<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-QSB


                   QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 1999


Commission File No. 0-20144
                    -------


                           TOWNE FINANCIAL CORPORATION
--------------------------------------------------------------------------------
             (Exact Name of Registrant as specified in its charter)

     OHIO                                            31-1334563
---------------                                  ----------------
(State or other                                  (I.R.S. Employer
 jurisdiction of                                   Identification
 incorporation                                      Number)
 or organization)

4811 COOPER ROAD
BLUE ASH, OHIO                                        45242
---------------------                               ----------
(Address of principal                               (Zip Code)
 executive office)


Registrant's telephone number, including area code:  (513) 791-1870


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes  X                                     No 
    ---                                       ---

As of May 7, 1999, the latest practicable date, 220,200 shares of the
registrant's common shares, $1.00 par value, were issued and outstanding.

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

                                  Page 1 of 59


<PAGE>   2



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                                      INDEX

<TABLE>
<CAPTION>
                                                                                 PAGE
                                                                                 ----
<S>                                                                             <C>
PART I     -    FINANCIAL INFORMATION

                Consolidated Statements of Financial
                Condition                                                          3

                Consolidated Statements of Earnings                                5

                            Consolidated Statements of Comprehensive
                            Income                                                 7

                Consolidated Statements of Cash Flows                              8

                Notes to Consolidated Financial Statements                        11

                Management's Discussion and Analysis
                of Financial Condition and Results of
                Operations                                                        18


PART II    -    OTHER INFORMATION                                                 57


SIGNATURES                                                                        59
</TABLE>

                                      -2-

<PAGE>   3




                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                   MARCH 31,   JUNE 30,
       ASSETS                                        1999        1998
                                                   --------   --------

<S>                                                <C>        <C>     
Cash and due from banks                            $  2,310   $  1,419
Federal funds sold                                    2,800      3,900
Interest-bearing deposits in other financial
 institutions                                           297        319
                                                   --------   --------
       Cash and cash equivalents                      5,407      5,638

Certificates of deposit in other financial
 institutions                                           290        469
Investment securities designated as available
 for sale - at market, amortized cost of
 $7,400 and $806 at March 31, 1999 and
 June 30, 1998                                        7,403        809
Investment securities held to maturity - at
 amortized cost, approximate market value of
 $602 and $812 at March 31, 1999 and
 June 30, 1998                                          599        809
Mortgage-backed securities designated as
 available for sale - at market, amortized cost
 of $19,067 and $18,413 at March 31, 1999
 and June 30, 1998                                   18,966     18,354
Mortgage-backed securities held to maturity - at
 amortized cost, approximate market value of
 $13,088 and $14,592 at March 31, 1999 and
 June 30, 1998                                       13,111     14,641
Loans held for sale - at lower of cost or market      1,312        882
Loans receivable - net                               70,149     71,476
Office premises and equipment - at depreciated
 cost                                                 2,196      2,250
Real estate acquired through foreclosure                132          -
Federal Home Loan Bank stock - at cost                  840        797
Accrued interest receivable on loans                    616        678
Accrued interest receivable on mortgage-backed
 securities                                             168        189
Accrued interest receivable on investments and
 interest-bearing deposits                              129         25
Goodwill - net of accumulated amortization              308        333
Prepaid expenses and other assets                       669        425
Prepaid federal income taxes                             22         15
                                                   --------   --------

       TOTAL ASSETS                                $122,317   $117,790
                                                   ========   ========
</TABLE>

                                      -3-
<PAGE>   4



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)

                        (In thousands, except share data)


<TABLE>
<CAPTION>
                                                          MARCH 31,         JUNE 30,
      LIABILITIES AND SHAREHOLDERS' EQUITY                  1999              1998
                                                          --------         --------

<S>                                                       <C>              <C>     
Deposits                                                  $ 98,409         $ 94,988
Advances from the Federal Home Loan Bank                    12,674           12,674
Loan of Employee Stock Ownership Plan                           15               30
Advances by borrowers for taxes and insurance                  400              300
Accounts payable on mortgage loans serviced for
 others                                                        633              492
Accrued interest payable                                        30               38
Other liabilities                                              140              175
Deferred Federal income taxes                                  512              430
                                                          --------         --------

      Total liabilities                                    112,813          109,127

Commitments                                                      -                -

Shareholders' equity
 Preferred shares - 250,000 shares of $1.00
  par value authorized; no shares issued                         -                -
 Common shares - 2,250,000 shares of $1.00
  par value authorized; 222,200 and 208,500
  shares issued and outstanding at March 31,
  1999 and June 30, 1998, respectively                         222              209
 Additional paid-in capital                                  1,884            1,680
 Retained earnings - substantially restricted                7,478            6,841
 Less required contributions for shares acquired
  by Employee Stock Ownership Plan (ESOP)                      (15)             (30)
 Accumulated other comprehensive income:
  Unrealized losses on securities designated as
   available for sale - net of related tax effects             (65)             (37)
                                                          --------         --------

      Total shareholders' equity                             9,504            8,663
                                                          --------         --------

      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          $122,317         $117,790
                                                          ========         ========
</TABLE>

                                      -4-
<PAGE>   5

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                       CONSOLIDATED STATEMENTS OF EARNINGS

                  For the nine and three months ended March 31,

                      (In thousands, except per share data)



<TABLE>
<CAPTION>
                                                     Nine months ended          Three months ended
                                                         March 31,                   March 31,
                                                   ---------------------        --------------------
                                                     1999           1998          1999          1998
                                                   ------         ------        ------        ------
<S>                                                <C>            <C>           <C>           <C>   
Interest income
  Loans                                            $4,512         $4,750        $1,467        $1,610
  Mortgage-backed securities                        1,449          1,309           441           462
  Investment securities                               220             84           109            24
  Interest-bearing deposits and other                 208            154            53            66
                                                   ------         ------        ------        ------

      Total interest income                         6,389          6,297         2,070         2,162

Interest expense
  Deposits                                          3,662          3,431         1,185         1,167
  Borrowings                                          555            570           182           196
                                                   ------         ------        ------        ------

      Total interest expense                        4,217          4,001         1,367         1,363
                                                   ------         ------        ------        ------

      Net interest income                           2,172          2,296           703           799

Provision for losses on loans                          23             18             7             6
                                                   ------         ------        ------        ------

      Net interest income after provision
       for losses on loans                          2,149          2,278           696           793

Other income
  Loan servicing fees (costs)                          (8)            36            12             7
  Gain on sale of mortgage loans                      436            277           150           189
  Gain (loss) on sale of mortgage-backed
   securities                                          (1)            20          --               7
  Gain on sale of investment securities                34           --              10          --
  Service fees, charges and other operating            43             33            10            12
                                                   ------         ------        ------        ------

      Total other income                              504            366           182           215

General, administrative and other expense
  Employee compensation and benefits                  890            839           301           297
  Occupancy and equipment                             290            277            99            96
  Data processing                                      67             76            25            24
  Federal deposit insurance premiums                   43             39            15            14
  Franchise taxes                                      72             72            22            25
  Advertising                                          76             69            22            22
  Amortization of goodwill                             25             25             9             8
  Other operating                                     174            150            59            53
                                                   ------         ------        ------        ------

      Total general, administrative and
       other expense                                1,637          1,547           552           539
                                                   ------         ------        ------        ------

      Earnings before income taxes
       (subtotal carried forward)                   1,016          1,097           326           469
</TABLE>

                                      -5-

<PAGE>   6

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF EARNINGS (CONTINUED)

                  For the nine and three months ended March 31,

                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                             Nine months ended          Three months ended
                                                 March 31,                  March 31,
                                           --------------------        --------------------
                                             1999          1998          1999          1998
                                           ------        ------        ------        ------
<S>                                        <C>           <C>           <C>           <C>   
      Earnings before income taxes
       (subtotal brought forward)          $1,016        $1,097        $  326        $  469

Federal income taxes
  Current                                     206           299            60           133
  Deferred                                     96            81            23            29
                                           ------        ------        ------        ------
      Total federal income taxes              302           380            83           162
                                           ------        ------        ------        ------

      NET EARNINGS                         $  714        $  717        $  243        $  307
                                           ======        ======        ======        ======

      EARNINGS PER SHARE:
        Basic                              $ 3.39        $ 3.44        $ 1.14        $ 1.47
                                           ======        ======        ======        ======

        Diluted                            $ 3.17        $ 3.27        $ 1.04        $ 1.40
                                           ======        ======        ======        ======
</TABLE>

                                      -6-


<PAGE>   7



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                  For the nine and three months ended March 31,

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                Nine months ended           Three months ended
                                                                     March 31,                  March 31,
                                                               -------------------         -------------------
                                                                1999          1998          1999          1998
                                                               -----         -----         -----         -----

<S>                                                            <C>           <C>           <C>           <C>  
Net earnings                                                   $ 714         $ 717         $ 243         $ 307

Other comprehensive income, net of related tax effects:
   Unrealized gains (losses) on securities
    designated as available for sale
      Unrealized gains (losses) arising
       during the period                                          (6)          165            (9)          177

      Reclassification adjustment:
       gain included in net earnings                             (22)          (13)           (7)           (4)
                                                               -----         -----         -----         -----

                                                                 (28)          152           (16)          173
                                                               -----         -----         -----         -----

Comprehensive income                                           $ 686         $ 869         $ 227         $ 480
                                                               =====         =====         =====         =====
</TABLE>

                                      -7-
<PAGE>   8



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                       For the nine months ended March 31,

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                   1999             1998
                                                                   ----             ----

<S>                                                            <C>              <C>     
Cash flows provided by (used in) operating 
 activities:
   Net earnings for the period                                 $    714         $    717
   Adjustments to reconcile net earnings to
    net cash provided by (used in) operating
    activities:
      Amortization of premiums and accretion of
       discounts on investment securities, net                        1                -
      Amortization of premiums and accretion of
       discounts on mortgage-backed securities, net                  61                8
      Gain on sale of investment securities                         (34)               -
      Loss (gain) on sale of mortgage-backed securities               1              (20)
      Provision for losses on loans                                  23               18
      Gain on sale of mortgage loans                               (156)            (102)
      Accretion of discount on loans                                 (2)              (2)
      Amortization of deferred loan origination fees                (36)             (28)
      Loans originated for sale in the secondary market         (21,837)         (14,118)
      Proceeds from sale of loans in the secondary
       market                                                    22,407           14,295
      Depreciation and amortization                                 123              119
      Federal Home Loan Bank stock dividends                        (43)             (41)
      Amortization of goodwill                                       25               25
      Increases (decreases) in cash due to changes in:
        Accrued interest receivable on loans                         62              (51)
        Accrued interest receivable on mortgage-backed
         securities                                                  21              (18)
        Accrued interest receivable on investments
         and interest-bearing deposits                             (104)              (7)
        Prepaid expenses and other assets                          (244)            (166)
        Accrued interest payable                                     (8)               7
        Other liabilities                                           (35)              23
        Federal income taxes
         Current                                                     (7)              24
         Deferred                                                    96               81
                                                               --------         --------

            Net cash provided by operating activities             1,028              764
</TABLE>

                                      -8-


<PAGE>   9

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                       For the nine months ended March 31,

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                  1999             1998
                                                                  ----             ----

<S>                                                           <C>              <C>   
Cash flows provided by (used in) investing activities:
  Proceeds from sale of investment securities
   designated as available for sale                           $  3,863         $      -
  Proceeds from called investment securities held
   to maturity                                                     285            1,800
  Purchase of investment securities designated
   as available for sale                                       (10,424)            (247)
  Purchase of investment securities held to maturity               (75)          (1,310)
  Proceeds from sale of mortgage-backed securities
   designated as available for sale                              1,993            6,352
  Purchase of mortgage-backed securities designated as
   available for sale                                           (4,514)          (8,319)
  Purchase of mortgage-backed securities held to
   maturity                                                     (2,187)          (3,623)
  Principal repayments on mortgage-backed securities
   designated as:
    Available for sale                                           1,865              379
    Held to maturity                                             3,657              764
  Purchase of loans                                               (481)            (561)
  Loan disbursements                                           (21,410)         (22,605)
  Loan principal repayments                                     22,257           17,710
  Purchase of office premises and equipment                        (69)             (31)
  (Increase)decrease in certificates of deposit in
   other financial institutions - net                              179             (102)
                                                              --------         --------

      Net cash used in investing activities                     (5,061)          (9,793)

Cash flows provided by (used in) financing activities:
  Issuance of and credits to deposit accounts                   61,456           64,988
  Withdrawals from deposit accounts                            (58,035)         (53,901)
  Proceeds from Federal Home Loan Bank advances                      -            5,000
  Repayments of Federal Home Loan Bank advances                      -           (3,726)
  Advances by borrowers for taxes and insurance                    100              115
  Accounts payable on mortgage loans serviced for
   others                                                          141              354
  Proceeds from the exercise of stock options                      217                -
  Dividends paid on common shares                                  (77)             (63)
                                                              --------         --------

      Net cash provided by financing activities                  3,802           12,767
                                                              --------         --------

  Net increase (decrease) in cash and cash equivalents            (231)           3,738

  Cash and cash equivalents at beginning of period               5,638            2,715
                                                              --------         --------

  Cash and cash equivalents at end of period                  $  5,407         $  6,453
                                                              ========         ========
</TABLE>

                                      -9-
<PAGE>   10
                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                       For the nine months ended March 31,

                                 (In thousands)


<TABLE>
<CAPTION>
                                                                   1999            1998
                                                                   ----            ----

<S>                                                             <C>             <C>    
Supplemental disclosure of cash flow information:
  Cash paid during the period for:
    Federal income taxes                                        $   213         $   275
                                                                =======         =======

    Interest on deposits and borrowings                         $ 4,225         $ 3,994
                                                                =======         =======

Supplemental disclosure of noncash investing activities:
  Foreclosed mortgage loans transferred to
   real estate acquired through foreclosure                     $   150         $     -
                                                                =======         =======

  Loans disbursed to finance the sale of real
   estate acquired through foreclosure                          $    18         $     -
                                                                =======         =======

  Transfers of loans held for investment
   to held for sale classification                              $   814         $   766
                                                                =======         =======

  Transfer of allowance for loan losses
   from a general to a specific allocation                      $    35         $     -
                                                                =======         =======

  Loan charge-offs                                              $     -         $     4
                                                                =======         =======

  Recognition of mortgage servicing rights in
   accordance with Statement of Financial Accounting
   Standards No. 125                                            $   280         $   175
                                                                =======         =======

  Unrealized gains (losses) on securities designated
   as available for sale - net of related tax effects           $   (28)        $   152
                                                                =======         =======
</TABLE>

                                      -10-


<PAGE>   11

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   For the nine and three month periods ended
                             March 31, 1999 and 1998

         Towne Financial Corporation ("Towne Financial", or the "Corporation")
conducts a general banking business in southwestern Ohio which consists of
attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer and nonresidential purposes. The
Corporation's profitability is significantly dependent on its net interest
income, which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest paid on
interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net
interest income is affected by the relative amount of interest-earning assets
and interest-bearing liabilities and the interest received or paid on these
balances. The level of interest rates paid or received by the Corporation can be
significantly influenced by a number of environmental factors, such as
governmental monetary policy, that are outside of management's control.

1. Basis of Presentation
   ---------------------

         The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB and, therefore, do not
include information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. However, all adjustments (consisting
of only normal recurring accruals) which, in the opinion of management, are
necessary for a fair presentation of the consolidated financial statements have
been included. The results of operations for the nine and three month periods
ended March 31, 1999 and 1998 are not necessarily indicative of the results
which may be expected for an entire fiscal year.

2. Principles of Consolidation
   ---------------------------

         Towne Financial is a unitary savings and loan holding company. Since
the date of its incorporation, Towne Financial's activities have been limited
primarily to holding the common stock of its wholly-owned subsidiary, The Blue
Ash Building and Loan Company ("Blue Ash", or the "Company").




                                      -11-
<PAGE>   12

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   For the nine and three month periods ended
                             March 31, 1999 and 1998

2. Principles of Consolidation (continued)
   ---------------------------

         The accompanying consolidated financial statements include the accounts
of Towne Financial and Blue Ash. Future references to Towne Financial or Blue
Ash are utilized herein as the context requires. All significant intercompany
balances and transactions have been eliminated in the accompanying consolidated
financial statements.

3. Effects of Recent Accounting Pronouncements
   -------------------------------------------

         In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general-purpose financial statements. Comprehensive
income consists of net earnings or loss for the current period and other
comprehensive income - revenue, expenses, gains and losses that bypass the
income statement and are reported directly in a separate component of equity.
Other comprehensive income includes, for example, foreign currency items,
minimum pension liability adjustments and unrealized gains and losses on certain
investment securities. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. It does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS No. 130 requires that an enterprise (i) classify items of other
comprehensive income by their nature in a financial statement and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 was effective for fiscal years beginning after
December 15, 1997, and required restatement of prior year financial statements
presented for comparative purposes. For the nine and three months ended March
31, 1999, Towne Financial presented a separate statement of comprehensive income
and other information pursuant to the provisions of SFAS No. 130. In accordance
with the Statement, prior period financial statements presented for comparative
purposes were restated to conform with SFAS No. 130.




                                      -12-
<PAGE>   13
                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   For the nine and three month periods ended
                             March 31, 1999 and 1998

3. Effects of Recent Accounting Pronouncements (continued)
   -------------------------------------------

         In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 significantly changes
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about reportable segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 uses a "management approach" to disclose financial and descriptive
information about the way that management organizes the segments within the
enterprise for making operating decisions and assessing performance. A
reportable segment, referred to as an operating segment, is a component of an
enterprise about which separate financial information is produced internally,
that is evaluated by the chief operating decision-maker to assess performance
and allocate resources. Enterprises are required to report segment profit or
loss, certain specific revenue and expense items and segment assets based on
financial information used internally for evaluating performance and allocating
resources. An enterprise is also required to describe how its operating segments
were determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in its financial statements and any changes in the measurement of
segment amounts from the previous period. For many enterprises, the management
approach will likely result in more segments being reported. In addition, SFAS
No. 131 requires significantly more information to be disclosed for each
reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 was effective for fiscal years beginning
after December 15, 1997, but earlier application was encouraged. Segment
information reported in earlier years was to be restated to conform to the
requirements of SFAS No. 131. Enterprises were not required to report segment
information in interim financial statements in the year of adoption, but
comparative financial information was required beginning with the second year
after adoption. The adoption of SFAS No. 131 did not have a material impact on
Towne Financial's consolidated financial statements as management did not
believe that implementation of this Statement resulted in the identification of
other reportable business segments at this time.


                                      -13-
<PAGE>   14

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   For the nine and three month periods ended
                             March 31, 1999 and 1998

3. Effects of Recent Accounting Pronouncements (continued)
   -------------------------------------------

         In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits," which revises employers'
disclosures about pension and other Postretirement benefit plans. It eliminates
certain current disclosures and requires additional information about changes
in the benefit obligation and the fair values of plan assets. It also
standardizes the disclosure requirements of SFAS No. 87, No. 88 and No. 106 to
the extent practicable and recommends a parallel format for presenting
information about pensions and other postretirement benefits. SFAS No. 132 does
not change any of the measurement or recognition provisions provided for in SFAS
No. 87, No. 88 or No. 106, and provides reduced disclosure requirements for
nonpublic entities. SFAS No. 132 was effective for fiscal years beginning after
December 15, 1997, with earlier application encouraged. Restatement of
disclosures for earlier periods was required unless the information was not
readily available, in which case the notes to the financial statements would
include all available information and a description of the information not
available. The adoption of SFAS No. 132 did not have a material impact on Towne
Financial's consolidated financial position or results of operations.

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes uniform accounting and
reporting standards for derivative financial instruments and other similar
financial instruments and for hedging activities. SFAS No. 133 requires all
derivatives to be measured at fair value and be recognized as either assets or
liabilities in the statement of financial position. SFAS No. 133 also specifies
new methods of accounting for hedging transactions, prescribes the items and
transactions that may be hedged and specifies detailed criteria to be met to
qualify for hedge accounting. The definition of a derivative financial
instrument is complex, but in general, it is an instrument with one or more
underlyings, such as an interest rate or foreign exchange rate, that is applied
to a notional amount, such as an amount of currency, to determine the settlement
amount(s). It generally requires no significant initial investment and can be
settled net or by delivery of an asset that is readily convertible to cash. SFAS
No. 133 applies to derivatives embedded in other contracts, unless the
underlying of the embedded derivative is clearly and closely related to the host
contract. In



                                      -14-
<PAGE>   15

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   For the nine and three month periods ended
                             March 31, 1999 and 1998

3. Effects of Recent Accounting Pronouncements (continued)
   -------------------------------------------

addition, SFAS No. 133 includes a provision that permits the transfer of held to
maturity securities to the available for sale category or the trading category
on the date of adoption of the Statement. Such transfers from the held to
maturity category will not call into question an entity's intent to hold other
debt securities to maturity in the future. SFAS No. 133 precludes certain fair
value hedges of held to maturity securities and precludes certain cash flow
hedges of the variable interest payments of held to maturity securities. SFAS
No. 133 therefore includes the provision permitting transfer of securities out
of the held to maturity category because it will enable an entity to hedge the
securities or the cash flows from the securities in the future. The unrealized
holding gain or loss on a held to maturity security that is transferred to the
available for sale category should be reported as part of the cumulative effect
adjustment in accumulated other comprehensive income, together with other
transition adjustments reported in other comprehensive income on adoption of
SFAS No. 133. If the security is transferred to the trading category, the
unrealized holding gain or loss should be reported as part of the cumulative
effect adjustment of adopting SFAS No. 133 in arriving at net income. SFAS No.
133 should be adopted in its entirety; it cannot be adopted piecemeal. All
provisions of SFAS No. 133 should therefore be applied on initial application.
The Statement is effective for fiscal years beginning after June 15, 1999. Early
adoption is permitted as of the beginning of any fiscal quarter that begins
after the Statement was issued. Management does not believe that the adoption of
SFAS No. 133 will have a material adverse effect on Towne Financial's
consolidated financial position or results of operations.

         In December 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." The Statement amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities," to require a mortgage
banking entity that securitizes mortgage loans held for sale to classify any
retained mortgage-backed securities and other retained interests based on the
entity's ability and intent to sell or hold those investments. Retained
mortgage-backed securities should be classified as trading, available for sale,
or held to maturity, as provided under SFAS No. 115, "Accounting for Certain
Investments in Debt and



                                      -15-
<PAGE>   16

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   For the nine and three month periods ended
                             March 31, 1999 and 1998

3. Effects of Recent Accounting Pronouncements (continued)
   -------------------------------------------

Equity Securities." However, any retained mortgage-backed securities that a
mortgage banking enterprise commits to sell before or during the securitization
process must be classified as trading. SFAS No. 134 conforms the accounting
treatment for these transactions by a mortgage banking enterprise with the
accounting for securities retained after the securitization of other types of
assets, such as credit card receivables, by a nonmortgage banking enterprise.
The Statement was effective for the first fiscal quarter beginning after
December 15, 1998, with early application encouraged. On adoption of the
Statement, an entity could reclassify mortgage-backed securities and other
beneficial interests retained after the securitization of mortgage loans held
for sale from the trading category, except for those with sales commitments in
place. Transfers from the trading category resulting from the adoption of SFAS
No. 134 should be accounted for under SFAS No. 115, that is, the unrealized gain
or loss at the date of the transfer will have already been recognized in
earnings and should not be reversed. Management did not believe that the
adoption of SFAS No. 134 had a material adverse effect on Towne Financial's
consolidated financial position or results of operations.

4. Earnings Per Share
   ------------------

         In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which requires institutions to present basic earnings per share and, if
applicable, diluted earnings per share, respectively. Basic earnings per share
is computed without including potential common shares, i.e., no dilutive effect.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares, including options, warrants,
convertible securities and contingent stock agreements.

         In accordance with the provisions of SFAS No. 128, basic earnings per
share was computed by dividing net earnings available to common shareholders by
the weighted-average number of common shares outstanding during each of the
periods presented. Basic earnings per share has been computed based on 210,574
and 208,500 weighted-average shares of common stock outstanding for the nine
month periods ended March 31, 1999 and 1998, respectively, and



                                      -16-
<PAGE>   17

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   For the nine and three month periods ended
                             March 31, 1999 and 1998

4. Earnings Per Share (continued)
   ------------------

213,931 and 208,500 weighted-average shares of common stock outstanding for the
three month periods ended March 31, 1999 and 1998, respectively. Unlike the
primary earnings per share calculation of Accounting Principles Board ("APB")
Opinion No. 15, the denominator of basic earnings per share does not include
dilutive common stock equivalents, such as convertible securities, warrants, or
stock options. As a result, exercisable options, attendant to Towne Financial's
Stock Option and Incentive Plans, were not considered in the computation of
basic earnings per share.

         Diluted earnings per share, which replaced fully-diluted earnings per
share under APB Opinion No. 15, takes into consideration common shares
outstanding (as computed under basic earnings per share) and dilutive potential
common shares. As a result, diluted earnings per share was computed assuming
exercise of all Towne Financial's outstanding stock options. Weighted-average
common shares deemed outstanding for purposes of computing diluted earnings per
share totaled 225,024 and 219,218 for the nine month periods ended March 31,
1999 and 1998, respectively, and 230,746 and 219,218 for the three month periods
ended March 31, 1999 and 1998, respectively.




                                      -17-
<PAGE>   18

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

Forward-Looking Statements
--------------------------

         In the following pages, management presents an analysis of Towne
Financial's consolidated financial condition as of March 31, 1999, and the
consolidated results of operations for the nine and three month periods ended
March 31, 1999, as compared to the same periods in 1998. In addition to this
historical information, the following discussion contains forward-looking
statements that involve risks and uncertainties. Economic circumstances, Towne
Financial's operations and Towne Financial'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
herein but also include changes in the economy and interest rates in the nation
and in Towne Financial's general market area.

         Without limiting the foregoing, some of the forward-looking statements
included herein include the following:

         1.       Management's determination of the amount of and adequacy of
                  the allowance for loan losses;

         2.       The effect of changes in interest rates;

         3.       Management's analysis and discussion of the interest rate
                  risk, liquidity and regulatory capital of Blue Ash;

         4.       Management's belief that Towne Financial's and Blue Ash's
                  activities will not be materially affected by proposed changes
                  in the regulation of all savings institutions and their
                  holding companies;

         5.       Management's opinion as to the effects of recent accounting
                  pronouncements on Towne Financial's consolidated financial
                  statements;

         6.       Management's assessment of the risks of potential problems
                  that could arise from the failures of computer systems and
                  programming to recognize the year 2000; and

         7.       Management's belief that Towne Financial will not likely incur
                  significant expense to implement the necessary corrective
                  measures regarding any year 2000 related problems.



                                      -18-
<PAGE>   19

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
------------------------------------------------------------------------------

         At March 31, 1999, Towne Financial's consolidated assets totaled $122.3
million, representing an increase of $4.5 million, or 3.8%, over the $117.8
million asset level at June 30, 1998. The increase in asset size experienced
during the nine months ended March 31, 1999 was funded principally through an
increase in deposits of $3.4 million, or 3.6%, and, to a lesser extent, an
increase in shareholders' equity of $841,000, or 9.7%, and an increase realized
in all noninterest-bearing liabilities of $280,000, or 19.5%, all of which were
partially offset by a decrease in borrowings of $15,000, or 0.1%. Such increase
in total assets was primarily due to an increase in investment securities of
$6.4 million, or 394.6%, which was partially offset by a reduction in
mortgage-backed securities of $918,000, or 2.8%, a reduction in loans receivable
and loans held for sale of $897,000, or 1.2%, and a reduction in cash, cash
equivalents and certificates of deposit in other financial institutions of
$410,000, or 6.7%. The current period's growth in assets followed an increase of
$15.2 million, or 14.9%, during fiscal 1998 and $10.4 million, or 11.2%, during
fiscal 1997. Towne Financial's growth during the nine month period ended March
31, 1999 and over the last two years was generally indicative of management's
efforts to increase net interest income levels by effectively leveraging the
capital base. The growth in total assets was also consistent with management's
short-term goals and with its strategic objective of continuing to grow the size
of the operations within the existing branch structure.

         Cash and due from banks, federal funds sold, interest-bearing deposits
and certificates of deposits in other financial institutions totaled
approximately $5.7 million at March 31, 1999, a decrease of $410,000, or 6.7%,
from June 30, 1998 levels of $6.1 million. The reduction during the nine months
ended March 31, 1999 in cash, cash equivalents and certificates of deposit in
other financial institutions was largely driven by the dissemination of excess
cash and liquid funds into primarily higher yielding investment securities and,
to a lesser extent, certain fixed-rate mortgage-backed and related securities.
As the Corporation's liquidity position increased during the 1999 period as a
result of a continued growth in deposits, which was coupled with a reduction in
the loan portfolio as loan prepayments and loan sales



                                      -19-
<PAGE>   20

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
------------------------------------------------------------------------------
(continued)

accelerated in a historically low interest rate environment, management elected
to channel such increasing liquidity into the investment and mortgage-backed
securities portfolios to take advantage of certain market opportunities as well
as to increase its overall investment yield in a declining and flat yield curve
environment. The increase in investment securities of $6.4 million, or 394.6%,
and the purchase of $6.7 million in mortgage-backed securities during the nine
months ended March 31, 1999 were predominately funded by an increase in deposits
of $3.4 million, or 3.6%, a decrease in loans receivable and loans held for sale
of $897,000, or 1.2%, a decrease in cash and other liquid assets of $410,000, or
6.7%, and cash flows received from accelerated prepayments on certain
mortgage-backed securities. Growth in the investment securities portfolio
outpaced growth in deposits and proceeds received from loan sales and repayments
on loans and securities, causing the reduction in cash and cash equivalents at
March 31, 1999.

         Investment securities designated as available for sale and held to
maturity totaled $8.0 million at March 31, 1999, an increase of $6.4 million, or
394.6%, over June 30, 1998 levels of $1.6 million. This increase in investment
securities reflected the purchase of predominately municipal obligations of
$10.4 million, which was partially offset by proceeds received from the sale of
municipal obligations of $3.9 million and proceeds received from the call of
securities of $285,000. With interest rates having fallen so rapidly during the
nine months ended March 31, 1999, the Corporation experienced an increase in
liquidity and a shortening in duration on many security positions within the
investment and mortgage-backed securities portfolios. This was especially true
considering the amount of cash flow which has and will be coming into the
portfolio through called U.S. Government and agency obligations and mortgage
prepayments on loans and securities in the months ahead. The result is exposure
to a continued decline in interest rates. The Corporation's interest rate risk
position has changed as the decline in interest rates has accelerated cash flows
from callable and mortgage securities. As a result, the Corporation has become
heavily exposed to falling interest rates. To correct this exposure, the
purchase of fixed-rate assets was



                                      -20-
<PAGE>   21

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
------------------------------------------------------------------------------
(continued)

needed. The wide spreads and steepness of the municipal yield curve made
tax-free securities especially attractive to correct exposure to falling
interest rates during the nine months ended March 31, 1999. As a result, the
excess funds from the deposit growth as well as from proceeds from loan sales
and prepayments on loans and mortgage-backed securities were utilized to
purchase tax-free fixed-rate municipal obligations designated as available for
sale with eight to ten years of call protection and maturities ranging from
twelve to twenty-five years. These securities were acquired for the purpose of
not holding them to maturity, to obtain attractive tax-equivalent yields in a
declining interest rate environment, to recognize additional earnings through
profits from sale of securities in future periods to offset the pressures of
narrowing net interest margins and to lengthen out maturities within the
investment portfolio so as to combat the shortened portfolio duration as a
result of accelerating calls and prepayments on securities. The overall increase
in investment securities during the nine months ended March 31, 1999 not only
resulted from a slowdown in the growth of the loan portfolio, but also resulted
from management's decision to leverage funds into higher yielding assets, such
as municipal obligations.

         Mortgage-backed securities designated as available for sale and
mortgage-backed securities held to maturity decreased by approximately $918,000,
or 2.8%, during the nine months ended March 31, 1999. This decrease in the
mortgage-backed securities portfolio was attributed to principal repayments on
securities of $5.5 million, proceeds from the sale of securities designated as
available for sale, including losses, of $2.0 million, amortization of premiums
and accretion of discounts on securities, net, of $61,000 and a net increase in
unrealized market losses on securities designated as available for sale of
$42,000, all of which were partially offset by purchases of $1.6 million in
floating-rate collateralized mortgage obligations designated by management as
held to maturity, purchases of $543,000 in fixed-rate participation certificates
designated as held to maturity and purchases of $4.5 million in fixed-rate
collateralized mortgage obligations and participation certificates designated as
available for sale. In addition to growing the investment portfolio, management
elected to change the mix as well as to increase the



                                      -21-
<PAGE>   22

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
------------------------------------------------------------------------------
(continued)

level of its mortgage-backed securities during the nine months ended March 31,
1999 as the loan portfolio growth slowed in attempts to diversify its investment
holdings and to increase the volume of interest-earning assets relative to the
equity base (leverage) in order to improve net interest income and overall net
earnings. However, the Corporation experienced heavier than expected prepayments
on its mortgage-backed securities due to the decline in overall interest rates.
Such accelerated prepayment activity on securities in conjunction with proceeds
received from sales on securities more than fully offset the Corporation's
purchase activity during the 1999 period, thereby reducing the overall level of
mortgage-backed securities at March 31, 1999. As a result, the reduction in the
mortgage-backed securities portfolio was utilized, in part, to help fund the
increase in the investment securities portfolio, specifically the purchase of
tax-free fixed-rate municipal obligations. From time to time, when opportunities
exist, the Corporation utilizes advances from the Federal Home Loan Bank in the
acquisition of certain securities in order to lock in an attractive spread
between investment and borrowing. In continuing its efforts from prior periods
to better diversify the mortgage-backed securities portfolio so as to improve
overall performance and yield, the Corporation acquired during the nine months
ended March 31, 1999 short- to immediate-term fixed-rate securities designated
as available for sale, a monthly floating-rate collateralized mortgage
obligation indexed to the composite prime rate of 75% of the thirty largest U.S.
banks as reported by THE WALL STREET JOURNAL and a monthly floating-rate short
average life collateralized mortgage obligation indexed to the Eleventh District
cost of funds. By investing in short- to intermediate-term fixed-rate
securities, specifically collateralized mortgage obligations and participation
certificates, management intended to capitalize if and when the Federal Reserve
Board began cutting short-term interest rates, which appeared artificially high
in relation to long-term interest rates. The floating-rate security tied to the
composite prime rate was acquired in order to take advantage of an attractive
spread to the comparable U.S. treasury index without incurring a greater
prepayment risk stemming from a lower interest rate environment that existed
during the nine months ended March 31, 1999. The floating-rate security tied to
the



                                      -22-
<PAGE>   23

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
------------------------------------------------------------------------------
(continued)

Eleventh District cost of funds was acquired as a defensive measure and to take
advantage of a lower interest rate environment currently in effect. The
Corporation also invested in a fully securitized fixed-rate Government National
Mortgage Association project loan that offered an attractive yield and good lock
out protection. As a result of these acquisitions, management wanted to be in
position to not only improve its current overall yield on mortgage-backed
securities, but to more favorably capitalize in a declining interest rate
environment.

         Loans receivable and loans held for sale decreased in the aggregate by
approximately $897,000, or 1.2%, during the nine months ended March 31, 1999.
This decline was largely attributed to loan sales, net of gains, of $22.3
million, principal repayments on loans of $22.3 million and loans acquired
through foreclosure of $150,000, all of which were partially offset by loan
disbursements, loan purchases and loans originated for sale in the secondary
market of $43.7 million. The reduction in the loan portfolio was primarily due
to a decrease of $1.4 million, or 11.9%, in nonresidential real estate and land
loans, a decrease of $257,000, or 9.8%, in home equity line of credit loans and
a decrease of $128,000, or 3.3%, in multi-family construction and residential
real estate loans, all of which were partially offset by an increase of
$794,000, or 1.5%, in one-to-four family residential real estate and
construction loans and an increase of $33,000, or 16.9%, in passbook loans to
deposit customers and other secured consumer loans. Over the past few years,
Blue Ash has substantially grown in the loan portfolio as a result of a
continued greater loan origination volume in all types of loans, management's
strategy to primarily hold loans in the portfolio subject to certain interest
rate risk limitations and management's strategy to redeploy funds from other
asset categories into lending activities to the extent practicable. The strategy
to hold loans has reflected management's continued desire to grow the
Corporation largely through loan portfolio growth, management's desire to obtain
a better loan portfolio mix of adjustable- and fixed-rate loans by increasing
the fixed-rate portion of its loan portfolio and management's intent to increase
its loan-to-deposit ratio. During the nine months ended March 31, 1999 as well
as during the



                                      -23-
<PAGE>   24

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
------------------------------------------------------------------------------
(continued)

last two previous quarters, however, due to a decline in long-term interest
rates toward historical lows, combined with a shift to a very flat yield curve,
management redirected its efforts and strategies to originating for sale in the
secondary market all conforming single-family residential mortgage loans in
order to reduce its exposure to interest rate risk. Adhering to this change in
strategy, coupled with heavy principal repayments and payoffs on loans,
including a couple of large balance nonresidential real estate loans, resulted
in a reduction of loans receivable and loans held for sale at March 31, 1999.
During this period of generally lower interest rates, loan originations and loan
sales were at higher levels than in prior periods due to an increased loan
demand consisting primarily of refinancings and fixed-rate loans. During the
nine months ended March 31, 1999, total loan originations and purchases were a
robust $43.7 million, as compared to $37.3 million during the nine months ended
March 31, 1998, an increase of $6.4 million, or 17.3%. Specifically, loans
originated for sale in the secondary market increased significantly during the
nine months ended March 31, 1999, as compared to the nine months ended March 31,
1998 from $14.1 million to $21.8 million, while loans originated and purchased
for the portfolio declined period-to-period from $23.2 million to $21.9 million.
It was management's strategy to accelerate loan originations during this lower
interest rate period by utilizing loan sales as a means to accommodate the
increased loan volume, thereby slowing loan portfolio growth and increasing
other operating income from gains on sale of loans in the secondary market.
Management utilized sales of loans in the secondary market as a means of meeting
the consumer preference for fixed-rate loans. If interest rates remain at all
time historical lows, selling residential mortgage loans in the secondary market
will continue to be a part of Blue Ash's future plans, as this practice will
enable Blue Ash to enhance the management of its liquidity position as well as
effect changes in its asset and liability mix. Despite the reduction in the loan
portfolio which was dictated by a declining interest rate environment, overall
loan origination volume remained very strong during the nine months ended March
31, 1999 due to the continued strong marketing and selling effort by management
to originate loans and the continual development and refinement of new loan
products and programs to better serve the lending area.



                                      -24-
<PAGE>   25

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
------------------------------------------------------------------------------
(continued)

         At March 31, 1999, the Corporation's allowance for loan losses totaled
$270,000, an increase of $6,000, or 2.3%, over the $264,000 level represented at
June 30, 1998. During the nine months ended March 31, 1999, the Corporation
increased its allowance for general loan losses by $23,000, transferred $35,000
in allowance for loan losses from a general to a specific allocation and
incurred loan charge-offs of $17,000 on foreclosed single-family residential
mortgage loans which were subsequently transferred to real estate acquired
through foreclosure. The Corporation's internally-classified assets, net of a
specific valuation allowance, totaled approximately $841,000 at March 31, 1999,
as compared to $885,000 at June 30, 1998. Non-performing and nonaccrual loans,
on the other hand, totaled only $340,000, or 0.48% of loans receivable and loans
held for sale, at March 31, 1999, as compared to $885,000, or 1.22% of loans
receivable and loans held for sale, at June 30, 1998. The reduction in
internally-classified assets during the nine months ended March 31, 1999 was
primarily due to an aggregate decrease both in number and outstanding balance in
the classification of single-family residential mortgage loans, which was
partially offset by the initial classification of a single-family construction
loan as "Special Mention." The improvement in non-performing and nonaccrual
loans was largely due to the reduction in single-family residential and lot loan
delinquencies of 90 days or more during the 1999 period. In the opinion of
management, such internally-classified assets and non-performing and nonaccrual
loans in the aggregate represented an approximate 70-75% loan-to-value ratio at
March 31, 1999 and were deemed adequately secured in the event of default by the
borrowers. Because the loan loss allowance is based on estimates, it is
monitored regularly on an ongoing basis and adjusted as necessary to provide an
adequate allowance. The Corporation reviews on a monthly basis its loan
portfolio, including problem loans, to determine whether any loans require
classification and/or the establishment of appropriate allowances. The allowance
for loan losses is determined by management based upon past loss experience,
trends in the level of delinquent and problem loans, adverse situations that may
affect the borrowers' ability to repay, the estimated value of any underlying
collateral and current and anticipated economic conditions in Blue Ash's lending
area. The



                                      -25-
<PAGE>   26

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
------------------------------------------------------------------------------
(continued)

provision for general loan losses of $23,000 recorded during the nine months
ended March 31, 1999 was attributed to management's assessment of the current
level of internally-classified and non-performing and nonaccrual loans, the
current composition of loans within the portfolio and Blue Ash's overall growth
within the loan portfolio over the past few years. Management believed that the
loan loss allowance existing at March 31, 1999 was adequate to cover unforeseen
loan losses based upon the ongoing review of such internally-classified assets
and non-performing and nonaccrual loans. Although management believed that its
allowance for loan losses at March 31, 1999 was adequate based on facts and
circumstances available at the time, there can be no assurance that additions to
such allowance will not be necessary in future periods which could adversely
affect the Corporation's results of operations. At March 31, 1999, the
Corporation's allowance for loan losses consisted of a general valuation
allowance, as defined by the regulations of the Office of Thrift Supervision
("OTS"), of $252,000 and a specific loan loss allowance of $18,000, and
represented 0.38% of the total amount of loans outstanding, including those
loans designated as held for sale, and 31% of internally-classified assets.

         Deposits totaled $98.4 million at March 31, 1999, an increase of $3.4
million, or 3.6%, over the $95.0 million in deposits outstanding at June 30,
1998. The increase in total overall deposits was primarily the result of an
increase in certificates of deposit of $1.3 million, or 1.8%, which was coupled
with an increase in transaction accounts (NOW accounts, money market deposit
accounts, passbook accounts and Christmas club accounts) of $2.1 million, or
10.9%. The increase in certificates of deposit (primarily certificates of
deposit with original terms to maturity of two years or less) during the nine
months ended March 31, 1999 was attributed to an increase in certificate of
deposit balances obtained from the local market area of $5.5 million, or 6.2%,
which was partially offset by a decline in outstanding brokered deposits of $2.1
million, or 35.5%. In an effort to sustain deposit growth during the nine months
ended March 31, 1999, management continued its strategy in part of funding the
growth in assets by carefully growing the deposit base through certificates of
deposit. The increase in certificates of deposit from Blue Ash's local market



                                      -26-
<PAGE>   27

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
------------------------------------------------------------------------------
(continued)

area during the nine months ended March 31, 1999 was attributed to the influx of
new accounts resulting from continued strong marketing efforts and competitive
pricing on certificate of deposit accounts. The emphasis in brokered deposits
and other out-of-state funds was de-emphasized by management as they became a
less attractive alternative funding source. The need for brokered deposits
lessened as the loan portfolio growth slowed in the declining interest rate
environment and cash flows from loans and mortgage-backed securities
accelerated. From time to time, however, when circumstances dictate in the
future, management will continue its strategy of selectively obtaining brokered
deposits and other out-of-state funds to supplement its deposit base. As long as
demand for new loan production remains strong in the periods ahead, brokered
deposits will continue to be a viable funding source, as management is reluctant
to aggressively price above market and seek at all times certificates of deposit
from its local market area. The increase in transaction accounts during the nine
months ended March 31, 1999 was due to an increase in NOW accounts of $1.3
million, or 32.6%, an increase in money market deposit accounts of 685,000, or
10.3%, and an increase in passbook and club accounts of $53,000, or 0.6%. As
part of its efforts to increase the deposit base, management continued its more
assertive efforts during the nine months ended March 31, 1999 in its attempts to
minimize the outflow of funds from transaction accounts and to reacquire these
deposit balances by placing a stronger emphasis on the cross-selling of deposit
products (i.e., checking accounts) at the branch level and developing specific
advertising campaigns aimed at transaction account customers. As a result of
these marketing and selling efforts, the outstanding balance of all customer
checking accounts increased by $504,000, or 14.4%, and the number of overall
checking accounts increased by 9.8% during the nine months ended March 31, 1999.
In terms of checking account growth at the Mason branch office, which is located
in a fast-developing and growing area, there was an increase of 35.3% in the
number of accounts open and an increase of 21.1% in the outstanding balance of
such accounts during the nine months ended March 31, 1999. The overall growth in
deposits during the nine months ended March 31, 1999 reflected management's
continuing efforts to maintain steady growth and was consistent with
management's short-



                                      -27-
<PAGE>   28

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
------------------------------------------------------------------------------
(continued)

term and long-term goals. From time to time, however, in an attempt to closely
control its overall cost of funds and based on the current interest rate
environment, management may temporarily elect to use alternative funding
sources, such as brokered deposits. It is the continued goal of management to
increase loan production and the level of loan retention, thereby increasing the
need for overall deposits and available liquid assets. Management expects to
continue meeting the need for deposits, for the most part, through increased
marketing and competitive pricing of the Company's deposit products, which could
result in additional operating expenses and interest expense.

         Total borrowings, which consisted principally of Federal Home Loan Bank
advances at March 31, 1999, totaled approximately $12.7 million at March 31,
1999, as compared to $12.7 million at June 30, 1998. During the nine months
ended March 31, 1999, there was a principal repayment of $15,000 in regards to
the outstanding Employee Stock Ownership Plan loan that is secured by the
Corporation's common stock. Although there was no activity with regards to
borrowings from the Federal Home Loan Bank during the nine months ended March
31, 1999, Federal Home Loan Bank advances have been actively pursued and
utilized by the Corporation for a variety of reasons in prior periods and will
continue to be used when necessary in future periods. From time to time, Federal
Home Loan Bank advances are utilized as an alternative funding source or as a
supplement to deposits if the cost of such borrowings is favorable in comparison
to the cost of deposits. Federal Home Loan Bank advances are utilized by Blue
Ash for funding in times of low cash availability, as well as funding specific
needs, such as large loans. Another use is the funding of investments and
mortgage-backed securities, where an attractive spread is offered when compared
to the cost of borrowing, and where both the security and the borrowing may have
similar terms to maturity or similar repricing patterns. Management believes
that the use of Federal Home Loan Bank advances is a prudent measure in the
above instances. Additionally, Federal Home Loan Bank advances may also be used
as an instrument in the control of interest rate risk when appropriate or for
restructuring purposes. In future periods, management may acquire additional
Federal Home Loan Bank advances to fund loan production, to acquire investments
and mortgage-backed



                                      -28-
<PAGE>   29

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
------------------------------------------------------------------------------
(continued)

securities, or as a tool to manage the interest rate risk of Blue Ash.

         Shareholders' equity totaled $9.5 million at March 31, 1999, an
increase of $841,000, or 9.7%, over the total of $8.7 million at June 30, 1998.
The increase in shareholders' equity was primarily due to net earnings for the
period of $714,000, proceeds from the exercise of stock options of $217,000 and
a reduction in required contributions of the Employee Stock Ownership Plan of
$15,000, all of which were partially offset by the payment of dividends to
shareholders of $77,000 and an increase in unrealized market losses on
securities designated as available for sale, net of related tax effects, of
$28,000. At March 31, 1999, shareholders' equity as a percentage of total assets
was 7.8%.

         Blue Ash is subject to minimum regulatory capital standards promulgated
by the OTS. Failure to meet minimum capital requirements can initiate certain
mandatory - and possibly additional discretionary - actions by regulators that,
if undertaken, could have a direct material effect on Blue Ash's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, Blue Ash must meet specific capital guidelines that
involve quantitative measures of its assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. Blue Ash's
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors. The minimum
capital standards of the OTS generally require the maintenance of regulatory
capital sufficient to meet each of three tests, hereinafter described as the
tangible capital requirement, the core capital requirement and the risk-based
capital requirement. The tangible capital requirement provides for minimum
tangible capital (defined as shareholders' equity less all intangible assets)
equal to 1.5% of adjusted total assets. The core capital requirement provides
for minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) equal to 3.0% of adjusted total
assets, while the risk-based capital requirement currently provides for the
maintenance of core capital plus general loan loss allowances equal to 8.0% of
risk-weighted assets as of March 31,



                                      -29-
<PAGE>   30

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
------------------------------------------------------------------------------
(continued)

1999. In computing risk-weighted assets, Blue Ash multiplies the value of each
asset on its statement of financial condition by a defined risk-weighted factor,
e.g., one-to-four family residential loans carry a risk-weighted factor of 50%.

         Management has determined that Blue Ash is in compliance with each of
the three capital requirements at March 31, 1999. Specifically, Blue Ash's
tangible and core capital of $9.0 million, or 7.4% of total adjusted assets,
exceeded the respective minimum requirements of $1.8 million and $3.7 million at
that date by approximately $7.2 million, or 5.9% of total adjusted assets, and
$5.3 million, or 4.4% of total adjusted assets. Additionally, Blue Ash's
risk-based capital of approximately $9.2 million at March 31, 1999, or 16.0% of
risk-weighted assets (including a general loan loss allowance of $252,000),
exceeded the current 8.0% requirement of $4.6 million by approximately $4.6
million, or 8.0% of risk-weighted assets.

         The OTS has proposed an amendment to the core capital requirement that
would increase the minimum requirement to a range of 4.0% - 5.0% of adjusted
total assets for substantially all savings associations. Management anticipates
no material change to Blue Ash's excess regulatory capital position if the
proposal is adopted in its present form.

         The OTS adopted a final rule in August 1993 incorporating an interest
rate risk component into the risk-based capital rules. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating the risk-based capital requirement. An institution
with a greater than "normal" interest rate risk is defined as an institution
that would suffer a loss of net portfolio value ("NPV") exceeding 2.0% of the
estimated market value of its assets in the event of a 200 basis point increase
or decrease in interest rates. NPV is the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts. A resulting change in NPV of more than 2% of the estimated market
value of an institution's assets will require the institution to deduct from its
capital 50% of that excess change. The rule



                                      -30-
<PAGE>   31

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
------------------------------------------------------------------------------
(continued)

provides that the OTS will calculate the interest rate risk component quarterly
for each institution. The OTS has indicated that no institution will be required
to deduct an interest rate risk component from capital for purposes of computing
the risk-based capital requirement until further notice. In general,
institutions which have risk-based capital in excess of 12% and assets under
$300 million are exempt from the new requirement unless the OTS requires
otherwise. The OTS will continue, however, to closely monitor the level of
interest rate risk at individual institutions and retains the authority, on a
case-by-case basis, to impose a higher individual minimum capital requirement
for individual institutions with significant interest rate risk. At March 31,
1999, Blue Ash had total assets of $122.3 million and risk-based capital of
16.0% which would have qualified Blue Ash for this exemption had the new
requirements been in effect at such date.


                                      -31-
<PAGE>   32

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
-------------------------------------------------------------------------------
and 1998
--------

General
-------

         Net earnings totaled $714,000 for the nine months ended March 31, 1999,
a decrease of $3,000, or 0.4%, from the $717,000 in net earnings recorded for
the nine months ended March 31, 1998. The slight decline in net earnings was
primarily attributable to a decrease in net interest income after provision for
losses on loans of $129,000, or 5.7%, and an increase in general, administrative
and other expense of $90,000, or 5.8%, which were both partially offset by an
increase in other income of $138,000, or 37.7%. The decrease in net interest
income after provision for losses on loans was further accentuated by the
presentation during the nine months ended March 31, 1999 of interest income on
tax-exempt municipal securities on a tax-free basis instead of on a
tax-equivalent basis, creating some difficulty and inconsistencies in accurately
comparing total interest income and net interest income from the 1999 period to
the 1998 period as there were no municipal securities in the portfolio during
the 1998 period. The decrease in earnings level before federal income taxes of
$81,000, or 7.4%, resulted in a decrease in the provision for federal income
taxes of $78,000, or 20.5%. The decrease in the provision for federal income
taxes was also attributed to a reduction in the Corporation's effective tax rate
resulting primarily from the federal tax treatment of accumulating bank
qualified municipal securities.

Net Interest Income and Provision for Losses on Loans
-----------------------------------------------------

         The Corporation's net interest income decreased by $124,000, or 5.4%,
during the nine months ended March 31, 1999, as compared to the same period in
the prior year. The decrease in net interest income during the nine months ended
March 31, 1999 was primarily the result of an increase in total interest
expense, due to increases in the average outstanding balances of deposits and
borrowings, which were partially offset by decreases in the weighted-average
rates paid on deposits and borrowings. Total interest expense on the
Corporation's interest-bearing liabilities for the nine months ended March 31,
1999, as compared to the same period in the prior year, increased by $216,000,
or 5.4%, due to overall increases of $9.1 million, or 9.0%, in the average



                                      -32-
<PAGE>   33

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
-------------------------------------------------------------------------------
and 1998 (continued)
--------

Net Interest Income and Provision for Losses on Loans (continued)
-----------------------------------------------------

outstanding balances of such interest-bearing liabilities, which were partially
offset by overall declines of 18 basis points (100 basis points equal 1%), from
5.30% to 5.12%, in the weighted-average rates paid on the Corporation's
interest-bearing liabilities. The increase in total interest expense during the
nine months ended March 31, 1999 was partially offset by an increase in total
interest income, primarily due to increases in the average outstanding balances
of mortgage-backed securities, investment securities and other interest-earning
assets, which were partially offset by a decrease in the average outstanding
balance of loans and to declines in the weighted-average rates earned on all the
Corporation's interest-earning assets. Total interest income on the
Corporation's interest-earning assets increased by $92,000, or 1.5%, during the
nine months ended March 31, 1999, as compared to the same period in the prior
year, due to overall increases of $10.0 million, or 9.6%, in the average
outstanding balances of such interest-earning assets, which were partially
offset by overall declines of 51 basis points, from 8.02% to 7.51%, in the
weighted-average yields earned on such interest-earning assets. The downward
movement in the average yields earned on the Corporation's interest-earning
assets as compared to the average yields paid on the Corporation's
interest-bearing liabilities reflected assets repricing downward more rapidly
than liabilities. Such changes in yields earned and paid were reflected in the
interest rate spread, which had decreased from 2.72% during the nine months
ended March 31, 1998 to 2.39% during the nine months ended March 31, 1999, and
the net yield (net interest income as a percentage of average interest-earning
assets), which had decreased from 2.93% during the nine months ended March 31,
1998 to 2.61% during the nine months ended March 31, 1999. The major factors
contributing to the decreases in the interest rate spread and net yield
period-to-period were the decline in long-term interest rates toward historical
lows and the extremely flat yield curve which continued to evolve during the
nine months ended March 31, 1999, which made it more difficult for the
Corporation to earn a significant positive spread on new deposit activity.



                                      -33-
<PAGE>   34

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
-------------------------------------------------------------------------------
and 1998 (continued)
--------

Net Interest Income and Provision for Losses on Loans (continued)
-----------------------------------------------------

         Interest income on loans decreased by $238,000, or 5.0%, during the
nine months ended March 31, 1999, as compared to the same period in the prior
year. The decrease in interest income on loans during the nine months ended
March 31, 1999 was due to a decrease of $1.4 million, or 2.0%, in the average
balance of loans outstanding, which was coupled with a decline of 27 basis
points, from 8.75% to 8.48%, in the weighted-average rate earned on loans. The
decrease in the average outstanding balance of loans period-to-period reflected
a situation in which loan principal repayments, sales and payoffs exceeded loan
originations and purchases. Over the past few years, there had been a tremendous
growth in the loan portfolio which had been attributed to a strong origination
volume and management's strategy, to the extent practicable, to portfolio
fixed-rate mortgage loans subject to certain interest-rate risk limitations.
Over the past fifteen months, however, this loan growth in the portfolio was
curtailed by the rapidly declining interest rate environment which had the
effect of accelerating prepayments on loans and refinancing of higher rate
mortgage loans. In addition, management began refocusing its efforts during this
declining interest rate environment on originating for sale in the secondary
market all conforming fixed-rate mortgage loans, which had the effect of
reducing the loan portfolio. The majority of loans that were sold in the
secondary market during the 1999 period were refinances of loans that were
initially originated for the portfolio in prior periods at higher interest
rates. The decrease in the average yield earned on loans during the nine months
ended March 31, 1999 was principally the result of the acceleration of
prepayments on higher yielding fixed-rate mortgage loans held in the loan
portfolio in the low interest rate environment, the downward repricing of
existing adjustable-rate ("teaser") mortgage loans and the reduction
period-to-period in the average outstanding balance of higher rate
nonresidential real estate and land loans.

         Interest income on mortgage-backed securities designated as available
for sale and held to maturity increased by $140,000, or 10.7%, during the nine
months ended March 31, 1999, as compared to the same period in the prior year.
The increase in interest income on mortgage-backed securities during the nine
months ended March



                                      -34-
<PAGE>   35

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
-------------------------------------------------------------------------------
and 1998 (continued)
--------

Net Interest Income and Provision for Losses on Loans (continued)
-----------------------------------------------------

31, 1999 was the result of an increase in the average outstanding balance of
mortgage-backed securities of $5.8 million, or 20.9%, which was partially offset
by a decline in the weighted-average rate earned on such assets of 53 basis
points, from 6.30% to 5.77%. The increase in the average outstanding balance of
mortgage-backed securities reflected the purchases of primarily fixed-rate and
floating-rate collateralized mortgage obligations and fixed-rate participation
certificates, which were partially offset by principal repayments and sales of
securities. As long-term interest rates declined and greater emphasis was placed
on originating fixed-rate loans for sale during the nine months ended March 31,
1999, management elected to shift more funds from other asset categories into
the mortgage-backed securities portfolio as loan portfolio growth slowed from
the increased refinancing and payoff of higher rate portfolio fixed-rate loans.
Such increase in the average balance of mortgage-backed securities outstanding
was attributable in part to a strategy adopted by management to sustain
continued growth in asset levels by primarily using deposits and repayment cash
flows to fund purchases of such assets. From time to time when circumstances
dictate and opportunities exist, purchases of mortgage-backed securities are
leveraged against advances from the Federal Home Loan Bank to obtain a
particular interest rate spread. The increased volume of mortgage-backed
securities, which offset the lack of growth in the loan portfolio, helped
improve the Corporation's overall interest rate spread and net earnings level as
well as achieve better diversification of securities within the portfolio. The
decrease in the weighted-average yield earned on mortgage-backed securities
period-to-period generally reflected the greater principal repayments on higher
yielding securities due to a lower interest rate environment during the nine
months ended March 31, 1999, the recognition against earnings of greater premium
amounts on securities resulting from faster prepayment speeds and shorter
estimated average lives and the downward movement in the U.S. treasury rates,
the specified prime rate and the Eleventh District cost of funds rate which a
majority of the Corporation's adjustable-rate and floating-rate mortgage-backed
securities and collateralized mortgage obligations are tied to in determining
interest rate changes.


                                      -35-
<PAGE>   36

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
-------------------------------------------------------------------------------
and 1998 (continued)
--------

Net Interest Income and Provision for Losses on Loans (continued)
-----------------------------------------------------

         Interest and dividend income on investment securities and other
interest-earning assets increased in the aggregate by $190,000, or 79.8%, during
the nine months ended March 31, 1999, as compared to the same period in the
prior year. The increase during the nine months ended March 31, 1999 was
primarily due to increases of $3.9 million, or 252.8%, and $1.7 million, or
57.4%, in the average outstanding balances of investment securities and other
interest-earning assets (primarily interest-bearing deposits in other financial
institutions), respectively, which were partially offset by declines of 13 basis
points, or 1.8%, and 98 basis points, or 14.3%, in the weighted-average rates
earned on investment securities and other interest-earning assets, respectively.
The increase in the average outstanding balance of investment securities during
the nine months ended March 31, 1999 was principally due to the purchase of
municipal obligations. As interest rates continued falling toward historical
lows, the purchasing of new U.S. Government agency obligations became less
attractive as interest rate spreads tightened and call periods shortened. As a
result, the Corporation began purchasing tax-free fixed-rate municipal
obligations with good call protections and relatively attractive tax-equivalent
yields in comparison to other investment alternatives. These municipal
securities were primarily designated as available for sale and were utilized to
supplement the overall asset yield while loan portfolio growth slowed. The
decrease in the weighted-average yield earned on investment securities was the
function of a lower interest rate environment period-to-period, as newer
securities' purchases were obtained at lower rates than those securities
previously purchased, and the call of higher rate U.S. Government agency
obligations. The increase in other interest-earning assets was attributed in
part to continued growth in assets period-to-period and to an increase in excess
liquidity and expected cash flows from called investment securities and
accelerated mortgage prepayments as a result of interest rates having fallen so
rapidly. The decrease in the weighted-average rate earned on such
interest-earning assets period-to-period was the direct result of a lower
interest rate environment during the nine months ended March 31, 1999 and the



                                      -36-
<PAGE>   37

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
-------------------------------------------------------------------------------
and 1998 (continued)
--------

Net Interest Income and Provision for Losses on Loans (continued)
-----------------------------------------------------

significantly greater level of lower earning federal funds sold in the portfolio
during the 1999 period.

         Interest expense on deposits, the largest component of the
Corporation's interest-bearing liabilities, increased by $231,000, or 6.7%,
during the nine months ended March 31, 1999, as compared to the same period in
the prior year. The increase in interest expense on deposits during the nine
months ended March 31, 1999 was due to an increase of $8.8 million, or 10.0%, in
the average balance of deposits outstanding, which was partially offset by a
decrease of 16 basis points, from 5.19% to 5.03%, in the weighted-average rate
paid on deposits. The increase in the average balance of deposits outstanding
during the periods presented reflected a significant increase in term
certificates of deposit (primarily certificates of deposit with original terms
to maturity of two years or less) of $7.8 million, or 11.3%, which was coupled
with an increase of $1.0 million, or 5.4%, in deposit balances subject to daily
repricing (passbook, money market deposit and NOW accounts). Such increase in
certificates of deposit emanated from depositors' preference for shifting funds
from deposits subject to daily repricing to higher yielding term certificates of
deposit and from an influx of new deposits due to increased marketing and
selling efforts by management and competitive pricing strategies. In addition,
from time to time, management has utilized brokered deposits and other
out-of-state funds as an alternative source of funds in an effort to continue
the growth in certificates of deposit. In many cases, interest rates paid on
brokered deposits were actually the same or lower than interest rates paid on
local deposits. The increase in transaction accounts was largely due to
management's continued strong efforts to expand its core deposit base through
increased customer checking accounts so as to better develop cross-selling
opportunities of other Company products and services as well as to lower overall
cost of funds. The increase in the average outstanding balance of deposits
period-to-period was necessary to continually fund the growth in the loan,
investment and mortgage-backed securities portfolios. The decrease in the
weighted-average rate paid on deposit accounts period-to-period reflected lower
market rates of interest, which was partially


                                      -37-
<PAGE>   38

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
-------------------------------------------------------------------------------
and 1998 (continued)
--------

Net Interest Income and Provision for Losses on Loans (continued)
-----------------------------------------------------

offset by a greater percentage of higher rate certificate of deposit balances to
total deposit balances during the nine months ended March 31, 1999.
Specifically, the weighted-average rate paid on certificates of deposit
decreased from 5.88% during the nine months ended March 31, 1998 to 5.65% during
the nine months ended March 31, 1999, and the weighted-average rate paid on
transaction accounts decreased slightly from 2.65% during the nine months ended
March 31, 1998 to 2.62% during the nine months ended March 31, 1999. The
increase in the higher costing certificate of deposit balances as a percentage
of total deposits increased period-to-period from 78.7% to 79.6%.

         Interest expense on borrowings, consisting primarily of fixed-rate
Federal Home Loan Bank advances, special convertible fixed-rate advances and, to
a lesser extent, an adjustable-rate loan of the ESOP at March 31, 1999,
decreased by $15,000, or 2.6%, during the nine months ended March 31, 1999, as
compared to the same period in the prior year. The decrease in interest expense
on borrowings during the nine months ended March 31, 1999 was attributed to a
decline of 27 basis points, or 4.4%, in the weighted-average rate paid on
borrowings, which was partially offset by an increase of $237,000, or 1.9%, in
the average outstanding balance of borrowings. Such increase in the average
outstanding balance of borrowings period-to-period was the result of management
utilizing new borrowings from the Federal Home Loan Bank to assist, in part, in
funding the Corporation's lending and investment activities. Advances from the
Federal Home Loan Bank were utilized by management as an alternative funding
source to deposits in order to provide additional liquidity and sources of funds
to the lending function during periods of cash outflows, as well as to pursue
its lending and investment programs when the opportunities existed. During the
nine months ended March 31, 1999, the weighted-average rate paid on borrowings
was reduced to 5.83%, a decline of 27 basis points from the 6.10% during the
nine months ended March 31, 1998. This decline in the weighted-average rate paid
period-to-period generally reflected management's restructuring efforts of its
borrowing mix by lengthening out maturities in a lower interest rate environment
that prevailed when



                                      -38-
<PAGE>   39

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
-------------------------------------------------------------------------------
and 1998 (continued)
--------

Net Interest Income and Provision for Losses on Loans (continued)
-----------------------------------------------------

such restructuring was undertaken. Management accomplished its objectives by
taking advantage of special convertible fixed-rate advances offered at
attractive rates by the Federal Home Loan Bank and paying off higher rate
short-term LIBOR-based advances as well as replacing a maturing five year
fixed-rate advance. Such restructuring of its total borrowings allowed the
Corporation the opportunity to reduce its cost of funds on $6.0 million of
borrowings by approximately 43 basis points.

         The Corporation's provision for losses on loans increased by $5,000, or
27.8%, during the nine months ended March 31, 1999, as compared to the same
period in the prior year. The provision for losses on loans, which was comprised
solely of discretionary additions to the general loan loss allowance during the
nine months ended March 31, 1999, represents a charge to earnings to maintain
the allowance for loan losses at a level management believes is adequate to
absorb losses in the loan portfolio. The 1999 nine month period loan loss
provision was the result of management's continued efforts to set the allowance
at a level considered to be appropriate based upon the internal analysis of the
risk of loss in the loan portfolio. Among the factors considered in this
analysis were the assessment of general economic conditions in Blue Ash's
lending area applied to the portfolio, analysis of specific loans in the
portfolio, known and inherent risk in the portfolio, growth in the loan
portfolio, changes in the composition of loans and other factors previously
discussed. The Corporation has historically followed strict underwriting
guidelines in its loan origination process, and this is considered to be one of
the many factors which has resulted in minimal loan losses (charge-offs) over
the past five years. The Corporation's provision for losses on loans during the
nine months ended March 31, 1999 was principally attributable to management's
current assessment of its internally-classified and non-performing and
nonaccrual loans and to the growth in the loan portfolio which has been mostly
prevalent over the past several years. Management uses the best information
available in providing for possible loan losses and believes that the allowance
is adequate to cover any unforeseen losses in the loan portfolio at March 31,
1999. However, future adjustments to



                                      -39-
<PAGE>   40

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
-------------------------------------------------------------------------------
and 1998 (continued)
--------

Net Interest Income and Provision for Losses on Loans (continued)
-----------------------------------------------------

the allowance could be necessary and net earnings could be affected if
circumstances and/or economic conditions differ substantially from the
assumptions used in making the initial determinations.

         As a result of the foregoing changes in interest income, interest
expense and provision for losses on loans, net interest income after provision
for losses on loans decreased during the nine months ended March 31, 1999 by
$129,000, or 5.7%, as compared to the same period in the prior year.

Other Income
------------

         Total other income increased by $138,000, or 37.7%, from $366,000
during the nine months ended March 31, 1998 to $504,000 during the nine months
ended March 31, 1999. The primary reasons for this rise in other income during
the nine months ended March 31, 1999 were an increase in gain on sale of
mortgage loans of $159,000, or 57.4%, an increase in gain on sale of investments
and mortgage-backed securities of $13,000, or 65.0%, and an increase in service
fees, charges and other operating income of $10,000, or 30.3%, all of which were
partially offset by a decrease in loan servicing fees of $44,000.

         The Corporation recognized gains (including mortgage servicing rights
pursuant to SFAS No. 125) on the sale of mortgage loans in the secondary market
of $436,000 and $277,000 during the nine months ended March 31, 1999 and 1998,
respectively. Such gains were the result of Blue Ash selling its fixed-rate
single-family residential mortgage loans to the Federal Home Loan Mortgage
Corporation in the secondary market as a means of minimizing interest rate risk
as well as generating additional funds for lending and other purposes. Loan
sales volume increased significantly during the nine months ended March 31,
1999, as the demand for fixed-rate single-family residential mortgage loans was
stronger within Blue Ash's lending area than during the nine months ended March
31, 1998 due to a lower interest rate environment prevailing during the 1999
period. As a result, proceeds from the



                                      -40-
<PAGE>   41

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
-------------------------------------------------------------------------------
and 1998 (continued)
--------

Other Income (continued)
------------

sale of loans in the secondary market increased from $14.3 million during the
nine months ended March 31, 1998 to $22.4 million during the nine months ended
March 31, 1999, an increase of $8.1 million, or 56.7%, and loans originated for
sale in the secondary market increased from $14.1 million during the nine months
ended March 31, 1998 to $21.8 million during the nine months ended March 31,
1999, an increase of $7.7 million, or 54.7%. In order to adequately meet the
increased demand for lower rate fixed-rate mortgages and refinancings of higher
rate fixed-rate mortgages and adjustables during the 1999 period, management
placed more emphasis on loans originated for sale in the secondary market as
opposed to holding loans in the portfolio as it had predominately done over the
past few years. Such a change in strategy had the effect of slowing loan
portfolio growth and core earnings, while at the same time increasing gains on
sale of loans and reducing the Corporation's overall exposure to interest rate
risk.

         The increase in gain on sale of mortgage-backed securities and
investment securities of $13,000, or 65.0%, during the nine months ended March
31, 1999 was due to the recognition of gains to earnings from the sale of
primarily tax-free municipal securities. During the nine months ended March 31,
1999, there were proceeds of $3.9 million from the sale of municipal securities
and $2.0 million from the sale of mortgage-backed securities, while there were
$6.4 million in total sale proceeds from securities during the nine months ended
March 31, 1998. There were more opportunities in the 1999 period to recognize
gains from securities transactions based primarily on market conditions
prevailing at the times of sale and the types of securities traded. Such sales
activity in the 1999 period was predicated upon the declining interest rate
environment that prevailed and better diversifying the investment and
mortgage-backed securities portfolios so as to improve the Corporation's overall
yield and market performance to varying interest rate environments. In
particular, the Corporation took advantage of the declining interest rate
environment and attractive spreads as compared to other investment alternatives
by acquiring and then selling certain tax-free municipal obligations designated
as available for sale for the primary purpose of bolstering other



                                      -41-
<PAGE>   42

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
-------------------------------------------------------------------------------
and 1998 (continued)
--------

Other Income (continued)
------------

income from the gains on sales in order to combat the effects of declining
overall yields on interest-earning assets and a tighter interest rate spread.
While there was a greater sales volume within the securities portfolio during
the 1998 period, there were fewer opportunities of taking profits at that time
as the Corporation was taking steps to better diversify and reposition its
securities portfolio. The decrease in loan servicing fees of $44,000 during the
nine months ended March 31, 1999 was principally attributed to an increase of
$61,000 in expenses for amortization and impairment of originated mortgage
servicing rights under SFAS No. 125 due to a greater mortgage servicing rights
portfolio during the 1999 period and to accelerated prepayments of mortgages
associated with a declining interest rate environment, which was partially
offset by an increase in normal loan servicing fees received of $17,000, or
22.4%, due to an increase of approximately $9.3 million, or 21.8%, in the
average outstanding balance of loans sold in the secondary market and to other
financial institutions. The increase in service fees, charges and other
operating income of $10,000, or 30.3%, reflected increased fees generated
period-to-period from NOW accounts, debit card processing, construction loan
draws, in-house inspection fees, certain loan processing-related fees and fee
income received from correspondent lenders for nonconforming and Federal Housing
Administration loans.

General, Administrative and Other Expense
-----------------------------------------

         Total general, administrative and other expense increased by $90,000,
or 5.8%, during the nine months ended March 31, 1999, as compared to the same
period in the prior year. The components of this increase in total general,
administrative and other expense during the nine months ended March 31, 1999
were comprised of an increase in employee compensation and benefits of $51,000,
or 6.1%, an increase in occupancy and equipment expense of $13,000, or 4.7%, an
increase in advertising expense of $7,000, or 10.1%, an increase in federal
deposit insurance premiums of $4,000, or 10.3%, and an increase in other
operating expense of $24,000, or 16.0%, all of which were partially offset by a
decrease in data processing expense of $9,000, or 11.8%.



                                      -42-
<PAGE>   43

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
-------------------------------------------------------------------------------
and 1998 (continued)
--------

General, Administrative and Other Expense (continued)
-----------------------------------------

         The principal category of the Corporation's general, administrative and
other expense is employee compensation and benefits. The increase in this
expense category of $51,000, or 6.1%, during the nine months ended March 31,
1999, as compared to the same period in the prior year, was primarily due to
normal merit increases, increases in staffing levels, increases in loan officer
salaries due to a change in the method of compensating certain of these
employees, increases in employee group health insurance premiums, increases in
loan officer bonus expense as a result of a greater lending volume, increases in
estimated annual bonus expense to employees and officers stemming from a higher
earnings base for purposes of calculating the bonus, increases in director
medical reimbursement expenses, increases in certain payroll-related taxes such
as social security taxes and workers' compensation and increases in officer,
director and employee reimbursement expenses, all of which were partially offset
by decreases in expenses related to the ESOP due to the additional expense
incurred in the 1998 period for the payout of benefits to terminated employees
and increases of $29,000, or 20.4%, in deferred loan origination costs in
accordance with SFAS No. 91 as a result of an approximate $6.4 million, or
17.3%, increase in total lending volume period-to-period and increased personnel
costs per loan during the 1999 period.

         The increase in occupancy and equipment expense of $13,000, or 4.7%,
was largely due to increases in office building repair and maintenance,
depreciation on furniture, fixtures and equipment resulting from upgrading the
Corporation's internal computer systems, expenses associated with ATM
processing, real estate taxes, telephone and postage, all of which were
partially offset by decreases in furniture, fixture and equipment expenses and
light, heat and other utilities. The increase in advertising expense of $7,000,
or 10.1%, was principally attributable to a continuation of intensified
marketing and selling efforts by management which were directed toward the loan
origination function and attracting new deposits and to an increase in
classified advertising in newspapers for various job openings within the
Corporation. The decrease of $9,000, or 11.8%, in data processing and related
fees, which are based on the outstanding number of loan and deposit accounts,
reflected the negotiation of lower costs in the renewal of Blue



                                      -43-
<PAGE>   44

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
-------------------------------------------------------------------------------
and 1998 (continued)
--------

General, Administrative and Other Expense (continued)
-----------------------------------------

Ash's contract with its third party provider of data processing services in a
prior period, which was partially offset by an increased average deposit base as
well as growth in lending operations. The increase in federal deposit insurance
premiums of $4,000, or 10.3%, was primarily attributed to an increased average
deposit base period-to-period. The increase in other operating expense of
$24,000, or 16.0%, was primarily due to increases in supervisory assessments,
directors' and officers' insurance, annual audit and tax service, organizational
dues and subscriptions, NOW accounts, legal expenses pertaining to delinquent
and foreclosed loans, bank service charges, real estate owned expenses and
office supplies resulting from an expanding loan and savings operation.

Federal Income Taxes
--------------------

         The provision for federal income taxes totaled $380,000 for the nine
months ended March 31, 1999, as compared to $302,000 for the nine months ended
March 31, 1998, a decrease of $78,000, or 20.5%. The decrease in provision for
federal income taxes reflected the lower level of pre-tax earnings for the nine
months ended March 31, 1999, a decrease of $81,000, or 7.4%, from $1.1 million
during the nine months ended March 31, 1998 to $1.0 million during the nine
months ended March 31, 1999, which was coupled with a reduction in the
Corporation's effective tax rate period-to-period due largely to the tax-exempt
status regarding municipal securities. As a result, the level of federal income
tax expense for each of the nine month periods ended March 31, 1999 and 1998
generally reflected the level of pre-tax earnings for such periods, adjusted for
changes in the Corporation's effective tax rate. The Corporation's effective tax
rates amounted to 29.7% and 34.6% for the nine month periods ended March 31,
1999 and 1998, respectively.



                                      -44-
<PAGE>   45

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended March 31, 1999
--------------------------------------------------------------------------------
and 1998
--------

General
-------

         Net earnings totaled $243,000 for the three months ended March 31,
1999, a decrease of $64,000, or 20.8%, from the $307,000 in net earnings
recorded for the three months ended March 31, 1998. The decrease in net earnings
was primarily attributable to a decrease in net interest income after provision
for losses on loans of $97,000, or 12.2%, a decrease in other income of $33,000,
or 15.3%, and an increase in general, administrative and other expense of
$13,000, or 2.4%. As previously discussed, the decrease in net interest income
after provision for losses on loans was further accentuated during the three
months ended March 31, 1999 by the reporting of interest income on municipal
securities on a tax-free basis yielding 5.03%, as opposed to a tax-equivalent
basis yielding 7.17%. The decrease in earnings level before federal income taxes
of $143,000, or 30.5%, resulted in a decrease in the provision for federal
income taxes of $79,000, or 48.8%. The decrease in the provision for federal
income taxes was also attributed to a reduction in the Corporation's effective
tax rate mainly as a result of the federal tax treatment from the accumulation
of bank qualified municipal securities during the 1999 period.

Net Interest Income and Provision for Losses on Loans
-----------------------------------------------------

         The Corporation's net interest income decreased by $96,000, or 12.0%,
during the three months ended March 31, 1999, as compared to the same period in
the prior year. The decrease in net interest income during the three months
ended March 31, 1999 was the result of a decrease of $92,000, or 4.3%, in total
interest income, due to a decrease in the average outstanding balance of loans
and to declines in the weighted-average rates earned on loans, mortgage-backed
securities and other interest-earning assets, which were partially offset by
increases in the average outstanding balances of mortgage-backed securities,
investment securities and other interest-earning assets and to an increase in
the weighted-average rate earned on investment securities. The decrease in total
interest income during the three months ended March 31, 1999 was coupled with an
increase in total interest expense of $4,000, or 0.3%, primarily due to an
increase in the average outstanding balance of deposits, which was partially
offset by a decrease in



                                      -45-
<PAGE>   46

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended March 31, 1999
--------------------------------------------------------------------------------
and 1998 (continued)
--------

Net Interest Income and Provision for Losses on Loans (continued)
-----------------------------------------------------

the average outstanding balance of borrowings and to declines in the
weighted-average rates paid on deposits and borrowings. As a result, the
Corporation's interest rate spread declined from 2.75% during the three months
ended March 31, 1998 to 2.36% during the three months ended March 31, 1999, a
decrease of 39 basis points, or 14.2%. Such decrease in the interest rate spread
period-to-period was attributed to decreases of 71 basis points, from 7.99% to
7.28%, in the overall weighted-average rates earned on all interest-earning
assets, which were partially offset by decreases of 32 basis points, from 5.24%
to 4.92%, in the overall weighted-average rates paid on all interest-bearing
liabilities. In addition, the Corporation's net yield decreased from 2.95%
during the three months ended March 31, 1998 to 2.56% during the three months
ended March 31, 1999, a decrease of 39 basis points, or 13.2%.

         Interest income on loans decreased by $143,000, or 8.9%, during the
three months ended March 31, 1999, as compared to the same three month period in
the prior year. The decrease in interest income on loans during the 1999 period
was due to a decrease of $3.2 million, or 4.3%, in the average balance of loans
outstanding, which was coupled with a decrease of 42 basis points, from 8.70% to
8.28%, in the weighted-average rate earned on the loan portfolio. Similarly,
interest income on mortgage-backed securities decreased by $21,000, or 4.5%,
during the three months ended March 31, 1999, as compared to the same period in
the prior year. Such decrease in interest income on mortgage-backed securities
was the result of a decline in the weighted-average rate earned on
mortgage-backed securities of 95 basis points, from 6.31% to 5.36%, which was
partially offset by an increase in the average outstanding balance of
mortgage-backed securities of $3.7 million, or 12.5%. The decrease in the
average outstanding balance of loans period-to-period was a function of loan
sales, principal repayments and payoffs exceeding loan originations and
purchases due to the acceleration of loan prepayments and refinancings of higher
rate mortgage loans in a declining interest rate environment and management's
renewed emphasis on originating loans for sale in the secondary market. The
decrease in the average yield earned on



                                      -46-
<PAGE>   47

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended March 31, 1999
--------------------------------------------------------------------------------
and 1998 (continued)
--------

Net Interest Income and Provision for Losses on Loans (continued)
-----------------------------------------------------

loans was principally the result of a paydown in higher rate fixed-rate loans
originated for the loan portfolio and the downward repricing of existing
adjustable-rate mortgage loans. The decrease in the average balance of
mortgage-backed securities outstanding period-to-period was a function of
principal repayments and sales of securities exceeding purchases, as management
began shifting funds from proceeds from sales and repayment cash flows on
mortgage-backed securities towards the investment portfolio with the purchase of
tax-free municipal securities. The decline in the weighted-average yield earned
on mortgage-backed securities generally reflected the acceleration of principal
repayments on higher rate securities due to a lower interest rate environment in
the 1999 period and the downward movement of interest rate changes on the
Corporation's adjustable-rate and floating-rate mortgage-backed securities and
collateralized mortgage obligations.

         Interest and dividend income on investment securities and other
interest-earning assets increased by $72,000, or 80.0%, during the three months
ended March 31, 1999, as compared to the same period in the prior year. The
increase during the three months ended March 31, 1999 was primarily due to an
increase of $6.9 million, or 494.1%, in the average outstanding balance of
investment securities, an increase of $385,000, or 11.0%, in the average
outstanding balance of other interest-earning assets and an increase in the
weighted-average rate earned on investment securities of 31 basis points, from
6.85% to 7.16%, all of which were partially offset by a decline in the
weighted-average rate earned on other interest-earning assets of 208 basis
points, from 7.53% to 5.45%. The increases in the average outstanding balance
and weighted-average rate earned on investment securities period-to-period were
attributed to the purchase of tax-free municipal securities at attractive
spreads in comparison to other investment alternatives that were tied to the
U.S. Treasury index. The increase in the average outstanding balance of other
interest-earning assets was mainly the result of an increase in interest-bearing
deposits and other short-term liquid funds from a sustained deposit growth and a
slowdown in loan portfolio growth, while the decrease in the weighted-average
yield earned on other interest-earning assets was attributable to the reduction
of short-term




                                      -47-
<PAGE>   48

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended March 31, 1999
--------------------------------------------------------------------------------
and 1998 (continued)
--------

Net Interest Income and Provision for Losses on Loans (continued)
-----------------------------------------------------

interest rates by the Federal Reserve Board during the 1999 period and the call
and maturity of higher yielding certificate of deposit investments in prior
periods.

         Interest expense on deposits increased by $18,000, or 1.5%, during the
three months ended March 31, 1999, as compared to the same period in the prior
year. The increase in interest expense on deposits for the three months ended
March 31, 1999 was primarily attributed to a $7.1 million, or 7.8%, increase in
the average balance of deposits outstanding, which was partially offset by a
decline of 30 basis points, from 5.12% to 4.82%, in the weighted-average rate
paid on deposits, reflecting the lower market rates of interest paid during the
1999 period as compared to the 1998 period, especially on certificate of deposit
accounts. As previously indicated, the overall increase in the average
outstanding balance of deposits period-to-period, particularly term certificates
of deposit and customer checking accounts, was largely due to intensified
marketing efforts and competitive pricing strategies in these areas in order to
fund the Corporation's lending and investment activities.

         Interest expense on borrowings decreased by $14,000, or 7.1%, during
the three months ended March 31, 1999, as compared to the same period in the
prior year. The decrease in interest expense on borrowings during the three
months ended March 31, 1999 was primarily the result of a decrease in the
average outstanding balance of borrowings of $199,000, or 1.5%, which was
coupled with a decline in the weighted-average rate paid on borrowings of 34
basis points, from 6.08% to 5.74%. The decrease in the average volume of
borrowings period-to-period was principally attributed to the repayment of
certain Federal Home Loan Bank advances as a part of a restructuring effort by
management in a prior period. These repayments were funded with excess liquidity
and deposit inflows, as it was management's intent of principally growing the
Corporation through an increased deposit base. The decrease in the
weighted-average rate paid on borrowings period-to-period reflected


                                      -48-
<PAGE>   49

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended March 31, 1999
--------------------------------------------------------------------------------
and 1998 (continued)
--------

Net Interest Income and Provision for Losses on Loans (continued)
-----------------------------------------------------

the lower costs of newer borrowings in comparison to borrowings obtained in
previous periods. During the fourth quarter of fiscal 1998, management utilized
special convertible fixed-rate advances from the Federal Home Loan Bank as part
of a restructuring effort to extend out the maturities of the Corporation's
borrowings. As previously discussed, such convertible advances gave the
Corporation an opportunity to lock in long-term money at a very low interest
rate as well as to replace higher rate short-term adjustable advances, thereby
lowering the overall cost of funds on borrowings in the 1999 period, as compared
to the 1998 period.

         The provision for losses on loans totaled $7,000 for the three months
ended March 31, 1999, as compared to $6,000 for the three months ended March 31,
1998, an increase of $1,000, or 16.7%. The provision for losses on loans during
the three months ended March 31, 1999 was comprised of discretionary additions
to the general loan loss allowance. As previously discussed, provisions for
losses on loans are charged to earnings to bring the total allowance to a level
considered appropriate by management based on historical experience, the volume
and type of lending conducted by Blue Ash, industry standards, the status of
past due principal and interest payments, general economic conditions,
particularly as they relate to Blue Ash's lending area, and other factors
related to the collectibility of the loan portfolio. The provision for losses on
loans during the three months ended March 31, 1999 was predicated upon the
overall loan portfolio growth over the last several years and management's
review of non-performing and nonaccrual loans and anticipated losses on loans
for the period.

         As a result of the foregoing changes in interest income, interest
expense and provision for losses on loans, net interest income after provision
for losses on loans decreased during the three months ended March 31, 1999 by
$97,000, or 12.2%, as compared to the same period in the prior year.



                                      -49-
<PAGE>   50

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended March 31, 1999
--------------------------------------------------------------------------------
and 1998 (continued)
--------

Other Income
------------

         Total other income decreased by $33,000, or 15.3%, from $215,000 during
the three months ended March 31, 1998 to $182,000 during the three months ended
March 31, 1999. The decrease in other income during the three months ended March
31, 1999 was principally due to a decrease in gain on sale of mortgage loans of
$39,000, or 20.6%, and a decrease in service fees, charges and other operating
income of $2,000, or 16.7%, both of which were partially offset by an increase
of $5,000, or 71.4%, in loan servicing fees and an increase of $3,000, or 42.9%,
in gain on sale of investment and mortgage-backed securities. The decrease in
gain on sale of mortgage loans of $39,000, or 20.6%, period-to-period was
primarily due to the decline in the volume of loan sales during the three months
ended March 31, 1999, as the demand for origination of fixed-rate mortgage loans
for sale in the secondary market given the low interest rate environment and
consumer preference for fixed-rate loans was more pronounced during the 1998
period. During the 1999 period, interest rates had mostly stabilized and the
flurry of refinancings of higher rate mortgage loans and subsequent sales of
such loans had already occurred in previous periods as interest rates were still
falling toward historical lows. The increase in gain on sale of investment and
mortgage-backed securities of $3,000, or 42.9%, was due to greater gains
realized on the sale of securities in the 1999 period, even though there was a
greater sales volume in the 1998 period. During the 1999 period, the Corporation
sold approximately $1.8 million in available for sale municipal securities at
gains of $10,000 and $1.5 million in available for sale mortgage-backed
securities at no gain, as compared to $4.2 million in aggregate sales at gains
of $7,000 during the 1998 period. There were greater market opportunities during
the 1999 period due to a declining interest rate environment to take some
profits on certain municipal securities within the investment portfolio as a
means of offsetting the decline in net earnings from a shrinking net interest
margin or interest rate spread. The increase in loan servicing fees of $5,000,
or 71.4%, was principally attributable to an increase in loan servicing fees
received of $7,000, or 26.9%, due to an increase period-to-period in the average
outstanding balance of loans sold of $10.0 million, or 22.5%, which was
partially offset


                                      -50-
<PAGE>   51

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended March 31, 1999
--------------------------------------------------------------------------------
and 1998 (continued)
--------

Other Income (continued)
------------

by an increase of $2,000, or 10.5%, in amortization and impairment expense on
originated mortgage servicing rights under SFAS No. 125 due to accelerated
prepayments on loans. The decrease in service fees, charges and other operating
income of $2,000, or 16.7%, was primarily due to a reduction in fee income from
construction loan draws, inspections and loan processing-related matters and an
increase in costs incurred for the origination of no-cost home equity
line-of-credit loans, which were partially offset by an increase in fee income
from NOW accounts, debit card processing and correspondent origination and
service release premiums.

General, Administrative and Other Expense
-----------------------------------------

         Total general, administrative and other expense increased by $13,000,
or 2.4%, during the three months ended March 31, 1999, as compared to the same
period in the prior year, due primarily to an increase in employee compensation
and benefits of $4,000, or 1.3%, an increase in occupancy and equipment expense
of $3,000, or 3.1%, an increase in federal deposit insurance premiums of $1,000,
or 7.1%, an increase in data processing expense of $1,000, or 4.2%, an increase
in amortization of goodwill of $1,000, or 12.5%, and an increase in other
operating expense of $6,000, or 11.3%, all of which were partially offset by a
decrease in state franchise tax expense of $3,000, or 12.0%.

         The increase in employee compensation and benefits of $4,000, or 1.3%,
during the three months ended March 31, 1999, as compared to the three months
ended March 31, 1998, was principally due to normal merit increases of officer
and employee salaries, an increase in staffing levels, an increase in director
medical reimbursement expenses, an increase in health insurance costs, an
increase in certain payroll-related taxes and a decrease in deferred loan
origination costs in accordance with SFAS No. 91 as a result of an approximate
$1.9 million, or 12.8%, decline in total loan origination volume
period-to-period, all of which were partially offset by a decrease in annual
bonus expense as a result of a lower earnings level used for calculating such
bonus, a decrease in loan officer bonus expense due to a reduced loan




                                      -51-
<PAGE>   52

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended March 31, 1999
--------------------------------------------------------------------------------
and 1998 (continued)
--------

General, Administrative and Other Expense (continued)
-----------------------------------------

origination volume, a decrease in workers' compensation premiums and state
unemployment taxes and a decrease in expenses related to the ESOP due to the
Plan having to purchase common shares at fair value of certain terminated
employees in a previous period.

         The increase in occupancy and equipment expense of $3,000, or 3.1%,
period-to-period was the result of an increase in office building repairs and
maintenance, an increase in depreciation expense on furniture and equipment, an
increase in ATM processing expense and an increase in telephone expense, all of
which were partially offset by a decrease in furniture, fixtures and equipment
expenses and a decrease in postage. The increase in data processing and related
fees of $1,000, or 4.2%, was due to a larger volume of loan and deposit account
activity. The increase in federal deposit insurance premiums of $1,000, or 7.1%,
was mainly the result of an increased average deposit base, while the decrease
in state franchise taxes of $3,000, or 12.0%, was primarily attributed to a
higher level of state supervisory tax credits applied to the Corporation for
purposes of reducing its franchise tax liability and to a lower effective
franchise tax rate, which were partially offset by an enhanced average equity
position period-to-period. Other operating expense increased from $53,000 during
the three months ended March 31, 1998 to $59,000 during the three months ended
March 31, 1999, an increase of $6,000, or 11.3%, due primarily to an increase in
supervisory fees and assessments, an increase in annual audit and tax service,
an increase in NOW account expenses, an increase in organizational dues and
subscriptions, an increase in real estate owned expenses, an increase in legal
fees associated with certain holding company and other corporate-related matters
and an increase in office supplies resulting from an expanding loan and savings
operation, all of which were partially offset by a decrease in legal fees
associated with delinquent and foreclosed loans.

Federal Income Taxes
--------------------

         The provision for federal income taxes totaled $83,000 for the three
months ended March 31, 1999, as compared to $162,000 for the



                                      -52-
<PAGE>   53

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended March 31, 1999
--------------------------------------------------------------------------------
and 1998 (continued)
--------

Federal Income Taxes (continued)
--------------------

three months ended March 31, 1998, a decrease of $79,000, or 48.8%. The decrease
in provision for federal income taxes reflected the lower level of pre-tax
earnings for the three months ended March 31, 1999, a decrease of $143,000, or
30.5%, from $469,000 during the three months ended March 31, 1998 to $326,000
during the three months ended March 31, 1999, which was coupled with a reduction
in the Corporation's effective tax rate period-to-period due largely to the
tax-exempt status regarding municipal securities. As a result, the level of
federal income tax expense for each of the three month periods ended March 31,
1999 and 1998 generally reflected the level of pre-tax earnings for such
periods, adjusted for changes in the Corporation's effective tax rate. The
Corporation's effective tax rate amounted to 25.5% and 34.5% for the three month
periods ended March 31, 1999 and 1998, respectively.

Year 2000 Compliance Issues
---------------------------

         The Year 2000 issue is a serious operational problem which is
widespread and complex, affecting all industries. The Federal Financial
Institution Examination Council (the "FFIEC"), representing the views of each of
the primary financial institution regulators, has focused on the risk that
programming code in existing computer systems will fail to properly recognize
the new millennium when it occurs in the year 2000. According to various
studies, most computer programs and related hard-printed memory circuits have
been developed utilizing nine-digit date fields (YYMMDD) with the YY two-digit
field for the year and the basis for all calculation formulas. While this
two-digit approach has worked in the past, as the financial services industry
enters the year 2000, the two-digit field will not permit accurate calculations
based on current formulas. For example, January 1, 2000, will read as 000101;
many computers will recognize this date as January 1, 1900, or default to
January 1, 1980. In either case, the potential impact to data calculations will
be significant. Erroneous calculations may occur due to the computers' erroneous
reading of the year, or entire systems failures may occur. Other concerns



                                      -53-
<PAGE>   54

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended March 31, 1999
--------------------------------------------------------------------------------
and 1998 (continued)
--------

Year 2000 Compliance Issues (continued)
---------------------------

have been raised regarding February 29, 2000, as well as September 9, 1999
(990999), which are new calculation challenges that may result in further
problems.

         Most significantly affected are all forms of financial accounting,
including interest computations, due dates, pensions, personnel benefits,
investments, legal commitments, valuations, fixed asset depreciation lapse
schedules, tax filings and financial models. Additional problems may occur on
inventory, maintenance and file record retention programs. The total impact is
currently unknown; however, it is projected that failure to address these
programming code issues and make appropriate changes may expose an institution
to all types of risks, including credit, transaction, liquidity, interest rate,
compliance, reputation, strategic, price and foreign exchange.

         Programming code changes to account for these issues will require from
thousands to millions of lines of code, representing a tremendous time
commitment and cost to correct. Many financial institutions, services and
vendors are on a tight time line for determining what programming changes to
fix, correcting the affected software programs, testing the new software code,
and then fully implementing the software changes.

         Blue Ash established a Year 2000 Action Team, which includes senior
management representatives and other key employees, to assess the risk of
potential problems that might arise from the failures of computer programming to
recognize the year 2000 and to develop a plan to mitigate any such risk.
Research by the Action Team indicated that the greatest potential impact upon
Blue Ash was the risk related to vendors used by Blue Ash, particularly Blue
Ash's data processing service bureau. Most critical to the continuing operations
of Blue Ash is the data processing of all the customers' loan and savings
accounts. Blue Ash contracts with Intrieve, Inc. to provide the data processing
for this critical area. Quarterly progress reports from Intrieve, Inc. have
indicated levels of manpower and expertise sufficient to amend and test the
adequacy of their computer programming and systems prior



                                      -54-
<PAGE>   55

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended March 31, 1999
--------------------------------------------------------------------------------
and 1998 (continued)
--------

Year 2000 Compliance Issues (continued)
---------------------------

to the arrival of the year 2000. Formal testing in relation to the Intrieve,
Inc. system occurred in November 1998. The tests encompassed an extensive
sampling of the Intrieve, Inc. online core processing, representing the testing
of deposits and loans. No significant problems occurred. All other vendors used
by Blue Ash have been identified and requests for year 2000 certifications have
been forwarded.

         Since Blue Ash's primary computer applications are not internally
developed and contracted with third party vendors, the cost to address Blue
Ash's year 2000 issues has been isolated to hardware and system upgrades.
Upgrades of Blue Ash's internal hardware and software have occurred within the
teller and savings operation, accounting and loan operation in accordance with
Blue Ash's normal course of operations. Most of the computer systems replaced
were fully depreciated and upgrades and new hardware would have been necessary
in the near future. To date, the cost incurred has been approximately $60,000.
This cost has been mostly capitalized and will be amortized over a five-year
period. Future estimated costs are not expected to have a material impact on the
Corporation's consolidated financial statements.

         With regards to handling the most reasonably likely year 2000 worst
case scenarios, the Board of Directors has authorized the Year 2000 Action Team
to establish policies, procedures and responsibilities for organization-wide
contingency planning. Contingency plans typically include identification of the
systems and third party risks that the plan covers, analysis of resources and
strategies to restore operations and a recovery program that identifies
participants, processes and any significant equipment needed. The Action Team
estimates the completion of such a written contingency plan by June 1999.

         The year 2000 compliance program established by the Action Team
includes quarterly progress reports submitted to the Board of Directors and a
target date of December 31, 1998 for all required internal testing of each
system utilized, which was expected to be minimal. The Action Team believes that
Blue Ash met this target



                                      -55-
<PAGE>   56

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended March 31, 1999
--------------------------------------------------------------------------------
and 1998 (continued)
--------

Year 2000 Compliance Issues (continued)
---------------------------

date of December 31, 1998 and that all systems and hardware are Year 2000 ready.
There are unknown elements outside of management's control or ability to test,
such as power, water, telephone failure, which could affect operations. The
Action Team estimates, however, that the overall impact of year 2000 compliance
upon Blue Ash's results of operations, liquidity and capital resources will be
immaterial.


                                      -56-
<PAGE>   57

                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                                     PART II


ITEM 1.  Legal Proceedings
         -----------------

         Neither the Corporation nor Blue Ash is involved in any pending legal
         proceedings other than non-material legal proceedings occurring in the
         ordinary course of business.

ITEM 2.  Changes in Securities
         ---------------------

         The following table sets forth information regarding all sales of
         shares of Common Stock by the Corporation without registration for the
         past three years. All of the sales were a result of the exercise of
         options granted to directors, executive officers and employees of the
         Corporation pursuant to the Corporation's 1992 Stock Option Plan. The
         transactions were exempt from registration under Section 3(a)(11) of
         the Securities Act of 1933. In each case, the exercise price was paid 
         in cash and no commissions or underwriting fees were paid.

                                  Number of                 Exercise
             Date                  Shares                     Price
             ----                 ---------                 ----------
            6/4/96                      500                 $ 5,750.00     
            1/13/97                     500                   5,750.00
            11/9/98                   1,500                  17,250.00
            1/12/99                     500                   5,750.00
            3/2/99                    1,500                  17,250.00
            3/3/99                    1,000                  11,500.00
            3/3/99                    1,500                  17,250.00
            3/4/99                    1,500                  17,250.00
            3/9/99                    1,500                  17,250.00
            3/9/99                    1,000                  12,000.00
       
ITEM 3.  Defaults Upon Senior Securities
         -------------------------------

         Not Applicable

ITEM 4.  Submission of Matters to a Vote of Security Holders
         ---------------------------------------------------

         Not Applicable

ITEM 5.  Other Materially Important Events
         ---------------------------------

         On March 11, 1999, Oak Hill Financial, Inc. ("Oak Hill Financial"), a
         corporation chartered under the laws of the State of Ohio, and the
         Corporation jointly announced the signing of an Agreement and Plan of
         Merger in which the Corporation will be merged into Oak Hill Financial.
         Under the terms of the agreement, Oak Hill Financial will exchange
         4.125 of its common shares for each of the 222,100 outstanding shares
         of the Corporation as of March 11, 1999. The exchange ratio is subject
         to change if the value of Oak Hill Financial's common stock is above
         $21.71 per share prior to closing. The Corporation will have the right
         to terminate the Agreement and Plan of Merger if the average price of
         Oak Hill Financial's common stock falls below $16.05 per share, unless
         Oak Hill Financial increases the exchange ratio to compensate for the
         difference between the price of Oak Hill Financial common stock at
         closing and $16.05. Based on the average of Oak Hill Financial's
         closing bid and ask price of $19.22 on March 10, 1999, the transaction
         is valued at $17.6 million, or $79.28 per share of the Corporation's
         common stock. The Merger will be accounted for as a
         pooling-of-interests and is expected to be completed by October 1999,
         pending Oak Hill Financial and the Corporation shareholder approval,
         regulatory approval 



                                      -57-
<PAGE>   58

         and other customary conditions of closing. The transaction is expected
         to be a "tax-free" reorganization for federal income tax purposes. At
         March 31, 1999, Oak Hill Financial reported total assets of $435.2
         million, total deposits of $370.9 million and shareholders' equity of
         $38.4 million.

ITEM 6.  Exhibits and Reports on Form 8-K
         --------------------------------

         Reports on Form 8-K:      None

         Exhibit 2.1               Agreement and Plan of Merger [dated as of 
                                   March 11, 1999, between Oak Hill Financial, 
                                   Inc. and Towne Financial Corporation.]

         Exhibit 2.2               Supplemental Agreement [dated as of March 11,
                                   1999, between Oak Hill Financial, Inc. and 
                                   Towne Financial Corporation.]

         Exhibit 27:               Financial Data Schedule for the Nine Months
                                   Ended March 31, 1999



                                      -58-
<PAGE>   59

                                   SIGNATURES
                                   ----------


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


Dated:   May 12, 1999               By:/s/  William S. Siders         
                                       -----------------------------
                                       William S. Siders
                                       Executive Vice President


Dated:   May 12, 1999               By:/s/  Joseph L. Michel          
                                       ----------------------------
                                       Joseph L. Michel
                                       Chief Financial Officer, Vice
                                         President and Treasurer




                                      -59-