<PAGE>
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
FORM 10-QSB
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from __________ to _____________.
Commission File Number: 0-23411
-------
COMMUNITY NATIONAL CORPORATION
- ----------------------------------------------------------------
(Exact Name of Small Business Issuer
as Specified in Its Charter)
Tennessee 62-0644195
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
19 Natchez Trace Drive, Lexington, Tennessee 38351
- ----------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (901) 968-6624
--------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ( ) No (X)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date: December 10, 1997 222,993 Shares of Common Stock
$1 Par Value
Transitional Small Business Disclosure Format (check one):
Yes (X) No ( )<PAGE>
<PAGE>
COMMUNITY NATIONAL CORPORATION
CONTENTS
Part I FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statement of Financial Condition at
September 30, 1997 and December 31, 1996 3
Statements of Consolidated Income for the
Three Months and Nine Months Ended September 30,
1997 and 1996 4
Statements of Consolidated Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 5
Notes to Financial Statements 6-8
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 12
Item 2: Changes in Securities 12
Item 3: Defaults Upon Senior Securities 12
Item 4: Submission of Matters to a Vote of
Security Holders 12
Item 5: Other Information 12
Item 6: Exhibits and Reports on Form 8-K 12
Signature 12
<PAGE>
<PAGE>
3
COMMUNITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 724,072 $ 542,045
Time deposits 750,000 850,000
Investment securities:
Securities held-to-maturity (estimated
market value of $1,176,788 (1997),
$2,278,896 (1996) 1,157,259 2,256,805
Securities available-for-sale, at
estimated market value 2,317,187 1,802,059
Mortgage-backed and related securities:
Securities held-to-maturity (estimated
market value of $627,868 (1997),
$681,255 (1996) 590,133 678,175
Securities available-for-sale, at
estimated market value 3,154,660 2,664,334
Loans receivable, net 17,865,228 16,205,224
Accrued interest receivable 115,311 105,365
Real estate held for investment 103,312 671
Investments required by law:
Stock in Federal Home Loan Bank,
at cost 259,200 245,900
Stock in Savings and Loan Data
Corporation, at cost 15,000 15,000
Premises and equipment 305,594 254,702
Other assets 114,473 2,979
------------ ------------
Total Assets 27,471,429 25,623,259
------------ ------------
LIABILITIES
Deposits 22,275,466 20,637,993
Advances from FHLB 863,561 955,393
Advances from borrowers for taxes
and insurance 923 2,630
Accrued interest payable 161,953 155,765
Income taxes:
Current 67,852 (26,303)
Deferred 38,609 14,326
Other liabilities 20,251 22,084
------------ ------------
Total Liabilities $ 23,428,615 $ 21,761,859
------------ ------------
STOCKHOLDERS' EQUITY
Common stock of $1.00 par value,
authorized 8,000,000 shares,
222,993 issued and outstanding $ 222,993 $ 222,963
Additional paid-in capital 483,106 483,106
Retained earnings - substantially
restricted 3,345,576 3,200,683
Unrealized gain (loss) on securities
available for sale (8,861) (45,382)
------------ ------------
Total Stockholders' Equity $ 4,042,814 $ 3,861,400
------------ ------------
Total Liabilities & Stockholders Equity $ 27,471,429 $ 25,623,259
============ ============
/TABLE
<PAGE>
<PAGE> 4
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME (Unaudited) (Unaudited) (Unaudited) (Unaudited)
First mortgage loans $ 361,489 $ 344,593 $ 1,073,244 $ 1,015,825
Consumer & other loans 25,676 6,443 44,636 19,547
Interest and dividends on investments 60,694 93,766 192,765 288,458
Interest on deposits with banks 8,789 4,690 35,112 19,697
Interest on mortgage-backed securities 56,748 50,317 166,178 165,085
----------- ----------- ----------- -----------
Total interest income $ 513,396 $ 499,809 $ 1,511,935 $ 1,508,612
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits $ 270,398 $ 260,053 $ 778,418 $ 774,920
Interest on advances from FHLB 17,203 18,839 54,019 56,877
----------- ----------- ----------- -----------
Total interest expense $ 287,601 $ 278,892 $ 832,437 $ 831,797
----------- ----------- ----------- -----------
Net interest income $ 225,795 $ 220,917 $ 679,498 $ 676,815
Provision for loan losses 10,900 7,500 20,074 22,500
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses $ 214,895 $ 213,417 $ 659,424 $ 654,315
----------- ----------- ----------- -----------
OTHER INCOME
Income from real estate held
for investment $ -- $ -- $ 7,425 $ 4,455
Service charges 28,081 8,124 64,516 19,999
Other operating income 1,244 385 2,769 3,120
----------- ----------- ----------- -----------
Total other income $ 29,325 $ 8,509 $ 74,710 $ 27,574
----------- ----------- ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES
Compensation & benefits $ 87,023 $ 70,624 $ 268,434 $ 212,779
Occupancy & equipment 11,915 7,067 32,756 24,862
Federal deposit insurance premiums 3,598 140,023 11,032 164,131
Data processing fees 13,087 9,420 31,978 23,915
Other operating expenses 22,415 16,731 75,429 52,146
----------- ----------- ----------- -----------
Total general and administrative
expense $ 138,038 $ 243,865 $ 419,629 $ 477,833
----------- ----------- ----------- -----------
Earnings (Loss) before income taxes $ 106,182 $ (21,939) $ 314,505 $ 204,056
Income tax expense (benefit) 42,598 (7,290) 116,872 74,938
----------- ----------- ----------- -----------
Net earnings (Loss) $ 63,584 $ (14,649) $ 197,633 $ 129,118
=========== =========== =========== ===========
</TABLE>
<PAGE>
<PAGE>
5
COMMUNITY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION> September 30,
----------------------------
1997 1996
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 197,633 $ 141,118
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 20,074 22,500
Provision for depreciation 12,854 7,534
Amortizations of investment securities
premiums and discounts (net) 505 2,716
Stock in FHLB received as dividends (13,300) (12,000)
Changes in operating assets and liabilities:
(Increase) decrease in interest receivable (9,946) (10,884)
(Increase) decrease in other assets (111,494) (13,822)
Increase (decrease) in interest payable 6,188 (12,034)
Increase (decrease) in income taxes 98,532 (30,343)
Increase (decrease) in other liabilities (1,833) 119,124
------------ ------------
Net cash provided by operating activities $ 199,213 $ 213,909
----------------------------------------- ------------ ------------
INVESTING ACTIVITIES:
Net (increase) decrease in time deposits $ 100,000 $ 650,000
Net (increase) decrease in loans (1,660,004) (1,285,673)
Additions to premises & equipment (166,387) (73,972)
Purchases of mortgage-backed securities (1,000,000) (317,488)
Proceeds from collection of mortgage-
backed securities 624,137 925,088
Purchases of investment securities (1,000,000) (1,050,000)
Proceeds from maturities of investment
securities 1,593,845 1,091,310
------------ ------------
Net cash provided by investing activities $ (1,508,409) $ (60,735)
----------------------------------------- ------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts, passbook savings accounts,
and certificates of deposits $ 1,637,502 $ (360,904)
Payments on advances from FHLB (91,832) (18,718)
Net increase (decrease) in mortgage escrow
funds (1,707) 2,502
Purchase of common stock -- (64)
Dividends paid (52,740) (52,796)
------------ ------------
Net cash provided by financing activities $ 1,491,223 $ (429,980)
----------------------------------------- ------------ ------------
Increase in cash and cash equivalents $ 182,027 $ (276,806)
-------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD $ 542,045 $ 611,572
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 724,072 $ 334,766
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 832,437 $ 831,797
Taxes paid 17,016 98,780
Non-cash investing and financing activities
consisted of the following:
Stock dividends received from FHLB 13,300 12,200
Total net increase (decrease) in unrealized
loss on securities available-for-sale $ 36,521 $ (50,251)
/TABLE
<PAGE>
<PAGE>
6
COMMUNITY NATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 1 - NATURE OF BUSINESS
As of September 30, 1987, Lexington First Federal Mutual
Holding Company was in the process of completing its Conversion
and Reorganization to the stock form of organization, whereby
Community National Corporation, a Tennessee-chartered stock
holding company (the "Corporation") will own 100% of the
outstanding shares of Common stock of Community National Bank, a
National Bank, and the Corporation will sell 61% of its shares
to the public and issue 39% of its shares to the current public
stockholders owning shares of Lexington First Federal Savings
Bank. The discussion in the Form 10-QSB therefore relates to
the operations of Lexington First Federal Mutual Holding Company
and its subsidiary savings bank, Lexington First Federal Savings
Bank.
Lexington First Federal Savings Bank, (Lexington First)
commenced operations in 1961 as a federally-chartered mutual
savings association under the name "Lexington First Federal
Savings and Loan Association". In December 1992, Lexington
First Federal Savings and Loan Association became a stock
association known as Lexington First Federal Savings and Loan
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. Lexington First's
deposits are currently insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") and it is a member of the FHLB of
Cincinnati. Lexington First is subject to the regulation of the
OTS, as wells as the FDIC. On December 14, 1992, the
Association reorganized into the mutual holding company form of
organization and completed a sale of stock to the public (the
"MHC Reorganization"). As of September 30, 1997, the Mutual
Holding Company and the Public Stockholders own an Aggregate of
135,000 shares and 87,993 shares, or 60.54% and 39.46%,
respectively, of the outstanding shares of Bank Common Stock.
The exercise of stock options and the issuance of Management
Recognition Plan shares resulted in the issuance of 7,993
additional shares of Common Stock.
Lexington First's primary business, as conducted through
its office located in Lexington, Tennessee, has been the
origination of mortgage loans secured by single-family
residential real estate located primarily in Henderson County,
Tennessee, with funds obtained through the attraction of savings
deposits, primarily transaction accounts, and certificate
accounts with terms of 18 months or less. The Bank also makes
construction loans on single-family residences, savings account
loans, and second mortgage consumer loans. In the past years,
the Bank has made a limited number of loans on multi-family and
commercial real estate. The Bank also purchases mortgage-backed
securities, and invests in other liquid investment securities
when warranted by the level of excess funds. In the early
1980's, the Bank made and began to emphasize the origination of
adjustable-rate mortgage loans. However, due to customer
preference for fixed-rate mortgage loans, the Bank has been
unable to originate a significant number of adjustable-rate
loans in recent years. The Bank will continue to offer and make
loans with adjustable rates, as the market allows, 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. However, it is expected that a
significant percentage of the Bank's assets will continue to be
invested in mortgage-backed securities and other liquid
investment securities.<PAGE>
<PAGE>
7
COMMUNITY NATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 2 - STOCK CONVERSION AND REORGANIZATION
PURPOSES OF THE STOCK CONVERSION AND REORGANIZATION
In their decision to pursue the Stock Conversion and
Reorganization, the Mutual Holding Company and the Bank
considered the various advantages of a stock holding company
form of organization including : (1) a stock holding company's
ability to diversify the Company's and the Bank's business
activities; (2) the larger capital base of a stock holding
company; (3) the enhancement of the Company's future access to
capital markets; (4) the increase in the number of outstanding
shares of publicly traded stock (which may increase the
liquidity of the Common Stock); and (5) the greater flexibility
in structuring acquisitions. In addition, the Mutual Holding
Company and the Bank considered various regulatory uncertainties
associated with the mutual holding company structure, as well as
the general uncertainty regarding the future of the thrift
charter.
DESCRIPTION OF THE STOCK CONVERSION AND REORGANIZATION
On April 12, 1997, the Boards of Directors of the Bank and
the Mutual Holding Company adopted the Plan (which was
subsequently adopted, as amended) and in July 1997 the Bank
organized the Company under Tennessee law as a first-tier wholly
owned subsidiary. Pursuant to the Plan: (I) the Mutual Holding
Company will convert to an interim federal stock savings bank
and simultaneously will merge with and into the Bank; (ii) the
Mutual Holding Company will cease to exist and the 135,000
shares of the outstanding Bank Common Stock held by the Mutual
Holding Company will be canceled; and (iii) a second interim
savings association ("Interim") formed by the Company solely for
such purpose will become 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 or 39.46% of the outstanding Bank
Common Stock at October 21, 1997, will be converted into the
Exchange Shares pursuant to a ratio (the "Exchange Ratio"),
which will result in the holders of such shares (the "Public
Stockholders") owning in the aggregate approximately 31.86% of
the Common Stock to be outstanding upon the completion of the
Stock Conversion and Reorganization (i.e., the Conversion Stock
and the Exchange Shares), before giving effect to: (I) the
exercise of dissenter's rights of appraisal by the holders of
any shares of Bank Common Stock; (ii) the payment of cash in
lieu of issuing fractional Exchange Shares; and (iii) any shares
of Conversion Stock purchased by the Bank's stockholders in the
Offerings. The Exchange Ratio reflects an adjustment for a
special $5.00 per share dividend paid on Public Bank Shares and
waived by the Mutual Holding Company in 1994.
NOTE 3 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial
statements, (except for the statement of financial condition at
December 31, 1996, which is audited) have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all information and
footnotes required by generally <PAGE>
<PAGE>
8
COMMUNITY NATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 3 - BASIS OF PRESENTATION (CONT.)
accepted accounting principles for complete financial
statements. In the opinion of management all adjustments (none
of which were other than normal recurring accruals) necessary
for a fair presentation of the financial position and results of
operations for the periods presented have been included. The
financial statements of the Company are presented on a
consolidated basis with those of Lexington First Federal Saving
Bank. The results of operations for the nine months ended
September 30, 1997 are not necessarily indicative of the results
of operations that may be expected for the year ended December
31, 1997.
The accounting policies followed are as set forth in Note 1, of
the Note to Financial Statements in the 1996 Lexington First
Federal Mutual Holding Company consolidated financial
statements.
NOTE 4 - REGULATORY CAPITAL REQUIREMENTS
The following is a reconciliation of capital amounts for
the Savings Bank at September 30, 1997, to the regulatory
capital requirements of the bank: (in thousands)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------------------ ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ ---------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Capital $4,214,000 30.61% $1,101,000 >=8.0% $1,377,000 >=10.0%
(to Risk Weighted Assets)
Tier 1 Capital 4,052,000 29.43% $ 551,000 >=4.0% $ 826,000 >=6.0%
(to Risk Weighted Assets)
Tier 1 Capital 4,052,000 14.93% $1,085,000 >=4.0% $1,357,000 >=5.0%
(to Average Assets)
</TABLE>
At September 30, 1997, the institution is in the "well-
capitalized" category.
<PAGE>
<PAGE>
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Lexington is primarily engaged in attracting deposits from
the general public and using those and other available sources
of funds to originate loans secured by single-family residences
located in Henderson County and surrounding counties in West
Tennessee. To a lesser extent, Lexington also originates
construction loans, land loans and consumer loans. It also has
a significant amount of investments in mortgage-backed
securities United States Government and federal agency
obligations, and tax exempt securities.
The profitability of Lexington depends primarily on its 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.
Lexington's net income also is dependent, to a lesser extent, on
the level of its noninterest income and its non-interest
expenses, such as compensation and benefits, occupancy and
equipment, insurance premiums, and miscellaneous other expenses,
as well as federal income tax expense.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996
Lexington First's total assets increased $1.9 million or
7.7% from $25.6 million at December 31, 1996 to 27.5 million at
September 30, 1997. The increase in total assets during the
nine-month period ended September 30, 1997 was principally the
result of an increase in net loans receivable of $1.7 million or
6.8% from $16.2 million to $17.9 million.
The allowance from loan losses totaled $162,000 at
September 30, 1997 and $141,000 at December 31, 1996. As of
those dates Lexington First had loans over ninety-one days
delinquent of $206,000 and $114,000 respectively at September
30, 1997 and December 31, 1996 in its portfolio. There were no
loans charged off or recoveries of previous loan losses during
the nine months ended September 30, 1997. 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 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. Lexington First has had minimal losses on loans in
prior years. At September 30, 1997 the ratio of the allowance
for loan losses to net loans was .90% as compared to .86% at
December 31, 1997.
During the nine months period ended September 30, 1997,
total liabilities increased $1.7 million or 7.7%. This increase
was primarily the result of an increase of $1.6 million or 7.9%
in deposits. Management is continually evaluating the
investment alternatives available to Lexington First'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 NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
General. Lexington First had net income of $198,000 for
the nine month ended September 30, 1997, compared to net income
of $129,000 for 1996. Net interest income increased $5,000.
Non-interest income increased $47,000, while non-interest
expense decreased $58,000.<PAGE>
<PAGE>
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
NET INTEREST INCOME. Net interest income increased by
$5,000 or 0.8% for the nine months ended September 10, 1997
compared to the nine months ended September 10, 1996.
INTEREST INCOME. Interest income increased by $3,000 from
$1,509,000 to $1,512,000 or .2% for the nine months ended
September 30, 1997 compared to the nine-month period ended
September 30, 1996.
INTEREST EXPENSE. The balances as of September 30, 1997
and 1996 are comparable.
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 established
fair value of the underlying collateral and other factors that
warrant recognition in providing for an adequate loan loss
allowance.
No actual losses occurred during the nine months ended
September 30, 1997 and 1996. Loans past due 91 days or more
amounted to $206,000 at June 30, 1997.
NON-INTEREST INCOME. The $47,000 increase in non-interest
income in 1997 compared to 1996 was primarily attributable to an
increase in service charges of $45,000. This increase was
realized by the institution of additional service charges in the
latter part of 1996 such as an insufficient funds (NSF) charge
of $10, later increased to $20.
NON-INTEREST EXPENSE. The $59,000 decrease in non-interest
expenses in 1997 compared to 1996 was primarily attributable to
the $128,000 special SAIF assessment paid during September 1996.
The assessment rate for the special assessment was 65.7 basis
points on deposits, compared to 1.625 basis points per quarter
assessment in 1997. This decrease was partially offset by an
increase in compensation and benefits of $55,000 in 1997 over
1996. This increase was primarily composed of a six months
salary bonus totaling $20,000 paid to an officer that retired
March 1997 as additional compensation for her many years of
service and the addition of three employees hired in 1997 with
salaries totaling $28,000 for the nine months ended September
30, 1997.
INCOME TAXES. Lexington's effective tax rate for the nine
months ended September 30, 1997 and 1996 was 37.2% and 36.7%,
respectively. The increase in income tax expense of $42,000 was
due to the increase in income in 1997 compared to 1996.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
GENERAL. Lexington First had net earnings of $64,000 for
the three month ended September 30, 1997, compared to a net loss
of $15,000 for 1996. Net interest income after provision for
loan losses for 1997 and 1996 is comparable. Non-interest
income increased $20,000, while non-interest expense decreased
$106,000.
NON-INTEREST INCOME. The $20,000 increase in non-interest
income in 1997 compared to 1996 was primarily attributable to an
increase in service charges of $20,000. This increase was
realized by the institution of additional service charges in the
latter part of 1996 such as an insufficient funds (NSF) charge
of $10, later increased to $20.<PAGE>
<PAGE>
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996.(CONT.)
NON-INTEREST EXPENSE. The $106,000 decrease in
non-interest expense in 1997 compared to 1996 was primarily
attributable to the $128,000 special SAIF assessment paid during
September 1996. The assessment rate for the special assessment
was 65.7 basis points on deposits, compared to 1.625 basis
points per quarter assessment in 1997. This decrease was
partially offset by an increase in compensation and benefits of
$16,000 in 1997 over 1996. This increase was primarily composed
of three employees hired in 1997 with salaries totaling $14,000
for the three months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Lexington First's primary sources of funds consists of
deposits, repayment of loans and mortgage-backed securities,
maturities of investments and interest-bearing deposits, and
funds provided from operations. While scheduled repayments of
loans and mortgage-backed securities and maturities of
investment securities are predicable sources of funds, deposit
flows and loan repayments are greatly influenced by the general
level of interest rates, economic conditions and competition.
Lexington First uses its liquidity resources principally to fund
existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to
invest in other interest-earning assets, to maintain liquidity,
and to meet operating expenses. Management believes that
proceeds from the stock sale, loan repayments and other sources
of funds will be adequate to meet Lexington First's liquidity
needs for the immediate future.
Lexington First is required to maintain minimum levels of
liquid assets as defined by the OTS regulations. This
requirement, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based
upon a percentage of deposits and short-term borrowings. The
required minimum ratio became 4% effective November 24, 1997.
The Company has historically maintained a level of liquid assets
in excess of regulatory requirements. Lexington First's
liquidity ratio at September 30, 1997 was 20%.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial statements and related data presented herein
have been prepared in accordance with generally accepted
accounting principles, which require the measurement of
financial position and results of operations in terms of
historical dollars without considering changes in the relative
purchasing power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets
and liabilities of Lexington First are monetary in nature. As a
result, interest rates have a more significant impact on
Lexington First's performance than the effects of general levels
of inflation. Interest rates do not necessarily move in same
direction or in the same magnitude as the prices of goods and
services.<PAGE>
<PAGE>
12
COMMUNITY NATIONAL CORPORATION
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
None.
ITEM 2: Changes in Securities
Not Applicable.
ITEM 3: Defaults Upon Senior Securities
Not Applicable.
ITEM 4: Submission of Maters to a Vote of Security Holders.
Not Applicable
ITEM 5: Other Information.
None
ITEM 6: Exhibits and Reports on Form 8-K.
Exhibit 27 - Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Lexington First Federal
Mutual Holding Company
Registrant
Date: December 9, 1997 /s/ Howard Tignor
__________________________
Howard Tignor, President
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
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0
0
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</TABLE>
