<PAGE>
 
                              COMMUNITY NATIONAL
                                  CORPORATION

                                    [LOGO]

                                  ----------

                                     1998

                                  ----------

                                    ANNUAL

                                    REPORT
<PAGE>
 
                              FINANCIAL HIGHLIGHTS

<TABLE> 
<CAPTION> 
                                                                At December 31,                    Change       
                                                          --------------------------       -----------------------
                                                             1998             1997         Amount          Percent
                                                             ----             ----         ------          -------
                                                                             (Dollars in thousands)
<S>                                                       <C>              <C>             <C>             <C>
Financial Position:
  Total assets..........................................  $   38,688       $  31,216       $   7,472        23.94%
  Loans receivable, net.................................      26,403          19,544           6,859        35.10
  Mortgage-backed securities............................       3,136           4,019            (883)      (21.97)
  Investment securities.................................       2,233           3,675          (1,442)      (39.24)
  Deposits..............................................      28,994          21,416           7,578        35.38
  Stockholders' equity..................................       8,647           8,568              79         0.92

  Number of common shares outstanding...................     712,866         712,866              --         0.00%


<CAPTION>
                                                              For the Year Ended
                                                                   December 31,                   Change          
                                                          --------------------------       -----------------------
                                                             1998             1997          Amount        Percent
                                                            ------           ------         ------        -------
                                                                              (Dollars in thousands)
<S>                                                       <C>              <C>             <C>            <C>
Results of Operations:
  Interest income......................................   $    2,541       $   2,046       $     495        24.2%
  Interest expense.....................................        1,257           1,124             133        11.8
                                                          ----------       ---------       ---------
       Net interest income.............................        1,284             922             362        39.3
  Provision for loan losses............................          231              54             177       327.8
                                                          ----------       ---------       ---------
  Net interest income after provision for loan losses..        1,053             868             185        21.3
  Noninterest income...................................          161             104              57        54.8
  Noninterest expense..................................          871             646             225        34.8
                                                          ----------       ---------       ---------

  Income before income taxes...........................          343             326              17         5.2
  Provision for income taxes...........................          130             102              28        27.5
                                                          ----------       ---------       ---------

  Net income...........................................   $      213       $     224       $     (11)       (4.9)
                                                          ==========       =========       =========
  Earnings per share...................................   $     0.30       $    0.59       $   (0.29)      (49.2)
                                                          ==========       =========       =========
</TABLE>

                                       1
<PAGE>
 
                [Letterhead of Community National Corporation]


March 31, 1999


To Our Stockholders:

The directors, officers and staff of Community National Corporation and
Community National Bank of Tennessee present to you this annual report following
the first full year of operation as Community National Bank of Tennessee.

Our primary goal is the maximization of stockholder value. We have clear cut
secondary goals to achieve this end. Our short term goal at the beginning of
1997 was to reorganize, convert to a full stock company and a full service
commercial bank. Our goal at the beginning of 1998 was to efficiently utilize
new investment in facilities, equipment and staff by building a commercial bank
deposit base, a customer base, and a diversified loan portfolio. That goal was
accomplished in 1998 to the extent of a 35% increase in deposits, a 35% increase
in loans and a 24% increase in total assets. Are we satisfied? No, by no means.
We must do much more and with increased efficiency. We are just beginning.

Our success remains highly dependent upon successful lending. Commercial and
consumer loans account for the bulk of the net increase in the loan portfolio.
Residential real estate loans dropped from approximately 80% of the portfolio to
approximately 68% of the portfolio. With falling interest rates, refinancing
resulted in decreasing margins in the residential real estate portfolio as the
higher rate real estate loans in our portfolio were paid off with replacements
coming in at lower rates resulting in narrow margins. Many of the residential
real estate loans originated in 1998 were by necessity at low fixed rates and
were sold in the mortgage market. Subsequently our net growth in the residential
portfolio was less than $500,000. With the growth in our commercial and consumer
portfolio our loan to deposit ratio at the end of the year was 91%. As a part of
and to support our loan growth we allocated $231,094 to our allowance for loan
losses during 1998 increasing our reserve to $368,375, equal to 1.38% of the
total portfolio and in keeping with Tennessee industry averages.

Our secondary goals are continued growth to spread/absorb fixed expenses and
grow our franchise while increasing emphasis on improving interest spread and
fee income. Our primary goal remains to maximize value for our
stockholder/investors based on and in keeping with the highest level of
integrity and customer service of which we are capable. The Board is committed
to pursuing every avenue available in achieving what is in the best interest of
our investors.

We have much strength and flexibility in our strong capital position of
$8,646,826 at year end. We have a unique opportunity as a locally owned and
operated community bank in an environment of change where big banks continue to
swallow up smaller banks in their quest for market share. Although the economic
environment is extremely competitive, we feel that we are positioned to take
advantage of our changing environment as a strong community oriented bank. We
will be seeking investment opportunities and innovative ways in utilizing our
resources to protect and maximize your investment. We ask for your support and
your business.

Yours truly,

/s/ Howard W. Tignor

Howard W. Tignor
President and Chief Executive Officer

                                       3
<PAGE>
 
                     BUSINESS OF THE COMPANY AND THE BANK

      Community National Corporation (the "Company") was incorporated under the
laws of the State of Tennessee for the purpose of holding all of the capital
stock of Lexington First Federal Savings Bank ("Lexington First Federal")
following the second step conversion of its former mutual holding company (the
"Conversion and Reorganization"), which was completed on December 11, 1998. The
Company's principal business is that of directing, planning and coordinating the
business activities of the Bank. Immediately following the Conversion and
Reorganization, Lexington First Federal converted to a national bank with the
name Community National Bank of Tennessee (the "Bank") and remained a
wholly-owned subsidiary of the Company (the "Bank Conversion"). Upon the
completion of the Bank Conversion, the Company became a bank holding company. In
1998, the Company purchased a participation totaling $442,482 in loans held by
the Bank. The Company has no other significant assets other than its basis with
the Bank, the Company had total assets of $38.7 million, net loans receivable of
$26.4 million, cash and investment securities of $7.5 million, mortgage-backed
securities of $3.1 million, total deposits of $29.0 million and stockholders'
equity of $8.6 million.

      The Bank is a national bank operating through its office in Lexington,
Tennessee, serving Henderson County in southwestern Tennessee. The Bank is the
successor to Lexington First Federal. Therefore, all references to the Bank also
include its predecessor, Lexington First Federal. 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 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. 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. The Bank's emphasis is the diversification in the portfolio with
quality consumer and commercial loans in order to both reduce and control
interest rate risk, and to increase the interest rate spread.

      As a bank holding company, the Company is registered with, and subject to
regulation and examination by, the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). The Bank is subject to comprehensive
examination, supervision, and regulation by the Office of the Comptroller of the
Currency ("OCC"). Because the Bank was formerly chartered as a savings
association, the Bank's deposits are insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") up
to the applicable limits for each depositor.

      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, and its phone number is (901) 968-9599.

                                       5
<PAGE>
 
                SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

Summary of Financial Condition

<TABLE>
<CAPTION>
                                                             At December 31,          
                                                 1998              1997             1996     
                                            --------------    --------------   --------------
                                                       (Dollars in thousands)
<S>                                         <C>               <C>              <C>
Total assets............................    $    38,688       $   31,216       $   25,623
Loans receivable, net...................         26,403           19,544           16,205
Cash and cash equivalents...............          4,148            2,742            1,392
Investment securities:
   Available for sale...................          1,575            2,518            1,802
   Held to maturity.....................            658            1,157            2,257
Mortgage-backed securities:
   Available for sale...................          2,756            3,462            2,664
   Held to maturity.....................            380              557              678
Deposits................................         28,994           21,416           20,638
FHLB advances...........................            693              822              955
Stockholders' equity....................          8,647            8,568            3,861

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

Number of:
   Real estate loans outstanding........            471              490              506
   Savings accounts.....................          1,937            1,850            1,567
   Offices open.........................              2                1                1
</TABLE>


Summary of Operations
<TABLE>
<CAPTION>
                                                          Year Ended  December 31,               
                                                 1998              1997             1996     
                                            --------------    --------------   --------------
                                                          (Dollars in thousands)
<S>                                         <C>               <C>              <C>
Interest income.........................    $     2,541       $    2,046       $     2,011
Interest expense........................          1,257            1,124             1,103
                                            -----------       ----------       -----------
     Net interest income................          1,284              922               908
Provision for loan losses...............            231               54                30
                                            -----------       ----------       -----------
Net interest income after provision for 
 loan losses............................          1,053              868               878
Noninterest income......................            161              104                41
Noninterest expense.....................            871              646               617
                                            -----------       ----------       -----------
Income before income taxes..............            343              326               302
Provision for income taxes..............            130              102               105
                                            -----------       ----------       -----------

Net income..............................    $       213       $      224       $       197
                                            ===========       ==========       ===========
Earnings per share......................    $      0.30       $     0.59       $      0.54
                                            ===========       ==========       ===========
Dividend payout ratio...................          67.14%           23.66%            35.74%
                                            ===========       ==========       ===========
</TABLE>


      The above dividend payout ratio for 1997 and 1996 was computed by dividing
the actual dividends paid, by the Net Income without giving consideration to the
dividends waived by the Mutual Holding Company for those years. The Mutual
Holding Company waived dividends of $0.20 per quarter for 1996 and 1997.

                                       6
<PAGE>
 
Key Operating Ratios

<TABLE>
<CAPTION>
                                                                             At or for the Year
                                                                              Ended December 31,               
                                                              -------------------------------------------------
                                                                   1998              1997             1996     
                                                              --------------    --------------   --------------
<S>                                                                <C>             <C>              <C>
Performance Ratios:
   Return on assets (net earnings divided by average
      total assets).......................................            0.56%          0.82%            0.76%
   Return on average equity  (net earnings divided
      by average equity)..................................            3.43           5.17             5.21
   Interest rate spread (combined weighted average
      interest rate earned less  combined weighted
      average interest rate cost).........................            3.10           2.73             3.08
   Net interest margin (net interest income divided
      by average interest-earning assets).................            3.65           3.59             3.76
   Ratio of average interest-earning  assets to
      average interest-bearing liabilities................          115.53         117.22           115.59
   Ratio of noninterest expense to average total
      assets..............................................            2.29           2.36             2.40

Asset Quality Ratios:
   Nonperforming assets to total assets at
      end of period.......................................            1.11           0.79%            0.56%
   Nonperforming loans to total loans at
      end of period.......................................            1.60           1.26             0.75
   Allowance for loan losses to total loans
      at end of period....................................            1.37           0.99             0.86
   Allowance for loan losses to nonperforming
     loans at end of period...............................           85.58          78.63           124.56

   Provision for loan losses to total loans receivable, net           6.87           0.28             0.18

   Net charge-offs to average loans outstanding...........            0.22           0.00             0.08

Capital Ratios:
   Equity to total assets at end of period................           22.35%         27.45%           15.07%

   Average equity  to average assets......................           16.31          15.85            14.68
</TABLE>

                                       7
<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

      The Company's principal business is that of directing, planning and
coordinating the business activities of the Bank. The Company has no significant
assets other than its investment in the Bank, and certain cash and cash
equivalents. Other than investing its available assets, the Company conducts no
significant activities. Therefore, much of the discussion below relates to the
business of the Bank.

      Until February 1998, 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 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. 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. The Bank's emphasis is the diversification in the portfolio with
quality consumer and commercial loans in order to both reduce and control
interest rate risk, and to increase the interest rate spread.

      A new full service, high visibility branch office at 435 West Church
Street in Lexington, Tennessee, opened in the spring of 1998. The branch has two
drive-up windows, three inside teller stations, two offices, and two desks in
the lobby. The completed cost for the branch including the property,
improvements and equipment was $527,000. The branch has been initially staffed
with one loan officer and three tellers/customer service representatives. The
Bank has been and is continuing to be structured to offer full service banking
and to compete on an equal basis with traditional full service banks.

      The offering of a wider range of loan products, the opening of a new
branch office are all integral parts of the Bank's new emphasis on commercial
banking. The goals in implementing these steps are to increase the Bank's
interest rate spread, improve the Bank's interest rate sensitivity mismatch and
increase overall profitability, while maintaining an acceptable level of risk.
Although there are additional risks inherent in pursuing a commercial banking
strategy, the Board of Directors believes that President Tignor and the new
employees he has hired (including two new lending officers) possess the
requisite amount of skill, experience and leadership to accomplish this goal
over a reasonable period of time.

      The profitability of the Company and the Bank depends primarily on the
Bank's net interest income, which is the difference between interest and
dividend income on interest-earning assets, principally loans, mortgage-backed
securities and investment securities, and interest expense on interest-bearing
deposits and borrowings (if any). The Company's and the Bank's net earnings also
are dependent, to a lesser extent, on the level of its other income, including
gains and losses on the sale of investment securities and other assets,
servicing fees and other fees and rental income, and its general, administrative
and other expenses, such as employee compensation and benefits, occupancy and
equipment expense, deposit insurance premiums, franchise taxes and miscellaneous
other expenses, as well as income tax expense.

Asset and Liability Management

      The ability for the Bank to maximize net interest income is largely
dependent upon the achievement of a positive interest rate spread that can be
sustained during fluctuations in prevailing interest rates. Interest
rate-sensitivity is a measure of the difference between amounts of
interest-earning assets and interest-bearing liabilities which either reprice or
mature within a given period of time. The difference, or the interest rate
repricing "gap," provides an indication of the extent to which an institution's
interest rate spread will be affected by changes in interest rates. A gap is
considered positive when the amount of interest rate-sensitive assets exceeds
the amount of interest rate-sensitive 

                                       8
<PAGE>
 
liabilities, and is considered negative when the amount of interest
rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets.
Generally, during a period of rising interest rates, a negative gap within
shorter maturities would adversely affect net interest income, while a positive
gap within shorter maturities would result in an increase in net interest
income, and during a period of falling interest rates, a negative gap within
shorter maturities would result in an increase in net interest income while a
positive gap within shorter maturities would have the opposite effect.

      The lending activities of savings associations have historically
emphasized long-term fixed-rate loans secured by single-family residences, and
the primary source of funds of such institutions has been deposits. The deposit
accounts of savings associations generally bear interest rates that reflect
market rates and largely mature or are subject to repricing within a short
period of time. This factor, in combination with substantial investments in
long-term, fixed-rate loans, has historically caused the income earned by
savings associations on its loan portfolios to adjust more slowly to changes in
interest rates than the cost of funds. The emphasis within the organization of
short-term commercial and consumer loans, as well as the emphasis on variable
rate mortgage-backed securities in the investment portfolio is part of the
strategy to address the Bank's negative gap position.

      The strategy for reducing the negative interest-rate gap and above average
interest-rate risk has been a switch to variable-rate and balloon fixed-rate
only residential real estate loans, and elimination of long-term fixed-rate
financing except for loan originations that are packaged for sale. In addition,
the focus on diversification in the loan portfolio with the origination of
short-term commercial and consumer loans, as well as the emphasis on variable
rate mortgage-backed securities in the investment portfolio is part of the
strategy to address the Bank's negative gap position.

      Notwithstanding the foregoing, however, because the Bank's
interest-bearing liabilities which mature or reprice within short periods
substantially exceed its earning assets with similar characteristics, material
and prolonged increases in interest rates generally would adversely affect net
interest income. Material and prolonged decreases in interest rates generally,
but to a lesser extent because of their historically low levels, would have the
opposite effect.

      Analysis of GAP. In recent years, the Bank has measured its interest rate
sensitivity by computing the "gap" between the assets and liabilities which were
expected to mature or reprice within certain periods, based on assumptions
regarding loan prepayment and deposit decay rates formerly provided by the OTS.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998 which are expected
to mature or reprice in each of the time periods shown.

<TABLE>
<CAPTION>
                                                            Over One     Over Five       Over Ten         Over
                                              One Year       Through      Through         Through        Twenty
                                               or Less     Five Years    Ten Years     Twenty Years       Years        Total
                                             ----------    ----------    ----------   -------------    -----------   ---------
                                                                       (Dollars in thousands)
<S>                                          <C>           <C>           <C>             <C>           <C>           <C>
Interest-earning assets:
   One- to four-family  mortgage loans.....  $      892    $    3,113    $    5,216      $    5,799    $     1,600   $  16,620
   Other mortgage loans....................         125            53            31              12             --         221
   Consumer loans..........................         562           376           --              --              --         938
   Investment securities...................         500            --         1,098             346             --       1,944
   Mortgage-backed securities..............         437           877           591             958            588       3,451
   FHLB Stock..............................         255            --            --              --             --         255
   Other interest earning assets...........       2,443            --            --              --             --       2,443
                                             ----------    ----------    ----------      ----------    -----------   ---------
      Total................................  $    5,214         4,419         6,936           7,115          2,188      25,872
                                             ----------    ----------    ----------      ----------    -----------   ---------

Interest-bearing liabilities:
   Deposits................................      19,594         2,093            --              --             --      21,687
   FHLB Advances...........................          27           129           116             278            347         897
                                             ----------    ----------    ----------      ----------    -----------   ---------
      Total................................  $   19,621         2,222           116             278            347      22,584
                                             ----------    ----------    ----------      ----------    -----------   ---------

Interest sensitivity gap...................  $  (14,407)   $    2,197    $    6,820      $    6,837    $     1,841   $   3,288
                                             ==========    ==========    ==========      ==========    ===========   =========
Cumulative interest sensitivity gap........  $  (14,407)   $  (12,210)   $   (5,390)     $    1,447    $     3,288   $   3,288
                                             ==========    ==========    ==========      ==========    ===========   =========

Ratio of interest-earning assets
   to interest-bearing liabilities.........       26.58%       198.85%     5,979.31%       2,559.40%        630.55%     114.56%
                                             ==========    ==========    ==========      ==========    ===========   ========= 

Ratio of cumulative gap to total assets....      (37.24)%      (31.56)%     (13.93)%           3.74%          8.50%       8.50%
                                             ==========    ==========    =========       ==========    ===========   ========= 
</TABLE>

                                       9
<PAGE>
 
      The preceding table was prepared utilizing certain assumptions regarding
prepayment and decay rates provided by a private data processing and consulting
firm. While management believes that these assumptions are reasonable, the
actual interest rate sensitivity of the Bank's assets and liabilities could vary
significantly from the information set forth in the table due to market and
other factors. The following assumptions were used: (i) adjustable-rate
mortgages were recorded in the period in which they reprice; (ii) fixed-rate
mortgages and mortgage-backed securities will prepay at the rate of 5%; (iii)
investments are recorded in the periods in which they mature or reprice as
applicable; (iv) fixed maturity deposits are not withdrawn prior to maturity;
(v) other deposits are withdrawn or reprice in less than one year; and (vi) FHLB
advances are recorded in the period in which they contractually mature.

      The interest rate sensitivity of the Bank's assets and liabilities
illustrated in the table above could vary substantially if different assumptions
were used or actual experience differs from the assumptions used. If passbook
and NOW accounts were assumed to mature in one year or less (which does not
reflect actual experience), the Bank's one-year gap would have been
substantially negative.

      Certain shortcomings are inherent in the method of analysis presented in
prior tables setting forth the maturing and repricing of interest-earning assets
and interest-bearing liabilities. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in differing degrees to changes in market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-rate
loans, which represent the Bank's primary loan product, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. In addition, the proportion of adjustable-rate loans in the Bank's
portfolios could decrease in future periods if market interest rates remain at
or decrease below current levels due to refinance activity. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in the tables. Finally,
the ability of many borrowers to service their adjustable-rate debt may decrease
in the event of an interest rate increase.

      The lending activities of savings institutions have historically
emphasized long-term, fixed-rate loans secured by single-family residences, and
the primary source of funds of such institutions has been deposits. The deposit
accounts of savings associations generally bear interest rates that reflect
market rates and largely mature or are subject to repricing within a short
period of time. This factor, in combination with substantial investments in
long-term, fixed-rate loans, has historically caused the income earned by
savings associations on their loan portfolios to adjust more slowly to changes
in interest rates than their cost of funds.

      The Bank originates both fixed- and adjustable-rate residential real
estate loans as market conditions dictate. However, these market conditions
continue to cause the Bank to issue fixed rate financing, although the
residential loans originated by the Bank in recent months have been mostly
short-term balloon loans with terms of one, three, five and seven years.
Additionally in 1997, the Bank began to offer consumer and commercial loans,
which reprice more rapidly.

      Notwithstanding the foregoing, however, because the Bank's
interest-bearing liabilities which mature or reprice within short periods
substantially exceed its earning assets with similar characteristics, material
and prolonged increases in interest rates generally would have a severely
adverse effect on net interest income, while material and prolonged decreases in
interest rates generally, but to a lesser extent because of their historically
low levels, would have the opposite effect.

                                       10
<PAGE>
 
Average Balances, Interest and Average Yields

      The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid at the date and for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average monthly balance of assets
or liabilities, respectively, for the periods presented. Average balances for
loans include nonaccrual loans. Average balances are derived from month-end
balances. Management does not believe that the use of month-end balances instead
of daily balances has caused any material difference in the information
presented.

<TABLE>
<CAPTION>
                                                                                         Year Ended December 31,
                                               At December 31,                      1998                         1997
                                                    1998            -------------------------------  ------------------------------
                                             -------------------                            Average                        Average
                                                         Yield/       Average                Yield/   Average               Yield/
                                               Balance    Cost        Balance    Interest   Cost (1)  Balance    Interest  Cost (1) 

                                             ---------- --------    ----------  ----------  -------  ---------  --------- ---------
                                                                                (Dollars in thousands)
<S>                                          <C>        <C>         <C>         <C>         <C>      <C>        <C>        <C>
Interest-earning assets:
   Loans receivable, net (2)...............  $   26,403     7.37%   $   25,834  $    1,945     7.53% $  17,692     $1,531      8.65%

   Investment securities
      Taxable..............................       1,576     9.71         1,584         153     9.66      2,230        143      6.41
      Nontaxable...........................         657    11.11           658          73    11.09      1,103        106      9.61
   Mortgage-backed securities..............       3,136     7.30         3,251         229     7.04      3,576        226      6.32
   Other interest-earning assets...........       5,046     3.29         4,568         166     3.63      2,086         76      3.64
                                             ----------             ----------  ----------           ---------  ---------
      Total interest-earning assets........      36,818     6.97        35,895       2,566     7.15     26,687      2,082      7.67
                                                                                ----------                      ---------
Noninterest-earning assets.................       1,870                  2,223                             648
                                             ----------             ----------                       ---------
      Total assets.........................  $   38,688             $   38,118                       $  27,335
                                             ==========             ==========                       =========

Interest-bearing liabilities:
   Deposits................................  $   28,994     4.13    $   30,376  $    1,198     3.94% $  21,865     $1,053      4.82
   FHLB advances...........................         693     8.51           693          59     8.51        901         72      7.88
                                             ----------             ----------  ----------           ---------  ---------
      Total interest-bearing liabilities...      29,687     4.23        31,069       1,257     4.05     22,766      1,124      4.94
                                                                                ----------                      ---------
Noninterest-bearing liabilities............         354                    832                             236
                                             ----------             ----------                       ---------
      Total liabilities....................      30,041                 31,901                          23,002
Equity.....................................       8,647                  6,217                           4,333
                                             ----------             ----------                       ---------
      Total liabilities and equity.........  $   38,688             $   38,118                       $  27,335
                                             ==========             ==========                       =========

Interest income............................                                     $    1,309                     $      958
Iterest rate spread.......................                 2.74%                              3.10%                           2.73%
                                                        ========                            =======                         =======
Net yield on interest-earning assets.......                                                    3.65%                           3.59%
                                                                                            =======                         =======
Tax equivalent adjustments:
      Investment securities................                                           (25)                           (36)
                                                                                ---------                       --------
Ratio of average interest-earning assets...
   to average interest-bearing liabilities.               124.02%                            115.53%                         117.22%
                                                          ======                             ======                         =======
Net interest income........................                                     $    1,284                     $      922
                                                                                ==========                     ==========
</TABLE>

(1)   The average yield is calculated by combining earnings on investment
      securities and mortgage-backed securities in one category for presentation
      in this table.
(2)   Includes nonaccrual loans.

                                       11
<PAGE>
 
Rate/Volume Analysis

      The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); (ii) changes in rate (change in rate
multiplied by old volume); and (iii) rate/volume change (change in volume
multiplied by change in rate).

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,                
                                                     ------------------------------------------------
                                                        1998                  vs.             1997       
                                                     ------------------------------------------------
                                                                    Increase (Decrease)
                                                                         Due to
                                                     ------------------------------------------------
                                                                                 Rate/
                                                       Volume        Rate        Volume        Total
                                                     ---------    ---------     --------     --------
                                                                      (In thousands)
<S>                                                  <C>          <C>           <C>         <C>
Interest Income:
  Loans receivable................................   $     705    $    (199)    $    (92)    $    414
  Investment securities:
      Taxable.....................................         (41)          72          (21)          10
      Nontaxable..................................         (43)          15           (6)         (34)
  Mortgage-backed securities......................         (21)          26           (2)           3
  Short-term investments and other
     interest-earning assets......................          90           --           --           90
                                                     ---------    ---------     --------     --------
        Total interest income.....................         690          (86)        (121)         483
                                                     ---------    ---------     --------     --------

Interest-bearing liabilities:
  Deposits........................................         410         (191)         (74)         145
   FHLB advances..................................         (17)           5           (1)         (13)
                                                     ---------    ---------     --------     --------
      Total interest-bearing
         liabilities..............................         393         (186)         (75)         132
                                                     ---------    ---------     --------     --------

Change in net interest income.....................   $     297    $     100     $    (46)    $    351
                                                     =========    =========     ========     ========
</TABLE>

---------------
      Differences due to rounding.


Comparison of Financial Condition at December 31, 1998 and December 31, 1997

      At December 31, 1998, the Company's assets totaled $38.7 million, as
compared to $31.2 million at December 31, 1997. Total assets increased $7.5
million, or 24.0%, from December 31, 1997 to December 31, 1998. The increase was
composed of an increase in net loans receivable of $6.9 million, an increase in
premises and equipment of $219,000, and an increase in cash of $2.5 million.
These increases were offset by decreases in mortgage backed securities of
$882,000 and in investment securities of $1.4 million.

      The allowance for loan losses totaled $398,000 at December 31, 1998, and
$195,000 at December 31, 1997. As of those dates the Bank had total
non-performing loans of $430,000 and $248,000, respectively, at December 31,
1998 and December 31, 1997 in its portfolio. There were $58,000 loans charged
off and no recoveries of previous loan losses during the year ended December 31,
1998. The determination of the allowance for loan losses is based on
management's analysis, performed on a monthly basis, of various factors,
including the market value of the underlying collateral, growth and composition
of the loan portfolio, the relationship of the allowance for loan losses to
outstanding 

                                       12
<PAGE>
 
loans, historical loss experience, delinquency trends, and prevailing economic
conditions. Although management believes its allowance for loan losses is
adequate, there can be no assurance that additional allowances will not be
required or that losses on loans will not be incurred. The Bank has had minimal
losses on loans in prior years. At December 31, 1998, the ratio of the allowance
for loan losses to net loans was 1.40%, as compared to 1.00% at December 31,
1997.

      During the year ended December 31, 1998, the Company's total liabilities
increased $7.4 million, or 32.7%. This increase was primarily the result of an
increase of $7.6 million, or 35.4%, in Bank deposits. Management is continually
evaluating the investment alternatives available to the Bank's customers, and
adjusts the pricing on its savings products to maintain and improve its existing
deposit base.

Comparison of Results of Operations for the Years Ended December 31, 1998 
and 1997

      General. The Company had net income of $213,000 for the year ended
December 31, 1998, compared to net income of $224,000 for 1997. Net interest
income increased $362,000. Noninterest income increased $58,000 while
noninterest expense increased $255,000 and the provision for loan losses
increased $177,000.

      Net Interest Income. Net interest income increased by $362,000, or 39.3%,
for the year ended December 31, 1998 compared to the year ended December 31,
1997. The increase was primarily due to the increase in the ratio between
interest-earning assets and interest-bearing liabilities.

      Interest Income. Interest income increased by $496,000 from $2.05 million
to $2.54 million, or 24.2%, for the year ended December 31, 1998 compared to the
year ended December 31, 1997. This increase resulted in part from an overall
increase of average interest-earning assets of $9.2 million from $26.7 million
for 1997 to $35.9 million, or 34.5% for 1998.

      Interest Expense. Interest expense increased by $133,000 or 11.8%, to 1.3
million for the year ended December 31, 1998 from $1.1 million for the year
ended December 31, 1997. The increase is primarily due to an increase in average
deposits from $21.9 million in 1997 to $30.4 million in 1998.

      Provision for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation
considers numerous factors including general economic conditions, loan portfolio
composition, prior loss experience, the estimated fair value of the underlying
collateral and other factors that warrant recognition in providing for an
adequate loan loss allowance.

      The provision was increased $177,000 from $54,000 to $231,000 because the
Bank is now making consumer loans which carry an inherently greater risk than
mortgage loans. Actual losses of $58,000 and $0 occurred during the years ended
December 31, 1998 and 1997, respectively. Non-performing loans amounted to
$430,000 at December 31, 1998 as compared to $248,000 at December 31, 1997.

      Noninterest Income. The $58,000 increase in noninterest income in 1998
compared to 1997 was primarily attributable to an increase in loan fees of
$55,000 or 65.1%. This is the result of a new fee schedule for all loans.
Deposit account fees also increased.

      Noninterest Expense. The $225,000 increase in noninterest expense in 1998
compared to 1997 was primarily attributable to the $41,000 increase in
compensation and benefits, the $27,000 increase in data processing, and the
$89,000 increase in occupancy and equipment cost.

      Income Taxes. The Company's effective tax rate for the year ended December
31, 1998 and 1997 was 37.8% and 31.2%, respectively. Income tax expense
increased $28,000.

                                       13
<PAGE>
 
Impact of Inflation and Changing Prices

      The financial statements and related data presented herein have been
prepared in accordance with GAAP which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.

      Unlike most companies, the assets and liabilities of a financial
institution are primarily monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation. In the current interest
rate environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.

Possible Year 2000 Computer Program Problems

      The year 2000 poses many challenges for the banking industry. Many
automated applications may cease to properly function as a result of how date
fields have historically been programmed. Many programs were designed and
developed without considering the impact of the upcoming change in the century.
Failure to address this issue in a timely manner may cause banking institutions
to experience operational problems and could cause disruption of financial
markets. Many experts believe that even the most prepared organizations may
encounter some implementation problems. As a result, Community National Bank has
developed a Year 2000 Strategic Plan (the "Plan") to take the necessary steps to
insure that problems and disruptions are minimized.

      The Bank's data processing system is outsourced to Intrieve, a service
bureau that services the majority of all thrifts and savings and loans
throughout the nation. All systems including all bank PC's are integrated with
the service bureau applications. Over $200,000 has been spent on upgrading all
equipment, software and systems. This was done principally to modernize
operations, but a substantial portion of this investment would have been
required for Year 2000 compliance alone. Final testing for Year 2000 compliance
has been completed with all applications performing with Year 2000 dates.
Successful tests have been completed with all vendors and correspondents with
which the Bank directly interfaces. The Bank is Year 2000 compliant at this
point. Additional testing will be made during 1999 to check and reinforce
compliance readiness. Should any unforeseen glitches arise, the Bank has a
contingency plan with several alternatives to meet the worst case scenario.

      The Bank's customers have been notified and counseled. All commercial
customers with Year 2000 requirements have been counseled one on one with
compliance assured to the Bank's satisfaction.

      The cost of addressing the Year 2000 issue has had no material impact on
earnings since the expenditures meeting Year 2000 requirements were required and
planned for modernization alone. With testing reflecting compliance to date,
there are no indications of material impact on earnings or uncertainty of future
operation results or financial condition.

Liquidity and Capital Resources

      The Bank is required to maintain minimum levels of specified liquid assets
which are currently equal to 5% of deposits and short-term borrowings. The
Bank's liquidity ratio for the year ended December 31, 1998 was 23.3% and its
liquidity ratio was 22.4% at December 31, 1997.

                                       14
<PAGE>
 
      The Bank's principal source of funds for investments and operations are
net earnings, deposits from its primary market area, principal and interest
payments on loans and mortgage-backed securities and proceeds from maturing
investment securities. Its principal funding commitments are for the origination
or purchase of loans and the payment of maturing deposits. Deposits are
considered a primary source of funds supporting the Bank's lending and
investment activities. Deposits were $29.0 million at December 31, 1998.

      The Bank's most liquid assets are cash and cash equivalents, which are
cash on hand, amounts due from financial institutions, federal funds sold,
certificates of deposit with other financial institutions that have an original
maturity of three months or less and money market mutual funds. The levels of
such assets are dependent on the Bank's operating, financing and investment
activities at any given time. The Bank's cash and cash equivalents totaled $4.1
million at December 31, 1998. The variations in levels of cash and cash
equivalents are influenced by deposit flows and anticipated future deposit
flows.

      At December 31, 1998, the Bank had no commitments to originate loans and
had $21.0 million in certificates of deposit which were scheduled to mature in
one year or less. It is anticipated that the majority of these certificates will
be renewed in the normal course of operations.

      The Bank is not aware of any trends or uncertainties that will have or are
reasonably expected to have a material effect on the Bank's liquidity or capital
resources. The Bank has no current plans for material capital improvements or
other capital expenditures that would require more funds than are currently on
hand.

Recent Accounting Pronouncements

      Accounting for Certain Investments in Debt and Equity Securities. The FASB
issued Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Securities" ("SFAS No 115"). This Statement
addresses the accounting and reporting for investments in equity securities that
have readily determinable fair values, and all investments in debt securities.
SFAS No. 115 requires classification of investments into three categories. Debt
securities that the Bank has the positive intent and ability to hold to maturity
are classified as held to maturity and must be reported at amortized cost. Debt
and equity securities that are brought and held principally for the purpose of
selling them in the near term are classified as trading and must be reported at
fair value, with unrealized gains and losses included in earnings. All other
debt and equity securities must be considered available for sale and must be
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholder's equity (net of tax
effects). SFAS No. 115 had the effect of increasing (reducing) total
stockholders' equity by $2,000 and ($6,000) at December 31, 1998 and 1997,
respectively.

      FASB Statement of Earnings Per Share. In March 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128. The Statement establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. This Statement simplifies the standards
for computing earnings per share previously found in Accounting Principles Board
("APB") Opinion No. 15, Earnings per Share ("EPS"), and makes them comparable to
international EPS Standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of basic
and diluted Earnings per Share on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basics EPS computation to the numerator and
denominator of the diluted Earnings per Share computation. Basic EPS excludes
dilution and its computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB
Opinion No. 15. This statement is effective for financial statement issued for
periods ending after December 15, 1998, including interim 

                                       15
<PAGE>
 
periods. SFAS No. 128 was adopted by the Company in fiscal 1997. The Company
does not believe the impact of adopting SFAS No. 128 will be material to the
Company's financial statements.

      FASB Statement on Disclosure of Information about Capital Structure. In
February 1997 the FASB issued SFAS No. 129. The Statement incorporates the
disclosure requirements of APB Opinion No. 15, Earnings per Share, and makes
them applicable to all public and nonpublic entities that have issued securities
addressed by the Statement. APB Opinion No. 15 requires disclosure of
descriptive information about securities that is not necessarily related to the
computation of earnings per share. This statement continues the previous
requirements to disclose certain information about an entity's capital structure
found in APB Opinion No. 10, Omnibus Opinion - 1996, and No. 15, Earnings per
Share, and FASB Statement No. 47, Disclosure of Long-Term Obligations, for
entities that were subject to the requirements of those standards. This
Statement eliminates the exemption of nonpublic entities form certain disclosure
requirements of Opinion 15 as provided by FASB Statement No. 21, Suspension of
the Reporting of Earnings per Share and Segment Information by Nonpublic
Enterprises. It supersedes specific disclosure requirements of Opinions 10 and
15 and Statement 47 and consolidates them in this Statement for ease of
retrieval and for greater visibility to nonpublic entities. The Statement is
effective for financial statements for periods ending after December 15, 1997,
SFAS No. 129 was adopted by the Company in fiscal 1997. The Company does not
believe the impact of adopting SFAS No. 129 will be material to the Company's
financial statements.

      FASB Statement of Comprehensive Income. In June 1997, the FASB issued SFAS
No. 130. The statement requires comprehensive income items, such as foreign
currency translation adjustments and gains and losses on certain securities, be
shown in a financial statement and displayed as prominently as other financial
statements. Statement No. 130 does not require a specific format for the
financial statement in which comprehensive income is reported, but does require
that an amount representing income be reported in that statement. The Company
does not believe the impact of adopting SFAS No. 130 is material to the
Company's financial statements.

      FASB Statement on Segment Disclosures. In December 1997, the FASB issued
SFAS No. 131. The statement requires public business enterprises to disclose
information on any operating segments that are a component of the enterprise. An
operating segment is defined as (1) a component that engages in business
activities from which it may earn revenue and incur expense; (2) a component
whose operating results are regularly reviewed by the enterprise's chief
operating decision maker to make decisions about resources to be allocated to
the segment and assess its performance; and (3) a component for which discrete
financial information is available. The Company does not believe this statement
will have any material effect on future financial statements.

      FASB Statement on Derivative Instruments. In November 1998, the FASB
issued SFAS No. 133. This statement establishes accounting and reporting
standards for derivative instruments including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value with
the offset to either current earnings or to other comprehensive income. The
Company does not believe this statement will have any material effect on the
financial statements.

                                       16
<PAGE>
 
                       CONSOLIDATED FINANCIAL STATEMENTS
                COMMUNITY NATIONAL CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                             Page
<S>                                                                                          <C>
Independent Auditors' Report                                                                     18

Consolidated Statements of Financial Condition as of December 31, 1998 and 1997               19-20

Consolidated Statements of Income for the Years Ended December 31, 1998 and 1997                 21

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998 and 1997   22

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 998 and 1997    23

Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997          24-25

Notes to Consolidated Financial Statements                                                    26-48
</TABLE>

                                       17
<PAGE>
 
                    ARNOLD, SPAIN, TRUETT & HEWITT, P.L.L.C.
                          CERTIFIED PUBLIC ACCOUNTANTS
                            914 NORTH HIGHLAND AVENUE
                            JACKSON, TENNESSEE 38301

MEMBERS:                           _____________
AMERICAN INSTITUTE OF              901- 427-8571
   CERTIFIED PUBLIC ACCOUNTANTS  FAX 901- 424-5701       Offices:

                                                             Jackson, Tennessee
TENNESSEE SOCIETY OF                                      Union City, Tennessee
   CERTIFIED PUBLIC ACCOUNTANTS                             McKenzie, Tennessee
                                                               Paris, Tennessee
AICPA DIVISION OF FIRMS:                                     Trenton, Tennessee
   PRIVATE COMPANIES PRACTICE SECTION                      Dyersburg, Tennessee
   SEC PRACTICE SECTION                                        Fulton, Kentucky
                          Independent Auditor's Report



Board of Directors
Community National Corporation
Lexington, Tennessee

We have audited the accompanying consolidated statements of financial condition
of Community National Corporation and subsidiary (the Company) as of December
31, 1998 and 1997, and the related consolidated statements of income,
stockholders equity, and cash flows for the years them ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and 1997, and the results of their operations and cash flows
for the year then ended, in conformity with generally accepted accounting
principles.




                     Certified Public Accountants

Jackson, Tennessee
February 16, 1999

                                       18
<PAGE>
 
                        COMMUNITY NATIONAL CORPORATION
                               (AND SUBSIDIARY)

                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


                                    ASSETS
                                    ------

<TABLE>
<CAPTION>                                         
                                                             December 31,
                                                      --------------------------
                                                          1998          1997
                                                      -----------    -----------
<S>                                                   <C>             <C>    
Cash and cash equivalents                    
   Non-interest bearing                               $   746,912     $  211,969
   Interest bearing                                     3,400,898      2,529,814
Time deposits                                           1,125,000              -
Investment securities:                                                   
   Securities held-to-maturity (estimated                                   
     market value of  $693,136 (1998) and                                
     $1,189,106 (1997)                                    657,770      1,157,492
   Securities available-for-sale,                                           
     at fair value                                      1,575,472      2,518,019
Mortgage backed and related securities:      
   Securities held-to-maturity (estimated       
     market value of $379,661 (1998) and                            
     $563,295 (1997)                                      380,098        556,783
   Securities available-for-sale,                                      
     at fair value                                      2,756,332      3,461,579
Loans receivable, net                                  26,403,032     19,544,222
Accrued interest receivable                               238,952        138,047
Premises and equipment                                    797,980        579,148
Real estate held for investment                                 -            336
Stock investments:                                                  
   Stock in Federal Home Loan Bank, at cost               283,200        263,900
   Stock in Federal Reserve Bank, at cost                 237,150        237,150
   Stock in Savings and Loan Data Corporation, at cost     15,000         15,000
Other assets                                               70,093          2,243
                                                      -----------  -------------
Total Assets                                          $38,687,889  $  31,215,702
                                                      ===========  =============
</TABLE>


                                      19
                        
<PAGE>
 
                        COMMUNITY NATIONAL CORPORATION
                               (AND SUBSIDIARY)

            CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Cont.)


                                  LIABILITIES
                                  -----------

<TABLE>
<CAPTION>                                                                                       
                                                                       December 31,
                                                            --------------------------------               
                                                                 1998               1997
                                                            -------------      -------------
<S>                                                         <C>                <C>
Deposits                                                    $  28,993,808      $  21,416,047
Advances from Federal Home Loan Bank                              692,848            821,777
Advances from borrowers for taxes and insurance                     3,164                454
Accrued interest payable                                          211,261            169,954
Income taxes:                                                                
  Current                                                          70,825             83,507
  Deferred                                                        (47,248)             4,935
Other liabilities                                                 116,405            151,055
                                                            -------------      -------------                 
Total Liabilities                                           $  30,041,063      $  22,647,729
                                                            -------------      -------------
                                                      
<CAPTION>


                             STOCKHOLDERS' EQUITY
                             --------------------
<S>                                                          <C>               <C>
Preferred stock, 2,000,000 shares authorized, - 0 - issued $            -      $           -
Common stock of $1.00 par value, authorized 8,000,000       
  shares, 712,866 (1998) and 712,866 (1997)                 
  issued and outstanding                                          712,866            712,866
Additional paid-in-capital                                      4,489,512          4,489,512
Retained earnings - substantially restricted                    3,442,773          3,371,864
Other accumulated comprehensive income                              1,675             (6,269)
                                                            -------------      -------------                 
  Total Stockholders' Equity                               $    8,646,826      $   8,567,973
                                                            -------------      -------------                 
                                                              
  Total Liabilities and Stockholders Equity                $   38,687,889      $  31,215,702
                                                           ==============      ============= 
</TABLE>



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

                                      20

<PAGE>
 
                        COMMUNITY NATIONAL CORPORATION
                               (AND SUBSIDIARY)

                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
INTEREST INCOME                                                                 Year Ended December 31,
                                                                             ----------------------------
                                                                                   1998         1997
                                                                             -------------  -------------
<S>                                                                          <C>              <C>
First mortgage loans                                                         $1,474,548       1,434,631  
Consumer and other loans                                                        470,216         100,595                     
Interest and dividends on investments:                                                                                            
     Taxable                                                                    163,102         149,070                          
     Tax-exempt                                                                  48,040          69,827     
     Dividends                                                                   33,708          18,919                           
Interest on deposits with banks                                                 122,876          48,505                          
Interest on mortgage-backed securities                                          228,976         224,341                         
                                                                             ----------       --------- 
Total Interest Income                                                        $2,541,466       2,045,888
                                                                             ----------       ---------  
INTEREST EXPENSE                                                                                          
Interest on deposits                                                         $1,197,981       1,053,415 
Interest on advances from Federal Home L                                         59,106          70,524    
                                                                             ----------       --------- 
Total Interest Expense                                                       $1,257,087       1,123,939
                                                                             ----------       ---------
                                                                                                                                 
Net Interest Income                                                            1,284,379        921,949               
                                                                                                                                 
Provision for loan losses                                                        231,094         53,802                          
                                                                              ----------       ---------               
                                                                                                                     
Net Interest Income After                                                                                            
Provision for Loan Losses                                                     $1,053,285        868,147              
                                                                              ----------       ---------               
OTHER INCOME                                                                                                                      
Income from real estate held                                                                      
for investment                                                                     8,089          9,865                 
Service charges                                                                  140,517         85,096                 
Other operating income                                                            12,650          8,731                 
                                                                              ----------       ---------
Total Other Income                                                            $  161,256        103,692                
                                                                              ----------       ---------               
                                                                                                                       
OTHER EXPENSE                                                                                                          
Compensation and benefits                                                        450,938        410,284                
Occupancy and equipment                                                          149,991         60,852                
Federal deposit insurance premiums                                                15,082         14,631                
Data processing fees                                                              69,539         42,653                
Other operating expenses                                                         185,661        117,892                
                                                                              ----------       ---------               
Total Other Expense                                                           $  871,211        646,312                
                                                                              ----------       ---------               
                                                                                                           
Income before income taxes                                                       343,330        325,527 
                                                                                                           
Income tax expense                                                               129,845        101,550     
                                                                              ----------       ---------               
                                                                                      
                                                                                      
Net Income                                                                    $  213,485       $223,977                
                                                                              ==========       =========                           
                                                                                                            
                                                                                                   
Basic earnings per share                                                      $    $0.30          $0.59
                                                                              ==========       ========
                                                                                                                 
Weighted average shares outstanding                                              712,866        381,349                   
                                                                              ==========       ========


</TABLE>

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



                                      21


<PAGE>
 
                        COMMUNITY NATIONAL CORPORATION
                               (AND SUBSIDIARY)

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



<TABLE>
<CAPTION>

                                                       Year Ended December 31, 
                                                       ----------------------
                                                          1998        1997
                                                       ---------    --------- 
<S>                                                    <C>          <C>
Net income                                             $ 213,485    $ 223,977

Other comprehensive income, net of tax:

  Change in unrealized gain (loss) on securities
    available-for-sale, net of applicable
    deferred income taxes of $4,092 (1998) and
    $20,149 (1997)                                         7,944       39,113
                                                       ---------    --------- 
    Other Comprehensive Income                         $ 221,429    $ 263,090
    --------------------------                         =========    =========

</TABLE>




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


                                      22


<PAGE>
 
 <TABLE>
 <CAPTION>
                                                                                                     Unrealized    
                                                                                                   Gain (Loss) on  
                                                           Common Stock      Additional              Securities         Total   
                                                      ---------------------   Paid-in     Retained    Available     Stockholders'
                                                        Shares     Amount     Capital     Earnings    For Sale         Equity    
                                                      ---------- ----------  ----------   --------   ----------     -------------
<S>                                                  <C>        <C>         <C>         <C>        <C>              <C>
BALANCE AT DECEMBER 31, 1996                             222,993  $ 222,993  $  483,106  $3,200,683  $  (45,382)      $ 3,861,400

Proceeds from issuance of 485,759 shares of
   Community National Corporation common stock
   on December 11, 1997, net of 240 fractional shares
   acquired, and net of offering expense
   of $361,071                                           485,759    485,759   4,010,520           -           -         4,496,279
Cancelation of shares held by Lexington First
   Federal Mutual Holding Company                       (135,000)  (135,000)    135,000           -           -                 -
Conversion of 87,993 shares common stock in
   Lexington First Federal Savings Bank to 227,107
   shares common stock in Community
   National Corporation                                  139,114    139,114    (139,114)          -           -                 -
Comprehensive income:                                   
   Change in unrealized gain (loss) on securities          
      available-for-sale, net of applicable                                                       
      deferred income taxes of $20,149                         -          -           -           -      39,113            39,113
   Net income for the period ended December 31, 1997           -          -           -     223,977           -           223,977
Cash dividends, $.20 per share, per quarter,                              
   for the first 3 quarters of the year                        -          -           -     (52,796)          -           (52,796)
                                                      ---------- ----------  ----------  ----------  ----------     -------------
                                                         712,866 $  712,866  $4,489,512  $3,371,864  $   (6,269)    $   8,567,973
                                                              
BALANCE AT DECEMBER 31, 1997                                                                          
                                                                                                          
Comprehensive income:                                                                                      
   Change in unrealized gain (loss) on securities                                                          
      available-for-sale, net of applicable                                                            
      deferred income taxes of $4,092                          -          -           -           -       7,944            7,944  
   Net income for the period ended December 31, 1998           -          -           -     213,485           -          213,485  
Cash dividends, $.20 per share, per quarter                    -          -           -    (142,576)          -         (142,576) 
                                                      ---------- ----------  ----------  ----------  ----------     -------------
BALANCE AT DECEMBER 31, 1998                             712,866 $  712,866  $4,489,512  $3,442,773  $    1,675     $   8,646,826
                                                      ========== ==========  ==========  ==========  ==========     =============
</TABLE> 

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

                                      23
<PAGE>
 
 
                        COMMUNITY NATIONAL CORPORATION
                               (AND SUBSIDIARY)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE> 
<CAPTION> 
                                                                                       Year Ended December 31,
                                                                              -------------------------------------
                                                                                   1998                   1997
                                                                              -------------------------------------
<S>                                                                           <C>                   <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                   $   213,485           $   223,977
  Adjustments to reconcile net income to net cash                              
   provided by operating activities:                                           
    Provision for loan losses                                                      231,094                53,802
    Provision for depreciation                                                     113,962                27,779
    Amortizations of investment securities                                         
     premiums and discounts (net)                                                   16,034                 1,847
    Stock in FHLB received as dividends                                            (19,300)              (18,000)
    Stock in FRB received as dividends                                                   -                  (765)
    Sale (purchase) of stock in FRB                                                      -              (236,385)
    Changes in operating assets and liabilities:                                   
      (Increase) decrease in interest receivable                                  (100,905)              (32,682)
      (Increase) decrease in other assets                                          (67,852)                  736
      Increase (decrease) in interest payable                                       41,307                14,189
      Increase (decrease) in income taxes                                          (67,689)               77,041
      Increase (decrease) in other liabilities                                     (34,650)              128,971
                                                                               -----------           -----------  
    Net Cash Provided by Operating Activities                                  $   325,486           $   240,510
    -----------------------------------------
INVESTING ACTIVITIES                                                           
  Net (increase) decrease in time deposits                                     $(1,125,000)          $   850,000
  Net (increase) decrease in loans                                              (7,024,947)           (3,389,799)
  Additions to premises & equipment                                              ( 397,458)             (351,806)
  Purchases of mortgage backed securities                                         (495,000)           (1,497,017)
  Proceeds from collection of mortgage-backed securities                         1,358,107               836,457
  Purchases of investment securities                                              (700,000)           (1,500,000)
  Proceeds from maturities of investment securities                              2,155,873             1,925,318
                                                                               -----------           -----------   
    Net Cash Used in Investing Activities                                      $(6,228,425)          $(3,126,847)
    -------------------------------------                                      -----------           -----------   
FINANCING ACTIVITIES
  Net increase (decrease) in demand deposits, NOW
   accounts, passbook savings accounts, and
   certificates of deposits                                                    $ 7,577,761           $   778,083
  Payments on advances from Federal Home Loan Bank                                (128,929)             (133,616)
  Net increase (decrease) in mortgage escrow funds                                   2,710                (2,175)
  Net proceeds received from the issuance of common stock                                -             4,496,579
  Dividends paid                                                                  (142,576)              (52,796)
                                                                               -----------           -----------   
    Net Cash Provided by Financing Activities                                  $ 7,308,966           $ 5,086,075
    -----------------------------------------                                  -----------           -----------   

    Increase in Cash and Cash Equivalents                                        1,406,027             2,199,738
    -------------------------------------                                      -----------           -----------
</TABLE> 
(Continued)

                                                                24

<PAGE>
 
 
                        COMMUNITY NATIONAL CORPORATION
                               (AND SUBSIDIARY)

                 CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)



<TABLE>
<CAPTION>

                                                                   Year Ended December 31, 
                                                                ---------------------------
                                                                    1998            1997
                                                                -----------     -----------
<S>                                                             <C>             <C>
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                  2,741,783         542,045
                                                                -----------     -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                      $ 4,147,810     $ 2,741,783
                                                                ==========      ===========
SUPPLEMENTAL INFORMATION
    Interest paid                                               $ 1,215,780     $ 1,109,750
    Taxes paid                                                      196,628          11,400
    Non-cash investing and financing activities consisted of
      the following:       
      Loans transferred to real estate owned during the year        120,204               -
      Stock dividends received from Federal Home Loan Bank           19,300          18,000
      Total net increase (decrease) in unrealized loss on
        securities available-for-sale                                 7,944          39,113

</TABLE>




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


                                      25



<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Lexington First Federal Savings and Loan Association (the Association) commenced
operations in 1961 as a federally chartered mutual savings association. Its
deposits have been federally insured up to applicable limits, and it has been a
member of the Federal Home Loan Bank (FHLB) system since that time.

On December 14, 1992, the Association completed its reorganization to a mutual
holding company known as Lexington First Federal Mutual Holding Company (the
Mutual Holding Company). On that date, Lexington First Federal Savings Bank (the
Savings Bank) completed its organization through the sale of a total of 215,000
shares of common stock, of which 135,000 shares were sold to the Mutual Holding
Company in exchange for the transfer to the Savings Bank of all but $100,000 of
the assets and liabilities of the Association, and 80,000 shares were sold to
persons other than the Mutual Holding Company at a price of $10.00 per share for
gross proceeds of $800,000, and net proceeds of $626,193, after deducting
expenses of $173,807.

Community National Corporation (the Company) was incorporated under the laws of
the State of Tennessee for the purpose of holding all of the capital stock of
Lexington First Federal Savings Bank following the second step conversion of its
former mutual holding company, which was completed on December 11, 1997. On that
date, pursuant to the plan of conversion: (i) the Mutual Holding Company
converted to an interim federal stock savings bank and simultaneously merged
with and into the Bank; (ii) the Mutual Holding Company ceased to exist and the
135,000 shares of the outstanding Bank Common Stock held by the Mutual Holding
Company were canceled; (iii) a second interim savings association (Interim) was
formed by the Company solely for the purpose of merging with and into the Bank.
As a result of the merger of Interim with and into the Bank, the Bank became a
wholly owned subsidiary of the Company operating under the name "Lexington First
Federal Savings Bank" and the outstanding Public Bank Shares, which amounted to
87,993 shares were converted into Exchange Shares pursuant to a ratio of
2.581243 for each Public Bank Share. At the conclusion of the Stock Conversion
and Reorganization Lexington First Federal Savings Bank converted to a national
bank known as "Community National Bank of Tennessee," the present wholly owned
subsidiary of Community National Corporation.

The Company's principal business is that of directing, planning and coordinating
the business activities of the Bank. These activities primarily consist of
accepting deposits from the general public and investing these funds in loans in
the Bank's market area and in investment securities and mortgage-backed
securities.

Basis of Presentation

The consolidated financial statements include the accounts of the Company (prior
to December 11, 1997 Lexington First Federal Mutual Holding Company) and its
wholly owned subsidiary, Community National Bank of Tennessee (prior to December
11, 1997 Lexington First Federal Savings Bank).

All significant inter-company accounts are eliminated in consolidation.

                                       26
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Cash and Cash Equivalents

Cash consists of currency on hand and demand deposits with other financial
institutions. Cash equivalents are short-term, highly liquid investments both
readily convertible to known amounts of cash and so near maturity that there is
insignificant risk of changes in value because of changes in interest rate. Only
investments with maturities of less than three months at the time of purchase
are considered as cash equivalents.

Securities

Investment securities are classified as follows:

Held-to-maturity, which includes those securities which the Company has the
intent and the ability to hold to maturity; Trading securities, which includes
those investment securities which are held for short-term resale; and
Available-for-sale, which includes all other investment securities.

Securities, which are held-to-maturity, are reflected at cost, adjusted for
amortization of premiums and accretion of discounts under methods, which
approximated the interest method. Securities, which are available-for-sale, are
carried at fair value, and unrealized gains and losses are recognized as direct
increases or decreases in stockholders' equity. Trading securities, where
applicable, are carried at fair value, and unrealized gains and losses on these
securities are included in net income.

Realized gains and losses on investment securities transactions are determined
based on the specific identification method and are included in net income.

Loans Receivable

Loans receivable are stated at unpaid principal balances, less the allowance for
possible loan losses, and net of deferred loan-origination fees. Interest on
loans is accrued and credited to operations based upon the principal amount
outstanding.

Allowance for Loan Losses

Provision for losses on loans receivable and foreclosed real estate are charged
to operations when the loss becomes probable based on management's judgement.
Management's periodic evaluation of the adequacy of the allowance is based on
the company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, and current economic
conditions.


                                       27
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Allowance for Loan Losses (Cont.)

Various regulatory agencies, as an integral part of their examination process,
periodically review the company's allowance for possible losses. Such agencies
may require the company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.

Uncollectible interest on loans is charged off, or an allowance is established,
when management is uncertain on the collectibility of the loan. The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent that payments
are received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is back to normal, in which case the
loan is returned to accrual status. At December 31, 1998 and 1997, $1,895 and
$4,743 respectively, of interest had been charged to the allowance for
uncollectible interest per management's evaluation

Loan Origination Fees and Related Costs

Loan fees are accounted for in accordance with FASB Statement No. 91, Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases. Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for estimated prepayments based on the company's
historical prepayment experience. The amount of the fees deferred at December
31, 1998 and 1997 were $13,429 and $22,679.

Real Estate Held for Investment and Foreclosure Real Estate

Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure. Real estate
properties held for investment are carried at the lower of cost, including cost
of improvements and amenities incurred subsequent to acquisition, or net
realizable value. Costs relating to development and improvement of property are
capitalized, whereas costs relating to the holding of property are expenses.

Income Taxes

The Company uses the accrual method of accounting for federal income tax
reporting. Deferred tax assets or liabilities are computed for significant
differences in financial statement and tax basis of assets and liabilities,
which result from temporary differences in financial statement and tax
accounting.

                                       28
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Premises and Equipment

Land is carried at cost. Buildings and furniture, fixtures and equipment are
carried at cost, less accumulated depreciation and amortization. Buildings and
furniture, fixtures and equipment are depreciated using the straight-line method
over the estimated useful lives of the assets.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.

Fair Value of Financial Instruments

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

                                       29
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

       Cash and cash equivalents: The carrying amounts reported in the statement
       of financial condition for cash and cash equivalents approximate those
       assets' fair values.

       Time deposits: Fair values for time deposits are estimated using a
       discounted cash flow analysis that applies interest rates currently being
       offered on certificates to a schedule of aggregated contractual
       maturities on such time deposits.

       Investment securities (including trading account securities and
       mortgage-backed securities): Fair values for investment securities are
       based on quoted market prices, were available. If quoted market prices
       are not available fair values are based on quoted market prices of
       comparable instruments.

       Loans: For variable-rate loans that reprice frequently and with no
       significant change in credit risk, fair values are based on carrying
       amounts. The fair values for other loans (for example, fixed rate
       commercial real estate and rental property mortgage loans and commercial
       and industrial loans) are estimated using discounted cash flow analysis,
       based on interest rates currently being offered for loans with similar
       terms to borrowers of similar credit quality. Loan fair value estimates
       include judgments regarding future expected loss experience and risk
       characteristics. The carrying amount of accrued interest receivable
       approximates its fair value.

       Deposits: The fair values disclosed for demand deposits (for example,
       interest-bearing checking accounts and passbook accounts) are, by
       definition, equal to the amount payable on demand at the reporting date
       (that is, their carrying amounts). The fair value for certificates of
       deposit are estimated using a discounted cash flow calculation that
       applies interest rates currently being offered on certificates to a
       schedule of aggregated contractual maturities on such time deposits. The
       carrying amount of accrued interest payable approximates fair value.

       Long-term borrowings: Rates currently available to the Savings Bank for
       borrowings with similar terms and remaining maturities are used to
       estimate fair value of existing borrowings.

Reclassification.

Certain prior year amounts have been reclassified to conform to the current year
financial statement presentation.

                                       30
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 2 - CASH AND CASH EQUIVALENTS

Cash and cash equivalents at December 31, 1998 and 1997, are summarized below:

<TABLE>
<CAPTION>
                                                    December 31,
                                              ----------------------------
                                                  1998            1997
                                              ------------     -----------
 <S>                                          <C>              <C>
 Cash on hand                                    $ 65,633         $ 36,150
 Demand deposits                                4,082,177        2,705,633
                                                ----------       ---------
                                              $ 4,147,810      $ 2,741,783
                                              ============     ===========
</TABLE>

NOTE 3 - INVESTMENT SECURITIES

The amortized cost and estimated market value of investments and mortgage-backed
securities are as follows:

<TABLE>
<CAPTION>
                  December 31, 1998                        Amortized        Unrealized     Unrealized     Market
                  -----------------                          Cost             Gains          Losses        Value
                                                         ------------       ----------     ----------   -----------
 <S>                                                     <C>                <C>            <C>          <C>
 Securities held-to-maturity consist of the following:
 Obligations of states & political subdivisions          $   657,770        $ 35,366       $    -       $   693,136
                                                         ============       =========      ==========   ===========

 Securities available-for-sale consist of the following:
 U.S. government and federal agencies                    $ 1,585,174         $ 5,835       $  (15,537)  $ 1,575,472
                                                         ============        ========      ==========   ===========

 Total                                                   $ 2,242,944        $ 41,201       $  (15,537)  $ 2,268,608
-------                                                  ============       =========      ==========   ===========

                  December 31, 1997
                  -----------------
 Securities held-to-maturity consist of the following:
 U.S. government and federal agencies                      $  500,000       $      -        $   (705)  $  499,295
 Obligations of states & political subdivisions               657,492         32,319              -       689,811
                                                           -----------      ---------        -------   ----------
                                                           $1,157,492       $ 32,319         $  (705)  $1,189,106
                                                           ===========      =========        =======   ==========

 Securities available-for-sale consist of the following:
 U.S. government and federal agencies                      $2,355,373       $  3,115      $  (30,956)  $2,327,532
 Obligations of states & political subdivisions               189,833            654             -        190,487
                                                           -----------      ---------      ---------   ----------
                                                           $2,545,206       $  3,769       $ (30,956)  $2,518,019
                                                           ===========      =========      =========   ==========

 Total                                                     $3,702,698       $ 36,088       $ (31,661)  $3,707,125
-------                                                    ===========      =========      =========   ==========
</TABLE>

                                       31
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 3 - INVESTMENT SECURITIES (Cont.)

The following is a summary of securities held-to-maturity and available-for-sale
as of December 31, 1998:



<TABLE>
<CAPTION>
                                        Securities Held-to-Maturity    Securities Available-for-Sale
                                       ----------------------------    -----------------------------
                                         Amortized      Estimated        Amortized       Estimated
                                           Cost       Market Value         Cost         Market Value
                                       ------------   ------------      -----------     ------------
 <S>                                   <C>            <C>               <C>             <C>
 Amounts maturing in:
 One year or less                       $       -        $       -      $   500,000      $   503,567
 After one year through five years              -                -          300,000          284,463
 After five years through ten years       397,770          409,052          701,267          702,711
 After ten years                          260,000          284,084           83,907           84,731
                                        ----------       ----------     ------------     -----------
                                        $ 657,770        $ 693,136      $ 1,585,174      $ 1,575,472
                                        ==========       ==========     ============     ===========
</TABLE>



During 1998 and 1997, the Savings Bank did not sell any investment securities.

Investment securities with a carrying amount of approximately $2,050,000 and
$1,300,000 at December 31, 1998 and December 31, 1997, respectively, were
pledged to secure deposits as required or permitted by law.

NOTE 4 - MORTGAGE-BACKED SECURITIES

The amortized cost and estimated market values of mortgage-backed securities are
as follows:
  
<TABLE>
<CAPTION>
                                                     December 31, 1998
                                  --------------------------------------------------------------
                                     Amortized      Unrealized       Unrealized         Market
                                       Cost           Gains            Losses           Value
                                  ------------     -----------      -----------      -----------
<S>                               <C>              <C>              <C>              <C>
 Securities held-to-maturity                            
  consist of the following:                           
 GNMA                             $    380,098     $         -      $      (437)     $   379,661
                                  ============     ===========      ===========      ===========
                               
 Securities available-for-sale                        
  consist of the following:    
FNMA                              $    189,514     $        36      $    (1,615)     $   187,935
GNMA                                 2,118,141          15,050           (5,531)       2,127,660
FHLMC                                  436,437           5,517           (1,217)         440,737
                                  ------------     -----------      -----------      -----------
                                  $  2,744,092     $    20,603      $    (8,363)     $ 2,756,332
                                  ============     ===========      ===========      ===========
                                  $  3,124,190     $    20,603      $    (8,800)     $ 3,135,993
                                  ============     ===========      ===========      ===========
</TABLE>               



                                       32
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 4 - MORTGAGE-BACKED SECURITIES (Cont.)

<TABLE>
<CAPTION>
                                       December 31, 1997
                   -------------------------------------------------------------
                    Amortized       Unrealized      Unrealized         Market
                      Cost            Gains           Losses           Value
                   -----------     -----------      -----------      -----------
Securities held-to-maturity consist of the following:
<S>                <C>             <C>              <C>              <C>

 GNMA              $   556,783     $     6,512      $       -        $   563,295
                   ===========     ===========      ===========      ===========
<CAPTION> 
Securities available-for-sale consist of the following:
<S>                <C>             <C>              <C>              <C>
 FNMA              $   472,780     $     1,024      $    (5,225)     $   468,579
 GNMA                2,122,884          20,798           (2,348)       2,141,334
 FHLMC                 848,226           9,091           (5,651)         851,666
                   -----------     -----------      -----------      -----------
                   $ 3,443,890     $    30,913      $   (13,224)     $ 3,461,579
                   ===========     ===========      ===========      ===========
                   $ 4,000,673     $    37,425      $   (13,224)     $ 4,024,874
                   ===========     ===========      ===========      ===========
</TABLE>


The following is a summary of securities held-to-maturity and available-for-sale
as of December 31, 1998:


<TABLE>
<CAPTION>
                                   Securities Held-to-Maturity      Securities Available-for-Sale
                                   ---------------------------      -----------------------------
                                    Amortized       Estimated         Amortized       Estimated
                                      Cost        Market Value          Cost        Market Value
                                   ----------     ------------      ------------    -------------
<S>                                <C>            <C>               <C>             <C>
Amounts maturing in:

One year or less                    $    --        $    --            $   65,768     $   65,834
                                                                                   
After one year through five years        --             --               216,962        214,130
                                                                                   
After five years through ten years       --             --               343,220        348,707
                                                                                   
After ten years                       380,098        379,661           2,118,142      2,127,661
                                    ---------      ---------          ----------     ----------
                                                                                   
                                    $ 380,098      $ 379,661          $2,744,092     $2,756,332
                                    =========      =========          ==========     ==========
</TABLE>

During 1998 and 1997, the Savings Bank sold no mortgage-backed securities.

The average yield for all mortgage-backed securities at December 31, 1998 and
1997 was 5.87% and 5.70%, respectively.

Mortgage-backed securities with a carrying amount of $500,000 at December 31,
1998 were pledged to secure deposits as required or permitted by law.

                                       33
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 5 - LOANS RECEIVABLE

Loans receivable are summarized as follows:


<TABLE>
<CAPTION>
                                                            December 31,
                                                     ---------------------------
                                                         1998           1997
                                                     -----------     -----------
<S>                                                  <C>             <C>
First mortgage loans (principally conventional):
 Principal balances:
  Secured by one-to-four-family residences           $16,448,517     $16,275,163
  Secured by other properties                          1,534,013         631,487
                                                     -----------     -----------
                                                     $17,982,530     $16,906,650
 Less - Net deferred loan origination fees                13,429          22,679
        Construction loans-in-process                    427,978         271,688
                                                     -----------     -----------
                                                     $17,541,123     $16,612,283
                                                     -----------     -----------

<CAPTION> 
                                                           December 31,
                                                   -----------------------------
                                                       1998             1997
                                                   -----------      ------------
<S>                                                <C>              <C>
Consumer and other loans:
 Principal balances:
  Secured by certificates of deposit               $   377,076      $   561,626
  Automobile                                           744,953          301,961
  Recreational vehicle                                  52,195              503
  Other personal                                       438,920          160,379
  Agricultural                                         203,560          148,323
  Commercial                                         6,498,947        1,699,603
  Mobile Homes                                         145,671           40,124
  Fixed term rate                                      768,962          214,659
                                                   -----------      -----------
                                                   $ 9,230,284      $ 3,127,178
                                                   -----------      -----------
Total first mortgage and consumer loans             26,771,407       19,739,461
Less - allowance for loan losses                       368,375          195,239
                                                   -----------      -----------
                                                   $26,403,032      $19,544,222
                                                   ===========      ===========
Average Yield                                             8.32%            8.78%
                                                   ===========      ===========
</TABLE>


In conformity with Statement No. 114 of the Financial Accounting Standards
Board, the Company has recognized loans with carrying values of approximately
$430,000 at December 31, 1998 and $248,000 at December 31, 1997, as being
impaired. None of the balance in the Allowance for Loan Losses is directly
related to these as the Company feels they will be collected.

                                       34
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 6 - ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses is summarized as follows:

<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                     ---------------------------
                                                        1998             1997
                                                     ---------         ---------
<S>                                                  <C>               <C>
Balance at beginning of year                         $ 195,239         $ 141,438
Provisions charged to income                           231,094            53,801
Charge-offs and recoveries, net                        (57,958)             --
                                                     ---------         ---------
Balance at end of year                               $ 368,375         $ 195,239
                                                     =========         =========
</TABLE>

The Company's lending efforts have historically focused on residential real
estate loans, which comprised approximately $18.0 million or 68% of the total
loan portfolio at December 31, 1998. At December 31, 1997, residential real
estate loans comprised $16.0 million or 80% of the total loan portfolio.
Generally the loan-to-value ratio does not exceed 80%. This has provided the
Company with an adequate collateral coverage in the event of default.
Nevertheless, the Company, as with any lending institution, is subject to the
risk that the values of real estate could deteriorate in its primary lending
area. For the Company this area consists of Henderson County and Surrounding
counties in the West Tennessee area. Management of the Company believes that the
real estate values in the its primary lending area are stable and such stability
will continue in the foreseeable future.

NOTE 7 - RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company makes loans to officers,
directors and employees and their related business interests. Such loans are
made on the same terms as those prevailing at the time for unrelated third
parties and did not involve more than the normal risk of collectibility or
present other unfavorable features. At December 31, 1998 and 1997, the amounts
of such loans were $1,171,819 and $832,875, respectively.

<TABLE>
<CAPTION>
                  Additions          Deductions           Balance at 12/31/98
                  ---------    ------------------------ ------------------------
                                       Amounts
     Balance at    Amounts     ------------------------ 
      12/31/97    Borrowed     Collected    Written Off  Current     Non-Current
     ----------   ---------    ---------    ----------- -----------  -----------
     <S>          <C>          <C>          <C>         <C>          <C>
     $ 832,875    $ 840,892    $ 501,948    $         - $ 1,171,819  $         -
</TABLE>

                                       35
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 8 - ACCRUED INTEREST RECEIVABLE

Accrued interest receivable is summarized as follows:

<TABLE>
<CAPTION>
                                                      December 31,
                                               --------------------------
                                                  1998             1997
                                               ----------       ---------
 <S>                                           <C>              <C>
 Investment securities                         $  74,668        $  58,925
 Mortgage-backed securities                       16,315           17,286
 Loans receivable                                147,969           61,836
                                               ----------       ---------
                                               $ 238,952        $ 138,047
                                               ==========       =========
</TABLE>

NOTE 9 - REAL ESTATE HELD FOR INVESTMENT

The Savings Bank has invested in an adjacent commercial building, which is being
held for rental purposes. The real estate held for investment is summarized as
follows:

<TABLE> 
<CAPTION> 
                                                      Years Ended December 31,
                                                     ---------------------------
                                                        1998             1997
                                                     --------          ---------
 <S>                                                 <C>               <C>
 Office building ...........................         $ 39,443          $ 39,443
 Less accumulated depreciation .............          (39,443)          (39,107)
                                                     --------          --------
                                                     $   --            $    336
                                                     ========          ========

Income from real estate operations is as follows:
<CAPTION> 
                                                       Years Ended December 31,
                                                      --------------------------
                                                        1998             1997
                                                      --------         ---------
 <S>                                                 <C>               <C>
 Rental income                                        $ 8,425          $10,200
 Depreciation expense                                    (336)            (335)
                                                      --------         --------
                                                      $ 8,089          $ 9,865
                                                      ========         ========
</TABLE>

NOTE 10 - FORECLOSED REAL ESTATE, NET OF ALLOWANCE FOR LOSSES

Activity in the allowance for losses for real estate foreclosed is as follows:

<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                     ---------------------------
                                                        1998             1997
                                                     ---------         ---------
 <S>                                                 <C>               <C>
 Balance at beginning of period                       $     -          $     -
 Provisions charged to income                               -                - 
 Charge-offs, net of recoveries                             -                -
                                                      --------         --------
 Balance at end of year                               $     -          $     -
                                                      ========         ========
</TABLE>


                                       36
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 11 - PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

<TABLE> 
<CAPTION> 
                                                     Years Ended December 31,
                                                   -----------------------------
                                                        1998             1997
                                                   -----------       -----------
 <S>                                               <C>               <C>
 Cost:
 Land                                              $   104,122       $ 169,122
 Buildings                                             675,926         396,545
 Furniture, fixtures and equipment                     418,570         300,494
                                                   -----------       ---------
                                                   $ 1,198,618       $ 866,161
 Less accumulated depreciation                        (400,638)       (287,013)
                                                   -----------       ---------
                                                   $   797,980       $ 579,148
                                                   ===========       =========
</TABLE>

Depreciation expense for the periods ended December 31, 1998 and 1997 totaled
$113,626 and $27,444, respectively.

NOTE 12 - DEPOSITS

Deposits are summarized as follows:

<TABLE>
<CAPTION>
                                                              December 31,
                                             ---------------------------------------------
                                                      1998                    1997
                                             ---------------------   ---------------------
                                                Amount     Percent      Amount     Percent
                                             -----------   -------   -----------   -------
<S>                                          <C>           <C>       <C>           <C>
NOW accounts at 2.00% in 1998
and in 1997                                  $ 1,103,114     3.80    $   706,409    12.73
Senior citizens checking                          65,446     0.23         78,697     0.33
Student checking                                   5,499     0.02          2,039     0.01
Free checking                                    309,684     1.07        121,838     0.51
Super NOW accounts, 3.05% in
1998 and in 1997                                 859,546     2.96        351,214     1.48
Commercial checking                              324,620     1.12        174,899     0.74
Passbook savings at 3.0% in
1998 and  in 1997                              1,469,347     5.07      1,913,689     8.07
Super passbook savings at 4.0% in 1998         1,380,416     4.76           --       --
                                             -----------   ------    -----------   ------
                                             $ 5,517,672    19.03    $ 3,348,785    23.87
                                             -----------   ------    -----------   ------
Certificates of deposit:
3% to 4%                                     $    57,684     0.20    $      --       --
4% to 5%                                       1,976,286     6.82        513,004     2.16
5% to 6%                                      21,442,166    73.95     17,554,258    73.97
                                             -----------   ------    -----------   ------
                                             $23,476,136    80.97    $18,067,262    76.13
                                             -----------   ------    -----------   ------
                                             $28,993,808   100.00    $21,416,047   100.00
                                             ===========   ======    ===========   ======
Weighted average cost of deposits                   5.20%                   5.03%
                                                    =====                   =====
</TABLE>

                                       37
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997

NOTE 12 - DEPOSITS (Cont.)

The amount of certificates of deposit with a minimum denomination of $100,000
was $7,322,929 and $4,069,367, respectively, at December 31, 1998 and 1997.

The Company routinely enters into deposit relationships with its directors,
officers and employees in the normal course of business. These deposits bear the
same terms and conditions as those prevailing at the time for comparable
transactions with unrelated parties. Balances of executive officers and
directors on deposit as of December 31, 1998 and 1997,were $1,235,383 and
$1,152,757 respectively.

Maturities of outstanding certificates of deposit are summarized as follows:

<TABLE>
<CAPTION>
                                                       December 31,
                                               ----------------------------
           Time to Maturity                        1998             1997
           ----------------                    ------------    ------------
 <S>                                           <C>             <C>
 0 to 1 year                                   $ 20,982,190    $ 16,612,431
 1 to 2 years                                     2,493,946       1,454,831
                                               ------------    ------------
                                               $ 23,476,136    $ 18,067,262
                                               ============    ============
</TABLE>

Interest expense on deposits is summarized as follows:

<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                   -----------------------------
                                                        1998            1997
                                                   ------------     ------------
 <S>                                               <C>              <C>
 NOW                                               $    68,951      $    20,631
 Super NOW                                              21,573            6,323
 Passbook                                               47,354           55,265
 Super passbook                                         31,394                -
 Certificates of deposit                             1,074,609          971,196
                                                   ------------     -----------
                                                   $ 1,243,881      $ 1,053,415
                                                   ============     ===========
</TABLE>

                                       38
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 13 - ADVANCES FROM FEDERAL HOME LOAN BANK

The Savings Bank had outstanding advances from the FHLB at December 31, of
$692,848 (1998) and $821,777 (1997). The Savings Bank has executed a blanket
mortgage collateral agreement with the FHLB, which pledges mortgage loans equal
to 1.5 times the amount of advance outstanding or $1,039,272 at December 31,
1998 and $1,232,666 at December 31, 1997.

The amounts due on advances excluding interest of $835,726 are as follows:

<TABLE>
<CAPTION>
                        Year Ended
                      December 31,                      Amount
                      -------------                   ---------
                      <S>                             <C>
                          1999                        $  20,183
                          2000                           21,770
                          2001                           23,483
                          2002                           25,331
                          2003                           27,326
                        2004-2008                        75,752
                        2009-2013                        95,867
                        2014-2018                       141,175
                        2019-2023                       208,253
                        2024-2026                        53,708
                                                      ---------
                                                      $ 692,848
                                                      =========
</TABLE>

The weighted average cost of advances at December 31, 1998 and 1997 was 7.76%
and 7.88%, respectively.

NOTE 14 - INCOME TAXES

A reconciliation of income taxes at the federal statutory rates to the income
tax expense in the financial statements is as follows:

<TABLE>
<CAPTION>
                                                                       December 31,
                                                     -------------------------------------------------
                                                               1998                      1997
                                                     -------------------------  ----------------------
                                                                  % of Pretax              % of Pretax
                                                       Amount        Income       Amount     Income
                                                     ----------   ------------  ---------  -----------
 <S>                                                 <C>          <C>           <C>        <C>
 Expected income tax expense at federal tax rates    $ 116,732       34.0       $ 110,679     34.0
 Increase (reductions) in taxes resulting from:
 Non-taxable income:
 Municipal bonds                                       (14,280)      (4.2)        (20,789)    (6.4)
 State income tax, net of federal income tax effect     27,744        8.1          24,673      7.6
 Other                                                    (351)      (0.1)        (13,013)    (4.0)
                                                     ----------      -----      ----------    -----
                                                     $ 129,845       37.8       $ 101,550     31.2
                                                     ==========      =====      ==========    ====
</TABLE>

                                       39
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997

NOTE 14 - INCOME TAXES (Cont.)

Deferred tax assets have been provided for taxable temporary differences related
to unrealized gains on available-for-sale securities, uncollected interest,
deferred compensation, bad debts, and deferred loan fees. Deferred tax
liabilities have been provided for temporary differences related to Federal Home
Loan Bank Stock dividends.

<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                                        ------------------------
                                                           1998          1997
                                                        ---------      ---------
 <S>                                                    <C>            <C>
 Deferred Tax Liabilities (Net)
 Stock dividends                                        $ 60,656       $ 54,094
 Bad debts                                               (72,686)       (18,293)
 Loan fees reported in different periods for
 tax and financial statement purposes                     (4,566)        (7,711)
 Deferred compensation                                   (30,871)       (18,314)
 Uncollected interest - deferred on books but
 reported as income on tax return                           (644)        (1,612)
 Deferred tax valuation for unrealized
 losses on available-for-sale securities                     863         (3,229)
                                                        ---------       --------
                                                        $(47,248)       $ 4,935
                                                        =========       ========
</TABLE>

NOTE 15 - BENEFIT PLANS

Deferred Compensation Plan

The Company's Board of Directors has established a Deferred Compensation Plan
for its directors, including the President of the Company. Before each calendar
year begins, each non-employee director may elect to defer receipt of all or
part of the fees that the Bank or the company would otherwise have provided, and
the President may elect to defer receipt of up to 25% of his future
compensation. In addition, the Company made a one-time credit of $207,730 to the
President's account. Of this amount, $100,000 will vest pro-rata over ten years
of the President's future service, and $107,730 will be 50% vested immediately
and vest 25% per year over the following two years of the President's future
service. For the $107,730 portion of the credit only, vesting accelerates to
100% if the President is terminated without "just cause" and not in connection
with a "change in control" (as these terms are defined in his Employment
agreement).

                                       40
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 15 - BENEFIT PLANS (Cont.)
Pension Plan

The Company annually contributes an amount to the Financial Institutions
Retirement Fund as necessary to fund the actuarially determined minimum funding
requirements in accordance with the Employee Retirement Income Security Act of
1974, as amended (ERISA). For the year ended September 30, 1991, the Retirement
Plan was completely funded. Pension expense amounted to $0 and $300 for the
years ended December 31, 1998 and 1997, respectively. Upon the normal retirement
age, at or after age 65, a participant is entitled to an annual retirement
benefit in the amount equal to 1.5% of the participant's average annual
compensation (as defined in the Retirement Plan) multiplied by the participant's
years of benefit service at normal retirement. Under the Retirement Plan,
employees may participate in the Retirement Plan after one year of employment
with the Company. Benefits are also payable under the Retirement Plan for
termination due to disability, early retirement and upon death. Benefits become
vested after a participant completes five years of service.

NOTE 16 - REGULATORY CAPITAL

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

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total capital and
Tier 1 capital to risk-weighted assets (as defined in the regulations), and Tier
1 capital to adjusted total assets (as defined). Management believes, as of
December 31, 1998, that the Bank meets all the capital adequacy requirements to
which it is subject.

As of December 31, 1998, the most recent notification from the FDIC, the Bank
was categorized as well capitalized under the regulatory framework for prompt
corrective action. To remain categorized as "well capitalized", the Bank will
have to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as disclosed in the following table. There are no conditions or
events since the most recent notification that management believes have changed
the Bank's prompt corrective action category.

                                       41
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997

NOTE 16 - REGULATORY CAPITAL (Cont.)

The Bank's actual and required capital amounts and ratios are as follows:

<TABLE>
<CAPTION>
                                                                              To Be Well Capitalized
                                                                                 under the Prompt
                                                             For Capital        Corrective Action
                                          Actual         Adequacy Purposes         Provisions
                                    -----------------    ------------------   ----------------------
                                     Amount    Ratio      Amount     Ratio      Amount      Ratio
                                    --------  -------    --------  --------   ---------  -----------
                                                       (Dollars in Thousands)
 <S>                                <C>       <C>        <C>       <C>         <C>       <C>
 As of December 31, 1998
 Total Capital
    (to Risk-Weighted Assets)       $ 6,783    32.2%     $ 1,682       8.0%   $ 2,102      10.0%
    Tier 1 Capital
    (to Risk-Weighted Assets)         6,519    31.0%         841       4.0%     1,261       6.0%
    Tier 1 Capital
    (to Adjusted Total Assets)        6,519    17.3%       1,503       4.0%     1,878       5.0%

 As of December 31, 1997
 Total Capital
    (to Risk-Weighted Assets)         6,540    29.7%       1,760       8.0%     2,200      10.0%
    Tier 1 Capital
    (to Risk-Weighted Assets)         6,345    28.8%         880       4.0%     1,320       6.0%
    Tier 1 Capital
    (to Adjusted Total Assets)        6,345    21.1%       1,203       4.0%     1,504       5.0%
</TABLE>

NOTE 17 - CONCENTRATION OF CREDIT RISK

Most of the Savings Bank's business activity is with customers located within
Henderson and surrounding counties in Tennessee. The loan portfolio is comprised
of first-mortgage loans to residential and commercial customers and consumer
loans.

NOTE 18 -FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the financial statements. The contractual amounts of
those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.

The Company's exposure to credit loss in the event of nonperformance by the
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as they
do for on-balance-sheet instruments. Unless noted otherwise, the Company
generally requires collateral to support financial instruments with credit risk.

                                      42
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 18 -FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (Cont.)

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since the majority of the commitments are expected to
be funded, the total commitment amounts represent future expected cash
requirements. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The Amount of collateral obtained if deemed necessary by the
Company upon extension of credit is based in part on management's credit
evaluation of the counter-part. Collateral held varies, but consists principally
of residential real estate and deposits.

The Company had outstanding firm commitments to originate loans as follows:

<TABLE>
<CAPTION>
                                                           December 31,
                                                     -----------------------
                                                        1998          1997
                                                     ---------      --------
 <S>                                                 <C>            <C>
 First-mortgage loans                                $      -       $ 52,371
                                                     =========      ========
</TABLE>

NOTE 19 - STOCKHOLDERS' EQUITY

The Mutual Holding Company had requested and received approval from the Office
of Thrift Supervision to waive receipt of dividends on its shares through
September 30, 1997. Dividends declared by the Association on Mutual Holding
Company shares cumulatively total $1,944,000 at December 31, 1997. Since the
Mutual Holding Company ceased to exist effective December 11, 1997, this amount
remains restricted for the payment of dividends to Company stockholders.

NOTE 20 - EARNINGS PER SHARE

Net income per share of common stock for the years ended December 31, 1998 and
1997 of $0.30 and $0.59 was computed by dividing the net income by the weighted
average number of shares outstanding for the year. All per share amounts prior
to December 11, 1997, the date of reorganization, have been adjusted for the
exchange rate of 2.581243. Diluted earnings per share has not been presented
because the Company has a simple capital structure.

                                       43
<PAGE>
 
                          COMMUNITY NATION CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 21 - PARENT COMPANY ONLY FINANCIAL INFORMATION

Financial information of the Corporation (parent company only) is as follows:

                               BALANCE SHEET

<TABLE>
<CAPTION>
                                  ASSETS
                                  ------
                                                         December 31,
                                                  ----------------------------
                                                      1998             1997
                                                  -----------      -----------
 <S>                                              <C>              <C>
 Cash in bank                                     $ 1,676,903      $ 2,315,038
 Loans receivable                                     442,482                -
 Accrued interest receivable                            5,043                -
 Investment in subsidiary                           6,522,677        6,317,050
                                                   ----------        ---------
   Total Assets                                   $ 8,647,105      $ 8,632,088
   ------------                                   ===========      ===========

                          LIABILITIES AND CAPITAL
                          -----------------------
 LIABILITIES
  Accounts payable and accrued expenses           $       113      $    62,820
  Taxes payable                                           166            1,295
                                                  -----------      -----------
   Total Liabilities                              $       279      $    64,115
   -----------------

 STOCKHOLDERS' EQUITY                               8,646,826        8,567,973
                                                  -----------      -----------
   Total Liabilities and Stockholders' Equity     $ 8,647,105      $ 8,632,088
   ------------------------------------------     ===========      ===========

                              INCOME STATEMENT
<CAPTION> 
                                                      For the Year Ended
                                                         December 31,
                                                  ----------------------------
                                                      1998             1997
                                                  -----------      -----------
<S>                                               <C>              <C>
INCOME
 Interest income                                  $    50,943      $     3,700
 Equity in net income of subsidiary                   205,625           84,321
                                                  -----------      -----------
                                                  $   256,568      $    88,021
 EXPENSES
 Operating expenses                                    32,849                -
                                                  -----------      -----------

   Income Before Income Taxes                     $   223,719      $    88,021
   --------------------------
 Income taxes                                           2,290            1,295
                                                  -----------      -----------
   Net Income                                     $   221,429      $    86,726
   ----------                                     ===========      ===========
</TABLE>

                                       44
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 21 - PARENT COMPANY ONLY FINANCIAL INFORMATION (Cont.)

                             STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                        For the Year Ended
                                                                                           December 31,
                                                                                  ----------------------------
                                                                                      1998             1997
                                                                                  -----------      -----------
 <S>                                                                              <C>              <C>
 CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                                                       $   221,429      $    86,726
  Adjustments to reconcile net income to net cash and cash equivalents:
   Equity in net income of subsidiary                                                (205,625)         (84,321)
   Changes in operating assets and liabilities:
   (Increase) in interest receivable                                                   (5,045)            --
   Increase in accounts payable                                                           113             --
   (Increase) in taxes payable                                                         (1,129)           1,295
                                                                                  -----------      -----------

  Net Cash Provided by Operating Activities                                       $     9,743      $     3,700
  -----------------------------------------                                       -----------      -----------

 CASH FLOWS FROM INVESTING ACTIVITIES
  Net (increase) in loans                                                         $  (442,482)     $      --
                                                                                  -----------      -----------

 CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from the issuance of stock                                             $      --        $ 4,496,518
  Purchase of stock in subsidiary                                                        --         (2,248,000)
  Increase in accounts payable - stock conversion cost                                (62,820)          62,820
  Dividends paid                                                                     (142,576)            --
                                                                                  -----------      -----------

   Net Cash Provided by (Used in) Financing Activities                            $  (205,396)     $ 2,311,338
   ---------------------------------------------------                            -----------      -----------

   Increase (Decrease) in Cash and Cash Equivalents                                  (638,135)       2,315,038
   ------------------------------------------------

 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                                    2,315,038             --
                                                                                  -----------      -----------

 CASH AND CASH EQUIVALENTS - ENDING OF PERIOD                                     $ 1,676,903      $ 2,315,038
                                                                                  ===========      ===========
</TABLE>

                                       45
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 22 - FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of the Corporation's financial instruments are as
follows:

<TABLE>
<CAPTION>
                                                             December 31,
                                          ---------------------------------------------------
                                                   1998                       1997
                                          ------------------------   ------------------------
                                            Carrying       Fair        Carrying       Fair
                                             Amount       Value         Amount       Value
                                          -----------  -----------   -----------  -----------
 <S>                                      <C>          <C>           <C>          <C>
 Financial Assets:
 Cash and cash equivalents                $ 4,147,810  $ 4,147,810   $ 2,741,783  $ 2,741,783
 Time deposits                              1,125,000    1,125,000             -            -
 Investment securities                      2,233,242    2,268,608     3,702,698    3,707,125
 Mortgage-backed securities                 3,136,430    3,135,993     4,000,673    4,024,874
 Loans, net of allowance                   26,408,075   26,607,706    19,544,222   20,018,796
 Accrued interest receivable                  238,952      238,952       138,047      138,047

 Financial Liabilities:
 Deposits                                  28,993,808   29,010,690    21,416,047   21,218,087
 Advances from FHLB                           692,848      731,330       821,777      867,419
 Accrued interest payable                     211,261      211,261       169,954      169,954

 Unrecognized Financial Instruments:
 Commitments to extend credit                       -            -        52,371       52,371
</TABLE>

NOTE 23 - THE CONVERSION

On April 12, 1997, the Board of Directors of the Savings Bank and the Mutual
Holding Company adopted a Plan of Conversion and Agreement and Plan of
Reorganization (Plan). Pursuant to the Plan, (1) the Mutual Holding Company
converted to an interim federal stock savings bank and simultaneously merged
into the Savings Bank, the Mutual Holding Company ceased to exist and the
135,000 shares or 60.5% of the outstanding shares of the Savings Bank's common
stock held by the Mutual Holding Company were cancelled, and (2) the Savings
Bank merged into an interim institution (Interim) to be formed as a wholly-owned
subsidiary of Lexington First Federal Mutual Holding Company (the Company), a
newly formed Tennessee corporation formed in connection with the reorganization,
with the Bank being the surviving entity; and (3) the outstanding shares of the
Bank's common stock (other than those held by the Mutual Holding Company, which
were cancelled) were converted into shares of common stock of the Company
pursuant to a ratio that will result in the holders of such shares owning in the
aggregate approximately the same percentage of the Company as they owned of the
Bank. The Company then offered for sale pursuant to the Plan additional shares
equal to 60.5% of the common shares of the Company. Consummation of the Plan was
subject to (i) the approval of the members of the Mutual Holding Company, (ii)
the stockholders of the Bank, and (iii) various regulatory agencies. Pursuant to
the Plan, shares of the Company's common stock were offered initially for
subscription by eligible members of the Company, eligible employee benefit plans
of the Company and the Bank, and certain other persons, including stockholders
of the Bank, as of specified dates subject to various subscription priorities as
provided in the Plan. The common stock was offered at a price determined by the
Board of Directors

                                       46
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997


NOTE 23 - THE CONVERSION (Cont.)

based upon an appraisal to be made by an independent appraisal firm. The exact
number of shares offered was determined by the Board of Directors in conjunction
with the determination of the price at which the shares were sold. Any stock not
purchased in the subscription offering was sold in a community offering that
commenced simultaneously with the subscription offering.

The Plan provided that when the conversion was completed, a "Liquidation
Account" was established in an amount equal to the amount of any dividends
waived by the Mutual Holding Company plus the greater of (1) the retained
earnings of the Bank as of March 31, 1992, the date of the latest Statement of
Financial Condition contained in the final offering circular utilized in the
formation of the Mutual Holding Company or (2) 60.5% of the Bank's total
stockholders' equity as reflected in its latest statement of financial condition
in the final prospectus utilized in the conversion. The Liquidation Account is
established to provide a limited priority claim to the assets of the Bank to
qualifying depositors as of specified dates (Eligible Account Holders and
Supplemental Eligible Account Holders) who continue to maintain deposits in the
Bank after the conversion. In the unlikely event of a complete liquidation of
the Bank, and only in such an event, Eligible Account Holders and Supplemental
Account Holders would receive from the Liquidation Account a liquidation
distribution based on their proportionate share of the then total remaining
qualifying deposits.

Current regulations allow the Bank to pay dividends on its stock after the
conversion if its regulatory capital would not thereby be reduced below the
amount then required for the aforementioned Liquidation Account. Also, capital
distribution regulations limit the Bank's ability to make capital distribution
which include dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt, and other transactions charged to
the capital account based on their capital level and supervisory condition.
Federal regulations also preclude (i) any repurchases of the stock of the
Company for one year after the conversion, and (ii) any repurchase of the stock
of the Company, in the second or third year after the conversion unless such
repurchase is pursuant to an offer made on a pro rata basis to all stockholders
and with prior approval of the Office of Thrift Supervision or pursuant to an
open-market stock repurchase program that complies with certain regulatory
criteria including such purchases to not more than 5% of the stock of the
Company unless otherwise approved by the Office of Thrift Supervision.

NOTE 24 - YEAR 2000 COMPLIANCE

The year 2000 poses many challenges for the banking industry. Many automated
applications may cease to properly function as a result of how date fields have
historically been programmed. Many programs were designed and developed without
considering the impact of the upcoming change in the century. Failure to address
this issue in a timely manner may cause banking institutions to experience
operational problems and could cause disruption of financial markets. Many
experts believe that even the most prepared organizations may encounter some
implementation problems. As a result, the Bank has developed a Year 2000
Strategic Plan (the Plan) to take the necessary steps to insure that problems
and disruptions are minimized.

                                       47
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                                (AND SUBSIDIARY)

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

                           DECEMBER 31, 1998 AND 1997

NOTE 24 - YEAR 2000 COMPLIANCE (Cont.)

The Bank's data processing system is outsourced to Intrieve, a service bureau
that services the majority of all thrifts and savings and loans throughout the
nation. All systems including all Bank PC's are integrated with the service
bureau applications. Over $200,000 has been spent on upgrading all equipment,
software and systems. This was done principally to modernize operations, but a
substantial portion of this investment would have been required for Year 2000
compliance alone. Final testing for Year 2000 compliance has been completed with
all applications performing with Year 2000 dates. Successful tests have been
completed with all vendors and correspondents with which the Bank directly
interfaces. The Bank is Year 2000 compliant at this point. Additional testing
will be made during 1999 to check and reinforce compliance readiness. Should any
unforeseen glitches arise the Bank has a contingency plan with several
alternatives to meet the worst case scenario.

The Bank's customers have been notified and counseled. All commercial customers
with Year 2000 requirements have been counseled one on one with compliance
assured to the Bank's satisfaction.

The cost of addressing the Year 2000 issue has had no material impact on
earnings since the expenditures meeting Year 2000 requirements were required and
planned for modernization alone. With testing reflecting compliance to date,
there are no indications of material impact on earnings or uncertainty of future
operation results or financial condition.

                                       48
<PAGE>
 
                        MARKET AND DIVIDEND INFORMATION

      The Company's common stock is traded on the over-the-counter market with
quotations available through the OTC "Electronic Bulletin Board" under the
symbol "ILCY." As of December 31, 1998, there were 712,866 shares of common
stock outstanding and approximately 157 holders of record of the common stock.
This does not include persons who may hold shares in "street name."

      The following table sets forth the high and low bid price for the common
stock since the common stock's issuance on December 11, 1997. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.

<TABLE>
<CAPTION>
         Fiscal 1997                      High         Low         Dividends Paid
         -----------                      ----         ---         --------------
         <S>                              <C>         <C>          <C>
         Fourth Quarter                   12.00       11.50                None

         Fiscal 1998
         -----------
         First Quarter                    12.00           11.00        35,644
         Second Quarter                   13.00           11.75        35,644
         Third Quarter                    13.375           9.00        35,644
         Fourth Quarter                   11.25            8.25        35,644
</TABLE>

Dividend Restrictions

      The Board of Directors of the Company has the authority to declare
dividends on the Common Stock, subject to statutory and regulatory requirements.
The Company will consider the establishment of a dividend policy although no
such policy has, as yet, been adopted. The Board will, however, review its
dividend policy on a quarterly basis. In addition, from time to time, the Board
of Directors may determine to pay special cash dividends. Special cash
dividends, if paid, may be paid in addition to, or in lieu of, regular cash
dividends. For a period of one year following the completion of the Conversion
and Reorganization, the Company may not pay any special dividends or dividends
that would be construed as a return of capital nor take any actions to pursue or
propose such dividends. Payment of dividends on the common stock is subject to
determination and declaration by the Company's Board of Directors. Any dividend
policy of the Company will depend, however, upon the Company's and Bank's debt
and equity structure, earnings, regulatory capital requirements, as well as
other factors, including economic conditions and regulatory restrictions.
Therefore, there can be no assurance that dividends will be paid or if paid will
continue to be paid in the future.

      Dividend payments by the Company are subject to regulatory restriction
under Federal Reserve Board policy as well as to limitations under applicable
provisions of Tennessee corporate law. 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 earnings for
the past year are 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. The Federal Reserve Board also
indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, the Federal
Reserve Board may prohibit a bank holding company from paying any dividends if
the holding company's bank subsidiary is classified as "undercapitalized".

      Under the Tennessee Business Corporation Act, a dividend may be paid by a
Tennessee corporation unless, after giving it effect, the corporation would not
be able to meet its debts as they become due in the usual course of business or
the corporation's total assets would be less than the sum of its total
liabilities plus the amount that would be needed, if the corporation were to be
dissolved at the time of the dividend, to satisfy any preferential rights upon
dissolution of stockholders whose preferential rights are superior to those
receiving the distribution. The payment of dividends from the Bank is subject to
various tax and regulatory restrictions.

                                       49
<PAGE>
 
                              BOARD OF DIRECTORS

<TABLE>
<S>                            <C>                                <C>
Charlie H. Walker              Howard W. Tignor                   Arba Milam Taylor
Chairman of the Board          President and Chief Executive      Secretary-Treasurer of Community
Retired attorney               Officer of Community National      National Corporation and Community
                               Corporation and Community          National Bank of Tennessee
                               National Bank of Tennessee

Pope Thomas                    Stephen M. Lowry                   Robert C. Thomas
Retired sales representative   Plant manager and engineer         Livestock specialist
                               Decatur Metal Works

Richard Walker                 Pat Carnal                         Stephen M. Milam
Practicing attorney            Insurance Agent;                   Attorney
                               President and Owner of
                               Pat Carnal Insurance
                                Agency, Inc.


                                  EXECUTIVE OFFICERS

Charlie H. Walker              Howard W. Tignor                   Arba Milam Taylor
Chairman of the Board          President and Chief                Secretary-Treasurer
                               Executive Officer


                                  OFFICE LOCATIONS

              Main Office                                       Branch Office
 
         19 Natchez Trace Drive                             435 West Church Street
       Lexington, Tennessee 38351                         Lexington, Tennessee 38351
             (901) 968-6624                                     (901) 968-9599


                                          GENERAL INFORMATION

Independent Auditors                      Annual Meeting                     Stockholder Inquiries and 
Arnold, Spain & Company, P.C.             The Annual Meeting of              Availability of 10-KSB Report
Jackson, Tennessee                        Stockholders will be held on       A COPY OF THE COMPANY'S 
                                          April 28, 1999 at 2:00 p.m. at     ANNUAL REPORT ON FORM
Special Counsel                           19 Natchez Trace Drive             10-KSB FOR THE FISCAL YEAR ENDED
Housley Kantarian & Bronstein, P.C.       Lexington, Tennessee 38351         DECEMBER 31, 1998 AS FILED WITH THE
1220 19th Street, N.W.                                                       SECURITIES AND EXCHANGE COMMISSION WILL
Suite 700                                 Transfer Agent and Registrar       BE FURNISHED WITHOUT CHARGE TO
Washington, D.C.  20036                   Illinois Stock Transfer Company    STOCKHOLDERS AS OF THE RECORD DATE FOR
                                          Chicago, Illinois                  THE APRIL 22, 1999 ANNUAL MEETING UPON
                                                                             WRITTEN REQUEST TO INVESTOR RELATIONS,
                                                                             COMMUNITY NATIONAL CORPORATION, 19
                                                                             NATCHEZ TRACE DRIVE, LEXINGTON,
                                                                             TENNESSEE 38351
</TABLE>

                                       50
<PAGE>
 
                         COMMUNITY NATIONAL CORPORATION
                         ------------------------------

                                     [LOGO]

                             19 NATCHEZ TRACE DRIVE
                           LEXINGTON, TENNESSEE 38351
                                 (901) 968-6624

                                       51