<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB



[ X ]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934
        For the fiscal year ended September 30, 1998

                                       OR

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

        For the transition period from ______________ to ___________________

                         Commission File Number: 0-28012

                          LONDON FINANCIAL CORPORATION
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

              Ohio                                         34-1800830
  -------------------------------                    ----------------------
  (State or other jurisdiction of                        (I.R.S. Employer
   incorporation or organization)                     Identification Number)

        2 East High Street, London, Ohio                      43140
  ---------------------------------------                  ----------
  (Address of principal executive offices)                  (Zip Code)

                    Issuer's telephone number: (740) 852-0787
                                               --------------

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

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

               None                         Common Stock, no par value per share
-------------------------------            ------------------------------------
(Name of each exchange on which                    (Title of Class)
registered)

         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 issuer was required to file such reports), and (2) has
been subject to such requirements for the past 90 days. Yes X   No
                                                           ---    ---

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

         The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on The OTC Bulletin Board as of December 18, 1998, was $5.4
million. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant).

         As of December 15, 1998, there were 479,450 of the Registrant's common
shares issued and outstanding.


                       DOCUMENTS INCORPORATED BY REFERENCE

         Part I of Form 10-KSB - Safe Harbor Under the Private Securities
Litigation Reform Act of 1995 in Exhibit 99. Part II of Form 10-KSB - Portions
of Annual Report to Shareholders for fiscal year ended September 30, 1998, in
Exhibit 13.

         Part III of Form 10-KSB - Portions of Proxy Statement for 1999 Annual
Meeting in Exhibit 20. 

      Transitional Small Business Disclosure Format: Yes      No  X 
                                                         ----   ----

<PAGE>   2


                                     PART I

ITEM 1.    DESCRIPTION OF BUSINESS

GENERAL

         London Financial Corporation ("LFC") was incorporated under Ohio law in
October 1995 at the direction of The Citizens Loan & Savings Company
("Citizens") for the purpose of purchasing all of the capital stock of Citizens
to be issued in connection with the conversion of Citizens from mutual to stock
form (the "Conversion"). On March 29, 1996, the effective date of the
Conversion, LFC acquired 100 common shares of Citizens. The principal business
of LFC since the effective date of the Conversion has been holding all of the
issued and outstanding shares of Citizens and 50% of the net proceeds of the
sale of 529,000 common shares of LFC in connection with the Conversion.

         On July 9, 1998, the respective Boards of Directors of Citizens and LFC
approved the conversion of Citizens from a state-chartered savings and loan
association to a state-chartered commercial bank (the "Charter Conversion").
Shortly thereafter, Citizens filed an application with the Division seeking
approval of the Charter Conversion, and Citizen's application was approved by
the Division on December 8, 1998. It is currently anticipated that the Charter
Conversion will be consummated on January 4, 1999. As a result of the Charter
Conversion, Citizens will be permitted to increase its commercial lending
activities to small businesses and to agricultural concerns and to increase its
commercial checking activity. After the Charter Conversion, Citizens will be
regulated by the Division and the Federal Deposit Insurance Corporation (the
"FDIC").

         Also in connection with the Charter Conversion, LFC filed an
application with the Federal Reserve Board for pre-approval to register as a
bank holding company. The Federal Reserve Board approved LFC's application for
pre-approval to become a bank holding company on October 16, 1998. Consequently,
after the Charter Conversion, LFC will be a bank holding company regulated by
the Federal Reserve Board and will no longer be a unitary savings and loan
holding company regulated by the OTS. As a unitary savings and loan holding
company, LFC has been permitted to engage in more numerous types of commercial,
securities and insurance activities than other financial institution holding
companies, including bank holding companies. However, LFC does not currently
engage in any activities which would be impermissible for it to engage in after
the Charter Conversion is consummated and LFC becomes a bank holding company.

         Citizens conducts business from its office located at 2 East High
Street in London, Ohio. The principal business of Citizens is the origination of
permanent and construction mortgage loans secured by first mortgages on one- to
four-family residential real estate located in Madison County, Ohio, the primary
market area of Citizens. Citizens also originates permanent and construction
mortgage loans secured by multifamily real estate (over four units) and
nonresidential real estate in its market area. In addition to real estate
lending, Citizens originates a limited number of commercial loans and secured
and unsecured consumer loans. For liquidity and interest rate risk management
purposes, Citizens invests in interest-bearing deposits in other financial
institutions, U.S. Government and agency obligations, mortgage-backed securities
and other investments permitted by applicable law. Funds for lending and other
investment activities are obtained primarily from savings deposits, which are
insured up to applicable limits by the FDIC, and principal repayments on loans.
Advances from the FHLB of Cincinnati are utilized from time to time when other
sources of funds are inadequate to fund loan demand.

         In addition to the historical information contained herein, the
following discussion contains forward-looking statements, the accuracy of which
is necessarily subject to present and future risks and uncertainties. Economic
circumstances, the operations of Citizens and LFC's actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed in
Exhibit 99.2, "Safe Harbor Under the Private Securities Litigation Reform Act of
1995," which should be read in conjunction with such forward-looking statements.

         Without limiting the generality of the foregoing, the following
statements in the referenced sections of this discussion and analysis are
forward looking and are, therefore, subject to such risks and uncertainties:

         1.       The discussion of interest rate risk associated with
                  adjustable-rate mortgage lending as set forth under "Lending
                  Activities - One- to Four-Family Residences;"

         2.       The discussion of the risk associated with multifamily
                  mortgage lending as set forth under "Lending Activities -
                  Loans Secured by Multifamily Residences;"




                                      -2-
<PAGE>   3


         3.       The discussion of the risk associated with nonresidential
                  mortgage lending as set forth under "Lending Activities -
                  Loans Secured by Nonresidential Real Estate;"

         4.       The discussion of the risk associated with construction
                  lending as set forth under "Lending Activities - Construction
                  Loans;"

         5.       The discussion of the risk associated with consumer lending as
                  set forth under "Lending Activities - Consumer Loans;"

         6.       The discussion of the risk of loss associated with
                  nonperforming loans as set forth under "Lending Activities -
                  Delinquent Loans, Nonperforming Assets and Classified Assets;"

         7.       The discussion of the adequacy of the amount of Citizens'
                  allowance for loan losses as set forth under "Lending
                  Activities - Allowance for Loan Losses;"

         8.       The discussion of the maturity of certificates of deposit at
                  Citizens as set forth under "Deposits and Borrowings -
                  Deposits;" and

         9.       The discussion of the effect of legislation which may be
                  enacted as set forth under "Regulation."

MARKET AREA

         The primary market area of Citizens for lending and deposit activity is
Madison County, Ohio. Madison County is primarily a suburban commuter economy
and has experienced growth in population and households in the 1990s at a higher
rate than the State of Ohio and the United States. There are relatively few
major employers and a lower number of residents employed in the finance,
insurance and real estate industries compared to persons employed in state and
local government, as the London Correctional Facility is the largest employer in
the county. Madison County is characterized by lower unemployment levels than
state or national averages and a median household income level similar to levels
in Ohio and the United States.

LENDING ACTIVITIES

         GENERAL. The principal lending activity of Citizens is the origination
of permanent and construction mortgage loans secured by one- to four-family
homes located in Madison County. Loans secured by multifamily properties and by
nonresidential real estate and loans for the construction of nonresidential
properties are also offered by Citizens. In addition to real estate lending,
Citizens originates a limited number of commercial loans and consumer loans,
including loans secured by deposit accounts, automobile loans and a limited
number of other secured and unsecured loans.




                                      -3-
<PAGE>   4

         LOAN PORTFOLIO COMPOSITION. The following table presents certain
information in respect of the composition of the loan portfolio of Citizens at
the dates indicated:
<TABLE>
<CAPTION>

                                                           At September 30,
                              -------------------------------------------------------------------------------------------------- 
                                          1998                               1997                               1996
                              -------------------------------------------------------------------------------------------------- 
                                                  Percent                             Percent                            Percent
                                                  of total                           of total                           of total
                                Amount              loans            Amount            loans            Amount            loans
                                ------              -----            ------            -----            ------            -----
                                                                                (Dollars in thousands)
<S>                             <C>                <C>               <C>                <C>             <C>                <C>   
Real estate loans:
   One- to four-family          $22,648            66.74%            $23,489            75.89%          $21,819            75.57%
   Multifamily                      665             1.96                 671             2.17               258             0.90
   Nonresidential                 5,083            14.98               4,529            14.63             4,831            16.73
   Construction                   1,315             3.88               1,360             4.39             1,084             3.75
                                -------           ------             -------           ------           -------           ------

      Total real estate loans    29,711            87.56              30,049            97.08            27,992            96.95
        

Commercial loans                  3,473            10.23                 166              .54               190             0.66

Consumer loans:
   Automobile loans                 266              .78                 186              .60               152             0.53
   Loans on deposits                 66              .20                  70              .23               147             0.51
   Other consumer loans             417             1.23                 481             1.55               392             1.35
                                -------           ------             -------           ------           -------           ------

      Total consumer loans          749             2.21                 737             2.38               691             2.39
                                -------           ------             -------           ------           -------           ------

Total loans                      33,933           100.00%             30,952           100.00%           28,873           100.00%
                                                  ======                               ======                             ======
  Less:
   Undisbursed portion of
     loans in process              (745)                                (885)                            (1,258)
   Unearned and deferred
     income                        (399)                                (415)                              (397)
   Allowance for loan losses
                                   (201)                                (187)                              (187)
                                -------                              -------                            -------
     Net loans                  $32,588                              $29,465                            $27,031
                                =======                              =======                            =======
</TABLE>


         LOAN MATURITY. The following table sets forth certain information as of
September 30, 1998, regarding the dollar amount of loans maturing in the
portfolio of Citizens based on their contractual terms to maturity. Demand
loans, home equity loans and other loans having no stated schedule of repayments
or no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>

                                                                          Due 4-5     Due 6-10   Due 11-20    Due more
                                        Due during the year ending         years       years       years       than 20
                                                September 30,              after       after       after     years after
                                        1999        2000       2001       9/30/98     9/30/98     9/30/98      9/30/98      Total
                                    ----------  ----------  ---------    ---------   ---------    --------     --------     -----
<S>                                 <C>            <C>         <C>         <C>          <C>          <C>       <C>          <C>    
Real estate loans:
  One- to four-family                 $   37        $ 24       $  11       $  317       $1,008       $6,915    $14,336      $22,648
   Multifamily and nonresidential         52           2          16          147          569        2,502      2,460        5,748
   Construction                          661         654           -            -            -            -          -        1,315
Commercial loans                       2,205          49         137          559           73          200        250        3,473
Consumer loans                           146          93         159          333           18            -          -        749
                                      ------        ----       -----       ------       ------       ------    -------      -------
Total                                 $3,101        $822        $323       $1,356       $1,668       $9,617    $17,046      $33,933
                                      ======        ====       =====       ======       ======       ======    =======      =======
</TABLE>

                                      -4-
<PAGE>   5


         The table below sets forth the dollar amount of all loans due after
September 30, 1999, which have predetermined interest rates and have floating or
adjustable interest rates:
<TABLE>
<CAPTION>

                                          Due after
                                     September 30, 1999
                                     ------------------
                                       (In thousands)

<S>                                          <C>     
Fixed rates of interest                      $  1,241
Adjustable rates of interest                   29,591
                                             --------
Total                                         $30,832
                                              =======
</TABLE>


         LOANS SECURED BY ONE- TO FOUR-FAMILY RESIDENCES. The principal lending
activity of Citizens is the origination of permanent mortgage loans secured by
one- to four-family residences, primarily single-family residences located
within Madison County. At September 30, 1998, one- to four-family residential
loans totaled approximately $22.6 million, or 66.7% of total loans. Citizens
also offers home equity lines of credit secured by second mortgages on
properties on which Citizens holds the first mortgage. Of the total of one- to
four-family residential loans, approximately $22.3 million were secured by first
mortgages and approximately $368,000 were secured by second mortgages at
September 30, 1998.

         Regulations and Ohio law limit the amount which Citizens may lend in
relationship to the appraised value at the time of loan origination of the real
estate and improvements which will secure the loan (the "LTV"). In accordance
with such regulations and laws, and as a matter of policy established by the
Board of Directors of Citizens, Citizens makes loans secured by one- to
four-family residences for not more than an 80% LTV.

         Adjustable-rate mortgage loans ("ARMs") are offered by Citizens for
terms of up to 25 years. The interest rate adjustment periods on ARMs are one
year, and the rates are adjusted in accordance with published changes in the
cost of funds of the Federal Home Loan Bank of San Francisco. The new interest
rate at each change date is determined by adding a margin of 3.00% to the
prevailing index. The maximum allowable adjustment at each adjustment date is 2%
and the maximum allowable adjustment over the term of a loan is 6%. Citizens has
originated no fixed-rate residential real estate loans in approximately the past
10 years.

         Although origination of ARMs decreases interest rate risk, such loans
involve other risks. As interest rates rise, for example, the payment by a
borrower increases to the extent permitted by the terms of his loan. Such
increase in the payment may increase the potential for default. Moreover, the
marketability of the underlying property may be adversely affected by a general
increase in interest rates. Citizens believes that such risks have not had a
material adverse effect on Citizens to date. See Exhibit 99.2, "Safe Harbor
Under the Private Securities Litigation Reform Act of 1995 - Interest Rate
Risk."

         LOANS SECURED BY MULTIFAMILY RESIDENCES. In addition to loans on one-
to four-family properties, Citizens originates loans secured by multifamily
properties (more than four units). At September 30, 1998, the multifamily loan
portfolio consisted of 3 loans, which totaled approximately $665,000, or 2.0% of
total loans, and which were performing in accordance with their terms.
Multifamily loans are offered with adjustable rates for terms of up to 25 years
and have LTVs up to 80%.

         Multifamily lending is generally considered to involve a higher degree
of risk than one- to four-family residential lending because the borrower
typically depends upon income generated by the property to cover operating
expenses and debt service. The profitability of a property can be affected by
economic conditions, government policies and other factors beyond the control of
the borrower. Citizens attempts to reduce the risk associated with multifamily
lending by evaluating the creditworthiness of the borrower and the projected
income from the property and by obtaining personal guarantees on loans made to
corporations and partnerships. Citizens requires financial statements to be
submitted annually by borrowers whose outstanding loan balances are considered
by the Board of Directors to be substantial. See Exhibit 99.2, "Safe Harbor
Under the Private Securities Litigation Reform Act of 1995 - Interest Rate
Risk."

         LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Citizens also originates
loans for the purchase of nonresidential real estate. Among the properties
securing the nonresidential real estate loans in the portfolio of Citizens are
office buildings and retail properties located in the primary market area of
Citizens. At September 30, 1998, approximately $5.1 million, or 15.0%, of the
total loans of Citizens, were secured by mortgages on nonresidential real
estate. At such date, the largest single loan secured by nonresidential real
estate had a balance of $485,000 and was performing in accordance with its
terms. The 



                                      -5-
<PAGE>   6

nonresidential real estate loans made by Citizens have adjustable rates, terms
of up to 25 years and LTVs of up to 75%. Citizens also makes loans for the
construction of nonresidential properties.

         Although loans secured by nonresidential real estate have higher
interest rates than one- to four-family residential real estate loans,
nonresidential real estate lending is generally considered to involve a higher
degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. Citizens has endeavored to reduce such
risk by evaluating the credit history and past performance of the borrower, the
location of the real estate, the financial condition of the borrower, the
quality and characteristics of the income stream generated by the property and
appraisals supporting the property's valuation. See Exhibit 99.2, "Safe Harbor
Under the Private Securities Litigation Reform Act of 1995 Interest Rate Risk."

         CONSTRUCTION LOANS. Citizens makes loans for the construction of
single-family houses, multifamily properties and nonresidential real estate
projects. Of the loans made by Citizens for construction of single-family
residences, all are made to owner-occupants or to professional builders. Some of
the homes for which construction loans are made to professional builders have
not been pre-sold and, therefore, involve greater risk to Citizens.

         Construction loans are offered with adjustable rates for terms of up to
25 years. At September 30, 1998, the loan portfolio of Citizens included $1.3
million in construction loans, or 3.9% of total loans, including undisbursed
proceeds of approximately $745,000. All of the construction loans in the
portfolio of Citizens are for construction of residential and non-residential
properties in Madison County and contiguous counties and all of such loans were
performing in accordance with their terms at September 30, 1998.

         Construction loans, particularly loans involving nonresidential real
estate, generally involve greater underwriting and default risks than do loans
secured by mortgages on existing properties. Loan funds are advanced upon the
security of the project under construction, which is more difficult to value
before the completion of construction. Moreover, because of the uncertainties
inherent in estimating construction costs, it is relatively difficult to
evaluate accurately the LTV and the total loan funds required to complete a
project. In the event a default on a construction loan occurs and foreclosure
follows, Citizens would have to take control of the project and attempt either
to arrange for completion of construction or dispose of the unfinished project.
See Exhibit 99.2, "Safe Harbor Under the Private Securities Litigation Reform
Act of 1995 - Interest Rate Risk."

         COMMERCIAL LOANS. Citizens offers commercial loans to businesses and
individuals in its primary market area. Such loans are typically secured by a
security interest in equipment, nonresidential real estate or other assets of
the borrower. At September 30, 1998, the commercial loan portfolio of Citizens
totaled $3.5 million, or 10.2% of total loans. All of the commercial loans are
to business and individuals in Madison County and contiguous areas and all of
such loans were performing in accordance with their terms at September 30, 1998.

         Commercial lending entails significant risks. Such loans are subject to
greater risk of default during periods of adverse economic conditions. Because
such loans are secured by equipment, inventory, accounts receivable and other
non-real estate assets, the collateral may not be sufficient to ensure full
payment of the loan in the event of a default. See Exhibit 99.2, "Safe Harbor
Under the Private Securities Litigation Reform Act of 1995 - Interest Rate
Risk."

         CONSUMER LOANS. Citizens makes various types of consumer loans,
including loans made to depositors on the security of their deposit accounts,
automobile loans, home improvement loans and other secured loans and unsecured
personal loans. Consumer loans are made at varying rates of interest and for
varying terms based on the type of loan. At September 30, 1998, Citizens had
approximately $749,000, or 2.2% of total loans, invested in consumer loans, all
of which were performing in accordance with their terms.

         Consumer loans, particularly consumer loans which are unsecured or are
secured by depreciating assets such as automobiles, may entail greater risk than
residential real estate loans. Repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance. The risk of default on consumer loans increases during periods of
recession, high unemployment and other adverse economic conditions. See Exhibit
99.2, "Safe Harbor Under the Private Securities Litigation Reform Act of 1995 -
Interest Rate Risk."

         LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by the lending staff of
Citizens and walk-in customers.

                                      -6-
<PAGE>   7

         Loan applications for permanent real estate loans are taken by loan
personnel at the office of Citizens. Citizens typically obtains a credit report,
verification of employment and other documentation concerning the
creditworthiness of the borrower. An appraisal of the fair market value of the
real estate which will be given as security for the loan is prepared by an
appraiser approved by the Board of Directors. Upon the completion of the
appraisal and the receipt of information on the credit history of the borrower,
the application for a loan is submitted for review in accordance with the
underwriting guidelines of Citizens. Loans of amounts less than $100,000 may be
approved by the President of Citizens. Loans of amounts between $100,000 and
$150,000 may be approved by the Executive Committee of the Board of Directors.
Loans in excess of $150,000 require approval of the full Board of Directors of
Citizens.

         If a mortgage loan application is approved, Citizens typically obtains
an attorney's opinion of title. Citizens obtains title insurance on only
approximately 10% of its loans secured by real estate. Borrowers are required to
carry satisfactory fire and casualty insurance and flood insurance, if
applicable, and to name Citizens as an insured mortgagee.

         The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. Citizens
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder. Once approved, the construction loan is
disbursed in portions based upon periodic inspections of construction progress.

         Commercial loans are underwritten on the basis of the borrower's credit
history and the analysis of the borrower's income and expenses relating to the
business they operate, as well as the value of the collateral, if any.

         Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.

         LOAN ORIGINATIONS AND PARTICIPATIONS. Currently, Citizens is
originating only ARMs and has no intention to sell such loans in the secondary
market. [VERIFY] Citizens does not service loans for other financial
institutions.

         The following table presents the loan origination activity of Citizens
for the periods indicated:
<TABLE>
<CAPTION>

                                                     Year ended September 30,
                                                     ------------------------
                                                     1998                 1997
                                                     ----                 ----
                                                           (In thousands)
<S>                                                <C>                   <C>   
Loans originated:
  One- to four-family residential                  $ 4,284               $3,709
  Multifamily residential                                -                  434
  Nonresidential                                       444                  864
  Construction                                       1,205                1,939
  Commercial                                         5,848                  172
  Consumer                                             840                  673
                                                   -------               ------
    Total loans originated                          12,621                7,791

Principal repayments                                (9,600)              (5,438)

Increase in other items, net (1)                       102                   81
                                                   -------               ------
Net increase                                        $3,123               $2,434
                                                   =======               ======
<FN>

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

(1)      Other items consist of deferred loan fees, allowance for loan losses
         and the undisbursed portion of construction loans.
</TABLE>


        FEDERAL LENDING LIMIT. OTS regulations impose a lending limit on the
aggregate amount that a savings association can lend to one borrower to an
amount equal to 15% of the association's total capital for risk-based capital
purposes plus any loan reserves not already included in total capital
(collectively, "Lending Limit Capital"). A savings association may lend to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." In applying this limit, the regulations require that
loans to certain related or affiliated borrowers be aggregated.

                                      -7-
<PAGE>   8

         Based on the 15% limit, Citizens was able to lend approximately
$671,000 to one borrower at September 30, 1998. The largest amount Citizens had
outstanding to one borrower and related persons or entities at September 30,
1998, was $684,000, consisting of nine loans, which are secured by real estate
and were performing in accordance with their terms on September 30, 1998. The 
slight amount in excess of the limit was the result of a $5.00 per share, or 
$2.7 million, special distribution paid to shareholders during fiscal 1998 
which decreased assets.

         LOAN ORIGINATION AND OTHER FEES. Citizens realizes loan origination
fees and other fee income from its lending activities and also realizes income
from late payment charges, application fees and fees for other miscellaneous
services.

         Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 91 as an adjustment to yield over
the life of the related loan.

         DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Payments
on loans made by Citizens are due on the first day of the month with the
interest portion of the payment applicable to interest accrued during the prior
month. When a loan payment has not been made by the fifteenth of the month, a
late notice is sent. If payment is not received by the thirtieth day, a second
notice is sent. Telephone calls are made to the borrower in connection with both
the 15- and 30-day notices. Each of the loans bears a late payment penalty which
is assessed as soon as such loan is more than 15 days delinquent. The late
penalty is the greater of 5% of the payment due or $20.

         When a loan secured by real estate becomes more than 90 days
delinquent, the loan is placed in nonaccrual status and a letter is sent to the
borrower by Citizens to inform the borrower that foreclosure proceedings will
begin if the loan is not brought current within 30 days. If the loan has not
been brought current within such 30-day period, the Board of Directors normally
refers the loan to an attorney to commence foreclosure proceedings.


         The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>

                                                           At September 30,
                                     --------------------------------------------------------------------
                                                 1998                                 1997
                                     -------------------------------      -------------------------------
                                                             Percent                              Percent
                                                             of total                             of total
                                     Number      Amount        loans      Number       Amount       loans
                                     ------      ------        -----      ------       ------       -----
                                                            (Dollars in thousands)
<S>    <C>                              <C>       <C>          <C>           <C>     <C>            <C> 

Loans delinquent for:
  30 - 59 days                          1         $27          .08%          4       $  49          .16%
  60 - 89 days                          1           6          .02           2          40          .13
  90 days and over                      -           -            -           5         268          .87
                                      ---         ---          ---          --        ----         ----
   Total delinquent loans               2         $33          .10%         11        $357         1.16%
                                      ===         ===          ===          ==        ====         ====
</TABLE>

         Nonperforming assets include nonaccruing loans, real estate acquired by
foreclosure or by deed-in-lieu thereof and repossessed assets. Citizens ceases
to accrue interest on real estate loans if the collateral value is not adequate,
in the opinion of management, to cover the outstanding principal and interest.
Generally, however, Citizens ceases to accrue such interest on a loan at any
time the loan is 90 days or more delinquent.




                                      -8-
<PAGE>   9

         The following table sets forth information with respect to the accrual
and nonaccrual status of the loans and other nonperforming assets of Citizens at
the dates indicated:
<TABLE>
<CAPTION>

                                                     At September 30,
                                                     ----------------
                                                 1998                 1997
                                                 ----                 ----
                                                  (Dollars in thousands)

<S>                                            <C>                  <C>   
Accruing loans delinquent 90+ days             $    -               $    7
Loans accounted for on a
   nonaccrual basis:
   Real estate
     One- to four-family                            -                  237
     Multifamily                                    -                    -
     Nonresidential                                 -                   24
   Consumer                                         -                    -
                                               ------                -----
     Total nonaccrual loans                         -                  261
                                               ------                -----

     Total nonperforming loans                      -                  268
   Real estate owned                                -                    -
                                               ------                -----
     Total nonperforming assets                $    -                 $268
                                               ======                =====

     Allowance for loan losses                   $201                 $187

     Nonperforming assets as a percent
       of total assets                              -%                 .70%

     Nonperforming loans as a percent
       of total loans                               -%                 .87%

     Allowance for loan losses as a
       percent of nonperforming loans               -%               69.78%
</TABLE>


         Real estate acquired by Citizens as a result of foreclosure proceedings
is classified as real estate owned ("REO") until it is sold. When property is so
acquired, such property is recorded by Citizens at the lower of cost or the
estimated fair value of the real estate, less estimated selling expenses, at the
date of acquisition and any write-down resulting therefrom is charged to the
allowance for loan losses. All costs incurred in maintaining REO property are
expensed from the date the property is acquired. Costs relating to the
development and improvement of the property are capitalized to the extent of
fair value. At September 30, 1998, Citizens had no REO properties.

         Citizens classifies its own assets on a monthly basis in accordance
with federal regulations. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that Citizens will sustain
some loss if the deficiencies are not corrected. "Doubtful" assets have the same
weaknesses as "substandard" assets, with the additional characteristics that (i)
the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, questionable and (ii) there is a high
possibility of loss. An asset classified "loss" is considered uncollectible and
of such little value that its continuance as an asset of Citizens is not
warranted.

                                      -9-
<PAGE>   10

         The aggregate amounts of classified assets of Citizens at the dates
indicated were as follows:
<TABLE>
<CAPTION>

                                            At September 30,
                                      ------------------------------
                                      1998                      1997
                                      ----                      ----
                                              (In thousands)
<S>                                     <C>                      <C> 
Classified assets:
   Substandard                          $77                      $305
   Doubtful                               -                         -
   Loss                                   -                         -
                                        ---                      ----
    Total classified assets             $77                      $305
                                        ===                      ====
</TABLE>


         Citizens establishes general allowances for loan losses for any loan
classified as substandard or doubtful. If an asset, or portion thereof, is
classified as loss, Citizens establishes specific allowances for losses in the
amount of 100% of the portion of the asset classified loss. Generally, Citizens
charges off the portion of any real estate loan deemed to be uncollectible.

         Citizens analyzes each classified asset on a monthly basis to determine
whether changes in the classifications are appropriate under the circumstances.
Such analysis focuses on a variety of factors, including the amount of any
delinquency and the reasons for the delinquency, if any, the use of the real
estate securing the loan, the status of the borrower and the appraised value of
the real estate. As such factors change, the classification of the asset will
change accordingly. See Exhibit 99.2, "Safe Harbor Under the Private Securities
Litigation Reform Act of 1995 - Possible Inadequacy of the Allowance for Loan
Losses."

         ALLOWANCE FOR LOAN LOSSES. Senior management, with oversight by the
Board of Directors, reviews on a monthly basis the allowance for loan losses as
it relates to a number of relevant factors, including, but not limited to,
trends in the level of delinquent and nonperforming assets and classified loans,
current and anticipated economic conditions in the primary lending area, past
loss experience and possible losses arising from specific problem assets. To a
lesser extent, management also considers loan concentrations to single borrowers
and changes in the composition of the loan portfolio. While management believes
that it uses the best information available to determine the allowance for loan
losses, unforeseen market conditions could result in adjustments and net
earnings could be significantly affected if circumstances differ substantially
from the assumptions used in making the final determination. The amounts in the
provision for loan losses shown in the table below for fiscal years 1998 and
1997 were determined based upon past loan experience, a review of individual
specific problem loans, if any, the estimated value of the underlying collateral
and the prevailing economic conditions. See Exhibit 99.2, "Safe Harbor Under the
Private Securities Litigation Reform Act of 1995 - Possible Inadequacy of the
Allowance for Loan Losses."

         The following table sets forth an analysis of the allowance for loan
losses of Citizens for the periods indicated:
<TABLE>
<CAPTION>

                                                           Year ended September 30,
                                                       -------------------------------
                                                       1998                       1997
                                                       ----                       ----
                                                           (Dollars in thousands)

<S>                                                     <C>                        <C> 
Balance at beginning of period                          $187                       $187

Charge-offs                                                8                          -
Recoveries                                                 -                          -
                                                        ----                       ----
Net charge-offs                                            8                          -

Provision for loan losses                                 22                          -
                                                        ----                       ----

Balance at end of year                                  $201                       $187
                                                        ====                       ====

Ratio of net charge-offs
   to average loans outstanding
   during the period                                       -%                         -%

Ratio of allowance for loan losses
   to total loans                                      .59%                       .60%
</TABLE>


                                      -10-
<PAGE>   11

         The following table sets forth the allocation of the allowance for loan
losses of Citizens by type of loan at the dates indicated:
<TABLE>
<CAPTION>

                                                    At September 30,
                            ------------------------------------------------------------
                                       1998                               1997
                            -------------------------        ---------------------------
                                           Percent of                        Percent of
                                         loans in each                      loans in each
                                          category to                        category to
                            Amount         total loans       Amount          total loans
                            ------         -----------       ------          -----------
                                              (Dollars in thousands)
<S>                         <C>               <C>             <C>              <C>   
Balance at year end
applicable to:
  Real estate loans         $130              87.56%          $182             97.08%
  Commercial loans            51              10.23              1               .54
  Consumer loans              20               2.21              4              2.38
  Unallocated                  -                  -              -                 -
                            ----              -----           ----            ------
    Total                   $201              100.0%          $187            100.00%
                            ====              =====           ====            ======
</TABLE>


         The allowance for loan losses is based on estimates and is, therefore,
monitored monthly and adjusted as necessary to provide an adequate allowance.


INVESTMENT ACTIVITIES

         OTS regulations require that Citizens maintain a minimum amount of
liquid assets, which may be invested in interest-bearing deposits in other
financial institutions, U.S. Treasury and agency obligations, mortgage-backed
securities and certain other specified investments. The Board of Directors of
Citizens has adopted an investment policy which authorizes management to make
investments in U.S. Government and agency securities, deposits in the FHLB,
certificates of deposit in federally-insured financial institutions and
mortgage-backed securities. John J. Bodle, the President of Citizens, and Joyce
E. Bauerle, its Treasurer, have primary responsibility for implementation of the
investment policy. The investment policy of Citizens is designed primarily to
provide and maintain liquidity within regulatory guidelines, to maintain a
balance of high quality investments to minimize risk and to maximize return
without sacrificing liquidity and safety. Such investment policy currently
provides that all investment securities are held to maturity.

                                      -11-
<PAGE>   12

         The following table sets forth the composition of interest-bearing
deposits, investment securities and mortgage-backed securities of Citizens at
the dates indicated:

<TABLE>
<CAPTION>

                                                                           At September 30,
                                     --------------------------------------------------------------------------------------
                                                       1998                                          1997
                                     -------------------------------------------  -----------------------------------------
                                     Carrying     % of        Fair       % of      Carrying     % of        Fair       % of
                                      value      total       value      total       value      total       value      total
                                                                      (Dollars in thousands)
<S>                                    <C>        <C>        <C>          <C>       <C>         <C>        <C>          <C>   
Interest-bearing deposits:
   Demand deposits                     $1,271     31.04%     $1,271       30.81%    $3,342      44.07%     $3,342       43.91%

Investment securities:
   Held to maturity:
     U.S. Government and agency
       securities                           -         -           -           -        500       6.59         502        6.59
   Available for sale:
     Corporate equity securities          121      2.95         121        2.93        155       2.05         155        2.04

Mortgage-backed securities
   held to maturity                     2,703     66.01       2,733       66.26      3,586      47.29       3,613       47.46
                                       ------    ------      ------      ------     ------     ------      ------      ------
Total investments                      $4,095    100.00%     $4,125      100.00%    $7,583     100.00%     $7,612      100.00%
                                       ======    ======      ======      ======     ======     ======      ======      ======
</TABLE>

         The maturities of the interest-bearing deposits and mortgage-backed
securities of Citizens at September 30, 1998, are indicated in the following
table:
<TABLE>
<CAPTION>

                                                              At September 30, 1998
                         ----------------------------------------------------------------------------------------------------------
                                            After one through       After five          After ten
                         One year or less     five years        through ten years         years                    Total
                         ----------------   -----------------   -----------------  -----------------  -----------------------------

                         Carrying  Average  Carrying  Average   Carrying  Average  Carrying  Average  Carrying  Market   Weighted 
                           value    yield    value     yield     value     yield    value    yield     value    value  average yield
                           -----    -----    -----     -----     -----     -----    -----    -----     -----    -----  -------------
                                                              (Dollars in thousands)


<S>                       <C>       <C>        <C>      <C>      <C>        <C>     <C>      <C>      <C>       <C>         <C>  
Interest-bearing
  deposits in other     
  financial institutions  $1,271    3.50%      $-       -%        $-         -%     $   -       -%    $1,271    $1,271      3.50%
Mortgage-backed           
 securities                    -       -        -       -          -         -      2,703    6.29      2,703     2,733      6.29 
                          ------    -----      ---     ---       ---       ---      -----    ----     ------    ------      ---- 
                          

     Total                $1,271    3.50%      $-       -%        $-         -%    $2,703    6.29%    $3,974    $4,004      5.42%
                          ======    ====       ==      ===       ===       ===     ======    ====     ======    ======      ====
</TABLE>


DEPOSITS AND BORROWINGS

         GENERAL. Deposits have traditionally been the primary source of funds
used by Citizens in lending and other investment activities. In addition to
deposits, Citizens derives funds from interest payments and principal repayments
on loans and income on earning assets. Loan payments are a relatively stable
source of funds, while deposit inflows and outflows fluctuate in response to
general interest rates and money market conditions. Citizens also utilizes FHLB
advances as an alternative source of funds.

         DEPOSITS. Deposits are attracted principally from within the market
area of Citizens through the offering of a broad selection of deposit
instruments, including NOW accounts, demand deposit accounts, money market
accounts, regular passbook savings accounts, term certificate accounts and
Individual Retirement Accounts ("IRAs"). Interest rates paid, maturity terms,
service fees and withdrawal penalties for the various types of accounts are
established periodically by management of Citizens based on the liquidity
requirements and growth goals of Citizens and interest rates paid by
competitors. Citizens does not use brokers to attract deposits. The amount of
deposits received by Citizens from outside its market area is not significant.

         At September 30, 1998, certificates of deposit at Citizens totaled
approximately $19.5 million, or 62.2% of total deposits. Of such amount,
approximately $9.5 million in certificates of deposit mature within one year.
Based on past experience and the prevailing pricing strategies of Citizens,
management believes that a substantial percentage of such 


                                      -12-
<PAGE>   13

certificates will be renewed with Citizens at maturity. If there is a
significant deviation from historical experience, Citizens can utilize
borrowings from the FHLB of Cincinnati as an alternative source of funds.

         The following table sets forth the dollar amount of deposits in the
various types of accounts offered by Citizens at the dates indicated:
<TABLE>
<CAPTION>

                                                                   At September 30,
                                                 ---------------------------------------------------
                                                          1998                            1997
                                                 -----------------------             ---------------
                                                                Percent                     Percent
                                                               of total                    of total
                                                   Amount      deposits       Amount       deposits
                                                   ------      --------       ------       --------
                                                                (Dollars in thousands)
<S>                                              <C>             <C>         <C>            <C>   
Transaction accounts:
 NOW accounts (1)                                $  3,905        12.48%      $3,092         10.32%
 Super NOW accounts (2)                                 -            -          278           .94
 Passbook savings accounts (3)                      5,951        19.01        5,834         19.47
 Money market accounts (4)                          1,976         6.31          226           .75
                                                 --------         ----       ------         -----

  Total transaction accounts                       11,832        37.80        9,430         31.48

Certificates of deposit:
   6.00% or less                                   15,170        48.47       15,616         52.14
   Over 6.01%                                       4,298        13.73        4,905         16.38
                                                 --------      -------    ---------        ------

   Total certificates of deposit (5)               19,468        62.20       20,521         68.52
                                                  -------      -------     --------        ------

   Total deposits                                 $31,300       100.00%     $29,951        100.00%
                                                  =======       ======      =======        ======
<FN>

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

(1)      The weighted average rate on NOW accounts at September 30, 1998 and
         1997, was 2.27%.

(2)      The weighted average rate on Super NOW accounts at September 30, 1997,
         was 3.50%.

(3)      The weighted average rate on passbook savings accounts at September 30,
         1998 and 1997, was 3.00%.

(4)      The weighted average rate on money market accounts at September 30,
         1998 and 1997, was 4.68% and 2.71%, respectively.

(5)      The weighted average rate on all certificates of deposit, including IRA
         accounts, at September 30, 1998 and 1997, was 5.91% and 6.00%,
         respectively.
</TABLE>

         Citizens bids on public funds from entities in its primary market area.
The amount of such deposits was approximately $91,000 at September 30, 1998.

         The following table shows rate and maturity information for
certificates of deposit at Citizens at September 30, 1998:
<TABLE>
<CAPTION>

                                                       Amount Due
                              ---------------------------------------------------------------
                                              Over          Over
                                Up to       1 year to    2 years to       Over
       Rate                    one year      2 years      3 years       3 years        Total
       ----                   ----------  -----------   -----------   -----------     -------
                                                      (In thousands)

<S>                            <C>          <C>            <C>          <C>           <C>    
4.01% to 6.00%                 $9,424       $2,573         $1,311       $1,862        $15,170
6.01% to 8.00%                     95        1,101             83        3,019          4,298
                               ------       ------         ------       ------        -------
  Total certificates
    of deposit                 $9,519       $3,674         $1,394       $4,881        $19,468
                               ======       ======         ======       ======        =======
</TABLE>


                                      -13-
<PAGE>   14

         The following table presents the amount of certificates of deposit of
$100,000 or more at Citizens by the time remaining until maturity at September
30, 1998:
<TABLE>
<CAPTION>

           Maturity                                     Amount
           --------                                     ------
                                                    (In thousands)

<S>                                                  <C>     
Three months or less                                 $    100
Over 3 months to 6 months                                 214
Over 6 months to 12 months                                233
Over 12 months                                            960
                                                       ------

    Total                                              $1,507
                                                       ======
</TABLE>


         The following table sets forth the deposit account balance activity at
Citizens for the periods indicated:
<TABLE>
<CAPTION>

                                                                 Year ended September 30,
                                                                 ------------------------
                                                                1998                 1997
                                                                ----                 ----
                                                                  (Dollars in thousands)

<S>                                                            <C>                  <C>    
                    Beginning balance                          $29,951              $28,195
                    Deposits                                    61,467               51,086
                    Withdrawals                                (61,268)             (50,447)
                                                               -------              -------
                    Net deposits before interest               
                    credited                                    30,150               28,834
                    Interest credited                            1,150                1,117
                                                               -------              -------
                    Ending balance                              31,300               29,951
                                                               -------              -------

                      Net increase                             $ 1,349              $ 1,756
                                                               =======              =======
</TABLE>


         BORROWINGS. The FHLB system functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. As a member in good standing of the FHLB of Cincinnati, Citizens
is authorized to apply for advances from the FHLB of Cincinnati, provided
certain standards of creditworthiness have been met. Under current regulations,
an association must meet certain qualifications to be eligible for FHLB
advances. The extent to which an association is eligible for such advances will
depend upon whether it meets the Qualified Thrift Lender Test (the "QTL test").
If an association meets the QTL test, such association will be eligible for 100%
of the advances it would otherwise be eligible to receive. If an association
does not meet the QTL test, such association will be eligible for such advances
only to the extent it holds specified QTL test assets. At September 30, 1998,
Citizens was in compliance with the QTL test and had $1.8 million in advances
from the FHLB, bearing interest at the rate of 6.27% and with maturity dates as
follows:
<TABLE>
<CAPTION>

                                           Amount                     Due Date
                                           ------                     --------
                                       (In thousands)

<S>                                       <C>                           <C>  
                                           $  500                       12/98
                                            1,000                        2/99
                                              300                        6/01
                                           ------                            
                                           $1,800
                                           ======
</TABLE>


COMPETITION

         Citizens competes for deposits with other savings and loan
associations, savings banks, commercial banks and credit unions and with issuers
of commercial paper and other securities, including shares in money market
mutual funds. The primary factors in competition for deposits are customer
service and convenience of office location. In making loans, Citizens competes
with other savings banks, savings and loan associations, commercial banks,
mortgage brokers, consumer finance companies, credit unions, leasing companies
and other lenders. Citizens competes for loan originations primarily through the
interest rates and loan fees it charges and through the efficiency and quality
of services it provides to borrowers. Competition is intense and is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels and other factors which
are not readily predictable. Citizens does not offer all of the products and
services offered by some of its competitors, particularly commercial banks.
Citizens monitors the product offerings of its competitors and adds new products
when it can do so competitively and cost effectively. See Exhibit 99.2, "Safe
Harbor Under the Private Securities Litigation Reform Act of 1995 -
Competition."

                                      -14-
<PAGE>   15

EMPLOYEES

         As of September 30, 1998, Citizens had 10 full-time employees and 4
part-time employees.

REGULATION PRIOR TO THE CHARTER CONVERSION

GENERAL

         Prior to the Charter Conversion, LFC has been a savings and loan
holding company within the meaning of the Home Owners Loan Act, as amended (the
"HOLA"). Consequently, LFC has been subject to regulation, examination and
oversight by the OTS and has been required to submit periodic reports to the OTS
concerning its activities and financial condition. In addition, as a savings and
loan association chartered under the laws of Ohio, Citizens has been subject to
regulation, examination and oversight by the Superintendent of the Division (the
"Ohio Superintendent").

OHIO SAVINGS AND LOAN REGULATION

         The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the laws of
the State of Ohio and imposes assessments on Ohio associations based on their
asset size to cover the costs of supervision and examination. Ohio law
prescribes the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments in real estate, subsidiaries and corporate or government
securities that such associations may make. The ability of Ohio associations to
engage in these state-authorized investments and activities is also subject to
oversight and approval by the FDIC, if such investments or activities are not
permissible for a federally-chartered savings association.

OFFICE OF THRIFT SUPERVISION

         GENERAL. The OTS is an office of the Department of the Treasury and is
responsible for the regulation and supervision of all federally-chartered
savings associations and all other savings associations the deposits of which
are insured by the FDIC in the SAIF. The OTS issues regulations governing the
operation of savings associations, regularly examines such associations and
imposes assessments on savings associations based on their asset size to cover
the costs of general supervision and examination. The OTS also may initiate
enforcement actions against savings associations and certain persons affiliated
with them for violations of laws or regulations or for engaging in unsafe or
unsound practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.

         Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests in its designated service area, with particular emphasis on low- to
moderate-income communities and borrowers in that area.

         REGULATORY CAPITAL REQUIREMENTS. Citizens has been required by OTS
regulations to meet certain minimum capital requirements. The tangible capital
requirement require savings associations to maintain "tangible capital" of not
less than 1.5% of their adjusted total assets. Tangible capital is defined in
OTS regulations as core capital minus any intangible assets.

         OTS regulations also require that savings associations maintain
"risk-based capital" in an amount not less than 8% of their risk-weighted
assets. Risk-based capital is defined as core capital plus certain additional
items of capital, which in the case of Citizens includes a general loan loss
allowance of $210,000 at September 30, 1998.

         The OTS has regulations governing prompt corrective action to resolve
the problems of capital deficient and otherwise troubled savings associations.
At each successively lower defined capital category, an association is subject
to more restrictive and more numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of the institution. Citizens' capital at September 30,
1998, met the standards for the highest category, a "well-capitalized"
institution.

                                      -15-
<PAGE>   16

         LIQUIDITY. OTS regulations require that a savings association maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than 4.0% of its net
withdrawable savings deposits payable in one year plus borrowings payable in one
year or less. Monetary penalties may be imposed upon associations failing to
meet these liquidity requirements. The eligible liquidity of Citizens at
September 30, 1998, was approximately $2.0 million, or 5.9%, and exceeded the
then applicable 4.0% liquidity requirement by approximately $325,000.

         QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, the QTL test required savings
associations to maintain a specified level of investments in assets that are
designated as qualifying thrift investments ("QTI"), which are generally related
to domestic residential real estate and manufactured housing and include credit
card, student and small business loans and stock issued by any FHLB, the FHLMC
or the FNMA. Under such test, 65% of an institution's "portfolio assets" (total
assets less goodwill and other intangibles, property used to conduct business
and 20% of liquid assets) must consist of QTI on a monthly average basis in nine
out of every 12 months. Effective September 30, 1996, a savings association may
also qualify as a QTL by meeting the definition of "domestic building and loan
association" under the Internal Revenue Code of 1986, as amended (the "Code").
In order for an institution to meet the definition of a "domestic building and
loan association" under the Code, at least 60% of such institution's assets must
consist of specified types of property, including cash loans secured by
residential real estate or deposits, educational loans and certain governmental
obligations. A savings association that fails to meet the QTL test will not be
eligible for new FHLB advances. At September 30, 1998, Citizens met the QTL
test.

         LENDING LIMIT. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to 15% of
the association's Lending Limit Capital. A savings association may lend to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." Certain types of loans are not subject to the lending
limit. A general exception to the 15% limit provides that an association may
lend to one borrower up to $500,000, for any purpose. In applying the limit on
loans to one borrower, the regulations require that loans to certain related
borrowers be aggregated.

         HOLDING COMPANY REGULATION. Prior to the Charter Conversion, LFC has
been a savings and loan holding company within the meaning of the HOLA. As such,
LFC has been registered with the OTS and has been subject to OTS regulations,
examination, supervision and reporting requirements.

         As a unitary savings and loan holding company, LFC generally has had no
restrictions on its activities. Such companies are the only financial
institution holding companies which may engage in any commercial, securities and
insurance activities without restriction. However, if the OTS determines that
there is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the OTS
may impose such restrictions as deemed necessary to address such risk, including
limiting (i) payment of dividends by the savings association, (ii) transactions
between the savings association and its affiliates, and (iii) any activities of
the savings association that might create a serious risk that the liabilities of
LFC and its affiliates may be imposed on the savings association.

FEDERAL DEPOSIT INSURANCE CORPORATION

         DEPOSIT INSURANCE AND ASSESSMENTS. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and savings and loan associations and safeguards the
safety and soundness of the banking and savings and loan industries. The FDIC
administers two separate insurance funds, the Bank Insurance Fund ("BIF") for
commercial banks and state savings banks and the SAIF for savings associations.
Citizens is a member of the SAIF and its deposit accounts are insured by the
FDIC up to the prescribed limits. After the Charter Conversion, Citizens'
current deposits will continue to be insured by the SAIF.

FEDERAL HOME LOAN BANKS

         The FHLBs provide credit to their members in the form of advances.
Citizens is a member of the FHLB of Cincinnati and must maintain an investment
in the capital stock of the FHLB of Cincinnati in an amount equal to the greater
of 1.0% of the aggregate outstanding principal amount of Citizens' residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or 5% of its advances from the FHLB of Cincinnati. Citizens was in
compliance with this requirement with an investment in stock of the FHLB of
Cincinnati of $288.000 at September 30, 1998.

                                      -16-
<PAGE>   17

         FHLB advances to member institutions who meet the QTL Test are
generally limited to the lower of (i) 25% of the member's assets or (ii) 20
times the member's investment in FHLB stock. At September 30, 1998, Citizens'
maximum limit on advances was approximately $5.8 million. The granting of
advances is also subject to the FHLB's collateral and credit underwriting
guidelines.

         Upon the origination or renewal of a loan or advance, the FHLB is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully-disbursed, whole first mortgage loans
on improved residential property or securities representing a whole interest in
such loans; securities issued, insured or guaranteed by the United States
Government or an agency thereof; deposits in any FHLB; or other real estate
related collateral (up to 30% of the member association's capital) acceptable to
the FHLB, if such collateral has a readily ascertainable value and the FHLB can
perfect its security interest in the collateral.

         The FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by the FHLB must be made only to provide funds for
residential housing finance. Currently, Citizens intends to continue to be a
member of the FHLB after the Charter Conversion.

REGULATION AFTER THE CHARTER CONVERSION

GENERAL

         As stated previously, on July 9, 1998, the respective Boards of
Directors of Citizens and LFC approved the Charter Conversion. As a result of
the Charter Conversion, Citizens will become a state-chartered commercial bank.
It is currently anticipated that the Charter Conversion will be consummated on
January 4, 1999. After the Charter Conversion, Citizens will be regulated by the
Division and the FDIC. In addition, after the Charter Conversion, LFC will be a
bank holding company regulated by the Board of Governors of the Federal Reserve
System (th "FRB") and will no longer be a unitary savings and loan holding
company regulated by the OTS.

         As a unitary savings and loan holding company, LFC has been permitted
to engage in more numerous types of commercial, securities and insurance
activities than other financial institution holding companies, including bank
holding companies. However, LFC does not currently engage in any activities
which would be impermissible for it to engage in after the Charter Conversion is
consummated and LFC becomes a bank holding company.

OHIO CORPORATION LAW

         LFC and Citizens have been and will continue to be subject to the
following Ohio corporation laws:

         MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.

         After the initial three-year moratorium, such a business combination
may not occur unless (1) one of the specified exceptions applies, (2) the
holders of at least two-thirds of the voting shares, and of at least a majority
of the voting shares not beneficially owned by the Interested Shareholder,
approve the business combination at a meeting called for such purpose, or (3)
the business combination meets certain statutory criteria designed to ensure
that the issuing public corporation's remaining shareholders receive fair
consideration for their shares.

         An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an 



                                      -17-
<PAGE>   18

opt-out amendment. The statute also provides that it will continue to apply to
any business combination between a person who became an Interested Shareholder
prior to the adoption of such an amendment as if the amendment had not been
adopted. Neither LFC nor Citizens has opted out of the protection afforded by
Chapter 1704.

         CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that, with certain
exceptions, acquisitions of voting securities which would result in the
acquiring shareholder owning 20%, 33-1/3% or 50% of the outstanding voting
securities of an Ohio corporation (a "Control Share Acquisition") must be
approved in advance by the holders of at least a majority of the outstanding
voting shares of such corporation represented at a meeting at which a quorum is
present and a majority of the portion of the outstanding voting shares
represented at such a meeting excluding the voting shares owned by the acquiring
shareholder, by certain other persons who acquire or transfer voting shares
after public announcement of the acquisition or by certain officers of the
corporation or directors of the corporation who are employees of the
corporation. The Control Share Acquisition Statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers.

         TAKEOVER BID STATUTE. Ohio law provides that an offeror may not make
not make a tender offer or request or invitation for tenders that would result
in the offeror beneficially owning more than ten percent of any class of the
target company's equity securities unless such offeror files certain information
with the Ohio Division of Securities (the "Securities Division") and provides
such information to the target company and the offerees within Ohio. The
Securities Division may suspend the continuation of the control bid if the
Securities Division determines that the offerors filed information does not
provide full disclosure to the offerees of all material information concerning
the control bid. The statue also provides that an offeror may not acquire any
equity security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan holding company and the proposed transaction
requires federal regulatory approval.

BANK HOLDING COMPANY REGULATION

         After the Charter Conversion, LFC will be registered with the FRB as a
bank holding company under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). Bank holding companies and their activities are subject to extensive
regulation by the FRB. Bank holding companies are required to file reports with
the FRB and such additional information as the FRB may require, and are subject
to regular examinations by the FRB. The FRB also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.

         Under FRB policy, a bank holding company is expected to act as a source
of financial strength to each subsidiary bank and to commit resources to support
such subsidiary banks. Under this policy, the FRB may require a bank holding
company to contribute additional capital to an undercapitalized subsidiary bank.

         The BHCA requires the prior approval of the FRB in any case where a
bank holding company proposes to acquire direct or indirect ownership or control
of more than 5% of the voting shares of any bank that is not already
majority-owned by it, to acquire all or substantially all of the assets of
another bank or bank holding company, or to merge or consolidate with any other
bank holding company. Section 4 of the BHCA also prohibits a bank holding
company, with certain exceptions, from acquiring more than 5% of the voting
shares of any company that is not a bank and from engaging in any business other
than banking or managing or controlling banks. The primary exception allows the
ownership of shares by a bank holding company in any company the activities of
which the FRB has determined to be so closely related to banking or to managing
or controlling banks as to be a proper incident thereto.

         Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act ("FRA") on maintenance of
reserves against deposits, extensions of credit to the bank holding company or
any of its subsidiaries, on investments in the stock or other securities of the
bank holding company or its subsidiaries and on the taking of such stock or
securities as collateral for loans to any borrower. Further, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of any services. Various consumer laws and regulations
also affect the operations of these subsidiaries including, but not limited to,
truth-in-lending disclosures, equal credit opportunity, fair credit reporting
and community reinvestment.

                                      -18-
<PAGE>   19

TRANSACTIONS WITH AFFILIATES

         Sections 23A and 23B of the FRA restrict transactions by insured
depository institutions and their subsidiaries with their affiliates. An
affiliate of an institution is any company or entity which controls, is
controlled by or is under common control with the institution. Generally,
Sections 23A and 23B (i) limit the extent to which an institution or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus (i.e.,
tangible capital) and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions.

         A financial institution's authority to extend credit to executive
officers, directors and greater than 10% shareholders, as well as entities such
persons control, is subject to Sections 22(g) and 22(h) of the FRA and
Regulation O promulgated thereunder by the FRB. Among other things, such loans
must be made on terms substantially similar to those offered to unaffiliated
individuals. In addition, the amount of loans an institution may make to such
persons is based, in part, on the institution's capital position, and certain
approval procedures must be followed in making such loans.

OHIO COMMERCIAL BANK REGULATION

         State chartered commercial banking corporations are subject to federal
and state regulation of their business and activities by the Division and either
the FRB or the FDIC, depending upon whether the state-chartered bank is a member
of the FRB. Ohio statutes and regulations prohibit a bank from engaging in any
activities deemed to constitute unsafe or unsound banking practices and also
govern many aspects of the activities and operations of the bank, including, but
not limited to, capital levels, range of permissible activities and expansion.
Ohio law also provides for prior Division approval of bank acquisitions and
prior approval of certain voting security acquisitions of 10% or more of an
institution's voting securities.

FEDERAL DEPOSIT INSURANCE CORPORATION

         As stated previously, the FDIC is an independent federal agency which
insures the deposits, up to prescribed statutory limits, of federally-insured
banks and savings associations and safeguards the safety and soundness of the
financial institution industry. Two separate insurance funds are maintained and
administered by the FDIC. In general, banking institutions are members of BIF
and savings associations are SAIF members. The insurance fund Charter Conversion
provisions do not prohibit a SAIF member from either converting to a bank
charter, as long as the resulting bank remains a SAIF member, or merging with a
bank, as long as the bank continues to pay the SAIF insurance assessments on the
deposits acquired. After the Charter Conversion, Citizens' current deposits will
continue to be insured by the SAIF.]

         Insurance premiums for SAIF and BIF members are determined during each
semi-annual assessment period based upon the members' respective categorization
as either (1) well capitalized, (2) adequately capitalized or (3)
undercapitalized. An institution is also assigned by the FDIC to one of three
supervisory subgroups within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information which
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor). An institution's
assessment rate depends on the capital category and supervisory category to
which it is assigned.

         Insurance of deposits may be terminated by the FDIC upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC.

INTERSTATE BANKING AND BRANCHING

         In 1994, the Riegle-Neal Act was enacted to ease restrictions on
interstate banking. The Riegle-Neal Act allows the FRB to approve an application
of an adequately capitalized and adequately managed bank holding company to
acquire control of, or acquire all or substantially all of the assets of, a bank
located in a state other than such holding company's home state, without regard
to whether the transaction is prohibited by the laws of any state. The FRB may
not approve the acquisition of a bank that has not been in existence for the
minimum time period (not exceeding five years) specified by the statutory law of
the host state. The Riegle-Neal Act also prohibits the FRB from approving an
application if the applicant (and its depository 


                                      -19-
<PAGE>   20

institution affiliates) controls or would control more than 10% of the insured
deposits in the United States or 30% or more of the deposits in the target
bank's home state or in any state in which the target bank maintains a branch.
The Riegle-Neal Act does not affect the authority of states to limit the
percentage of total insured deposits in the state which may be held or
controlled by a bank or bank holding company to the extent such limitation does
not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% statewide concentration limit contained
in the Riegle-Neal Act.

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

         The Riegle-Neal Act authorizes the FDIC to approve interstate branching
de novo by national and state banks, respectively, only in states which
specifically allow for such branching. The Riegle-Neal Act also required the
appropriate federal banking agencies to prescribe regulations by June 1, 1997
which prohibited any out-of-state bank from using the interstate branching
authority primarily for the purpose of deposit production. These regulations
include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities which they serve.

REGULATORY CAPITAL

         The FRB has adopted risk-based capital guidelines for bank holding
companies. The guidelines provide a systematic analytical framework which makes
regulatory capital requirements sensitive to differences in risk profiles among
banking organizations, takes off-balance sheet exposures expressly into account
in evaluating capital adequacy, and minimizes disincentives to holding liquid,
low-risk assets. Capital levels as measured by these standards also are used to
categorize financial institutions for purposes of certain prompt corrective
action regulatory provisions.

         The minimum guideline for the ratio of total capital ("Total Capital")
to risk-weighted assets (including certain off-balance sheet items such as
standby letters of credit) is 8% ("Total Risk-Based Capital"). This Total
Risk-Based Capital ratio must be at least 10% to be considered well capitalized.
At least half of the minimum Total Risk-Based Capital ratio (4%) must be
composed of common stockholders' equity, minority interests in the equity
accounts of consolidated subsidiaries and a limited amount of perpetual
preferred stock, less goodwill and certain other intangibles ("Tier 1 Risk-Based
Capital"). To be considered well capitalized, the Tier 1 Risk-Based Capital
ratio must be at least 6%. The remainder of Total Risk-Based Capital may consist
of subordinated debt, other preferred stock and a limited amount of loan and
lease loss allowance.

         The FRB also has established minimum leverage ratio guidelines for bank
holding companies. The guidelines provide for a minimum ratio of Tier 1
Risk-Based Capital to average assets (excluding the loan and lease loss
allowance, goodwill and certain other intangibles) ("Leverage Ratio") of 3% for
bank holding companies that meet certain criteria, including having the highest
regulatory rating. To be considered well capitalized, the Leverage Ratio must be
at least 5%. The guidelines further provide that bank holding companies making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum levels.

PROMPT CORRECTIVE REGULATORY ACTION

         The federal banking agencies have established a system of prompt
corrective action to resolve certain of the problems of undercapitalized
institutions. This system is based on five capital level categories for insured
depository institutions - "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." The federal banking agencies may (or in some cases must) take
certain supervisory actions depending upon an insured institution's capital
level. For example, the banking agencies must appoint a receiver or conservator
for an institution within 90 days after it becomes "critically undercapitalized"
unless the institution's primary regulator determines, with the concurrence of
the FDIC, that other action would better achieve regulatory purposes. Banking
operations otherwise may be significantly affected depending on an institution's
capital category. For example, an institution that is not "well 


                                      -20-
<PAGE>   21

capitalized" generally is prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market, and the holding company of any undercapitalized depository institution
must guarantee, in part, certain aspects of such depository institution's
capital plan for such plan to be acceptable.

         Under the final rules implementing the prompt corrective action
provisions, a financial institution that has a Total Risk-Based Capital of 10%
or greater, a Tier 1 Risk-Based Capital ratio of 6% or greater and a Leverage
Ratio of 5% or greater is deemed to be "well capitalized." An institution with a
Total Risk-Based Capital ratio of 8% or greater, a Tier 1 Risk-Based Capital
ratio of 4% or greater and a Leverage Ratio of 4% or greater (or a Leverage
Ratio of 3% or greater and a CAMEL 1 rating), is considered to be "adequately
capitalized." An institution that has a Total Risk-Based Capital of less than
8%, a Tier 1 Risk-Based Capital ratio of less than 4%, and a Leverage Ratio that
is less than 4% (or a Leverage Ratio of less than 3% and a CAMEL 1 rating), is
considered "undercapitalized." An institution that has a Total Risk-Based
Capital less than 6%, a Tier 1 Risk-Based Capital ratio of less than 3% or a
Leverage Ratio that is less than 3% is considered to be "significantly
undercapitalized." An institution that has tangible equity (core capital minus
intangible assets other than qualifying supervisory goodwill and purchased
mortgage servicing rights) to total assets ratio equal to or less than 2% is
deemed to be "critically undercapitalized."

LIMITS ON DIVIDENDS AND OTHER PAYMENTS

         There are various legal limitations on the extent to which subsidiary
banks may finance or otherwise supply funds to their parent holding companies.
Under federal and Ohio law, subsidiary banks may not, subject to certain limited
exceptions, make loans or extensions of credit to, or investments in the
securities of, their bank holding companies. Subsidiary banks are also subject
to collateral security requirements for any loans or extension of credit
permitted by such exceptions.

         The ability of a bank holding company to obtain funds for the payment
of dividends and for other cash requirements is largely dependent on the amount
of dividends which may be declared by its subsidiary banks. However, the FRB
expects a bank holding company to serve as a source of strength to its
subsidiary banks, which may require it to retain capital for further investment
in the subsidiaries, rather than for dividends for shareholders of the bank
holding company. Consequently, Citizens will not be allowed to pay dividends to
LFC, if, after paying such dividends, Citizens would fail to meet the required
minimum levels under the risk-based capital guidelines and the minimum leverage
ratio requirements. In addition, Citizens will be required to have the approval
of the Division if a dividend in any year would cause the total dividends for
that year to exceed the sum of the current year's net profits and the retained
net profits for the preceding two years, less required transfers to surplus.
Payment of dividends by Citizens may be restricted at any time at the discretion
of its applicable regulatory authorities, if they deem such dividends to
constitute an unsafe and/or unsound banking practice. These provisions could
have the effect of limiting LFC's ability to pay dividends. FEDERAL TAXATION

         LFC and Citizens are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, LFC and Citizens may be subject to the alternative minimum tax which
is imposed at a minimum tax rate of 20% on "alternative minimum taxable income"
(which is the sum of a corporation's regular taxable income, with certain
adjustments, and tax preference items), less any available exemption. Such tax
preference items include interest on certain tax-exempt bonds issued after
August 7, 1986. In addition, 75% of the amount by which a corporation's
"adjusted current earnings" exceeds its alternative minimum taxable income
computed without regard to this preference item and prior to reduction by net
operating losses, is included in alternative minimum taxable income. Net
operating losses can offset no more than 90% of alternative minimum taxable
income. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. However, the
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average gross
receipts of $5,000,000 or less for the three tax years ending with its first tax
year beginning after December 31, 1996. Once a corporation is recognized as a
small corporation, it will continue to be exempt from the alternative minimum
tax for as long as its average gross receipts for the prior three-year period
does not exceed $7,500,000. In determining if a corporation meets this
requirement, the first year that it achieved small corporation status is not
taken into consideration.

         Citizen's average gross receipts for the three tax years ending on
September 30, 1998, was $3.0 million and as a result, Citizens does qualify as a
small corporation exempt from the alternative minimum tax.

                                      -21-
<PAGE>   22

         Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, such as Citizens , were allowed deductions for bad debts under
methods more favorable than those granted to other taxpayers. Qualified thrift
institutions could compute deductions for bad debts using either the specific
charge-off method of Section 166 of the Code or one of two reserve methods of
Section 593 of the Code. The reserve methods under Section 593 of the Code
permitted a thrift institution annually to elect to deduct bad debts under
either (i) the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, a thrift institution
generally was allowed a deduction for an addition to its bad debt reserve equal
to 8% of its taxable income (determined without regard to this deduction and
with additional adjustments). Under the "experience" method, a thrift
institution was generally allowed a deduction for an addition to its bad debt
reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1997, 1996 and
1995, Citizens used the percentage of taxable income method.

         The Act eliminated the percentage of taxable income method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method.

         A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like Citizens , the amount
of the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.

         For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.

         The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by Citizens to LFC is deemed paid out of its
pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and
the gross income of Citizens for tax purposes would be increased by the amount
which, when reduced by the income tax, if any, attributable to the inclusion of
such amount in its gross income, equals the amount deemed paid out of the
pre-1988 reserves. As of September 30, 1998, the pre-1988 reserves of Citizens
for tax purposes totaled approximately $340,000. Citizens believes it had
approximately $4.5 million of accumulated earnings and profits for tax purposes
as of June 30, 1998, which would be available for dividend distributions,
provided regulatory restrictions applicable to the payment of dividends are met.
See 


                                      -22-
<PAGE>   23

Notes H and L to the financial statements. No representation can be made as to
whether Citizens will have current or accumulated earnings and profits in
subsequent years.

         The tax returns of Citizens have been audited or closed without audit
through fiscal year 1994. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of Citizens .

OHIO TAXATION

         LFC is subject to the Ohio corporation franchise tax, which, as applied
to LFC, is a tax measured by both net earnings and net worth. The rate of tax is
the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and
8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% times
taxable net worth. For tax years beginning after December 31, 1998, the rate of
tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable
income and 8.5% of computed Ohio taxable income in excess of $50,000 or (ii)
 .400% times taxable net worth.

         In computing its tax under the net worth method, LFC may exclude 100%
of its investment in the capital stock of Citizens , as reflected on the balance
sheet of LFC in computing its taxable net worth as long as it owns at least 25%
of the issued and outstanding capital stock of Citizens . The calculation of the
exclusion from net worth is based on the ratio of the excludable investment (net
of any appreciation or goodwill included in such investment) to total assets
multiplied by the net value of the stock. As a holding company, LFC may be
entitled to various other deductions in computing taxable net worth that are not
generally available to operating companies.

         A special litter tax is also applicable to all corporations, including
LFC, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
 .22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.

         Citizens is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the book net worth
of Citizens determined in accordance with generally accepted accounting
principles. For tax year 1999, however, the franchise tax on financial
institutions will be 1.4% of the book net worth and for tax year 2000 and years
thereafter the tax will be 1.3% of the book net worth. As a "financial
institution," Citizens is not subject to any tax based upon net income or net
profits imposed by the State of Ohio.

ITEM 2.    DESCRIPTION OF PROPERTY

         The following table sets forth certain information at September 30,
1998, regarding the office facilities of Citizens:
<TABLE>
<CAPTION>

                                              Owned or                        Date                 Net book
              Location                          leased                      acquired                 value
              --------                          ------                      --------                 -----

<S>                                             <C>                           <C>                    <C>     
2 East High Street, London, Ohio                Owned                         1977                   $308,000
</TABLE>


ITEM 3.    LEGAL PROCEEDINGS

         Neither LFC nor Citizens is presently involved in any material legal
proceedings. From time to time, Citizens is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by Citizens.


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

        Not applicable.

                                      -23-
<PAGE>   24


                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

        The information contained in the 1998 Annual Report to Shareholders (the
"Annual Report") under the caption "Common Stock and Related Information" is
incorporated herein by reference.


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

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


ITEM 7.    FINANCIAL STATEMENTS

        The Consolidated Financial Statements appearing in the Annual Report and
the report of Grant Thornton LLP ("Grant Thornton") dated November 6, 1998, are
incorporated herein by reference.


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

         Not applicable.

                                    PART III


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

        The information contained in the definitive Proxy Statement for the 1999
Annual Meeting of Shareholders of LFC (the "Proxy Statement"), a copy of which
is attached as Exhibit 99.1 hereto, under the caption "Election of Directors --
Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein
by reference.


ITEM 10.   EXECUTIVE COMPENSATION

        The information contained in the Proxy Statement under the caption "
Election of Directors -- Compensation of Executive Officers and Directors" is
incorporated herein by reference.


ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information contained in the Proxy Statement under the caption "
Election of Directors -- Voting Securities and Ownership of Certain Beneficial
Owners and Management" is incorporated herein by reference.


ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information contained in the Proxy Statement under the caption "
Election of Directors -- Certain Transactions" is incorporated herein by
reference.

                                     -24-
<PAGE>   25


ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K

(a)     EXHIBITS
<TABLE>
<CAPTION>


     Exhibit
     -------

    <S>      <C>                                            <C>                   
      3(a)    Articles of Incorporation                     Incorporated by reference to the Registration Statement on
                                                            Form S-1 filed by LFC on December 8, 1995, and amended on
                                                            January 31 and February 8, 1996 (the "Form S-1"), Exhibit
                                                            3.1

      3(b)    Certificate of Amendment to Articles of       Incorporated by reference to LFC's Form 10-KSB for the
              Incorporation                                 fiscal year ended September 30, 1996

      3(c)    Code of Regulations                           Incorporated by reference to the Form S-1, Exhibit 3.2

      10.1    London Financial Corporation 1996 Stock       Incorporated by reference to the Form S-1, Exhibit 10.1
              Option and Incentive Plan

      10.2    The Citizens Loan & Savings Company           Incorporated by reference to the Form S-1, Exhibit 10.2
              Management Recognition Plan and Trust
              Agreement

      10.3    London Financial Corporation Employee         Incorporated by reference to the Form S-1, Exhibit 10.4
              Stock Ownership Plan

      10.4    Employment Agreement between The Citizens     Incorporated by reference to the Form S-1, Exhibit 10.5
              Loan & Savings Company and John J. Bodle

       13     Annual Report to Shareholders

       20     Proxy Statement

       21     Subsidiaries of the Registrant

       27     Financial Data Schedule

       99     Safe Harbor Under the Private Securities
              Litigation Reform Act of 1995
</TABLE>

(B)     REPORTS ON FORM 8-K

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



                                      -25-
<PAGE>   26



                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on December 10, 1998.

                                       LONDON FINANCIAL CORPORATION


                                       By /s/ John J. Bodle
                                         -----------------------------------
                                            John J. Bodle
                                            President,
                                            (Duly Authorized Representative)

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


By  /s/ John I. Andrix                  By /s/ Rodney A. Bell
    -------------------------             -----------------------------
    John I. Andrix                        Rodney A. Bell
    Director                              Director



Date:  December 10, 1998                Date:  December 10, 1998



By  /s/ John J. Bodle                   By /s/ Donovan D. Forest
    -------------------------             -----------------------------
    John J. Bodle                         Donovan D. Forest
    President, Principal Financial        Director
    Officer, Principal Accounting
    Officer and Director



Date:  December 10, 1998                Date:  December 10, 1998



By /s/ Edward D. Goodyear               By /s/ Shirley G. Hansgen
    -------------------------              -----------------------------
    Edward D. Goodyear                     Shirley G. Hansgen
    Director                               Director



Date:  December 10, 1998               Date:  10, 1998


By /s/ Kennison A. Sims
    -------------------------            
    Kennison A. Sims
    Director


Date:  December 10, 1998





                                      -26-