable interest rates.

<TABLE>
<CAPTION>
 
                                                Fixed-     Floating- or
                                                Rates    Adjustable-Rates
                                            -----------  ----------------
           Total                                          (In Thousands)
          -------
<S>                                          <C>         <C>
Mortgage loans:
  One- to four-family......................    $ 7,563        $31,477
  Commercial real estate and multi-family..      1,214          1,404
  Land.....................................        148            467
  Construction.............................         --             --
                                               -------        -------
     Total mortgage loans..................      8,925         33,348
Commercial loans...........................        673             --
Agriculture loans..........................        385             --
Consumer and other loans...................      4,875             --
                                               -------        -------
     Total.................................    $14,858        $33,348
                                               =======        =======
 
</TABLE>

    Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets.  The average life of loans ordinarily is
substantially less than their contractual terms because of prepayments. The
average life of mortgage loans tends to increase, however, when current mortgage
loan market rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are higher than
current mortgage loan market rates.

    RESIDENTIAL REAL ESTATE LENDING.  The primary lending activity of the
Company is the origination of mortgage loans to enable borrowers to purchase
existing one- to four-family homes.  The Company presently originates for
retention in its portfolio both adjustable rate mortgage ("ARM") loans with
terms of up to 25 years and fixed-rate mortgage loans with terms of up to 10
years.  Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan.  The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.

                                      -3-
<PAGE>
 
    The loan fees charged, interest rates and other provisions of the Company's
ARM loans are determined  on the basis of its own pricing criteria and
competitive market conditions.  The Company originates one-year ARM loans
secured by owner-occupied residences whose interest rates and payments generally
are adjusted annually to a rate typically equal to 2.875% above the one-year
constant maturity U.S. Treasury ("CMT") index.  The Company occasionally offers
ARM loans with initial rates below those that would prevail under the foregoing
computations, determined by the Company based on market factors and competitive
rates for loans having similar features offered by other lenders for such
initial periods.  At September 30, 1998, the initial interest rate on ARM loans
offered by the Bank ranged from 6.00% to 7.50% per annum.  The periodic interest
rate cap (the maximum amount by which the interest rate may be increased or
decreased in a given period) on the Company's ARM loans is generally 1% per
adjustment period and the lifetime interest rate cap is generally 5% over the
initial interest rate of the loan.

    The Company does not originate negative amortization loans.  The terms and
conditions of the ARM loans offered by the Company, including the index for
interest rates, may vary from time to time.  The Company believes that the
adjustment features of its ARM loans provide flexibility to meet competitive
conditions as to initial rate concessions while preserving the Company's
objectives by limiting the duration of the initial rate concession.

    A significant portion of the Company's residential mortgage loans are not
readily saleable in the secondary market because they are not originated in
accordance with the purchase requirements of Freddie Mac or Fannie Mae. Although
such loans satisfy the Company's underwriting requirements, they are non-agency-
conforming because they do not satisfy collateral requirements, income and debt
ratios, acreage limits, or various other requirements imposed by the Freddie Mac
and Fannie Mae.  In addition, substantially all of the Company's ARM loans have
periodic interest rate caps of 1% per adjustment period and 5% lifetime over the
initial loan interest rate, while Freddie Mac and Fannie Mae secondary market
guidelines require higher adjustment periods and lifetime caps of 2% and 6%,
respectively. Accordingly, the Company's non-agency-conforming loans could be
sold only after incurring certain costs and/or discounting the purchase price.
The Company however, currently does not intend to sell its loans.  The Company
has historically found that its origination of non-agency-conforming loans has
not resulted in high amounts of non-performing loans.  In addition, the Company
believes that these loans satisfy a need in the Company's local community. As a
result, the Company intends to continue to originate such non-agency-conforming
loans.

    The retention of ARM loans in the Company's loan portfolio helps reduce the
Company's exposure to changes in interest rates.  There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer.  It is possible that during periods
of rising interest rates the risk of default on ARM loans may increase as a
result of repricing and the increased costs to the borrower.  Furthermore,
because the ARM loans originated by the Company generally provide, as a
marketing incentive, for initial rates of interest below the rates that would
apply were the adjustment index used for pricing initially (discounting), these
loans are subject to increased risks of default or delinquency.  Another
consideration is that although ARM loans allow the Company to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits.  Because of these considerations, the Company has no
assurance that yields on ARM loans will be sufficient to offset increases in the
Company's cost of funds.

    While fixed-rate single-family residential real estate loans are normally
originated with up to 10 year terms, such loans typically remain outstanding for
substantially shorter periods.  This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan.  In addition, some mortgage loans in the Company's loan
portfolio contain due-on-sale clauses providing that the Company may declare the
unpaid amount due and payable upon the sale of the property securing the loan.
Typically, the Company  enforces these due-on-sale clauses to the extent
permitted by law and as business judgment dictates.  Thus, average loan maturity
is a function of, among other factors, the level of purchase and sale activity
in the real estate market, prevailing interest rates and the interest rates
payable on outstanding loans.

                                      -4-
<PAGE>
 
    The Company generally requires title insurance insuring the status of its
lien on all of the real estate secured loans.  The Company also requires that
fire and extended coverage casualty insurance (and, if appropriate, flood
insurance) be maintained in an amount at least equal to the outstanding loan
balance.

    Appraisals are obtained on all properties and are conducted by independent
fee appraisers approved by the Board of Directors of each of its banking
subsidiaries.  The Company's lending policies generally limit the maximum loan-
to-value ratio on mortgage loans secured by owner-occupied properties to 80% of
the lesser of the appraised value or the purchase price, with the condition that
the loan-to-value ratio may be increased to 90% provided that private mortgage
insurance coverage is obtained for the amount in excess of 80%.

    INCOME PROPERTY LENDING.  Historically, the Company has engaged in limited
amounts of commercial real estate and multi-family lending (collectively,
"income property lending").  The Company does not actively solicit income
property loans but generally extends them as an accommodation to existing
customers and intends to continue to do so in the future.  At September 30,
1998, income property loans aggregated $3.7 million, or 5.84% of the gross loan
portfolio.

    The average principal balance of the loans in the Company's income property
loan portfolio was approximately $3.7 million  at September 30, 1998.
Substantially all of the income property loans are secured by properties located
in the Company's market area.  Such properties include residential properties of
five or more units, strip shopping malls generally containing between two and
six store fronts, churches, and professional offices.  Income property loans are
generally made for terms of 20 years with five- to 10-year balloon payments and
at variable interest rates that adjust annually.

    Income property loans generally involve greater risks than one- to four-
family residential mortgage loans. Payments on loans secured by such properties
often depend on successful operation and management of the properties. Repayment
of such loans may be subject to a greater extent to adverse conditions in the
real estate market or the economy.  The Company seeks to minimize these risks
in a variety of ways, including limiting the size of such loans, limiting the
maximum loan-to-value ratio to 70% and strictly scrutinizing the financial
condition of the borrower, the quality of the collateral and the management of
the property securing the loan.  All of the properties securing the Company's
income property loans are inspected by the Company's lending personnel before
the loan is made.  The Company  also obtains appraisals on each property in
accordance with applicable regulations.

    CONSTRUCTION LENDING.  The Company occasionally originates residential
construction loans to individuals or local builders to construct one- to four-
family homes.  At September 30, 1998, construction loans totalled $626,000, or
 .99% of the gross loan portfolio.

    Substantially all construction loans made to individuals provide for the
Company to originate a permanent loan upon the completion of construction, which
is generally an ARM loan as described under "-- Lending Activities --
Residential Real Estate Lending." The origination fee for construction loans is
generally 1.5% of the principal amount. Construction loans are generally made
for terms of up to six months. Loans to builders are made less frequently and
may be for the construction of a pre-sold home or may be a loan to construct a
speculative home (i.e., a home for which no purchaser has been identified).
Loans to builders are generally limited to local builders well known to the
Company.

    Construction lending is generally considered to involve a higher level of
risk as compared to one- to four-family residential permanent lending because of
the inherent difficulty in estimating both a property's value at completion of
the project and the estimated cost of the project.  The nature of these loans is
such that they are generally more difficult to evaluate and monitor.  If the
estimate of value proves to be inaccurate, the Company may be confronted at, or
prior to, the maturity of the loan, with a project whose value is insufficient
to assure full repayment. Loans for the construction of speculative homes carry
more risk because the payoff for the loan is dependent on the builder's ability
to sell the property prior to the time that the construction loan is due.

                                      -5-
<PAGE>
 
    LAND LENDING.  The Company originates loans secured by farm residences and
combinations of farm residences and farm real estate.  The Company  also
originates loans for the acquisition of land upon which the purchaser can then
build or upon which the purchaser makes improvements necessary to build upon or
to sell as improved lots.  At September 30, 1998, the land loan portfolio
totalled $653,000, or 1.03% of total gross loans, substantially all of which
were secured by properties located in the Company's  market area.  Land loans
are generally made for the same terms and at the same interest rates as those
offered on income property loans, except that the loan-to-value ratio is
generally limited to 60%.

    Loans secured by farm real estate generally involve greater risks than one-
to four-family residential mortgage loans.  Payments on loans secured by such
properties may, in some instances, be dependent on farm income from the
properties.  To address this risk, the Company  does not consider farm income
when qualifying borrowers.  In addition, such loans are more difficult to
evaluate.  If the estimate of value proves to be inaccurate, the Company may be
confronted with a property the value of which is insufficient to assure full
repayment in the event of default and foreclosure.

    AGRICULTURAL LENDING.  At September 30, 1998, the agricultural loan
portfolio totalled $3.2 million or 5.02% of total gross loans. The Company
presently originates both adjustable-rate and fixed-rate loans secured by
farmland located in the Company's market area.The Company offers adjustable-rate
loans that adjust monthly, quarterly and annually with maturities up to a 25-
year term.  The Company also offers fixed-rate loans with a ten-year term and a
ten-year amortization schedule.  The Company also makes agricultural operating
loans.  Agricultural operating loans or lines generally are made for a term  of
one year and are usually secured by a first or second mortgage, or liens on
property, farm equipment, grain, or growing crops.  Personal guarantees are
frequently required for loans made to corporations and other business entities.
The agruiculture loan portfolio is diversified and there is no concentration to
any one borrower.

     In originating an agricultural real estate loan, the Company considers the
debt service coverage of the borrower's cash flow, the amount of working capital
available to the borrower, the financial history of the farmer and the appraised
value of the underlying property as well as the Company's experience with and
knowledge of the borrower.  An environmental assessment is also performed.  The
maximum loan-to-value for agricultural real estate loans is 75%.

    The Company is approved to originate agricultural real estate and operating
loans with guarantees from USDA-FMHA up to a maximum of 90% of the principal and
interest.  Once the guaranteed loan has been funded, the Company retains the
loan in its loan portfolio.

    Agricultural lending affords the Company the opportunity to earn yields
higher than those obtainable on residential real estate lending.  However,
agricultural lending involves a greater degree of risk than residential real
estate loans.  Payments on agricultural loans are dependent on the successful
operation or management of the farm property securing the loan.  The success of
the farm may be affected by many factors outside the control of the farm
borrower, including adverse weather conditions that limit crop yields (such as
hail, drought and floods), declines in market prices for agricultural products
and the impact of government regulations (including changes in price supports,
subsidies and environmental regulations).  In addition, many farms are dependent
on a limited number of key individuals whose injury or death may significantly
affect the successful operation of the farm.

    The risk of crop damage by weather conditions can be reduced by the farmer
with multi-peril crop insurance which can guarantee set yields to provide
certainty of repayment.  Unless the circumstances of the borrower merit
otherwise, the Company generally does not require its borrowers to procure
multi-peril crop or hail insurance.  Farmers may mitigate the effect of price
declines through the use of futures contracts, options or forward contracts.
The Company does not monitor or require the use by borrowers of these
instruments.

                                      -6-
<PAGE>
 
    COMMERCIAL LENDING   Commercial business loans generally include equipment
loans with terms ranging up to seven years and working capital lines of credit
secured by inventory and accounts receivable.   Working capital lines of credit
are generally renewable and made for a one-year term with a requirement that the
borrower extinguish any outstanding balance for a particular time period during
the year.  Interest rates on commercial business loans are generally indexed to
the prime rate or an internal base rate.  The Company  generally requires annual
financial statements from its commercial business borrowers and personal
guarantees if the borrower is a corporation.

    Commercial business lending generally involves greater risk than residential
mortgage lending and involves risks that are different from those associated
with residential, commercial and multi-family real estate lending.  Real estate
lending is generally considered to be collateral based lending with loan amounts
based on predetermined loan to collateral values and liquidation of the
underlying real estate collateral is viewed as the primary source of repayment
in the event of borrower default.  Although commercial business loans are often
collateralized by equipment, inventory, accounts receivable or other business
assets, the liquidation of collateral in the event of a borrower default is
often not a sufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things.  Accordingly, the repayment of a commercial business loan
depends primarily on the creditworthiness of the borrower (and any guarantors),
while liquidation of collateral is a secondary and often insufficient source of
repayment.

    CONSUMER LENDING.  Consumer lending has traditionally been a small part of
the Company's business. However, with the acquistion of Lafayette County Bank,
consumer loans have become a larger portion of the Company's loan portfolio.
Consumer loans generally have shorter terms to maturity and higher interest
rates than mortgage loans.  The Company's consumer loans consist primarily of
home equity loans, deposit account loans, automobile loans and, to a
substantially lesser extent, unsecured loans. At September 30, 1998, the
Company's consumer loans totalled approximately $8.7 million, or 13.7% of the
Company's gross loans. The Company intends to emphasize consumer lending to a
greater degree by primarily cross-selling to its existing customer base.

    Consumer loans are made at fixed interest rates and for varying terms.
Automobile and other loans are generally made for terms up to 60 months, while
home equity loans are made for terms up to 10 years.  With respect to
substantially all home equity loans, the Company  holds the first mortgage on
the borrower's residence.

    Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles.  In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation.  The remaining deficiency often does not
warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment.  In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy.  Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on such loans.

                                      -7-
<PAGE>
 
    LOAN SOLICITATION AND PROCESSING.  Loan applicants come primarily from walk-
in customers and referrals by realtors and previous and present customers of the
Company.  Upon receipt of a loan application from a prospective borrower, a
credit report and other data are obtained to verify specific information
relating to the loan applicant's employment, income and credit standing.  An
appraisal of the real estate offered as collateral generally is undertaken by a
Board-approved independent fee appraiser who is certified by the State of
Missouri.

     Consumer loans may be made by loan officers  up to amounts authorized by
the bank's loan policies.  All loans over specified amounts must be approved by
the Board of Directors of each banking subsidiary.  Management of the Company
believes its local decision-making capabilities and the accessibility of its
senior officers is an attractive quality to customers within its market area.
The Company's loan approval process allows consumer loans to be approved in one
to two days and to expedite the approval and closing of mortgage loans.

    LOAN ORIGINATIONS, SALES AND PURCHASES.  During the year ended September 30,
1998, the Company's total gross loan originations were $28.1 million.
Consistent with its asset/liability management strategy, the Company's policy
has been to retain in its portfolio nearly all of the loans that it originates.

    The Company has occasionally purchased whole loans and loan participation
interests, primarily during periods of reduced loan demand in its market area.
At September 30, 1998, $2.1 million of the Company's  gross loan portfolio
consisted of purchased whole loans and purchased participation interests.  Any
such purchases are made in conformance with the Company's underwriting
standards.  The Company  may decide to purchase additional loans in the future
depending upon the demand for mortgage credit in its market area.   During the
fiscal year ended September 30, 1998, the Company did not purchase any  loans.

                                      -8-
<PAGE>
 
    The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
 
                                      Years Ended September 30,
                                      -------------------------
                                       1998     1997     1996
                                      -------  -------  -------
                                           (In Thousands)
<S>                                   <C>      <C>      <C>
Total loans at beginning
  of period.........................  $46,109  $45,569  $41,311
                                      -------  -------  -------
 
Loans acquired from Lafayette
  County Bank on 10/1/98............   16,544       --       --
 
Loans originated:
One- to four-family.................    8,460    7,288    6,589
Commercial real estate and
  multi-family......................    2,962      365      376
Land................................      189      219      124
Construction........................      700    1,219      900
                                      -------  -------  -------
   Total mortgage loans originated..   12,311    9,091    7,989
Commercial..........................    3,705       --       --
Agricultural........................    3,095       --       --
Consumer............................    8,959      517      793
                                      -------  -------  -------
   Total loans originated...........   28,067    9,608    8,862
 
Loans purchased:
One- to four-family.................       --      209    3,815
Commercial real estate and
   multi-family.....................       --      318       --
                                      -------  -------  -------
     Total loans purchased..........       --      527    3,815
 
Loans sold:
 Commercial real estate.............      119       --       --
 
Principal repayments................   27,687    9,595    8,419
                                      -------  -------  -------
 
Net loan activity...................   16,805      540    4,258
                                      -------  -------  -------
 
Total gross loans at
  end of period.....................  $62,914  $46,109  $45,569
                                      =======  =======  =======
 
</TABLE>

    LOAN COMMITMENTS.  The Company issues, without fee, commitments for one- to
four-family residential mortgage loans and operating or working capital lines of
credit.   Such commitments are made in writing on specified terms and conditions
and at a specified rate of  interest.  The Company  had outstanding net loan
commitments of approximately $1.3 million at September 30, 1998, $1.1 million of
which were for variable rate loans.  See Note M of Notes to the Consolidated
Financial Statements.

    LOAN ORIGINATION AND OTHER FEES.  The Company, in some instances, receives
loan origination fees.  Loan fees are a percentage of the principal amount of
the loan which are charged to the borrower for funding the loan.  The amount of
fees charged by the Company is generally up to 1% for mortgage loans and 1.5%
for construction loans. Current accounting standards require that origination
fees received (net of certain loan origination costs) for originating loans to
be deferred and amortized into interest income over the contractual life of the
loan.  Net deferred fees or costs associated with loans that are prepaid are
recognized as income at the time of prepayment.

                                      -9-
<PAGE>
 
    NON-PERFORMING ASSETS AND DELINQUENCIES.  When a loan borrower fails to
make a required loan payment when due, the Company institutes collection
procedures.  All loan payments that are contractually due are not considered
delinquent and collection procedures are not instituted until after the "actual
due date" which may vary  between 15 to 30 days following the payment due date.
Borrowers are charged a late penalty on all payments made after the actual due
date.  On real estate, commercial and agriculture loans, a pre-foreclosure
letter setting forth a date certain (generally 35 days after the date of the
letter) for instituting foreclosure procedures is mailed on or before 90 days
after the actual due date.  Foreclosure procedures are instituted on the date
specified in the pre-foreclosure letter if the delinquency continues to that
date.

    When a consumer loan borrower fails to make a required payment on a consumer
loan within seven days of the payment due date, the Company institutes
collection procedures.  The first notice is mailed to the borrower approximately
seven days following the actual due date.  If payment is not promptly received,
second and third notices are mailed to the borrower approximately 15 and 20 days
following the actual due date and the customer is contacted by telephone to
ascertain the cause of the delinquency.  If the delinquency remains uncured, the
Company mails a right to cure notice to the borrower on or before 30 days
following the actual due date.  In most cases, delinquencies are cured promptly;
however, if by the 90th day of delinquency the delinquency has not been cured,
the Company begins legal action to repossess the collateral.  The Company
transfers to repossessed assets the estimated market value of the collateral and
charges to allowance for loan losses with any deficinency at foreclosure. 
Except for extenuating circumstances loan past due 120 days are charged off.

    The Board of Directors of the Company's banking subsidiaries are informed
monthly as to the status of all loans that are delinquent more than 30 days, the
status on all loans currently in foreclosure, and the status of all foreclosed
and repossessed property owned by the Bank.

    The Company has experienced fluctuating and, periodically, relatively high
levels of loan delinquencies. Management attributes this experience primarily to
its practice, consistent with its mission as a community-oriented financial
institution, of offering non-agency-conforming loan products that enable
borrowers with lesser financial resources to otherwise qualify for a loan.  The
Company's loss experience, however, as measured by charge offs, has not been
significant.  See "-- Lending Activities -- Allowance for Loan Losses."  No
assurances can be given as to future delinquency and loss levels.

    The following table sets forth information regarding the Company's
delinquent loans, excluding loans 90 days or more delinquent and accounted for
on a non-accrual basis.
<TABLE>
<CAPTION>
 
                                                      At September 30,                            
                          ------------------------------------------------------------------ 
                                 1998                     1997                 1996         
                          -----------------------  ---------------------  ------------------- 
                                       Percentage             Percentage             Percentage                                
                          Principal     of Gross   Principal   of Gross   Principal   of Gross
                          Balance        Loans      Balance     Loans      Balance     Loans  
                          -----------  ----------  ----------  --------   ----------  -------- 
                                                  (Dollars in Thousands)
<S>                       <C>          <C>         <C>         <C>        <C>         <C>
Loans delinquent for:     
  30 - 59 days..              $  623       0.99%     $  939      2.02%      $1,088       2.38%
  60 - 89 days..                 649       1.03         328      0.71          331       0.72
                              ------       ----      ------      ----       ------       ----
                              $1,272       2.02%     $1,267      2.73%      $1,419       3.10%
                              ======       ====      ======      ====       ======       ====
 
</TABLE>

                                      -10-
<PAGE>
 
    The following table sets forth information with respect to the Company's
non-performing assets at the dates indicated.  The Company had no restructured
loans within the meaning of Statement of Financial Accounting Standards ("SFAS")
No. 15, at any of the dates indicated.   However,  at September 30, 1998, there
were loans totalling $57,000 which were past due contractually 90 days or more
as to principal or interest  that were still accruing interest.  In the opinion
of management collection of  principal and interest on these loans is expected
to resume and sufficient collateral is believed to exist to protect the Company
from any significant loss.
<TABLE>
<CAPTION>
 
                                       At September 30,
                                    ----------------------
                                     1998    1997    1996
                                    ------  ------  ------
                                    (Dollars in Thousands)
<S>                                 <C>     <C>     <C>
Loans 90 days or more delinquent
  and accounted for on
  a non-accrual basis:
 Residential real estate..........  $ 248   $ 334   $ 495
 Commercial real estate...........    143      --     106
 Commercial.......................     15      --      --
 Consumer.........................    118      60     177
                                    -----   -----   -----
   Total non-accrual loans........    524     394     778

Real estate owned.................     --      --      --
                                    -----   -----   -----
 
Total non-performing assets.......  $ 524   $ 394   $ 778
                                    =====   =====   =====
                                                    
Total non-performing loans                          
  to net loans....................   0.84%   0.86%   1.33%
                                    =====   =====   =====
Total non-performing loans                          
  to total assets.................   0.56%   0.67%   1.26%
                                    =====   =====   =====
Total non-performing assets to                      
  total assets....................   0.56%   0.67%   1.26%
                                    =====   =====   =====
</TABLE>

    At September 30, 1998, management of the Company was unaware of any material
loans not disclosed in the above table but where known information about
possible credit problems of the borrowers caused management to have serious
doubts as to the ability of such borrowers to comply with their loan repayment
terms at that date and which may result in future inclusion in the non-
performing assets category.

    The amount of interest collected in cash and included in the results of
operations on non-accruing loans for the year ended September 30, 1998 amounted
to approximately $38,000, before such loans were placed on non-accrual status.
Had such non-accruing loans been current in accordance with their original
terms, no additional interest income would have been recorded for the year
ended September 30, 1998.

    FORECLOSED REAL ESTATE.  See Note A of Notes to the Consolidated Financial
Statements for a discussion of the Company's procedures for accounting for
foreclosed real estate.  The Company had no foreclosed real estate at September
30, 1998.

    ASSET CLASSIFICATION.  The Federal regulators  have adopted various
regulations regarding problem assets of banking  institutions.  The regulations
require that each insured institution review and classify its assets on a
regular basis.  In addition, in connection with examinations of insured
institutions, bank  examiners have authority to identify problem assets and, if
appropriate, require them to be classified.  There are three classifications for
problem assets: substandard, doubtful and loss.  Substandard assets have one or
more defined weaknesses and are characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected.  Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high

                                      -11-
<PAGE>
 
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention" and are monitored by the Company.

    The aggregate amounts of the Company's classified assets and general and
specific loss allowances at the dates indicated, were as follows:

<TABLE>
<CAPTION>
                                At September 30,
                             ---------------------
                              1998   1997    1996
                             ------  -----  ------
                                 (In Thousands)
<S>                          <C>     <C>    <C>
 
Loss.......................  $   26  $  15   $  59
Doubtful...................      15     --      --
Substandard assets.........     926    350     602
Special mention............     460    151      67
                             ------  -----   -----
  Total classified assets..  $1,427  $ 516   $ 728
                             ======  =====   =====
                                             
General loss allowances....  $  573  $ 206   $ 142
Specific loss allowances...      26     15      59
                             ------  -----   -----
  Total allowances.........  $  599  $ 221   $ 201
                             ======  =====   =====
 
</TABLE>

    ALLOWANCE FOR LOAN LOSSES.  The Company has established a systematic
methodology for determining provisions for loan losses.  The methodology is set
forth in a formal policy and considers the need for an overall general valuation
allowance as well as specific allowances for individual loans.

    In originating loans, the Company recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan.  The Company increases its allowance for loan losses
by charging provisions for loan losses against the Bank's income.

    The general valuation allowance is maintained to cover losses inherent in
the portfolio of performing loans. Management reviews the adequacy of the
allowance at least quarterly based on management's assessment of current
economic conditions, past loss and collection experience, and risk
characteristics of the loan portfolio.  The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, credit
concentrations, trends in historical loss experience, specific impaired loans
and economic conditions.  Allowances for impaired loans are generally determined
based on collateral values or the present value of estimated cash flow.
Specific valuation allowances are established to absorb losses on loans for
which full collectibility may not be reasonably assured.  The amount of the
allowance is based on the estimated value of the collateral securing the loan
and other analyses pertinent to each situation.

    At September 30, 1998, the Company had an allowance for loan losses of
$599,000, which management believed to be adequate to absorb losses inherent in
the portfolio at that date.  Although management believes that it uses the best
information available to make such determinations, future adjustments to the
allowance for loan losses may be necessary and results of operations could be
significantly and adversely affected if circumstances differ substantially from
the assumptions used in making the determinations.

                                      -12-
<PAGE>
 
    While the Company believes it has established its existing allowance for
loan losses in accordance with generally accepted accounting principles, there
can be no assurance that regulators, in reviewing the Company's loan portfolio,
will not request the Company to increase significantly its allowance for loan
losses.  In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that substantial increases will not be
necessary should the quality of any loans deteriorate as a result of the factors
discussed above.  Any material increase in the allowance for loan losses may
adversely affect the Company's financial condition and results of operations.

    The following table sets forth an analysis of the Company's allowance for
loan losses for the periods indicated. Where specific loan loss reserves have
been established, any differences between the loss allowances and the amount of
loss realized has been charged or credited to current income.  As indicated by
the table, there has not been any material fluctuations in the allowance for
loan losses.  Periodically, however, the allowance for loan losses  has been
replenished in response to low level charge offs.  No assurances can be given as
to the level of future charge offs.

<TABLE>
<CAPTION>
                                             Year Ended September 30,
                                            ---------------------------
                                              1998      1997     1996
                                            --------  --------  -------
                                              (Dollars in Thousands)
<S>                                         <C>       <C>       <C>
 
Allowance at beginning of period..........   $  221    $  201   $  201
                                             ------    ------   ------
Allowance acquired from Lafayette
 County Bank..............................      391        --       --
Provision for loan losses.................       26        29       10
Recoveries................................       22        --       --
 
Charge-offs:
Residential real estate...................       --        --       --
Commercial................................       26        --       --
Commercial real estate and multi-family...        6        --       --
Construction..............................       --        --       --
Consumer..................................       29         9       10
                                             ------    ------   ------
    Total charge-offs.....................       61         9       10
                                             ------    ------   ------
    Net charge-offs.......................       39         9       10
                                             ------    ------   ------
Balance at end of period..................   $  599    $  221   $  201
                                             ======    ======   ======
 
Ratio of allowance to total
 loans outstanding at the
 end of the period........................     0.95%     0.48%    0.44%
                                             ======    ======   ======
 
Ratio of net charge-offs to
 average loans outstanding
 during the period........................     0.06%     0.02%    0.02%
                                             ======    ======   ======
 
Ratio of allowance to
 non-accrual loans........................   114.31%    56.10%   25.83%
                                             ======    ======   ======
</TABLE>

                                      -13-
<PAGE>
 
    The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated.  The portion of the allowance
to each loan category does not necessarily represent the total available for
losses within that category since the total allowance applies to the entire loan
portfolio.  The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.

<TABLE>
<CAPTION>
                                                      At September 30,
                              --------------------------------------------------------------
                                        1998                1997                1996
                              ------------------- ---------------------  -------------------
                                          % of                  % of                 % of
                                         Loans                 Loans                Loans
                                        in Each               in Each              in Each
                                        Category              Category             Category
                                        to Total              to Total             to Total
                              Amount     Loans      Amount     Loans      Amount     Loans
                             -------  -----------  -------   ----------  -------  -----------
                                                   (Dollars in Thousands)
<S>                          <C>      <C>          <C>       <C>         <C>      <C> 
Real estate mortgage:
  One- to four-family.......  $ 100     66.99%       $ 55       85.48%     $ 65      88.51%
  Commercial and multi-                                                          
   family...................    125      5.84          61        3.34        59       2.45
  Land......................     --      1.03          --        1.15        --       1.07
  Construction..............     --       .99          --        2.37        --       1.34
Commercial..................    100      6.40          --          --        --    
Agricultural................     25      5.02          --          --        --         --
Consumer....................    150     13.73          40        7.66        77       6.63
Unallocated.................     99        --          65          --        --         --             
                              -----    ------        ----      ------      ----     ------
  Total allowance for loan                                                       
   losses...................  $ 599    100.00%       $221      100.00%     $201     100.00%
                              =====    ======        ====      ======      ====     ======
</TABLE>

INVESTMENT ACTIVITIES

    The Company is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB-
Des Moines, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds.  Subject to various restrictions, the
Company may also invest a portion of its assets in commercial paper and
corporate debt securities.  Savings institutions like B&L Bank are also required
to maintain an investment in FHLB stock.

    B&L Bank is required under federal regulations to maintain a minimum amount
of liquid assets.  At September 30, 1998, B&L Bank's regulatory liquidity of
18.27% was significantly in excess of the 4% required by OTS regulations.
Management intends to hold all securities in B&L Bank's investment portfolio in
order to enable B&L Bank to provide liquidity for loan funding upon maturity of
such investment securities and to match more closely the interest-rate
sensitivities of its assets and liabilities.

    The Board of Directors' of B&L Bank and Lafayette County Bank approved
investment policies and procedures. The investment policies generally limit
investments to U.S. Government and agency securities, municipal bonds,
certificates of deposits, marketable investment grade corporate debt obligations
and mortgage-backed securities. Investments are made based on certain
considerations, which include the interest rate, yield, settlement date and
maturity of the investment,  liquidity position, and anticipated cash needs and
sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments).  The
effect that the proposed investment would have on the  credit and interest rate
risk, and risk-based capital is also given consideration during the evaluation.

                                      -14-
<PAGE>
 
    The Company adopted SFAS No. 115 on October 1, 1993.  At September 30, 1998,
the Company's portfolio classified as "held to maturity" and available for sale
contained all of the state and local debt securities and U. S Treasury
securities and the majority of its portfolio of federal agency securities
while the remaining  portfolio of federal agency obligations and all of the
mortgage-backed securities are classified as "available for sale."  Consistent
with the Company's asset/liability management strategy, at September 30, 1998,
the majority of the investment portfolio matures within five years of that date.
See Note B of Notes to the Consolidated Financial Statements for the specific
classification of securities under SFAS No. 115.

    The following table sets forth the composition of the Company's mortgage-
backed securities portfolio at carrying value at the dates indicated.

<TABLE>
<CAPTION>
                                 At September 30,
                          ----------------------------
                            1998      1997       1996 
                          --------  --------  --------
                          Carrying  Carrying  Carrying
                           Value     Value     Value  
                          --------  --------  --------
                                  (In Thousands)
<S>                       <C>       <C>       <C>
Government National
  Mortgage Association
  ("GNMA")..............     $ 265    $  290   $  319
Fannie Mae..............       224       409      524
Freddie Mac.............       348       970    1,220
                             -----    ------   ------
                                               
    Total...............     $ 837    $1,669   $2,063
                             =====    ======   ======
</TABLE>

     The following table sets forth the composition of the Company's investment
securities portfolio and FHLB stock at the dates indicated.

<TABLE>
<CAPTION>
                                                                At September 30,
                                       ---------------------------------------------------------------------
                                                 1998                    1997                  1996
                                       -----------------------  ---------------------  ---------------------
                                        Carrying    Percent of   Carrying  Percent of   Carrying  Percent of
                                         Value      Portfolio    Value     Portfolio    Value     Portfolio
                                       ----------  -----------  --------  -----------  --------  -----------
<S>                                    <C>         <C>          <C>       <C>          <C>       <C>
(Dollars in Thousands)                 
Investment securities:                 
 U.S. Government and federal agency    
  obligations(1).....................    $14,580       84.09%    $1,709       40.16%    $2,906       49.96%
 State and local obligations(1)......      1,921       11.08        878       20.63        848       14.58
 Mortgage-backed securities(1).......        837        4.83      1,669       39.21      2,063       35.46
                                         -------     -------     ------      ------     ------      ------
Total investment securities..........    $17,338      100.00%    $4,256      100.00%    $5,817      100.00%
                                         =======     =======     ======      ======     ======      ======

Capital stock - FHLB- Des Moines(2)..    $   520                 $  464                 $  464
                                         =======                 ======                 ======
</TABLE>
(1)  The Company adopted SFAS No. 115 on October 1, 1993. Mortgage-backed
     securities and certain U.S. Government and federal agency obligations are
     classified as "available-for-sale" and are valued at fair value at
     September 30, 1998, 1997 and 1996. State and local obligations and the
     balance of U.S. Government and federal agency obligations are classified as
     "held-to-maturity" and are reflected at amortized cost.
(2)  The dividend yield on the capital stock of the FHLB-Des Moines was 6.75%
     for the fiscal year ended September 30, 1998.

                                      -15-
<PAGE>
 
     The following table sets forth the maturities of the investment securities
portfolio at September 30, 1998.

<TABLE>
<CAPTION>
                                 One Year    After One To   Over Five to      After
                                  or Less     Five Years      Ten Years     Ten Years   Total Investment Securities
                                -----------  -------------  -------------  -----------  ---------------------------
                                Book Value    Book Value     Book Value    Book Value    Book Value    Market Value
                                -----------  -------------  -------------  -----------  ------------   ------------
                                                               (Dollars in Thousands)
<S>                             <C>          <C>            <C>            <C>          <C>            <C>
Available for sale............  $       --   $         --         $1,300       $  223      $ 1,523        $ 1,536
U.S. Government and Federal         
  Agencies....................          81             --             48          687          816            837 
                                    ------        -------         ------       ------      -------        -------
Mortgage-backed securities....          81             --          1,348          910        2,339          2,373 

Held-to-maturity..............       3,043          9,468            503           30       13,044         13,093
U.S. Government and Federal         
 Agencies.....................         141            861            376          543        1,921          2,096 
                                    ------        -------         ------       ------      -------        -------
State and local obligations...       3,184         10,329            879          573       14,965         15,189 
                                    ------        -------         ------       ------      -------        ------- 
Total investment securities...      $3,265        $10,329         $2,227       $1,483      $17,304        $17,562
                                    ======        =======         ======       ======      =======        -------
                                                                                           
Weighted average yield........        5.74%          5.98%          6.67%        8.13%        6.18%
                                    ======        =======         ======       ======      =======
</TABLE>

DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS

    GENERAL.  Deposits and loan repayments are the major sources of the
Company's funds for lending and other investment purposes.  Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB-Des Moines may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources.  At September 30, 1998, the Company  had no other
borrowing arrangements.

    DEPOSIT ACCOUNTS.  Substantially all of the Company's depositors are
residents of the State of Missouri. Deposits are attracted from within the
Company's market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, money
market deposit accounts, regular savings accounts, certificates of deposit and
retirement savings plans.  Deposit account terms vary, according to the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate, among other factors. In determining the terms of its deposit
accounts, the Company considers current market interest rates, profitability to
the Company, matching deposit and loan products and its customer preferences and
concerns.  The Company reviews its deposit mix and pricing weekly.

    The following table sets forth the composition of the Company's deposits at
September 30, 1998.

<TABLE>
<CAPTION>
 
                                                 Percentage
                                                  of Total
  Checking and Savings Deposits        Balance    Deposits
-------------------------------------  --------  ----------
<S>                                    <C>       <C>
 Demand non-interest bearing            $ 4,658       6.1%
 NOW accounts                             5,920       7.7
 Money market accounts                    6,670       8.7
 Passbook savings accounts                6,328       8.2
                                        -------     -----
                                         23,576      30.7
   Certificates of Deposits
-------------------------------------
 
With balances of less than $100,000      46,724      60.9
With balances in excess of $100,000       6,464       8.4
                                        -------     -----
                                         53,188      69.3
                                        -------     -----
Total Deposits                          $76,764     100.0%
                                        =======     -----
</TABLE>

                                      -16-
<PAGE>
 
        The following table indicates the amount of the Company's certificates
of deposit of $100,000 or more by time remaining until maturity as of 
September 30, 1998.

<TABLE> 
<CAPTION> 
        Maturity Period                     Amount     
        ---------------                  ------------- 
<S>                                      <C>
                                         (In Thousands)   

Three months or less.....................    $ 1,118
Over three through six months............      1,104
Over six through 12 months...............      1,118
Over 12 months...........................      3,124
                                             -------
      Total .............................    $ 6,464
                                             =======
</TABLE> 

    DEPOSIT FLOW.  The following table sets forth the balances and changes in
dollar amounts of deposits in the various types of accounts offered by the
Company at the dates indicated.

<TABLE>
<CAPTION>
                                                                                     At September 30,
                                             --------------------------------------------------------------------------------------
                                                              1998                               1997                   1996
                                             ------------------------------------  ------------------------------  ----------------
                                                               Percent                       Percent                        Percent
                                                                 of      Increase              of      Increase               of
                                                  Amount        Total   (Decrease)  Amount    Total    (Decrease)  Amount    Total
                                             ----------------  -------  ----------  -------  --------  ----------  -------  --------
                                                                             (Dollars in Thousands)     
<S>                                          <C>               <C>      <C>         <C>      <C>       <C>         <C>      <C>
Non-interest-bearing.......................       $ 4,658        6.07%    $ 3,971   $   687     1.61%    $ 182     $   505     1.20%
NOW checking...............................         5,920        7.71       4,848     1,072     2.51       100         972     2.30
Regular savings accounts (1)...............         6,328        8.24       2,447     3,881     9.09        29       3,852     9.12
Money market deposits......................         6,670        8.69       4,255     2,415     5.66       333       2,082     4.93
                                                  -------      ------     -------   -------   ------     -----     -------   ------
                                                   23,576       30.71      15,521     8,055    18.87       644       7,411    17.55
Fixed-rate certificates which mature (1):                                                                       
  Within 1 year............................        28,910       37.66       9,487    19,423    45.49       557      18,866    44.67
  After 1 year, but within 2 years.........        10,033       13.07       4,703     5,330    12.48      (986)      6,316    14.95
  After 2 years, but within 5 years........        13,534       17.63       3,994     9,540    22.35       442       9,098    21.54
Certificates maturing thereafter...........           711         .93         365       346     0.81      (200)        546     1.29
                                                  -------      ------     -------   -------   ------     -----     -------   ------
                                                   53,188       69.29      18,549    34,639    81.13      (187)     34,826    82.45
                                                  -------      ------     -------   -------   ------     -----     -------   ------
                 Total.....................       $76,764      100.00%    $34,070   $42,694   100.00%    $ 457     $42,237   100.00%
                                                  =======      ======     =======   =======   ======     =====     =======   ======
</TABLE>
----------------------------
(1)  Included in savings accounts and certificate balances were individual
     retirement account ("IRA") balances of $6,199,000,  $3,782,000 and
     $3,567,000 at September 30, 1998, 1997 and 1996, respectively.

     TIME DEPOSITS BY RATES.  The following table sets forth the time deposits
in the Company classified by rates at the dates indicated.

<TABLE>
<CAPTION>
                             At September 30,
                        --------------------------
                         1998     1997      1996
                        -------  -------  --------
                                  (In Thousands)
<S>                     <C>      <C>      <C>
 
      3.00 - 3.99%....  $   667  $    22  $     8
      4.00 - 4.99%....      403      229      913
      5.00 - 5.99%....   36,786   22,909   20,863
      6.00 - 6.99%....    8,988    5,362    7,222
      7.00 - 7.99%....    2,416    2,381    2,230
      8.00 - 8.99%....    3,906    3,736    3,590
      9.00% and over..       22       --       --
                        -------  -------  -------
         Total........  $53,188  $34,639  $34,826
                        =======  =======  =======
 
</TABLE>

                                      -17-
<PAGE>
 
        The following table sets forth the amount and maturities of time
deposits at September 30, 1998.

<TABLE>
<CAPTION>
                                                Amount Due                                         Percent
                         ---------------------------------------------------------                 of Total 
                         Less Than     1-2         2-3         3-4       After                     Certificate
                         One Year     Years       Years       Years      4 Years        Total      Accounts
                        ----------  ---------   ---------   ----------  -----------   ----------  -----------
                                                         (In Thousands)  
<S>                      <C>        <C>         <C>         <C>         <C>          <C>        <C>
   3.00 - 3.99%           $   667   $      --   $      --   $       --  $        --    $   667       1.25%
   4.00 - 4.99%               403          --          --           --           --        403        .76
   5.00 - 5.99%            26,116       7,359       2,612          264          977     37,328      70.18
   6.00 - 6.99%             1,313       2,014       2,403        1,371        1,495      8,596      16.16
   7.00 - 7.99%               388         660       1,154           27           37      2.266       4.26
   8.00 - and over            22-           -       3,906           --           --      3,928       7.39
                          -------     -------     -------   ----------  -----------    -------     ------
    Total                 $28,909     $10,033     $10,046       $1,646       $2.509    $53,188     100.00%
                          =======     =======     =======   ==========  ===========    =======     ======
 
</TABLE> 
          DEPOSIT ACTIVITIES. The following table sets forth the deposit
activities of the Company for the periods indicated.

<TABLE> 
<CAPTION> 
 
                                                         Year Ended September 30,
                                                     ---------------------------------
                                                       1998        1997        1996
                                                      -------     -------     ------- 
                                                              (In Thousands)
<S>                                                   <C>        <C>         <C>  
Beginning balance.................................    $42,694     $42,237     $42,401
                                                      -------     -------     -------
Deposits acquired in the acquisition
 of Lafayette County Bank.........................     31,355         ---         ---
Net deposits (withdrawals)
 before interest credited.........................       (777)     (1,220)     (1,765)
Interest credited.................................      3,492       1,677       1,601
                                                      -------     -------     -------
Net increase (decrease) in
 deposits.........................................     34,070         457        (164)
                                                      -------     -------     -------
Ending balance....................................    $76,764     $42,694     $42,237
                                                      =======     =======     =======
 
</TABLE>

     BORROWINGS.  The Company has the ability to use advances from the FHLB-Des
Moines to supplement its supply of lendable funds and to meet deposit withdrawal
requirements.  The FHLB-Des Moines functions as a central reserve bank providing
credit for savings and loan associations and certain other member financial
institutions.  As a member of the FHLB-Des Moines, the Company's banking
subsidiaries are authorized to apply for advances on the security of such stock
and certain of its mortgage loans and other assets (principally securities that
are obligations of, or guaranteed by, the U.S. Government) provided certain
creditworthiness standards have been met.  Advances are made pursuant to several
different credit programs.  Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit.

                                      -18-
<PAGE>
 
          The Company had average advances totalling $307,000 during the year
ended September 30, 1998.  The following table sets forth the amount and
maturity of advances at September 30, 1998:
<TABLE>
<CAPTION>
 
        Advance        Interest                  Maturity
         Date            Rate      Amount           Date
<S>                     <C>        <C>         <C>
      March 15, 1994     6.30%     $ 35,000     March 15, 1999
      March 15, 1994     6.50%       35,000     March 15, 2000
      March 15, 1994     6.70%       35,000     March 15, 2001
      March 15, 1994     6.80%       35,000     March 15, 2002
                                   --------
                                   $140,000
                                   ========
</TABLE>

During the years ended September 30, 1997 and 1996, B&L Bank had no borrowings
from the FHLB-Des Moines.

                                   REGULATION

GENERAL

     B&L Bank is subject to extensive regulation, examination and supervision by
the OTS as its chartering agency, and the FDIC, as the insurer of its deposits.
The activities of federal savings institutions are governed by the Home Owners'
Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit
Insurance Act ("FDIA") and the regulations issued by the OTS and the FDIC to
implement these statutes.  As a state bank that is not a member of the Federal
Reserve, Lafayette County Bank is subject to extensive regulation, examination
and supervision by the State of Missouri and the FDIC.  These laws and
regulations delineate the nature and extent of the activities in which
depository institutions may engage.  Lending activities and other investments
must comply with various statutory and regulatory capital requirements.  In
addition, the Banks' relationship with their  depositors and borrowers is also
regulated to a great extent, especially in such matters as the ownership of
deposit accounts and the form and content of the Banks' mortgage documents.  The
Banks must file reports with their regulators concerning their activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions.  There are periodic examinations by regulatory
authorities to review the Banks' compliance with various regulatory
requirements.  The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes.  Any change in such policies could have a material
adverse impact on the Banks and their operations.

FEDERAL REGULATION

     OFFICE OF THRIFT SUPERVISION.  The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board.  Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.

     FEDERAL HOME LOAN BANK SYSTEM.  The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB").  The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.  B&L Bank, as a member
of the FHLB-Des Moines, is required to acquire and hold shares of capital stock
in the FHLB-Des Moines in an amount equal to the greater of (i) 1.0% of the
aggregate outstanding principal amount of residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or
(ii) 1/20 of its advances (i.e., borrowings) from the FHLB-Des Moines.  B&L Bank
is in compliance with this requirement with an investment in FHLB-Des Moines
stock of $412,600 at September 30, 1998.  Among other benefits, the FHLB-Des
Moines provides a central credit facility primarily for member institutions.  It
is funded primarily from proceeds derived from the sale

                                      -19-
<PAGE>
 
of consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB-Des Moines.

     FEDERAL DEPOSIT INSURANCE CORPORATION.  The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
depository institutions.  The FDIC currently maintains two separate insurance
funds:BIF and the SAIF.  As insurer of the Banks' deposits, the FDIC has
examination, supervisory and enforcement authority over the Banks.

     B&L Bank's accounts are insured by the SAIF and Lafayette County Bank's
deposits are insured by the BIF, each to the maximum extent permitted by law.
The Banks pay deposit insurance premiums based on a risk-based assessment system
established by the FDIC.  Under applicable regulations, institutions are
assigned to one of three capital groups that are based solely on the level of an
institution's capital -- "well capitalized," "adequately capitalized," and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system, as discussed below.  These
three groups are then divided into three subgroups which reflect varying levels
of supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern.  The matrix so
created results in nine assessment risk classifications.

     Pursuant to the Deposit Insurance Funds Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio.  In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including B&L Bank, paying 0%.  This
assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995.  In addition, since January 1, 1997, SAIF
members are charged an assessment of .065% of SAIF-assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.

     The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date.  The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations.  It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of B&L Bank.

     The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC.  It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital.  If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC.  Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Banks.

     LIQUIDITY REQUIREMENTS.  Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
4.0%) of its net withdrawable accounts plus short-term borrowings.  Monetary
penalties may be imposed for failure to meet liquidity requirements.

     PROMPT CORRECTIVE ACTION.  Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it regulates.  The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action.  Under
the regulations, an

                                      -20-
<PAGE>
 
institution shall be deemed to be (i) "well capitalized" if it has a total risk-
based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a leverage ratio of 5.0% or more and is not subject to
specified requirements to meet and maintain a specific capital level for any
capital measure; (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8.0% or more, has a Tier I risk-based capital ratio of 4.0% or
more, has a leverage ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized;" (iii) "undercapitalized"
if it has a total risk-based capital ratio that is less than 8.0%, has a Tier I
risk-based capital ratio that is less than 4.0% or has a leverage ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, has a Tier I risk-based capital ratio that is less than 3.0% or has a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.

     A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity.  (Regulatory
authorities may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.)

     An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized.  Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.

     At September 30, 1998, the Banks were categorized as "well capitalized"
under the applicable prompt corrective action regulations.

     STANDARDS FOR SAFETY AND SOUNDNESS.  The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines").  The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired.  If the appropriate regulatory authority
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard.  Federal regulations
establish deadlines for the submission and review of such safety and soundness
compliance plans.

     QUALIFIED THRIFT LENDER TEST.  All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations.  A savings institution that fails to become or remain a QTL
shall either convert to a national bank charter or be subject to the following
restrictions on its operations:  (i) the institution may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the institution may not establish any new branch office where a
national bank located in the savings institution's home state would not be able
to establish a branch office; (iii) the institution shall be ineligible to
obtain new advances from any FHLB; and (iv) the payment of dividends by the
institution shall be subject to the rules regarding the statutory and regulatory
dividend restrictions applicable to national banks.  Also, beginning three years
after the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB.  In addition, within one year of the date on
which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies.  A savings institution may requalify as a QTL if
it thereafter complies with the QTL test.

                                      -21-
<PAGE>
 
     Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code or that
65% of an institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in nine out of
every 12 months.  Assets that qualify without limit for inclusion as part of the
65% requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards.  In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets:  50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by Freddie Mac or Fannie Mae.  Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets.  At
September 30, 1998, B&L Bank was in compliance with the QTL test.

     OTS CAPITAL REQUIREMENTS.  Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital.  Savings associations must meet all of the standards in
order to comply with the capital requirements.
 
     OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets).  Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities.  In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and non-includable subsidiaries.  Institutions
that fail to meet the core capital requirement would be required to file with
the OTS a capital plan that details the steps they will take to reach
compliance.  In addition, the OTS's prompt corrective action regulation provides
that a savings institution that has a leverage ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions.  See "--
Federal Regulation-- Prompt Corrective Action."

     Savings associations also must maintain "tangible capital" not less than
1.5% of adjusted total assets. "Tangible capital" is defined, generally, as core
capital minus any "intangible assets" other than purchased mortgage servicing
rights.

     Savings associations must maintain total risk-based capital equal to at
least 8% of risk-weighted assets.  Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined.  Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.

     The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets.  Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets.  The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due.  Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight.  Consumer, commercial, home equity and residential construction loans
are assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential

                                      -22-
<PAGE>
 
construction loans that do not exceed an 80% loan-to-value ratio. The book value
of assets in each category is multiplied by the weighing factor (from 0% to
100%) assigned to that category. These products are then totaled to arrive at
total risk-weighted assets. Off-balance sheet items are included in risk-
weighted assets by converting them to an approximate balance sheet "credit
equivalent amount" based on a conversion schedule. These credit equivalent
amounts are then assigned to risk categories in the same manner as balance sheet
assets and included risk-weighted assets.

     The OTS has incorporated an interest rate risk component into its
regulatory capital rule.  Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements.  A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
                               ----                                     
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of B&L
Bank's assets, as calculated in accordance with guidelines set forth by the OTS.
A savings association whose measured interest rate risk exposure exceeds 2% must
deduct an interest rate risk component in calculating its total capital under
the risk-based capital rule.  The interest rate risk component is an amount
equal to one-half of the difference between the institution's measured interest
rate risk and 2%, multiplied by the estimated economic value of the Bank's
assets.  That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement.  Under the rule,
there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data.  A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% is not subject to the interest rate
risk component, unless the OTS determines otherwise.  The rule also provides
that the Director of the OTS may waive or defer an association's interest rate
risk component on a case-by-case basis.  Under certain circumstances, a savings
association may request an adjustment to its interest rate risk component if it
believes that the OTS-calculated interest rate risk component overstates its
interest rate risk exposure.  In addition, certain "well-capitalized"
institutions may obtain authorization to use their own interest rate risk model
to calculate their interest rate risk component in lieu of the OTS-calculated
amount.  The OTS has postponed the date that the component will first be
deducted from an institution's total capital.

     FDIC CAPITAL REQUIREMENTS.  The FDIC's minimum capital standards applicable
to FDIC-regulated banks and savings banks require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of total
assets.  Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of purchased
mortgage servicing rights and certain other accounting adjustments.  All other
banks must have a Tier 1 leverage ratio of at least 100 to 200 basis points
above the 3% minimum.  The FDIC capital regulations establish a minimum leverage
ratio of not less than 4% for banks that are not highly rated or are
anticipating or experiencing significant growth.  Based on the definitions
contained in the FDIC's capital regulations, Lafayette County Bank had a Tier 1
leverage capital ratio of 7.47% as of September 30, 1998.

     The FDIC's capital regulations require higher capital levels for banks
which exhibit more than a moderate degree of risk or exhibit other
characteristics which necessitate that higher than minimum levels of capital be
maintained.  Any insured bank with a Tier 1 capital to total assets ratio of
less than 2% is deemed to be operating in an unsafe and unsound condition unless
the insured bank enters into a written agreement, to which the FDIC is a party,
to correct its capital deficiency. Insured banks operating with Tier 1 capital
levels below 2% (and which have not entered into a written agreement) are
subject to an insurance removal action. Insured banks operating with lower than
the prescribed minimum capital levels generally will not receive approval of
applications submitted to the FDIC. Also, inadequately capitalized state
nonmember banks will be subject to such administrative action as the FDIC deems
necessary.

     FDIC regulations also require that banks meet a risk-based capital
standard.  The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 or supplementary capital)
to risk weighted assets of 8% and Tier 1 capital to risk-weighted assets of 4%.
In determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the
risks the FDIC believes are inherent in the type of asset or item.  The
components of Tier 1 capital are equivalent to those

                                      -23-
<PAGE>
 
discussed above under the 3% leverage requirement. The components of
supplementary capital currently include cumulative perpetual preferred stock,
adjustable-rate perpetual preferred stock, mandatory convertible securities,
term subordinated debt, intermediate-term preferred stock and allowance for
possible loan and lease losses. Allowance for possible loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of risk-
weighted assets. Overall, the amount of capital counted toward supplementary
capital cannot exceed 100% of Tier 1 capital. Since September 1995, the FDIC
includes in its evaluation of a bank's capital adequacy an assessment of the
exposure to declines in the economic value of the bank's capital due to changes
in interest rates. However, no measurement framework for assessing the level of
a bank's interest rate risk exposure has been codified. In the future, the FDIC
will issue a proposed rule that would establish an explicit minimum capital
charge for interest rate risk, based on the level of a bank's measured interest
rate risk exposure.

     FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial weaknesses.
The FDIC capital regulations state that, where the FDIC determines that the
financial history or condition, including off-balance sheet risk, managerial
resources and/or the future earnings prospects of a bank are not adequate and/or
a bank has a significant volume of assets classified substandard, doubtful or
loss or otherwise criticized, the FDIC may determine that the minimum adequate
amount of capital for that bank is greater than the minimum standards
established in the regulation.

     LIMITATIONS ON CAPITAL DISTRIBUTIONS.  OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers.  In addition, OTS regulations require B&L Bank to give the OTS 30 days'
advance notice of any proposed declaration of dividends, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends.
The regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.

     A Tier 1 savings association has capital in excess of its capital
requirement (both before and after the proposed capital distribution).  A Tier 1
savings association may make (without application but upon prior notice to, and
no objection made by, the OTS) capital distributions during a calendar year up
to 100% of its net income to date during the calendar year plus one-half its
surplus capital ratio (i.e., the amount of capital in excess of its requirement)
                       ----                                                     
at the beginning of the calendar year or the amount authorized for a Tier 2
association.  Capital distributions in excess of such amount require advance
notice to the OTS.  A Tier 2 savings association has capital equal to or in
excess of its minimum capital requirement but below its requirement (both before
and after the proposed capital distribution).  Such an association may make
(without application) capital distributions up to an amount equal to 75% of its
net income during the previous four quarters depending on how close B&L Bank is
to meeting its capital requirement.  Capital distributions exceeding this amount
require prior OTS approval.  Tier 3 associations are savings associations with
capital below the minimum capital requirement (either before or after the
proposed capital distribution).  Tier 3 associations may not make any capital
distributions without prior approval from the OTS.

     B&L Bank currently meets the criteria to be designated a Tier 1 association
and, consequently, could at its option (after prior notice to, and no objection
made by, the OTS) distribute up to 100% of its net income during the calendar
year plus 50% of its surplus capital ratio at the beginning of the calendar year
less any distributions previously paid during the year.

     LOANS TO ONE BORROWER.  Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower.  Generally, this
limit is 15% of B&L Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion.  The OTS by regulation has amended the loans to one borrower rule
to permit savings associations meeting certain requirements, including capital
requirements, to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units.  At September 30, 1998, B&L  Bank's regulatory limit on loans to
one borrower was $1.8 million.  At September 30, 1998, B&L  Bank's largest
aggregate amount of loans to one borrower was $1.0 million.

                                      -24-
<PAGE>
 
     ACTIVITIES OF SAVINGS ASSOCIATIONS AND THEIR SUBSIDIARIES.  A savings
association may establish operating subsidiaries to engage in any activity that
the savings association may conduct directly and may establish service
corporation subsidiaries to engage in certain preapproved activities or, with
approval of the OTS, other activities reasonably related to the activities of
financial institutions.  When a savings association establishes or acquires a
subsidiary or elects to conduct any new activity through a subsidiary that the
association controls, the savings association must notify the FDIC and the OTS
30 days in advance and provide the information each agency may, by regulation,
require.  Savings associations also must conduct the activities of subsidiaries
in accordance with existing regulations and orders.

     The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the Bank or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary.  The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF.  If so, it may require that no SAIF member engage in
that activity directly.

     ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS.  Federal law
generally limits the activities and equity investments of FDIC-insured, state-
chartered banks to those that are permissible for national banks.  Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank.  An insured state
bank is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.

     In addition, an insured state bank (i) that is located in a state which
authorized as of September 30, 1991 investment in common or preferred stock
listed on a national securities exchange ("listed stock") or shares of a
registered investment company ("registered shares"), and (ii) which during the
period beginning September 30, 1990 through November 26, 1991 ("measurement
period") made or maintained investments in listed stocks and registered shares,
may retain whatever shares that were lawfully acquired or held prior to December
19, 1991 and continue to acquire listed stock and registered shares, provided
that the bank does not convert its charter to another form or undergo a change
in control.  In order to acquire or retain any listed stock or registered
shares, however, the bank must file a one-time notice with the FDIC which meets
specified requirements and which sets forth the bank's intention to acquire and
retain stocks or shares, and the FDIC must determine that acquiring or retaining
the listed stocks or registered shares will not pose a significant risk to the
deposit insurance fund of which the bank is a member.

     FDIC regulations provide that an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements.  Any insured state-chartered bank directly or indirectly
engaged in any activity that is not permitted for a national bank must cease the
impermissible activity.

          As an insured state-chartered bank, Lafayette County Bank  may not,
directly or indirectly, lend to any one borrower an amount or amounts which
exceed 20% of its unimpaired capital, which consist  of  common stock, capital
surplus, retained earnings and reserves.  At September 30, 1998, Lafayette
County Bank's lending limit to any one borrower  was $ 640,000.  At September
30, 1998, the largest aggregate amount of loans to one borrower, less any
governement guarantees,  was $ 268,000.

                                      -25-
<PAGE>
 
     TRANSACTIONS WITH AFFILIATES.  Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank.   A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the HOLA.
Generally, Sections 23A and 23B:  (i) limit the extent to which the insured
association or its subsidiaries may engage in certain covered transactions with
an affiliate to an amount equal to 10% of such institution's capital and surplus
and place an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable to the
institution or subsidiary, as those provided to a non-affiliate.  The term
"covered transaction" includes the making of loans, the purchase of assets, the
issuance of a guarantee and similar types of transactions.  Any loan or
extension of credit by the Bank to an affiliate must be secured by collateral in
accordance with Section 23A.

     Three additional rules apply to savings associations:  (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies;  (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B.  Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve, as is currently the case with respect to all FDIC-
insured banks.

     The Banks' authority to extend credit to executive officers, directors and
10% shareholders, as well as entities controlled by such persons, is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation
O thereunder.  Among other things, these regulations require that such loans be
made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
the Banks may make to such persons based, in part, on the Bank's capital
position, and requires certain board approval procedures to be followed.  The
OTS regulations, with certain minor variances, apply Regulation O to savings
institutions.

     FEDERAL RESERVE SYSTEM.  Regulation D of the Federal Reserve Board
requires all depository institutions that maintain transaction accounts or
nonpersonal time deposits.  These reserves may be in the form of cash or non-
interest-bearing deposits with the regional Federal Reserve Bank.  NOW accounts
and other types of accounts that permit payments or transfers to third parties
fall within the definition of transaction accounts and are subject to Regulation
D reserve requirements, as are any nonpersonal time deposits at a bank.  Under
Regulation D, a bank must establish reserves equal to 3% of the first $47.7
million of transaction accounts, of which the first $4.3 million is exempt, and
10% on the remainder. The reserve requirement on nonpersonal time deposits with
original maturities of less than 1-1/2 years is 0%.  As of September 30, 1998,
Lafayette County Bank met its reserve requirements.

     COMMUNITY REINVESTMENT ACT. The Banks are subject to the provisions of the
Community Reinvestment Act of 1977, which requires the appropriate federal bank
regulatory agency, in connection with its regular examination of a savings
association, to assess the saving association's record in meeting the credit
needs of the community serviced by the savings association, including low and
moderate income neighborhoods.  The regulatory agency's assessment of the
savings association's record is made available to the public.  Further, such
assessment is required of any savings association which has applied, among other
things, to establish a new branch office that will accept deposits, relocate an
existing office or merge or consolidate with, or acquire the assets or assume
the liabilities of, a federally regulated financial institution.

BANK HOLDING COMPANY REGULATION

     GENERAL.  Upon consummation of the acquisition of Lafayette County Bank the
Company become a bank holding company.  Bank holding companies are subject to
comprehensive regulation by the Board of Governors of the Federal Reserve System
(the "Federal Reserve") under the Bank Holding Company Act ("BHCA") and the
regulations of the Federal Reserve.  As a bank holding company, the Company is
required to file with the Federal Reserve annual

                                      -26-
<PAGE>
 
reports and such additional information as the Federal Reserve may require and
will be subject to regular examinations by the Federal Reserve. The Federal
Reserve also has extensive enforcement authority over bank holding companies,
including, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to require that a holding company
divest subsidiaries (including its bank subsidiaries). In general, enforcement
actions may be initiated for violations of law and regulations and unsafe or
unsound practices.

     Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (1) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3)
merging or consolidating with another bank holding company.

     The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries.  The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks.  The list of activities permitted by the Federal Reserve
includes, among other things, operating a savings institution, mortgage company,
finance company, credit card company or factoring company; performing certain
data processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of credit-
related insurance; leasing property on a full-payout, non-operating basis;
selling money orders, travelers' checks and United States Savings Bonds; real
estate and personal property appraising; providing tax planning and preparation
services; and, subject to certain limitations, providing securities brokerage
services for customers.

     INTERSTATE BANKING AND BRANCHING.  On September 29, 1994, the Riegle-Neal
Interstate Banking and Branching Act of 1994 (the "Riegle-Neal Act") was enacted
to ease restrictions on interstate banking.  The Riegle-Neal Act allows the
Federal Reserve to approve an application of an adequately capitalized and
adequately managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve may not approve the
acquisition of a bank that has not been in existence for the minimum time period
(not exceeding five years) specified by the statutory law of the host state.
The Riegle-Neal Act also prohibits the Federal Reserve from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch.  The Riegle-Neal Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a bank holding company to the
extent such limitation does not discriminate against out-of-state banks or bank
holding companies.  Individual states may also waive the 30% state-wide
concentration limit contained in the Riegle-Neal Act.

     Additionally, the federal banking agencies are authorized to approve
interstate merger transactions without regard to whether such transaction is
prohibited by the law of any state, unless the home state of one of the banks
opts out of the Riegle-Neal Act by adopting a law after the date of enactment of
the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all out-
of-state banks and expressly prohibits merger transactions involving out-of-
state banks. Interstate acquisitions of branches will be permitted only if the
law of the state in which the branch is located permits such acquisitions.
Interstate mergers and branch acquisitions will also be subject to the
nationwide and statewide insured deposit concentration amounts described above.

     The Riegle-Neal Act authorizes the applicable federal banking agency to
approve interstate branching de novo by national and state banks, but only in
states which specifically allow for such branching.

     DIVIDENDS.  The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends

                                      -27-
<PAGE>
 
only to the extent that the company's net income for the past year is sufficient
to cover both the cash dividends and a rate of earnings retention that is
consistent with the company's capital needs, asset quality and overall financial
condition. The Federal Reserve also indicated that it would be inappropriate for
a company experiencing serious financial problems to borrow funds to pay
dividends.

     Bank holding companies are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth.  The Federal Reserve may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe or unsound practice
or would violate any law, regulation, Federal Reserve order, or any condition
imposed by, or written agreement with, the Federal Reserve.  This notification
requirement does not apply to any company that meets the well-capitalized
standard for commercial banks, has a safety and soundness examination rating of
at least a "2" and is not subject to any unresolved supervisory issues.

     CAPITAL REQUIREMENTS.  The Federal Reserve has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks.  The Federal Reserve regulations provide that
capital standards will generally be applied on a bank only (rather than a
consolidated) basis on the case of a bank holding company with less than $150
million in total consolidated assets.


                                    TAXATION

FEDERAL TAXATION

     GENERAL.  The Company reports its income on a fiscal year basis using the
accrual method of accounting and will be subject to federal income taxation in
the same manner as other corporations with some exceptions, including
particularly the Bank's reserve for bad debts discussed below.  The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Bank or the
Company.  For additional information regarding income taxes, see Note H of Notes
to Consolidated Financial Statements.

     BAD DEBT RESERVE.  Historically, savings institutions such as B&L Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. B&L Bank's deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interest in real property, were computed using an amount based on B&L
Bank's actual loss experience, or a percentage equal to 8% of B&L Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the non-qualifying reserve.  Due to B&L Bank's loss
experience, B&L Bank generally recognized a bad debt deduction equal to 8% of
taxable income.

     The thrift bad debt rules were revised by Congress in 1996.  The new rules
eliminated the percentage of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after 
December 31, 1995. These rules also required that all institutions recapture all
or a portion of their bad debt reserves added since the base year (last taxable
year beginning before January 1, 1988). For taxable years beginning after
December 31, 1995, B&L Bank's bad debt deduction must be determined under the
experience method using a formula based on actual bad debt experience over a
period of years or, if the Bank is a "large" Bank (assets in excess of $500
million) on the basis of net charge-offs during the taxable year. The new rules
allowed an institution to suspend bad debt reserve recapture for the 1996 and
1997 tax years if the institution's lending activity for those years is equal to
or greater than the institutions average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation. For this purpose, only home
purchase or home improvement loans are included and the institution can elect to
have the tax years with the highest and lowest lending activity removed from the
average calculation. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax year.
The unrecaptured

                                      -28-
<PAGE>
 
base year reserves will not be subject to recapture as long as the institution
continues to carry on the business of banking. In addition, the balance of the
pre-1988 bad debt reserves continues to be subject to provisions of present law
referred to below that require recapture of the pre-1988 bad debt reserve in the
case of certain excess distributions to shareholders.

     DISTRIBUTIONS.  To the extent that B&L Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if B&L Bank's loan portfolio decreased since 
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in B&L Bank's taxable income. Nondividend distributions include
distributions in excess of B&L Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of B&L Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from B&L Bank's bad debt
reserve. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, B&L Bank makes a "nondividend distribution," then approximately one
and one-half times the Excess Distribution would be includable in gross income
for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state and local taxes). See "REGULATION" for limits on the payment
of dividends by the Bank. B&L Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserve.

     CORPORATE ALTERNATIVE MINIMUM TAX.  The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%.  The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI.  In addition, only 90%
of AMTI can be offset by net operating loss carryovers. AMTI is increased by an
amount equal to 75% of the amount by which the Company's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). For taxable years beginning after
December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of
the excess of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Company, whether or not an Alternative Minimum Tax
is paid.

     DIVIDENDS-RECEIVED DEDUCTION.  The Company may exclude from its income 100%
of dividends received from the Bank as a member of the same affiliated group of
corporations.  The corporate dividends-received deduction is generally 70% in
the case of dividends received from unaffiliated corporations with which the
Company and the Bank will not file a consolidated tax return, except that if the
Company or the Bank owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.

     AUDITS.  There have not been any Internal Revenue Service audits of B&L
Bank's or Lafayette County Bank's Federal income tax returns during the past
five years.

STATE TAXATION

     MISSOURI TAXATION.  Missouri-based institutions, such as B&L Bank and
Lafayette County Bank,  are subject to a special financial institutions tax,
based on net income without regard to net operating loss carryforwards, at the
rate of 7% of net income.  This tax is in lieu of certain other state taxes on
financial  institutions, on their property, capital or income, except taxes on
tangible personal property owned by B&L Bank or Lafayette County Bank  and held
for lease or rental to others and on real estate, contributions paid pursuant to
the Unemployment Compensation Law of Missouri, social security taxes, sales
taxes and use taxes.  In addition, B&L Bank and Lafayette County Bank are
entitled to credit against this tax all taxes paid to the State of Missouri or
any political subdivision, except taxes on tangible personal property owned  and
held for lease or rental to others and on real estate, contributions paid
pursuant to the Unemployment Compensation Law of Missouri, social security
taxes, sales and use taxes, and taxes imposed by the Missouri Financial
Institutions Tax Law.  Missouri-based financial  institutions are not subject to
the regular corporate income tax.

                                      -29-
<PAGE>
 
     There have not been any audits of the Bank's Missouri tax returns by
Missouri tax authorities during the past five years.

     As a Missouri-chartered corporation, the Company is subject to annual
franchise and income taxes imposed by the State of Missouri.  Franchise taxes
are assessed at a rate of 1/20 of 1% of the par value of outstanding shares and
surplus.  Income taxes are assessed at a rate of 6.25% of federal taxable income
derived from Missouri sources.

     For additional information regarding taxation, see Note H of Notes to
Consolidated Financial Statements contained in the Annual Report.

COMPETITION

     Due to the proximity of Lexington to the Kansas City metropolitan area, the
Company operates in an extremely competitive market for the attraction of
savings deposits (its primary source of lendable funds) and in the origination
of loans.  Historically, its most direct competition for savings deposits has
come from commercial banks and thrift institutions operating in its market area.
Some of these commercial banks are subsidiaries of large regional holding
companies having vastly greater resources at their disposal.  At September 30,
1998, there were 11 commercial banks, including Lafayette County Bank, and no
other thrift institutions in Lafayette County.  Particularly in times of high
market interest rates, the Company has faced competition for investors' funds
from short-term money market securities and corporate and U.S. Government
securities.  The Company competes for loan originations with mortgage bankers,
thrift institutions, credit unions and commercial banks.  Such competition for
deposits and loans may limit the Company's future growth and earnings prospects.

PERSONNEL

     As of September 30, 1998, the Company had 27 full-time and 6 part-time
employees.  The employees are not represented by a collective bargaining unit.
The Company believes its relationship with its employees is good.

                                      -30-
<PAGE>
 
EXECUTIVE OFFICERS

     The following table sets forth certain information regarding the executive
officers of the Company as of September 30, 1998.

<TABLE>
<CAPTION>
 
Name                     Age(1)    Position
----                     ------    --------
<S>                      <C>       <C>
                       
Erwin Oetting, Jr.          58     President and Chief Executive Officer
                                   
E. Steva Vialle             47     Executive Vice President, Chief Operating Officer, and Secretary
                                   
William J. Huhmann          59     Senior Vice President and Chief Financial Officer
                                   
Mark D. Summerlin           38     Senior Vice President
                                   
Terry L. Thompson           45     Vice President
</TABLE>

     The following table sets forth certain information regarding the executive
officers of B&L Bank and Lafayette County Bank

<TABLE>
<CAPTION>
 
Name                      Age(1)   Position
----                      ------   --------
<S>                       <C>      <C>

B&L Bank:
 
Erwin Oetting, Jr.           58     President and Chief Executive Officer
                         
E. Steva Vialle              47     Executive Vice President, Chief Operating Officer and Secretary
                         
Kathryn M. Swafford          36     Vice President and Treasurer
                         
Mark D. Summerlin            38     Vice President
                         
Lafayette County Bank:    
 
William J. Huhmann           59     Chairman and Chief Financial Officer
                         
Terry L. Thompson            45     President and Chief Executive Officer
                         
Donald L. Coen               60     Executive Vice President
                         
Carol Summerlin              58     Senior Vice President and Cashier
                         
Kirk Craven                  36     Vice President

</TABLE>

------------------------
(1)  As of September 30, 1998.

     Erwin Oetting, Jr. has been employed as an officer of the B&L Bank since
1960 and has been President and Chief Executive Officer since 1985.  He is a
member of the LIDC Authority, the Lexington Housing Authority, the Lexington
Chamber of Commerce, and the Lexington Police Board and a trustee of Wentworth
Military Academy.

     E. Steva Vialle has been employed by the B&L Bank since 1984 and has been
Executive Vice President, Chief Operating Officer and Secretary since 1994.  He
is a member of the Lexington Industrial Development Corporation, the Lexington
Zoning Board and the Lexington Board of Adjustments.

                                      -31-
<PAGE>
 
          William J. Huhmann has been employed by Lafayette County Bank since
1991 and has been Chairman of the Board and Chief Financial Officer since that
date.  He is a member of the American Institute of CPA's  and the Missouri
Society of CPA's.

     Mark D. Summerlin has been employed by the B&L Bank since 1985.  He is a
member of the Rotary Club, the Lexington Park Board, the Chamber of Commerce,
the Knights of Columbus and the Wentworth Country Club Board.

          Terry L. Thompson has been employed by Lafayette County Bank since
1989.  He is member of the Rotary Club,  Lexington R-V School Board and serves
on several committees of the Missouri Bankers Association.

          Donald L. Coen has been employed by Lafayette County Bank since 1990.
He is on the Board of Charles Lyons Foundation and the Lexington Historical
Society.

          Carol Summerlin has been employed by Lafayette County Bank since 1979.
She is a member of the Lexington Women's Club and the Lexington Chamber of
Commerce.

          Kathryn M. Swafford has been employed by B&L Bank since 1984.  She is
a member of the Lexington Park Board.

         Kirk Craven has been employed by Lafayette County Bank since 1991.

ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

     B&L Bank owns its main office located at 919 Franklin Avenue, Lexington,
Missouri.  The office was opened in 1960 and its size is approximately 3,500
square feet.  In addition to Lafayette County Bank's home office located at
Highway 13 and 20th Street, Lexington, Missiouri, it has two other branch
offices located in Wellington and Callao, Missouri.   The Lexington office is a
modern banking office constructed in 1982 and contains approximately 8,000
square feet.  The branch office in Wellington was constructed around 1920 and
has been remodeled several times and contains approximately 5,000 square feet.
The Callao office was constructed around 1930 and has approximately 4,000 square
feet.  All banking offices are owned and  have vaults and contain rental safe
deposit boxes.   At September 30, 1998, the net book value of the Company's
premises and equipment (land, building and improvements, furniture and
equipment) was $956,000.

ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     Periodically, there have been various claims and lawsuits involving the
Company, such as claims to enforce liens, condemnation proceedings on properties
on which the Company holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Company's
business.  The Company is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

     No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1998.

                                      -32-
<PAGE>
 
                                    PART II

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------------------------------------------------------------------

     The information contained under the section captioned "Common Stock
Information" on page 2 of the Annual Report to Stockholders ("Annual Report")
is incorporated herein by reference.

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------------
          RESULTS OF OPERATIONS OR PLAN OF OPERATIONS 
          -------------------------------------------

     The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" beginning on page
6 of the Annual Report is incorporated herein by reference.

ITEM 7.   FINANCIAL STATEMENTS
------------------------------

     (a)  Financial Statements
          Independent Auditor's Report*
          Consolidated Statements of Financial Condition as of September 30,
            1998 and 1997*
          Consolidated Statements of Stockholders' Equity for the Years Ended
            September 30, 1998, 1997 and 1996*
          Consolidated Statements of Income for the Years Ended
            September 30, 1998, 1997 and 1996*
          Consolidated Statements of Cash Flows for the Years Ended
            September 30, 1998, 1997 and 1996*
          Notes to the Consolidated Financial Statements*

  *  Included in the Annual Report attached as Exhibit 13 hereto and
  incorporated herein by reference.  All schedules have been omitted as the
  required information is either inapplicable or included in the Consolidated
  Financial Statements or related Notes contained in the Annual Report.

ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
--------------------------------------------------------------------------
          FINANCIAL DISCLOSURE
          --------------------

     Not applicable.


                                    PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-----------------------------------------------------------------------
          COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
          ------------------------------------------------

     The information contained under the section captioned "Proposal I --
Election of Directors" contained in the Bank's Proxy Statement, and "Part I --
Business -- Personnel -- Executive Officers" of this report, is incorporated
herein by reference.  Reference is made to the cover page of this report for
information regarding compliance with Section 16(a) of the Exchange Act.

ITEM 10.  EXECUTIVE COMPENSATION
--------------------------------

     The information contained under the sections captioned "Executive
Compensation," "Directors' Compensation" and "Benefits" under "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

     (a) Security Ownership of Certain Beneficial Owners

         Information required by this item is incorporated herein by reference
         to the section captioned "Security Ownership of Certain Beneficial
         Owners and Management" of the Proxy Statement.

                                      -33-
<PAGE>
 
     (b) Security Ownership of Management

         The information required by this item is incorporated herein by
         reference to the sections captioned "Proposal I -- Election of
         Directors" and "Security Ownership of Certain Beneficial Owners and
         Management" of the Proxy Statement.

     (c) Changes in Control

         The Company is not aware of any arrangements, including any pledge by
         any person of securities of the Company, the operation of which may at
         a subsequent date result in a change in control of the Company.

     The information required by this item is incorporated herein by reference
to the sections captioned "Proposal I -- Election of Directors" and "Security
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

     The information set forth under the section captioned "Proposal I --
Election of Directors -- Certain Transactions with the Bank" in the Proxy
Statement is incorporated herein by reference.

                                      -34-
<PAGE>
 
                                    PART IV
                                        
ITEM 13.  EXHIBITS LIST AND REPORTS ON FORM 8-K
-----------------------------------------------

     (a)    Exhibits

     3(a)   Articles of Incorporation of the Registrant*
     3(b)   Bylaws of the Registrant*
     10(a)  Employment Agreement with Erwin Oetting, Jr.**
     10(b)  Employment Agreement with E. Steva Vialle**
     10(c)  Salary Continuation Agreement with Erwin Oetting, Jr.**
     10(d)  Salary Continuation Agreement with E. Steva Vialle**
     10(e)  Severance Agreement with Mark D. Summerlin**
     10(f)  Severance Agreement with Kathryn M. Swafford**
     10(g)  1996 Stock Option Plan***
     10(h)  Management Recognition and Development Plan***
     (13)   Annual Report to Stockholders
     (21)   Subsidiaries of the Registrant
     (23)   Consent of Independent Auditor
     (27)   Financial Data Schedule

___________________
*    Incorporated by reference to the Registrant's Registration Statement on
     Form S-1, filed on February 16, 1996.
**   Incorporated by reference to the Registrant's Annual Report on Form 10-K
     for the year ended September 30, 1996.
***  Incorporated by reference to the Registrant's Definitive Proxy Statement
     for the 1998 Annual Meeting of Stockholders.

     (b)  Reports on Form 8-K

          No Reports on Form 8-K were filed during the quarter ended September
30, 1998.

                                      -35-
<PAGE>
 
                                   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 by the undersigned, thereunto duly authorized.

                                 LEXINGTON B & L FINANCIAL CORP.



Date:  December 24, 1998         By: /s/ Erwin Oetting, Jr.
                                    ______________________________________
                                    Erwin Oetting, Jr.
                                    President and Chief Executive Officer

     Pursuant to 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 and on the dates indicated.

<TABLE> 
<CAPTION> 

SIGNATURES                               TITLE                     DATE
----------                               -----                     ----
<S>                      <C>                                  <C> 
/s/ Erwin Oetting, Jr.   President, Chief Executive Officer   December 24, 1998
-----------------------  and Director (Principal Executive
Erwin Oetting, Jr.       Officer)                              
                            
/s/ E. Steva Vialle      Executive Vice President, Chief      December 24, 1998
-----------------------  Operating Officer, Secretary                   
E. Steva Vialle          and Director                     
                                    
/s/ William J. Huhmann   Senior Vice President and Chief      December 24, 1998
-----------------------  Financial Officer (Principal                   
William J. Huhmann       Financial and Accounting Officer)    
                            
                      
/s/ Steve Oliaro         Director                             December 24, 1998
-----------------------                        
Steve Oliaro          
                      
                      
/s/ Norman Vialle        Director                             December 24, 1998
-----------------------                        
Norman Vialle         
                      
                      
/s/ Charles R. Wilcoxon  Director                             December 24, 1998
-----------------------                        
Charles R. Wilcoxon   
                      
                      
/s/ Glenn H. Twente      Director                             December 24, 1998
---------------------                         
Glenn H. Twente

</TABLE>