<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
 
                                  FORM 10-KSB
(Mark One)

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

For the fiscal year ended December 31, 1998
 
[   ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

For the transition period from  ______ to ______
 
                          Commission File No. 0-23411
 
                        COMMUNITY NATIONAL CORPORATION
                ----------------------------------------------
                (Name of small business issuer in its charter)
 
             Tennessee                                          62-1700975
---------------------------------                         ----------------------
 (State or other jurisdiction                                (I.R.S. Employer
of incorporation or organization)                         Identification Number)
 
19 Natchez Trace Drive, Lexington, Tennessee                       38351
--------------------------------------------              ----------------------
(Address of principal executive offices)                        (Zip Code)

        Issuer's telephone number, including area code: (901) 968-6624
                                                        --------------

          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 $1.00 per share
                    ---------------------------------------
                               (Title of Class)

Check whether the issuer (1) has filed all reports required by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the past 12 months (or 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 here if no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.  [ X ]

The issuer's revenues for the fiscal year ended December 31, 1998 were
$2,702,722.

Based on the most recent sale of the common stock at a price of $10.50 per
share, the aggregate market value of the voting stock held by non-affiliates on
March 15, 1999 was $5.7 million.  For purposes of this calculation, it is
assumed that directors, officers and the Company's Management Recognition Plan
are affiliates.  On such date, 712,866 shares of the common stock were issued
and outstanding.

Transitional Small Business Disclosure Format (check one):  Yes  [  ] No [ X ]

                      DOCUMENTS INCORPORATED BY REFERENCE

     1.   Portions of the 1998 Annual Report to Stockholders for the year ended
          December 31, 1998 (Parts I and II)
     2.   Portions of Proxy Statement for the 1999 Annual Meeting of
          Stockholders (Part III)
<PAGE>
 
                                    PART I

Item 1.  Description of Business
--------------------------------

General

     The Company.   Community National Corporation (the "Company") was organized
under the laws of the State of Tennessee in July 1997 at the direction of the
Board of Directors of Lexington First Federal Savings Bank ("Lexington First")
in connection with the second step conversion of Lexington First Federal Mutual
Holding Company and the reorganization of Lexington First as a subsidiary of the
Company (the "Stock Conversion"). On December 11, 1997, the Stock Conversion was
consummated and the Company completed its initial public offering of its common
stock. A total of 485,759 shares were sold at $10.00 per share. Net proceeds
from the offering amounted to approximately $4.5 million. Immediately following
the Stock Conversion, Lexington First converted from a federal stock savings
bank to a national bank (the "Bank Conversion") known as Community National Bank
of Tennessee (the "Bank"). Unless otherwise stated herein, references to the
Bank refer to the Bank and its predecessor, Lexington First. The Company is
registered with and subject to the regulation and supervision of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") as a bank
holding company under the Bank Holding Company Act of 1956, as amended (the
"BHCA").

     The Company's principal business is overseeing the business of the Bank and
investing the portion of the net proceeds, from its initial public offering
retained by it.  The Company has no significant assets other than the
outstanding capital stock of the Bank and the portion of the net proceeds from
the Stock Conversion offering retained by the Company.  The Company has no
significant liabilities.    Accordingly, the information set forth herein,
relates primarily to the Bank.  At December 31, 1998, the Company had
consolidated total assets of $38.7 million, deposits of $29.0 million and
stockholders' equity of $8.6 million.

     The Company's principal executive office is located at the home office of
the Bank at 19 Natchez Trace Drive, Lexington, Tennessee 38351, and its
telephone number is (901) 968-6624.  The branch building is located at 435 West
Church Street, Lexington, Tennessee, and its telephone number is (901) 968-9599.

     The Bank.   Until February 1997, the Bank's primary business, as conducted
through its office located in Lexington, Tennessee, was the origination and
holding of mortgage loans secured by single-family residential real estate
located primarily in Henderson County, Tennessee, with funds obtained primarily
through the attraction of savings deposits, certificate accounts with terms of
18 months or less, and Federal Home Loan Bank ("FHLB") advances.  The Bank
historically made long-term fixed rate loans, fixed-rate balloon loans and a
limited amount of adjustable-rate loans.  The Bank also made some construction
loans on single-family residences, savings account loans, and second mortgage
consumer loans.  The Bank purchased mortgage-backed securities, and invested in
other liquid investment securities.

     Beginning in February 1997, the Bank's emphasis shifted to full service
banking, diversification of the loan portfolio, the origination of long term
fixed rate mortgage loans solely for sale in the secondary market, and the
offering of a greater variety of transaction accounts.  Current Bank policy
restricts fixed rate loans to five years with limited exceptions.  To reduce and
control interest rate risk, the Bank has emphasized the origination of variable
rate loans, short term loans and balloon loans of one, two, three and five
years.  The business emphasis of the Bank is the diversification in the
portfolio with the origination of quality consumer and commercial business and
commercial real estate loans in order to both reduce and control interest rate
risk, and to increase the interest rate spread.

     Community National Bank Branch.  In the spring of 1998, a new full service,
high visibility branch office opened.  The branch is a full service branch with
two drive-up windows, three inside teller stations, two offices and desks in the
lobby.  The branch has been initially staffed with one loan officer and three
teller/customer service representatives.

                                       2
<PAGE>
 
Market Area

     The Bank's market area comprises all of Henderson County and portions of
the neighboring counties of Decatur, Carroll,  Madison and Chester in
southwestern Tennessee.  The market area is rural with the principal segment of
the work force employed in semi-skilled and unskilled jobs.  Employment in these
rural communities or areas is largely in manufacturing, with significant
employment also coming from services, retail sales, transportation, utility and
construction industries.  A significant number of people are employed in Madison
County (sometimes referred to as the hub of West Tennessee), which is in the
western part of the Bank's market area.  Major employers in the area include
Magnetek, Johnson Controls, Dayco/Mark IV Automotive, Columbus-McKinnon and Auto
Zone.

     Tennessee's largest park, Natchez Trace State Park, with over 43,000 acres,
has its headquarters in Henderson County.  The Park is located in parts of four
counties.  The Park, along with the Beech River Watershed Development Authority,
which operates seven lakes, provides Henderson County with numerous jobs and is
an attraction for tourists in the use of facilities for boating, hunting,
fishing, camping and the activities associated with open space and water.

Lending Activities

     General.  The Bank, through its office in Lexington, Tennessee, had
primarily originated single-family residential real estate loans up to 
February 1, 1997. In the past the Bank had made fixed rate mortgage loans of
ten, fifteen, twenty and thirty years, resulting in above average interest rate
risk. Current Bank policy restricts fixed rate loans to five years with limited
exceptions.  The reduction and control of interest rate risk, and the
origination of variable rate loans, short term loans and balloon loans of one,
two, three and five years are emphasized.  Diversification of the portfolio with
emphasis on consumer and commercial lending began in 1997, and will continue in
order to both reduce and control interest rate risk and to increase the interest
rate spread.  In 1997 the Bank prepared to originate long-term fixed rate
mortgage loans to be sold in the secondary market.  The Bank does not originate
such loans without a forward commitment in place for sale, and such loans will
not be held in the Bank's loan portfolio.  The Bank also makes construction
loans on residential and commercial properties.  The Bank is offering full
lending services covering the lending needs of the community with emphasis on,
and soliciting of, loans of average to above average quality in both the
consumer and commercial sector.  Consumer and commercial real estate and
commercial business loans totaling $8.6 million were originated during the year
ended December 31, 1998.  At December 31, 1998, $17.5 million or 64.49% of the
Bank's gross loan portfolio consisted of single-family residential mortgage
loans, as compared to 82.85% of the gross loan portfolio at December 31, 1997.
In 1998 the Bank added personal loans of $439,000, agricultural loans of
$204,000, mobile home loans of $146,000 and increased commercial business loans
to $1.6 million and commercial real estate loans to $4.9 million, for a total of
$6.5 million or 23.88% of the gross loan portfolio.

                                       3
<PAGE>
 
Analysis of Loan Portfolio

     Set forth below is selected data relating to the composition of the Bank's
loan portfolio by type of loan at the dates indicated.

<TABLE>
<CAPTION>
                                                     At December 31,
                                           ---------------------------------- 
                                                  1998              1997
                                           ----------------   ---------------
                                            Amount     %       Amount     %
                                           -------   ------   -------   -----
                                                (Dollars in thousands)             
<S>                                        <C>       <C>      <C>       <C>
Type of Loan:                            
------------
Real estate loans:                       
  One- to four-family...............       $17,548    64.49%  $16,599   82.85%
   Commercial loans.................         4,856    17.85        26    0.13
Construction loans:                      
 One- to four-family................           433     1.59       282    1.41
Consumer loans:                          
  Savings account...................           377     1.39       561    2.80
  Other consumer....................         2,355     8.65       866    4.93
Commercial business.................         1,641     6.03     1,700    8.48
                                           -------   ------   -------   -----
                                            27,210   100.00%   20,034   100.00% 
                                                     ======             ======  
Less:                                    
  Loans in process..................           426                272
  Deferred loan fees and discounts..            13                 23
  Allowance for loan losses.........           368                195
                                           -------            -------
    Total...........................       $26,403            $19,544
                                           =======            =======
</TABLE>

                                       4
<PAGE>
 
     Loan Maturity Schedule.  The following table sets forth certain information
at December 31, 1998 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity, including scheduled
repayments of principal.  Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less.  The table does not include any estimate of prepayments which
significantly shorten the average life of all mortgage loans and may cause the
Bank's repayment experience to differ from that shown below.

<TABLE>
<CAPTION>
 
                                                 Due after      Due after      Due after       Due after
                               Due during the    1 through      3 through      5 through       10 through    Due after 20
                                year ending    3 years after  5 years after  10 years after  20 years after  years after
                                December 31,   December 31,   December 31,    December 31,    December 31,   December 31,
                                    1999           1998           1998            1998            1998           1998       Total
                               --------------  -------------  -------------  --------------  --------------  ------------  -------
                                                                         (In thousands)
<S>                            <C>             <C>            <C>            <C>             <C>             <C>           <C>
Real estate mortgage loans:
   One- to four-family.......          $3,690         $2,890         $3,116          $3,755          $3,089        $1,008  $17,548
   Commercial................           1,084            396          2,309             818             249            --    4,856
 Construction loans:
   One- to four-family.......             433             --             --              --              --            --      433
 Consumer loans:
   Savings account...........             354             23             --              --              --            --      377
   Other consumer............           1,085            324            790             100              56            --    2,355
 Commercial business.........             405            384            319             281             252            --    1,641
                                       ------         ------         ------          ------          ------  ------------  -------
       Total.................          $7,051         $4,017         $6,534          $4,954          $3,646        $1,008  $27,210
                                       ======         ======         ======          ======          ======  ============  =======
</TABLE>

     The next table sets forth at December 31, 1998, the dollar amount of all
loans due one year or more after December 31, 1998 which have predetermined
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
 
                                    Fixed Rate  Adjustable Rate
                                    ----------  ---------------
                                          (In thousands)
<S>                                 <C>         <C>
Real estate loans:
 One- to four-family..............     $12,738           $1,120
 Commercial.......................       3,772               --
Construction:
 One- to four-family residential..          --               --
Consumer loans:
 Savings accounts.................          23               --
 Other consumer loans.............       1,270               --
Commercial business...............       1,236               --
                                       -------           ------
  Total...........................     $19,039           $1,120
                                       =======           ======
</TABLE>

                                       5
<PAGE>
 
     One to Four Family Residential Real Estate Lending.  The mortgage loans
originated by the Bank are primarily conventional mortgage loans, originated in
amounts of less than $100,000, secured by single-family properties located in
the Bank's market area.  As of December 31, 1998, loans on single-family
residential properties accounted for approximately 64.49% of the Bank's loan
portfolio.

     The Bank's mortgage loan originations had previously been for terms of 10,
15 and 20 years, amortized on a monthly basis with interest and principal due
each month.  Beginning in 1998, the Bank has emphasized the origination of
balloon loans with one, three and five year terms, as well as other short-term
and variable rate loans.  Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms as borrowers may
refinance or prepay loans at their option, without penalty.  Conventional
residential mortgage loans granted by the Bank contain "due-on-sale" clauses
which permit the Bank to accelerate the indebtedness of the loan upon transfer
of ownership of the mortgaged property.  The Bank's lending policies generally
limit the maximum loan-to-value ratio on mortgage loans secured by owner-
occupied properties to 90% of the lesser of the appraised value or purchase
price of the property.

     The Bank historically had retained all adjustable rate mortgages it
originated, which are designed to reduce the Bank's exposure to changes in
interest rates.  The Bank's adjustable rate mortgages include caps on increases
or decreases of 2% per year, based on an index tied to the prime rate as
published in the Wall Street Journal.  The Bank has made very few adjustable
rate mortgage loans within the past few years, as there has been, and there
continues to be little demand for these mortgages in the Bank's market area.

     The Bank also originates conventional fixed rate long-term mortgages for
sale in the secondary market.  Although the Bank had, in past years, retained
these loans for its own portfolio, the Bank plans to sell all future
conventional long-term fixed rate mortgages in the secondary market.  During the
year ended December 31, 1998 and 1997, the Bank originated $4.6 million and $4.5
million in fixed rate mortgages, respectively, while $4.5 million and  $800,000
in mortgage loans during such periods, respectively, were paid off, due to loans
which were refinanced during those periods.

     Construction Lending.  The Bank engages in a limited amount of construction
lending, involving loans to qualified borrowers for construction of single-
family residential properties.  These properties are primarily located in the
Bank's market area.  As of December 31, 1998, the Bank's loan portfolio included
27 construction loans, totaling $433,000, all of which were to convert to
permanent loans.  All construction loans are secured by a first lien on the
property under construction.  Loan proceeds are disbursed in increments as
construction progresses and as inspection warrants.  Construction loans can have
either fixed or adjustable interest rates, and as permanent loans, have a
maximum loan-to-value ratio of 80%.  Borrowers must satisfy all credit
requirements that apply to permanent mortgage loan refinancing.

     Loans involving construction financing present a greater level of risk than
loans for the purchase of existing homes, since collateral value and
construction costs can only be estimated at the time the loan is approved, and
actual costs may exceed these estimates.  The Bank has sought to minimize this
risk by limiting construction lending to qualified borrowers in the Bank's
market area and by limiting the number of construction loans outstanding at any
time.

     Commercial Business and Commercial and Multi-Family Real Estate Lending.
Historically, the Bank has engaged in very little commercial real estate
lending, except to facilitate the sale of real estate owned.  This changed in
1997 and 1998, as the Bank originated a significant amount of commercial
business and commercial real estate loans.  The Bank, at December 31, 1998, had
in its portfolio commercial real estate loans totaling $4.9 million.  The Bank
will consider making any such loans that meet the Bank's underwriting standards,
in keeping with its goals of meeting the credit needs of the community by
seeking high quality business and commercial and multi-family real estate loans.
The Bank has no multi-family real estate loans at this time.  Two commercial
real estate loans totaling $284,000 were placed on non-accrual status as of
December 31, 1998.

                                       6
<PAGE>
 
     As part of its strategy to become more active in commercial banking
activities, the Bank expects that it will become significantly more involved in
commercial real estate and commercial business lending in its market area.
Subject to market conditions and demand, the Bank expects to originate loans to
small retail, commercial, agricultural and manufacturing  businesses in
Henderson County, Tennessee.  Since President Tignor joined the Bank, the Bank
has originated or agreed to loan commitments for various commercial business and
commercial real estate loans in the local market area.  Total commercial
business loans outstanding as of December 31, 1998 were $1.6 million, the
largest of which was for $515,000.  The Bank plans to continue solicitation of
commercial loans.

     Multi-family residential and commercial real estate lending, as well as
commercial business lending, entail significant additional risks as compared
with single-family residential property lending.  Multi-family residential and
commercial real estate loans, as well as commercial business lending, typically
involve larger loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans typically is dependent on the successful
operation of the real estate project, retail establishment or business.  These
risks can be significantly affected by supply and demand conditions in the
market for office, retail and residential space, or the profitability of the
business and, as such, may be subject to a greater extent to adverse conditions
in the economy generally.  To minimize these risks, the Bank generally limits
itself to its market area or to borrowers with which it has prior experience or
who are otherwise known to the Bank.  In addition, in the case of commercial
mortgage loans or commercial business loans made to a partnership or a
corporation, the Bank seeks, whenever possible, to obtain personal guarantees
and annual financial statements of the principals of the partnership or
corporation.

     Consumer Lending.  The Bank makes savings account loans in amounts which
may not exceed the account balance (plus accrued interest) at the due date.  The
interest rate is set 2% above the rate being paid on the savings account, and
the account must be pledged as collateral to secure the loan.

     The Bank also makes second mortgage loans and home equity lines of credit
on residential properties.  Second mortgages may be made at the prevailing
interest rate at the time the loan is granted or may be structured as a variable
rate line of credit.  The total outstanding indebtedness of the first and second
mortgages cannot exceed 90% of the appraised value of the property.

     The Bank intends to significantly expand its consumer lending to include
automobile loans and personal loans.  Consumer lending affords the Bank the
opportunity to earn yields higher than those obtainable on single-family
residential lending.  However, consumer loans entail greater risk than do
residential mortgage loans, particularly in the case of loans which are
unsecured or secured by rapidly depreciable assets such as automobiles.
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.  In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by events
such as job loss, divorce, illness or personal bankruptcy.  Further, the
application of various state and federal laws, including federal and state
bankruptcy and insolvency law, may limit the amount which may be recovered.  In
underwriting consumer loans, the Bank considers the borrower's credit history,
an analysis of the borrower's income and ability to repay the loan, and the
value of the collateral.

     Loan Originations, Solicitation and Processing.  Loan originations are
derived from a number of sources.  Residential mortgage loan originations
primarily come from walk-in customers and referrals by realtors, depositors and
borrowers.  In addition, the Bank is aggressive in its loan advertising.  Real
estate loans are originated by the Bank's staff of salaried loan officers.
Applications are processed in the Bank's office, and submitted for approval, as
noted below.

     Upon receipt of a loan application from a prospective borrower, a credit
report and verifications are ordered to verify specific information relating to
the loan applicant's employment, income and credit standing.  An appraisal of
the real estate intended to secure the proposed loan is undertaken by a Bank
appraiser or a fee appraiser approved by the Bank.  The Board of Directors of
the Bank has the responsibility and authority for general supervision over 

                                       7
<PAGE>
 
the lending policies of the Bank. The Board has established written lending
policies for the Bank and individual loan officers of the Bank have been granted
authority to approve loans up to varying specified dollar amounts, depending
upon the type of loan.  In addition, the Officer's Loan Committee, currently
comprised of three loan officers, has the authority to approve loans of up to
$200,000.  All loans in excess of $200,000 are approved by the Loan Committee
consisting of Pat Carnal, Stephen Milam, Stephen Lowry, Robert Thomas and Howard
Tignor.  Loan applicants are promptly notified of the decision of the Bank.

     It is the Bank's policy to record a lien on the real estate securing a loan
and to obtain a title opinion that the property is free of prior encumbrances
and other possible title defects.  Borrowers must also obtain hazard insurance
policies prior to closing and, when the property is in a flood plain as
designated by the Department of Housing and Urban Development, pay flood
insurance policy premiums.

     Under applicable law, with certain limited exceptions, loans and extensions
of credit by a national bank to a person outstanding at one time shall not
exceed 15% of the institution's unimpaired capital and surplus.  Loans and
extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of unimpaired capital and surplus.  Under these limits, the
Bank's loans to one borrower were limited to $2.2 million at December 31, 1998.
At that date, the Bank had no lending relationships in excess of the loans-to-
one-borrower limit.

     Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes.  These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and government budgetary matters.

     Set forth below is a table showing the Bank's loan origination and loan
sales activity for the periods indicated. The Bank purchased $49,000 in one- to
four-family loans during 1998 which represents two loans.

<TABLE>
<CAPTION>
 
                                             Year Ended December 31,
                                             -----------------------
                                              1998             1997
                                             -------          ------
                                                (In thousands)  
<S>                                          <C>              <C>
Loans originated:                                           
  Real estate loans:                                        
   One- to four-family.............          $ 4,640          $4,473
   Multi-family....................               --              --
   Commercial......................            5,289              31
 Construction loans:                                        
   One- to four-family.............              983             755
  Consumer loans:                                           
   Savings account.................              261             417
   Other consumer..................            2,844           1,404
 Commercial business loans.........              228           1,796
                                             -------          ------
    Total loans originated.........          $14,245          $8,876
                                             =======          ======
                                                            
Loans purchased                                             
 Real estate loans:                                         
   One-to four-family residential..          $    49          $   --
                                             =======          ======
                                                            
Loans sold.........................          $ 1,384          $  390
                                             =======          ======
</TABLE>

     Interest Rates and Loan Fees.  Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area.  Mortgage loan interest rates reflect factors such as general
market interest rate levels, the supply of money available to the financial
institutions industry and the demand for such loans.  These factors are in turn
affected by general economic conditions, the monetary policies of the Federal
government, including the Federal Reserve Board, and general supply of money in
the economy.

                                       8
<PAGE>
 
     In addition to interest earned on loans, the Bank receives fees in
connection with loan commitments and originations, loan modifications, late
payments and for miscellaneous services related to its loans.  Income from these
activities varies from period to period with the volume and type of loans
originated, which in turn is dependent on prevailing mortgage interest rates and
their effect on the demand for loans in the markets served by the Bank.  The
Bank hopes to increase its loan fee income by emphasizing the origination and
immediate sale of fixed-rate loans in the secondary mortgage market.

     Non-Performing Loans and Other Problem Assets.  Management reviews the
Bank's portfolio on a regular basis.  The Bank's collection procedures provide
that when a loan becomes past due 30 days, the borrower is contacted in person,
by telephone, or mail and payment is requested.  If payment is not promptly
received, the borrower is contacted again, and efforts are made to formulate an
affirmative plan to cure the delinquency.  After a loan becomes past due 90
days, the Bank generally initiates legal proceedings.  After residential
mortgage loans become past due more than 90 days, the Bank generally establishes
an allowance for uncollectible interest for the amount which the principal
balance and uncollected interest exceeds 90% of the appraised value of the
property.  Loans are charged off when management concludes that they are
uncollectible.

     Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold.  When such property is
acquired, it is recorded at the lower of its unpaid principal balance or fair
value.  Any required write-down of the loan to its fair value upon foreclosure
is charged against the allowance for loan losses.

     The following table sets forth information with respect to the Bank's non-
performing loans and other problem assets at the dates indicated.  No loans were
recorded as restructured loans within the meaning of Statement of Financial
Accounting Standards No. 15, at the dates indicated.
<TABLE>
<CAPTION>
 
                                                          At December 31,
                                                          ----------------
                                                           1998      1997
                                                          -----      -----
                                                        (Dollars in thousands)
<S>                                                       <C>        <C>
Loans accounted for on a nonaccrual basis: (1)                    
 Real estate:                                                     
   One- to four-family...........................         $  67      $ 248
   Commercial loans..............................           284         --
 Consumer loans..................................            13         --
                                                          -----      -----
    Total........................................         $ 364      $ 248
                                                          =====      =====
                                                                  
Accruing loans which are contractually                            
  past due 90 days or more:                                       
 Real estate loans:                                               
  One- to four-family............................         $  66      $  --
 Consumer loans..................................            --         --
                                                          -----      -----
    Total........................................         $  66      $  --
                                                          =====      =====
                                                                  
    Total non-performing loans...................         $ 430      $ 248
                                                          =====      =====
Percentage of total loans........................          1.60%      1.26%
                                                          =====      =====
Other non-performing assets......................         $  --      $  --
                                                          =====      =====
Loans modified in troubled debt  restructurings..         $  --      $  --
                                                          =====      =====
</TABLE>

-----------------
(1)  Non-accrual status denotes loans on which, in the opinion of management,
     the collection of additional interest is unlikely.  Payments received on a
     nonaccrual loan are either applied to the outstanding principal balance or
     recorded as interest income, depending on management's assessment of the
     collectibility of the loan.

                                       9
<PAGE>
 
     At December 31, 1998, the Bank did not have any loans which were not
currently classified as non-accrual, 90 days past due or restructured but where
known information about possible credit problems of borrowers caused management
to have serious concerns as to the ability of the borrowers to comply with
present loan repayment terms and would result in disclosure as non-accrual, 90
days past due or restructured.

     At December 31, 1998, the Bank's non-accruing loans totaled $67,000 of
residential loans with balances outstanding ranging from $10,000 to $30,000 and
$284,000 of commercial real estate loans with balances of $125,000 and 
$159,000 and $13,000 of consumer loans with balances outstanding ranging from 
$1,500 to $4,700.

     Asset Classification and Allowance for Losses.  Federal regulations require
national banks to classify their assets on the basis of quality on a regular
basis.  An asset is classified as "substandard" if it is determined to be
inadequately protected by the current retained earnings and paying capacity of
the obligor or of the collateral pledged, if any.  An asset is classified as
"doubtful" if full collection is highly questionable or improbable.  An asset is
classified as "loss" if it is considered uncollectible, even if a partial
recovery could be expected in the future.  The regulations also provide for a
"special mention" designation, described as assets which do not currently expose
a national bank to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention.  Assets classified as substandard or doubtful require a national bank
to establish general allowances for loan losses.  If an asset or portion thereof
is classified loss, a national bank must either establish a specific allowance
for loss in the amount of the portion of the asset classified loss, or charge
off such amount.  Federal examiners may disagree with a bank's classifications.
If a bank does not agree with an examiner's classification of an asset, it may
appeal this determination to the District Manager of the OCC.  The Bank
regularly reviews its assets to determine whether any assets require
classification or re-classification.  At December 31, 1998, the Bank had
$714,000 in classified assets, which consisted of $693,000 in assets classified
as substandard, $0 in assets classified as doubtful and $0 in assets classified
as loss and $21,000 in assets classified as special mention.

     In originating loans, the Bank recognizes that credit 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.   General allowances are made pursuant to
management's assessment of the risk in the Bank's loan portfolio as a whole.
Specific allowances are provided for individual loans when ultimate collection
is considered questionable by management after reviewing the status of loans
which are contractually past due and considering the net realizable value of the
security for the loan.  Management continues to actively monitor the Bank's
asset quality and to charge off loans against the allowance for loan losses when
appropriate, or to provide specific loss reserves when necessary.  In addition,
following the Bank Conversion, the Bank has increased its portfolio of consumer
and commercial loans which carry a higher risk of default than mortgage loans.
The Bank performs a quarterly analysis of the loans originated, its loan
portfolio and the characteristics of that portfolio in order to determine the
proper amount to add to its loan loss provisions.  Based on these factors, the
Bank contributed to its general loan loss reserve by adding an allowance of
$231,000  for the year ended December 31, 1998, to the loan loss reserve
account.  Although management believes it uses the best information available to
make determinations with respect to the allowance for loan losses, future
adjustments may be necessary if economic conditions vary from the assumptions
used in making the initial determinations.

     OCC policy requires maintenance of an adequate allowance for loan and lease
losses and an effective loan review system.  This policy includes an arithmetic
formula for checking the reasonableness of an institution's allowance for loan
loss estimate compared to the average loss experience of the industry as a
whole.  Examiners will review an institution's allowance for loan losses and
compare it against the sum of: (i) up to 60% of the portfolio that is classified
doubtful; (ii) up to 25% of the portfolio that is classified as substandard; and
(iii) for the portions of the portfolio that have not been classified (including
those loans designated as special mention), estimated credit losses over the
upcoming 12 months given the facts and circumstances as of the evaluation date.
This amount is considered neither a "floor" nor a "safe harbor" of the level of
allowance for loan losses an institution should maintain, but examiners will
view a shortfall relative to the amount as an indication that they should review
management's policy on allocating these allowances to determine whether it is
reasonable based on all relevant factors.

                                       10
<PAGE>
 
     The following table sets forth an analysis of activity in the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ------------------------
                                                   1998              1997
                                                  -------          -------
                                                   (Dollars in thousands)
<S>                                               <C>              <C>
Balance at beginning of period.........           $   195          $   141
                                                                
Loans charged off:                                              
  Real estate mortgage:                                         
    One- to four-family................                50               --
    Multi-family.......................                --               --
  Consumer.............................                 8               --
                                                  -------          -------
Total charge-offs......................           $    58          $    --
                                                  -------          -------
                                                                
Recoveries:                                                     
 Real estate mortgage:                                          
   One- to four-family.................           $    --          $    --
   Multi-family........................                --               --
   Commercial..........................                --               --
 Consumer..............................                --               --
 Commercial business loans.............                --               --
                                                  -------          -------
Total recoveries.......................           $    --          $    --
                                                  -------          -------
                                                                
Net loans charged off..................           $    58          $    --
                                                  -------          -------
                                                                
Provision for loan losses..............               231               54
                                                  -------          -------
                                                                
Balance at end of period...............           $   368          $   195
                                                  =======          =======
                                                                
Ratio of net charge-offs to average                             
  loans outstanding during the period..            0.2245%          0.0000%
                                                  =======          =======
</TABLE>

     In originating loans, the Bank recognizes that credit losses will occur 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.  It is management's policy to maintain a general
allowance for loan losses based on, among other things, regular reviews of
delinquencies and loan portfolio quality, character and size, the Bank's and the
industry's historical and projected loss experience and current and forecasted
economic conditions.  The Bank increases its allowance for loan losses by
charging provisions for possible losses against the Bank's income.  Federal
examiners may disagree with the savings institution as to the appropriate level
of the institution's allowance for loan losses.

     General allowances are made pursuant to management's assessment of risk in
the Bank's loan portfolio as a whole.  Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
Management also reviews individual loans for which full collectibility may not
be reasonably assured and evaluates among other things the net realizable value
of the underlying collateral.  Management continues to actively monitor the
Bank's asset quality and to charge off loans against the allowance for loan
losses when appropriate or provide specific loan losses when necessary.  As of
December 31, 1998, the Bank's 

                                       11
<PAGE>
 
allowance for loan losses did not include any specific loss reserves. Although
management believes it uses the best information available to make
determinations with respect to the allowance for loan losses, future adjustments
may be necessary if economic conditions differ substantially from the economic
conditions in the assumptions used in making the initial determinations.

     The following table allocates the Bank's allowance for loan losses by loan
category at the dates indicated.  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 category.

<TABLE>
<CAPTION>
 
                                              At December 31,
                              -----------------------------------------------
                                        1998                    1997
                              -------------------------  --------------------
                                            Percent of           Percent of
                                             Loans in              Loans in
                                           Category to           Category to
                                Amount     Total Loans   Amount  Total Loans
                              -----------  ------------  ------  ------------
                                             (Dollars in thousands)
<S>                           <C>          <C>           <C>     <C>
Real estate loans:
   One- to four-family......        $ 188        64.49%    $106        82.85%
   Commercial...............           65        17.85        6         0.13
   Construction.............            6         1.59        3         1.41
 
Consumer loans:
 Savings account............           --           --       --         2.80
 Other consumer.............           37         8.65       20         4.33
Commercial business.........           22         6.03       10         8.48
Unallocated.................           50           --       50           --
                                    -----       ------     ----       ------
  Total.....................        $ 368       100.00%    $195       100.00%
                                    =====       ======     ====       ======
</TABLE>

     Investment Activities.  The general objectives of the Bank's investment
policy are to (i) maintain liquidity levels sufficient to meet the operating
needs of the Bank and applicable regulatory requirements, (ii) minimize interest
rate risk by managing the repricing characteristics of the Bank's assets and
liabilities, (iii) reduce credit risk by maintaining a balance of high quality
diverse investments, (iv) absorb excess liquidity when loan demand is low and/or
deposit growth is high, (v) maximize returns without compromising liquidity or
creating undue credit or interest rate risk and (vi) provide collateral for
pledging requirements.  The Bank's investment activities are conducted by senior
management and supervised by the Board of Directors.  Investments are governed
by an investment policy adopted by the Board, which currently provides for
maintenance of an investment portfolio for the purposes of providing earnings,
ensuring a minimum liquidity reserve and facilitating the Bank's asset/liability
management objectives (e.g., limiting the weighted average terms to maturity or
repricing of the Bank's interest-earning assets).  In accordance with the
policy, management has primarily invested in government and agency securities
backed by the full faith and credit of the United States, mortgage-backed
securities and participation certificates issued by the Federal Home Loan
Mortgage Corporation ("FHLMC"), Federal National Mortgage Bank ("FNMA") or
Government National Mortgage Bank ("GNMA"), federal funds sold and, to a lesser
extent, federally insured interest-bearing deposits in other banks.

     The Bank holds some of its securities to maturity and others are available
for sale.  Securities held to maturity are accounted for at cost as adjusted for
unamortized discounts and premiums, while securities available for sale are
carried at fair value.  At December 31, 1998, the fair value of such securities,
including mortgage-backed securities was greater than the carrying value by
$26,400.   The amortized cost of the available-for-sale securities held by the
Bank exceeded the market value of such securities by $23,900 at December 31,
1998.  The Bank does not currently foresee any conditions that would require any
sales of its investments.  For additional information, see Notes 3 and 4 of the
Notes to Consolidated Financial Statements included in the Company's 1998 Annual
Report to Stockholders (the "Annual Report"), included as Exhibit 13 to this
report.

                                       12
<PAGE>
 
     The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                            At December 31,
                                                            ----------------
                                                             1998      1997
                                                            -------  -------
                                                         (Dollars in thousands)
<S>                                                         <C>      <C>
Securities available-for-sale:
 U.S. government agencies.........................          $ 1,575  $ 2,328
 Obligations of state and political subdivisions..               --      190
 Mortgage-backed securities.......................            2,756    3,462
                                                            -------  -------
   Total investment securities....................            4,331    5,980
                                                            -------  -------
 
Securities held-to-maturity
 U.S. government agencies.........................               --      500
 Obligations of state and political subdivisions..              657      657
  Mortgage-backed securities......................              380      557
                                                            -------  -------
                                                              1,037    1,714
                                                            -------  -------
 
Cash and time deposits - interest bearing.........            4,526    2,530
                                                            -------  -------
 
FHLB stock and FRB stock..........................              520      501
                                                            -------  -------
   Total..........................................          $10,414  $10,725
                                                            =======  =======
</TABLE>

                                       13
<PAGE>
 
     The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's investment portfolio at 
December 31, 1998.  The yields on tax-exempt securities have been computed 
on a fully-taxable equivalent basis.

<TABLE>
<CAPTION>
                                                                        Five to           More than
                             One Year or Less   One to Five Years      Ten Years          Ten Years      Total Investment Portfolio
                             -----------------  -----------------  -----------------  -----------------  --------------------------
                             Carrying  Average  Carrying  Average  Carrying  Average  Carrying  Average  Carrying  Market   Average
                              Value     Yield    Value     Yield    Value     Yield    Value     Yield    Value    Value     Yield
                             --------  -------  --------  -------  --------  -------  --------  -------  --------  ------   -------
                                                                     (Dollars in thousands)
<S>                          <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>
Securities available for                                                                               
 sale:                                                                                                 
 U.S. government agencies..    $500      5.87%    $300      3.57%   $  701     5.36%   $   85     6.32%   $1,586   $1,575    4.52%
 Obligations of states and                                                                                                 
   political subdivisions..      --                 --                  --                 --                 --       --  
 Mortgage-backed                                                                                                           
   securities..............      66      5.03      217      4.77       343     5.29     2,118     6.02     2,744    2,756    5.30
                               ----               ----              ------             ------             ------   ------  
                                566                517               1,044              2,203              4,330    4,331           
                               ----               ----               -----              -----             ------   ------           
                                                                                                                           
Securities                                                                                                                 
 held-to-maturity:                                                                                                         
 U.S. government agencies..    $ --               $ --              $   --             $   --             $   --       --  
  Obligations of states and                                                                                                
   political subdivision...      --                 --                 397     5.49       260     5.90       657      693    3.02
  Mortgage-backed                                                                                                          
   securities..............      --                 --                  --                380     6.11       380      380    6.08
                               ----               ----              ------             ------             ------   ------
                                 --                 --                 397                640              1,037    1,073 
                               ----               ----              ------             ------             ------   ------ 
                               $566               $517              $1,441             $2,843             $5,367   $5,404
                               ====               ====              ======             ======             ======   ======
</TABLE>

        For further information regarding the Bank's investment securities and 
mortgage-backed securities, see Notes 1, 3 and 4 of Notes to Consolidated 
Financial Statements in the Annual Report.

                                       14
<PAGE>
 
Deposit Activities and Other Sources of Funds

     General.  Deposits are a significant source of the Bank's funds for lending
and other investment purposes.  In addition to deposits, the Bank derives funds
from loan principal repayments and interest payments and maturing investment
securities.  Loan repayments and interest payments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by general interest rates and money market conditions.  Borrowings may be used
on a short-term basis to compensate for reductions in the availability of funds
from other sources, or on  a longer term basis for general business purposes.
Following the Bank Conversion, the Bank retained access to borrow from the FHLB
of Cincinnati.

     Deposits.  Deposits are attracted principally from within the Bank's
primary market area through the offering of a variety of deposit instruments,
including passbook and statement accounts and certificates of deposit ranging in
term from 31 days to 24 months.  Deposit account terms vary, principally on the
basis of the minimum balance required, the time periods the funds must remain on
deposit and the interest rate.  The Bank also offers individual retirement
accounts ("IRAs").  The Bank will attempt to increase its demand deposit
accounts following the Conversion.

     The Bank's policies are designed primarily to attract deposits from local
residents.  The Bank does not accept deposits from brokers due to the volatility
and rate sensitivity of such deposits.  Interest rates paid, maturity terms,
service fees and withdrawal penalties are established by the Bank on a periodic
basis.  Determination of rates and terms are predicated upon funds acquisition
and liquidity requirements, rates paid by competitors, growth goals and federal
regulations.  The Bank has recently paid rates slightly above prevailing market
rates in order to attract deposits.

     Savings deposits in the Bank at December 31, 1998 were represented by the
various types of savings programs described below.

<TABLE>
<CAPTION>
Interest          Minimum                                         Minimum            Percentage of
  Rate              Term                      Category            Amount   Balances  Total Savings
------------  ---------------       ----------------------------  -------  --------  --------------
                                                                       (Dollars in thousands)
<S>           <C>                   <C>                           <C>      <C>       <C>
3.00%         None                  Passbook accounts             $    25    $1,469           5.07%
4.12          None                  Super savings                  10,000     1,380           4.76
2.00          None                  NOW accounts                      200     1,103           3.80
3.05          None                  Super NOW accounts              1,500       860           2.97
0.00          None                  Noninterest-bearing checking
                                       accounts                       100       705           2.43
                              
                                    Certificates of Deposit
                                    -----------------------
                              
* 3.62%       1 month or less       Fixed-term, fixed-rate            500        58           0.20
* 4.49        3 months              Fixed-term, fixed-rate            500     1,977           6.82
* 5.09        6 months              Fixed-term, fixed-rate            500    10,692          36.88  
* 5.38        12 months             Fixed-term, fixed-rate            500     5,394          18.60  
* 5.56        18 months             Fixed-term, fixed-rate            500     3,628          12.51  
* 5.35        18 months - IRA       Fixed-term, fixed-rate            500     1,202           4.15  
  5.54        24 months             Fixed-term, fixed-rate            500       526           1.81   
                                                                            -------         ------
                                                                            $28,994         100.00%
                                                                            =======         ======
</TABLE>
---------------
* Represents weighted average interest rate.

                                       15
<PAGE>
 
     The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.

<TABLE>
<CAPTION>
                                                           Increase
                                 Balance at            (Decrease) from   Balance at
                                December 31,    % of     December 31,   December 31,    % of
                                    1998      Deposits       1997           1997      Deposits
                                ------------  ---------  -------------  ------------  ---------
                                                     (Dollars in thousands)
<S>                             <C>           <C>        <C>            <C>           <C>
Passbook and regular savings..       $ 1,469      5.07%        $ (445)       $ 1,914      8.94%
Super savings.................         1,380      4.76          1,380             --        --
NOW Accounts..................         1,103      3.80            397            706      3.30
Super NOW.....................           860      2.97            509            351      1.64
Certificates of deposit.......        15,162     52.29          2,358         12,804     59.78
IRA...........................         1,203      4.15              9          1,194      5.58
Jumbo certificates............         7,112     24.53          3,043          4,069     19.00
Other.........................           705      2.43            327            378      1.77
                                     -------    ------         ------        -------    ------
 Total........................       $28,994    100.00%        $7,578        $21,416    100.00%
                                     =======    ======         ======        =======    ======
</TABLE>

     The following tables set forth the average balances and interest rates
based on month-end balances for interest-bearing demand deposits and time
deposits as of the dates indicated.

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                       ------------------------------------
                                             1998               1997
                                       -----------------  -----------------
                                       Average  Average   Average  Average
                                       Balance    Rate    Balance    Rate
                                       -------  --------  -------  --------
                                               (Dollars in thousands)
<S>                                    <C>      <C>       <C>      <C>
Savings deposits.....................  $ 1,475     3.00%  $ 1,946     2.83%
Super savings deposit................    1,276     4.12        --       --
Interest-bearing demand deposits.....    3,599     2.24     1,539     2.01
Noninterest-bearing demand deposits..      726       --       217       --
Certificates of deposit..............   23,300     5.20    18,380     5.28
                                       -------            -------
 Total...............................  $30,376            $22,082
                                       =======            =======
</TABLE>

     Time Deposits by Rates.  The following table sets forth the time deposits
in the Bank classified by nominal rates at the dates indicated.

<TABLE>
<CAPTION>
                                            At December 31,
                                         ---------------------
                                           1998          1997
                                         -------       -------
                                         (Dollars in thousands)  
        <S>                               <C>          <C> 
        2.00 -  3.99% .................  $    --       $    --
        4.00 -  5.99% .................   23,476        18,067
        6.00 -  7.99% .................       --            --
        8.00 -  9.99% .................       --            --
                                         -------       -------
                                         $23,476       $18,067
                                         =======       =======
</TABLE>

                                       16
<PAGE>
 
     Time Deposit Maturity Schedule.  The following table sets forth the amount
and maturities of time deposits at December 31, 1998.

<TABLE>
<CAPTION>
                                            Amount Due                    
                        -------------------------------------------------
                        Less Than                         After          
Rate                     One Year  1-2 Years  2-3 Years  3 Years   Total 
----                    ---------  ---------  ---------  -------  -------
                                          (In thousands)                 
<S>                     <C>        <C>        <C>        <C>      <C>    
                                                                         
 2.00 -  3.99%.......     $    --     $   --     $   --  $    --  $    --
 4.00 -  5.99%.......      20,982      2,494         --       --   23,476
 6.00 -  7.99%.......          --         --         --       --       --
 8.00 -  9.99%.......          --         --         --       --       --
                          -------     ------     ------  -------  -------
                          $20,982     $2,494     $   --  $    --  $23,476
                          =======     ======     ======  =======  ======= 
</TABLE>

     Maturity of Jumbo Certificates.  The following table indicates the amount
of the Bank's certificates of deposit of $100,000 or more by time remaining
until maturity as of December 31, 1998.

<TABLE>
<CAPTION>
                                                         Certificates
                        Maturity Period                   of Deposits
                        ---------------                  ------------
                                                         (In thousands)
                        <S>                              <C>
                        Three months or less...........       $3,142
                        Over three through six months..        2,124
                        Over six through 12 months.....        1,346
                        Over 12 months.................          711
                                                              ------
                         Total.........................       $7,323
                                                              ======
</TABLE>

     Savings Deposit Activity.  The following table sets forth the savings
activities of the Bank for the periods indicated.

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                        -----------------------
                                                         1998             1997
                                                        ------           ------
                                                         (Dollars in thousands)
<S>                                                     <C>              <C>
Deposits less withdrawals...........................    $6,452           $ (80)
Interest credited...................................     1,126             858
                                                        ------           -----
 Net increase (decrease) in savings deposits........    $7,578           $ 778
                                                        ======           =====
</TABLE>

     Management attributes the changes in deposits for the years ended December
31, 1998 and 1997 to management's deposit pricing strategies.

     Borrowings.  Savings deposits historically have been the primary source of
funds for the Bank's lending and investment activities and for its general
business activities.  The Bank is authorized, however, to use advances from the
FHLB of Cincinnati to supplement its supply of lendable funds and to meet
deposit withdrawal requirements.  Advances from the FHLB typically would be
secured by the Bank's stock in the FHLB and a portion of the Bank's mortgage
loans.  The Bank has not obtained any borrowings other than FHLB advances in
recent years.  At December 31, 1998, the Bank had $693,000 in FHLB advances
outstanding with a weighted average interest rate of 7.76%, which mature in
years ranging from 1999 to 2026.

                                       17
<PAGE>
 
     The FHLB of Cincinnati functions as a central reserve bank providing credit
for savings institutions and certain other member financial institutions.  As a
member, the Bank is required to own capital stock in the FHLB and is authorized
to apply for advances on the security of such stock and certain of its home
mortgages and other assets (principally, securities which are obligations of, or
guaranteed by, the United States) provided certain standards related to
creditworthiness have been met.

Subsidiary Activities

     The Bank has one wholly owned subsidiary service corporation, Lexington
First Federal Service Corporation (the "Service Corporation").  The stock in the
subsidiary was transferred to Community National Bank and the subsidiary was
liquidated in March 1998.

Competition

     The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits comes from other savings institutions,
credit unions, regional bank holding companies and commercial banks located in
its primary market area.  Significant competition for the Bank's other deposit
products and services comes from money market mutual funds, brokerage firms,
insurance companies and retail stores.  The primary factors in competing for
loans are interest rates and loan origination fees and the range of services
offered by various financial institutions,  commercial banks, mortgage bankers,
mortgage brokers and insurance companies.

     The Bank's primary competition comes from 16 commercial banks, four of
which have branch offices located in Henderson County, Tennessee.  The branches
of the four commercial banks located in Henderson County have gross deposits of
approximately $276 million at December 31, 1998, the most recent date for which
such information is available.  The Bank had approximately $29 million in
deposits as of December 31, 1998.

     The Bank is able to compete effectively in its primary market area by
offering competitive interest rates and loan fees, and a wide variety of deposit
products and by emphasizing personal customer service and cultivating
relationships with the local businesses.  Management believes that, as a result
of the Bank's commitment to competitive pricing, varied products and personal
service, the Bank has developed a solid base of core deposits and the Bank's
loan origination activities are an asset to the community.

Personnel

     As of December 31, 1998, the Company and its subsidiaries had 13 full-time
employees and two part-time employees.  The employees are not represented by a
collective bargaining unit.  Management believes that the Company and its
subsidiaries enjoy good relations with its personnel.

                                       18
<PAGE>
 
                          SUPERVISION AND REGULATION

Regulation of the Company

     General.  The Company is a bank holding company within the meaning of the
BHCA.  As such, the Company is registered with the Federal Reserve Board and
subject to Federal Reserve Board regulation, examination, supervision and
reporting requirements.  As a bank holding company, the Company is required to
furnish to the Federal Reserve Board annual and quarterly reports of its
operations at the end of each period and to furnish such additional information
as the Federal Reserve Board may require pursuant to the BHCA.  The Company is
also subject to regular examination by the Federal Reserve Board.

     Under the BHCA, a bank holding company must obtain the prior approval of
the Federal Reserve Board before (1) acquiring direct or indirect ownership or
control of any voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or indirectly own or
control more than 5% 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.

     Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
Effective September 29, 1995, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") allows the Federal Reserve Board
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 Board may not approve the acquisition of 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 Board 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 or 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
has opted 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 are permitted only if
the law of the state in which the branch is located permits such acquisitions.
Interstate mergers and branch acquisitions are also subject to the nationwide
and statewide insured deposit concentration amounts described above.

     The Riegle-Neal Act authorizes the OCC and FDIC to approve interstate
branching de novo by national and state banks, respectively, only in states
which specifically allow for such branching.  The Riegle-Neal Act also requires
the appropriate federal banking agencies to prescribe regulations which prohibit
any out-of-state bank from using the interstate branching authority primarily
for the purpose of deposit production.

     The BHCA also prohibits, with certain exceptions, a bank holding company
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of a company that is not a bank or a 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 Board regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks.  The activities of the Company are subject to these legal
and regulatory limitations under the BHCA and the Federal Reserve Board's
regulations thereunder.  Notwithstanding the 

                                       19
<PAGE>
 
Federal Reserve Board's prior approval of specific nonbanking activities, the
Federal Reserve Board has the power to order a holding company or its
subsidiaries to terminate any activity, or to terminate its ownership or control
of any subsidiary, when it has reasonable cause to believe that the continuation
of such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness or stability of any bank subsidiary of that holding
company.

     Capital Adequacy.  The Federal Reserve Board has adopted guidelines
regarding the capital adequacy of bank holding companies, which require bank
holding companies to maintain specified minimum ratios of capital to total
assets and capital to risk-weighted assets.  See "-- Regulation of the Bank --
Regulatory Capital Requirements."

     Dividends and Distributions.  The Federal Reserve Board has the power to
prohibit dividends by bank holding companies if their actions constitute unsafe
or unsound practices.  The Federal Reserve Board has issued a policy statement
on the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board's view that a bank holding company should pay cash
dividends 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 earning retention that
is consistent with the company's capital needs, asset quality, and overall
financial condition.

     Bank holding companies are required to give the Federal Reserve Board
notice of any purchase or redemption of their 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 the bank holding company's
consolidated net worth.  The Federal Reserve Board may disapprove such a
purchase or redemption if it determines that the proposal would violate any law,
regulation, Federal Reserve Board order, directive, or any condition imposed by,
or written agreement with, the Federal Reserve Board.  Bank holding companies
whose capital ratios exceed the thresholds for "well capitalized" banks on a
consolidated basis are exempt from the foregoing requirement if they were rated
composite 1 or 2 in their most recent inspection and are not the subject of any
unresolved supervisory issues.

Regulation of the Bank

     General.  As a national bank, the Bank is subject to the primary
supervision of the OCC under the National Bank Act.  The OCC regularly examines
the operations of the Bank, including but not limited to capital adequacy,
reserves, loans, investments and management practices.  These examinations are
for the protection of the Bank's depositors and not its shareholders.  In
addition, the Bank is required to furnish quarterly and annual reports to the
OCC.  The OCC's enforcement authority includes the power to remove officers and
directors and the authority to issue cease-and-desist orders to prevent a bank
from engaging in unsafe or unsound practices or violating laws or regulations
governing its business.

     The Bank's deposits are insured by the FDIC to the legal maximum of
$100,000 for each insured depositor.  Some of the aspects of the lending and
deposit business of the Bank that are subject to regulation by the Federal
Reserve Board and the FDIC include reserve requirements and disclosure
requirements in connection with personal and mortgage loans and savings deposit
accounts.  In addition, the Bank is subject to numerous federal and state laws
and regulations which set forth specific restrictions and procedural
requirements with respect to the establishment of branches, investments,
interest rates on loans, credit practices, the disclosure of credit terms and
discrimination in credit transactions.

     Regulatory Capital Requirements.  The Federal Reserve Board and the OCC
have established guidelines with respect to the maintenance of appropriate
levels of capital by bank holding companies and national banks, respectively.
The regulations impose two sets of capital adequacy requirements: minimum
leverage rules, which require bank holding companies and banks to maintain a
specified minimum ratio of capital to total assets, and risk-based capital
rules, which require the maintenance of specified minimum ratios of capital to
"risk-weighted" assets.

                                       20
<PAGE>
 
     The regulations of the Federal Reserve Board and the OCC require bank
holding companies and national banks, respectively, to maintain a minimum
leverage ratio of "Tier 1 capital" (as defined in the risk-based capital
guidelines discussed in the following paragraphs) to total assets of 3.0%.
Although setting a minimum 3.0% leverage ratio, the capital regulations state
that only the strongest bank holding companies and banks, with composite
examination ratings of 1 under the rating system used by the federal bank
regulators, would be permitted to operate at or near such minimum level of
capital.  All other bank holding companies and banks are expected to maintain a
leverage ratio of at least 1% to 2% above the minimum ratio, depending on the
assessment of an individual organization's capital adequacy by its primary
regulator.  Any bank or bank holding company experiencing or anticipating
significant growth would be expected to maintain capital well above the minimum
levels.  In addition, the Federal Reserve Board has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, seeking to engage in new activities or otherwise facing unusual or
abnormal risks, it will consider, on a case-by-case basis, the level of an
organization's ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital.

     The risk-based capital rules of the Federal Reserve Board and the OCC
require bank holding companies and state member banks to maintain minimum
regulatory capital levels based upon a weighting of their assets and off-balance
sheet obligations according to risk.  The risk-based capital rules have two
basic components: a core capital (Tier 1) requirement and a supplementary
capital (Tier 2) requirement.  Core capital consists primarily of common
stockholders' equity, certain perpetual preferred stock (which must be
noncumulative with respect to banks), and minority interests in the equity
accounts of consolidated subsidiaries; less all intangible assets, except for
certain purchased mortgage servicing rights and purchased credit card
relationships.  Supplementary capital elements include, subject to certain
limitations, the allowance for losses on loans and leases; perpetual preferred
stock that does not qualify as Tier 1 capital and long-term preferred stock with
an original maturity of at least 20 years from issuance; hybrid capital
instruments, including perpetual debt and mandatory convertible securities; and
subordinated debt and intermediate-term preferred stock.

     The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor.  The assets and off-balance sheet items in the four risk categories are
weighted at 0%, 20%, 50% and 100%.  These computations result in the total risk-
weighted assets.  The risk-based capital regulations require all banks and bank
holding companies to maintain a minimum ratio of total capital to total risk-
weighted assets of 8%, with at least 4% as core capital.  For the purpose of
calculating these ratios: (i) supplementary capital will be limited to no more
than 100% of core capital; and (ii) the aggregate amount of certain types of
supplementary capital will be limited.  In addition, the risk-based capital
regulations limit the allowance for loan losses includable as capital to 1.25%
of total risk-weighted assets.

     OCC regulations and guidelines additionally specify that national banks
with significant exposure to declines in the economic value of their capital due
to changes in interest rates may be required to maintain higher risk-based
capital ratios.  The federal banking agencies, including the OCC, have proposed
a system for measuring and assessing the exposure of a bank's net economic value
to changes in interest rates.  The federal banking agencies, including the OCC,
have stated their intention to propose a rule establishing an explicit capital
charge for interest rate risk based upon the level of a bank's measured interest
rate risk exposure after more experience has been gained with the proposed
measurement process.  Federal Reserve Board regulations do not specifically take
into account interest rate risk in measuring the capital adequacy of bank
holding companies.

     The OCC has issued final regulations which classify national banks by
capital levels and which provide for the OCC to take various prompt corrective
actions to resolve the problems of any bank that fails to satisfy the capital
standards.  Under such regulations, a well-capitalized bank is one that is not
subject to any regulatory order or directive to meet any specific capital level
and that has or exceeds the following capital levels: a total risk-based capital
ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of
5%.  An adequately capitalized bank is one that does not qualify as well-
capitalized but meets or exceeds the following capital requirements: a total
risk-based capital ratio 

                                       21
<PAGE>
 
of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either
(i) 4% or (ii) 3% if the bank has the highest composite examination rating. A
bank not meeting these criteria is treated as undercapitalized, significantly
undercapitalized, or critically undercapitalized depending on the extent to
which the bank's capital levels are below these standards. A national bank that
falls within any of the three undercapitalized categories established by the
prompt corrective action regulation will be subject to severe regulatory
sanctions. As of December 31, 1998, the Bank was well-capitalized as defined by
the OCC's regulations.

     For information regarding the Bank's compliance with its regulatory capital
requirements, see Note 16  of Notes to Consolidated Financial Statements
included in the Annual Report.

     Branching.  Under the McFadden Act of 1927, national banks may only
establish branches to the extent specifically authorized by statute for banks
chartered by the state in which the national bank is located and subject to the
restrictions as to location imposed by state law on state banks.  The Riegle-
Neal Act authorizes the OCC and FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching.

     Dividend Limitations.  Pursuant to the National Bank Act, no national bank
may pay dividends from its paid-in capital.  All dividends must be paid out of
current or retained net profits, after deducting reserves for losses and bad
debts.  The National Bank Act further restricts the payment of dividends out of
net profits by prohibiting a national bank from declaring a dividend on its
shares of common stock until the surplus fund equals the amount of capital stock
or, if the surplus fund does not equal the amount of capital stock, until one-
tenth of a bank's net profits for the preceding half year in the case of
quarterly or semi-annual dividends, or the preceding two half-year periods in
the case of annual dividends, are transferred to the surplus fund.  Prior OCC
approval is required for the payment of a dividend if the total of all dividends
declared by a national bank in any calendar year would exceed the total of its
net profits for that year combined with its net profits for the two preceding
years, less any required transfers to surplus or a fund for the retirement of
any preferred stock.  In addition, the Bank is prohibited by federal statute
from paying dividends or making any other capital distribution that would cause
the Bank to fail to meet its regulatory capital requirements.  Further, the OCC
also has authority to prohibit the payment of dividends by a national bank when
it determines such payment to be an unsafe and unsound banking practice.

     Deposit Insurance.  Because the Bank was a savings bank prior to the Bank
Conversion, its deposits continue to insured by the SAIF rather than by the Bank
Insurance Fund ("BIF") which generally insured the deposits of national banks.
The Bank is required to pay semi-annual assessments based on a percentage of its
insured deposits to the FDIC for insurance of its deposits by the SAIF.  Under
the Federal Deposit Insurance Act, the FDIC is required to set semi-annual
assessments for SAIF-insured institutions to maintain the designated reserve
ratio of the SAIF at 1.25% of estimated insured deposits or at a higher
percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.

     Under the risk-based deposit insurance assessment system adopted by the
FDIC, the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC, which is
determined by the institution's capital level and supervisory evaluations.
Based on the data reported to regulators for the date closest to the last day of
the seventh month preceding the semi-annual assessment period, institutions are
assigned to one of three capital groups -- "well capitalized," "adequately
capitalized" or "undercapitalized."  Within each capital group, institutions are
assigned to one of three subgroups on the basis of supervisory evaluations by
the institution's primary supervisory authority and such other information as
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance fund.

     Over the past several years, institutions with SAIF-assessable deposits,
like the Bank, were required to pay higher deposit insurance premiums than
institutions with deposits insured by the BIF.  In order to recapitalize the
SAIF and address the premium disparity, in November 1996 the FDIC imposed a one-
time special assessment on institutions with SAIF-assessable deposits based on
the amount determined by the FDIC to be necessary to increase the reserve 

                                       22
<PAGE>
 
levels of the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of their SAIF-assessable deposits as of March 31, 1995. As a result of the
special assessment the Bank incurred an expense of $128,000 during the quarter
ended September 30, 1996.

     The FDIC has adopted a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings would be reduced to zero and institutions in the
lowest risk assessment classification will be assessed at the rate of 0.27% of
insured deposits.  Until December 31, 1999, however, SAIF-insured institutions,
will be required to pay assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO") an agency of the federal government established to finance
takeovers of insolvent thrifts.  During this period, BIF members will be
assessed for these obligations at the rate of 1.3 basis points.  After December
31, 1999, both BIF and SAIF members will be assessed at the same rate for FICO
payments.

     Transactions with Affiliates.  Transactions between a national bank and any
affiliate are governed by Sections 23A and 23B of the Federal Reserve Act.  An
affiliate of a national bank is any company or entity which controls, is
controlled by or is under common control with the national bank.  In a holding
company context, the parent holding company of a national bank (such as the
Company) and any companies which are controlled by such parent holding company
are affiliates of the national bank.  Generally, Sections 23A and 23B (i) limit
the extent to which the bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such bank's
capital stock and surplus, and contain an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital stock
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, purchase of assets, issuance of a guarantee and
similar other types of transactions.  In addition to the restrictions imposed by
Sections 23A and 23B, no national bank may (i) loan or otherwise extend credit
to an affiliate, except for any affiliate which engages only in activities which
are permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the national bank.  The BHCA further
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions.

     Loans to Directors, Executive Officers and Principal Stockholders.
National banks are also subject to the restrictions contained in Section 22(h)
and 22(g) of the Federal Reserve Act on loans to executive officers, directors
and principal stockholders.  Under Section 22(h), loans to a director, executive
officer or greater than 10% stockholder of a national bank and certain
affiliated interests of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the bank's loans to
one borrower limit (generally equal to 15% of the institution's unimpaired
capital and surplus) and all loans to such persons may not exceed the
institution's unimpaired capital and unimpaired surplus.  Section 22(h) also
prohibits loans, above amounts prescribed by the appropriate federal banking
agency, to directors, executive officers and greater than 10% stockholders of a
national bank, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting.  The Federal Reserve
Board has prescribed the loan amount (which includes all other outstanding loans
to such person), as to which such prior board of director approval if required,
as being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, the Federal Reserve Board pursuant to Section 22(h) requires that loans
to directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
unless the loan is made pursuant to a benefit or compensation plan that is
widely available to other employees and does not give preference to insiders.
Section 22(h) also prohibits a depository institution from paying the overdrafts
of any of its executive officers or directors.  Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of depository institutions
be approved by the board of directors of the institution, and imposes reporting
requirements for and additional restrictions on the type, amount and terms of
credits to such officers.  In addition, Section 106 of the BHCA prohibits

                                       23
<PAGE>
 
extensions of credit to executive officers, directors, and greater than 10%
stockholders of a depository institution by any other institution which has a
correspondent banking relationship with the institution, unless such extension
of credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.

Item 2.  Properties
-------------------

     The following table sets forth the location and certain additional
information regarding the Bank's offices at December 31, 1998.
<TABLE>
<CAPTION>
 
 
                                                     Book Value at                            Deposits at
                                Year   Owned or       December 31,        Approximate         December 31,
                               Opened   Leased            1998           Square Footage           1998
                               ------  --------  ----------------------  --------------  ----------------------
                                                 (Dollars in thousands)                  (Dollars in thousands)
<S>                            <C>     <C>       <C>                     <C>             <C>
Main Office:
 
19 Natchez Trace Drive
Lexington, Tennessee 38351       1961   Owned           $216,000             6,800                 $27,900
                                                                        
Branch Office:                                                          
                                                                        
435 West Church Street           1998   Owned            378,000             1,450                   1,100
Lexington, Tennessee  38351
</TABLE>


     The Bank owns three parcels of land.  One parcel, the office building in
which the office of the Bank is located, is at 19 Natchez Trace Drive, and
another parcel adjoins the office building, and was purchased in 1976 for
expansion purposes.   In the spring of 1997, the Bank purchased property for
$127,500 for its branch which opened in the spring of 1998.  The Bank remodeled
the building and installed a drive-up window facilities for a full service
branch.  The cost of these improvements was $270,000 with furniture, fixtures
and equipment costing $129,000 for a total cost of $526,500.

     Intrieve, Cincinnati, Ohio, performs data processing and record keeping for
the Bank.  The Bank's fixtures and equipment include a network of teller
terminals, personal computers, miscellaneous office equipment and satellite
communications equipment.

     As of December 31, 1998, the net book value of the Bank's premises,
furniture, fixtures and equipment was $798,000.

Item 3.  Legal Proceedings
--------------------------

     From time to time, the Bank is a party to various legal proceedings
incident to its business.  At December 31, 1998, there were no other legal
proceedings to which the Company or the Bank was a party, or to which any of
their property was subject, which were expected by management to result in a
material loss to the Company or the Bank.

                                       24
<PAGE>
 
Item 4.  Submission of Matters to Vote of Security Holders
----------------------------------------------------------

     No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.


                                 PART II

Item 5.  Market for the Registrant's Common Equity and Related Stockholders'
----------------------------------------------------------------------------
Matters
-------

     The information contained under the section captioned "Market and Dividend
Information" in the Annual Report is incorporated herein by reference.

Item 6.  Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------

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

Item 7.  Financial Statements
-----------------------------

     The Independent Auditor's Report and related Consolidated Financial
Statements and Notes thereto contained in the Annual Report are incorporated
herein by reference.

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
-----------------------------------------------------------------------

     For information concerning the Board of Directors and executive officers of
the Company, the information contained under the section captioned "Proposal 
I -- Election of Directors" in the Company's definitive proxy statement for the
Company's 1999 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.

     For information concerning compliance with Section 16(a) of the Exchange
Act, see "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement which is incorporated herein by reference.

Item 10.  Executive Compensation
--------------------------------

     The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation and Other Benefits" 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 in "Security Ownership of Certain Beneficial
          Owners and Management" in the Proxy Statement.

                                       25
<PAGE>
 
     (b) Security Ownership of Management

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

     (c)  Changes in Control

          Management of the Company knows of no 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
          registrant.


Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

     The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Transactions
with Management" in the Proxy Statement.


                                    PART IV

Item 13.  Exhibits, List and Reports on Form 8-K
------------------------------------------------

(a)  Exhibits.  The exhibits required by Item 601 of Regulation S-B are either
     --------                                                                 
filed as part of this Annual Report on Form 10-KSB or incorporated herein by
reference. The following is a list of exhibits filed as part of this Annual
Report on Form 10-KSB and is also the Exhibit Index.

<TABLE>
<CAPTION>
 
      No.                          Exhibits
      ----                         --------
<S>   <C>   <C>
 
 *     3.1  Charter of Community National Corporation
 
 *     3.2  Bylaws of Community National Corporation
 
+*    10.1  Form of Employment Agreement between Lexington First Federal Savings Bank and Howard W. Tignor as Amended and Restated
 
+*    10.2  Form of Guaranty Agreement between Community National Corporation and Howard W. Tignor
 
+*    10.3  Proposed Community National Corporation Deferred Compensation Plan

      13  Annual Report to Stockholders

      21  Subsidiaries of the Registrant

      23  Consent of Accountants        

      27  Financial Data Schedule
</TABLE> 
-------------------------
*    Incorporated by reference to the Company's Registration Statement on Form
     SB-2 (File No. 333-31637)
+    Management contract or compensatory plan.


(b)  Reports on Form 8-K.  No Reports on Form 8-K were filed by the Company
     -------------------                                                   
during the last quarter of the fiscal year covered by this report.

                                       26
<PAGE>
 
                               SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                    COMMUNITY NATIONAL CORPORATION

March 26, 1999                      By: /s/ Howard W. Tignor
                                        --------------------
                                        Howard W. Tignor
                                        President and Chief Executive Officer
                                        (Duly Authorized Representative)

     In accordance with the Exchange Act, 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> 

<S>                                                                             <C>
By:  /s/ Howard W. Tignor                                                       March 26, 1999
     ---------------------------------------------------------   
     Howard W. Tignor
     President, Chief Executive Officer and Director
     (Principal Executive, Financial and Accounting Officer)

By:  /s/ Charlie H. Walker                                                      March 26, 1999
     ---------------------------------------------------------   
     Charlie H. Walker
     Chairman of the Board

By:  /s/ Arba Milam Taylor                                                      March 26, 1999
     ---------------------------------------------------------   
     Arba Milam Taylor
     Director

By:  /s/ Pope Thomas                                                            March 26, 1999
     ---------------------------------------------------------   
     Pope Thomas
     Director and Vice President

By:  /s/ Stephen M. Lowry                                                       March 26, 1999
     ---------------------------------------------------------   
     Stephen M. Lowry
     Director
 
By:  /s/ Stephen M. Milam                                                       March 26, 1999
     ---------------------------------------------------------   
     Stephen M. Milam
     Director
 
By:  /s/ Robert C. Thomas                                                       March 26, 1999
     ---------------------------------------------------------   
     Robert C. Thomas
     Director
 
By:  /s/ Richard Walker                                                         March 26, 1999
     ---------------------------------------------------------   
     Richard Walker
     Director
 
By:  /s/ Pat Carnal                                                             March 26, 1999
     ---------------------------------------------------------   
     Pat Carnal
     Director
</TABLE>
                                       27