<PAGE>   1


                                                            EXHIBIT 13 TO 10-KSB





                            TOWNE FINANCIAL CORPORATION
 
                                 Parent Company of
                     The Blue Ash Building and Loan Company












                                       1998
                                   ANNUAL REPORT

<PAGE>   2


                                TO OUR SHAREHOLDERS


     On behalf of the directors, officers and employees of Towne Financial
Corporation ("Towne Financial") and The Blue Ash Building and Loan Company
("Blue Ash"), we would like to express our thanks and gratitude for your
continuing support and investment in Towne Financial.  Since 1908, great
efforts have been made to make Blue Ash a safe, sound and profitable mutual
savings and loan.  As a publicly-owned savings and loan holding company, whose
primary investment is Blue Ash, Towne Financial is still positioned to build on
the strong foundation laid by those past efforts.

     In celebrating 90 years in business of providing a wide array of quality
financial products and services to our customers, fiscal 1998 was marked by a
record year in earnings, continued growth in assets and solid performances
within the lending and savings operations.  The strength and vitality of Towne
Financial continues, as evidenced by the consolidated financial reports and
information as of and for the year ended June 30, 1998, included in our Seventh
Annual Report.

     Towne Financial closed fiscal 1998 with assets totaling an unprecedented
$117.8 million, an increase of $15.2 million, or 14.9%, from fiscal 1997 asset
levels.  This represents the fourth consecutive year of double-digit asset
growth for the Corporation. Since 1992, Towne Financial has doubled in asset
size, as the Board of Directors and management continue to aggressively grow
the business in all facets to insure continued strong operating performance and
enhanced shareholder value in the years ahead.  The increase in asset size
during fiscal 1998 was primarily due to an increase in the loan portfolio of
$5.6 million, or 8.3%, and an increase in the mortgage-backed securities
portfolio of $6.3 million, or 23.4%. These increases were primarily funded by
deposits, which grew to an all time high of $95.0 million at June 30, 1998, an
increase of $13.2 million, or 16.1%, over deposit levels at June 30, 1997.  The
growth in assets during fiscal 1998 gave rise to a healthy increase of
$335,000, or 12.3%, in net interest income.  It is important to stress that the
growth in assets experienced during fiscal 1998, as well as over the last few
years, can be tangibly measured and is symbolic of the increasing consumer
preference for transacting business with a community-based financial
institution.  It should also be noted that such growth in the asset base has
been consistent with our short-term and long-term goals and objectives, as we
continue expanding our customer base within existing and new market areas.

     Our operating results were fueled by a record setting performance in net
earnings.  Consolidated net earnings during the


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year ended June 30, 1998 totaled a record $938,000, an increase of $573,000, or
157.0%, over the $365,000 in net earnings recorded in fiscal 1997.  As a
result, diluted earnings per share rose from $1.69 per share during fiscal 1997
to $4.28 per share during fiscal 1998, an increase in diluted earnings per
share of $2.59, or 153.3%. Included in fiscal 1997 consolidated net earnings
was the negative impact from an after-tax charge of $242,000 for a special
assessment levied on all financial institutions insured by the Savings
Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation
(FDIC).  Without the one-time special charge for the SAIF assessment, fiscal
1997 consolidated net earnings would have been reported at $607,000, or $2.81
per diluted share.  If this SAIF charge is not included in fiscal 1997
consolidated net earnings, Towne Financial's consolidated net earnings for
fiscal 1998 were $331,000, or 54.5%, greater than fiscal 1997 net earnings and
$1.47, or 52.3%, greater on a diluted per share basis.  The components fueling
the significant 54.5% increase in fiscal 1998 net earnings, exclusive of the
effects of the SAIF charge in fiscal 1997, were the increase in net interest
income of $335,000, or 12.3%, an increase in other income of $288,000, or
135.8%, primarily from gains on sale of loans and mortgage-backed securities,
and to reduced federal deposit insurance premiums resulting from the one-time
special SAIF assessment levied in fiscal 1997 and stringent expense control of
operating costs.  Notwithstanding a fourth straight year of double-digit asset
growth, our cost of operations increased by less than 6% year-to-year.  In
point of fact, our annual operating costs have increased by only 13% over the
last three years while assets have grown by 48%.

     Indicative of our strong earnings were the improvements made in two of our
key financial ratios.  Return on equity, which is net earnings divided by
average equity, was 11.54% during the year ended June 30, 1998, as compared to
a SAIF-adjusted 8.29% during the year ended June 30, 1997.  Return on assets,
which is net earnings divided by average total assets, was 0.84% during the
year ended June 30, 1998, as compared to a SAIF-adjusted 0.63% during the year
ended June 30, 1997.  During fiscal 1998, both of these key financial ratios
exceeded fiscal 1997 levels by 39% and 33%, respectively.

     Even though we achieved strong earnings, 1998 was not without its
difficulties.  Significant pressure was placed on our interest rate spread from
the combination of a declining interest rate environment and a flattening yield
curve.  Simply put, our interest rate spread, the difference between what we
pay our depositors and what we receive from our borrowers, declined from 2.80%
in fiscal 1997 to 2.68% in fiscal 1998.  In order to remain profitable under
less than ideal conditions, we found it necessary to compensate for


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this decline in spread by continuing our strategy of sustained loan portfolio
growth to the extent practicable, placing a greater emphasis during fiscal 1998
on increasing other income by originating mortgage loans for sale in the
secondary market in order to meet the demand for fixed-rate loans in a
declining interest rate environment, restructuring the securities portfolio by
taking profits on certain securities and acquiring additional securities for
sale in order to take advantage of the declining interest rate environment and
driving down our overall cost of funds by continuing to push transaction
accounts and implementing more stringent pricing on certificate of deposit
accounts.  Despite this decline in interest rate spread during fiscal 1998,
core earnings still increased.  Specifically, net interest income, which is the
interest income generated by interest-earning assets after the deduction of
interest expense associated with deposits and borrowed money, increased by
$335,000, or 12.3%, from $2.7 million during fiscal 1997 to $3.0 million during
fiscal 1998, primarily from the growth in interest-earning assets.

     Our primary business activity, mortgage lending, had another extremely
strong growth year in fiscal 1998, as demand for mortgage loans to finance home
sales and construction in our lending area remained relatively strong.  Loan
originations and purchases in fiscal 1998 totaled approximately $48.5 million,
an increase of $19.6 million, or 67.6%, over the $28.9 million loan origination
level in fiscal 1997.  Attributing to the significant increase in loan volume
was loans originated for sale in the secondary market.  During fiscal 1998,
loans originated for sale in the secondary market totaled $18.9 million, as
compared to only $1.7 million in fiscal 1997, and loan sales increased from
$1.9 million in fiscal 1997 to $18.9 million in fiscal 1998.  During fiscal
1998 while market rates of interest were declining, loan originations and loan
sales were at higher levels than in fiscal 1997.  In order to accommodate the
increased consumer demand for fixed-rate loans, loan sales were utilized more
heavily in fiscal 1998 resulting in increased gains and origination activity.
In addition to loans originated for sale, loans originated and purchased for
the portfolio also increased during fiscal 1998 by $2.4 million, or 8.7%, from
$27.2 million during fiscal 1997 to $29.6 million during fiscal 1998.  As a
result of this strong loan origination volume for the portfolio, the loan
portfolio grew a robust 8.3%, from $66.8 million at June 30, 1997 to $72.4
million at June 30, 1998.  Since 1992, the loan portfolio has grown by over $45
million, or 168%.  Such growth in loans can be attributed to our strong lending
operation, to an aggressive marketing and selling effort of our lending
products and services to the communities we lend to and to the continual
development and refinement of new and innovative lending programs that give us
a more competitive advantage.


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<PAGE>   5


     Residential mortgage lending will continue to be a major area of
opportunity for the Company.  Looking ahead, we see opportunities to continue
to grow our loan portfolio and to grow it at attractive  spreads; however, such
growth may be slowed somewhat if interest rates remain at historical lows and
loan prepayments accelerate.  If such a low interest rate scenario exists in
the months ahead, selling residential mortgage loans in the secondary market
will continue to be a major part of the Company's future plans.  This practice
enables the Company to enhance the management of its liquidity position, as
well as effect changes in its asset and liability mix.  As we move forward into
fiscal 1999 and beyond, we expect to continue concentrating our efforts at
increasing our lending presence into newer market areas, much like we did
during the past twelve months.  During fiscal 1998, we hired two new loan
officers to help further our lending presence in Northern Kentucky and the west
side of Cincinnati.  In addition to expanding into newer markets, we also want
to focus on further developing the rapidly growing Mason area, as there is much
new home construction occurring in and around our branch facility.  It is our
continued goal to increase loan production and the level of loan retention,
obtaining such goal mainly through customer deposit growth.

     The key to our growth is how well we manage it.  With every new branch and
every new product come new opportunities and new challenges.  Changing
technology continues to require investment to ensure that we are both efficient
and cost effective.  Our ability and willingness to accept and adopt new
technologies and to quickly adapt to the ever-changing needs of our customers
regarding our products and services will determine how successful we are in
growing our business as we head into the next century.  Keeping this in mind,
we are not complacent with the current year's growth rate, as we continue to
explore new branching possibilities and additional services to provide to our
customers.  During fiscal 1997, we invested in new loan origination software
which gave us the capability of directly interfacing with the Federal Home Loan
Mortgage Corporation (FHLMC), our primary source for selling loans.  As loans
originated for sale in the secondary market intensified during fiscal 1998, we
began processing a significant amount of these loans through FHLMC's "Loan
Prospector" system which gave us faster loan processing time and qualified
potential borrowers who may not have normally qualified for low fixed-rate
mortgage loans.  Since we are one of the first companies to have this new
secondary market technology in our local area, it gives us a distinct
competitive advantage in marketing these types of loans.  During fiscal 1998,
we hired a Federal Housing Administration (FHA) Direct-Endorsed (DE)
Underwriter and were approved by the Housing Urban Development (HUD) as a
direct-endorsed lender to originate FHA loans.  We also streamlined our entire
underwriting process in order to obtain better efficiencies in delivering
quality loan products and services to our customers.  In the area of new
deposit


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offerings, we extended our "free checking" program in fiscal 1998 to all of our
branch offices as we continued placing a stronger emphasis on obtaining new
checking customers.  The goals for increasing checking accounts are to attract
new core deposit customers, lower the average cost of funds and provide a
strong volume of cross-selling opportunities for other company products.
Finally, the Board of Directors and management made a commitment in fiscal 1998
to upgrade most of the teller terminals in our offices with an eye towards
having all of the Company's internal computer systems fully functional for the
year 2000.  The upgrades were completed in July 1998 and will enhance our
ability to offer better service to our customers.  We are very excited about
these advancements in technology and look forward to providing better service
to our customers in the future.  We believe that branching out into new markets
and expanding and improving current services to our customers is essential so
that Blue Ash can compete and grow amidst the ever-increasing technology of the
financial services industry.  Continued reinvestment of our earnings will help
sustain this growth and maximize shareholder value.

     Additional efforts to improve shareholder value were initiated in fiscal
1998 by paying out for the first time ever quarterly cash dividends.  In
addition to realizing an annual return from net earnings of $4.28 per diluted
share during fiscal 1998, quarterly cash dividends for the year of $.40 were
paid out to each shareholder, bringing the total rate of return on each
shareholder's initial investment of $10.00 per share to approximately 47% for
the year ended June 30, 1998. As long as we continue to be successful in the
years ahead, we will continue looking to enhance our shareholder value through
the payment of quarterly cash dividends and increase the expected payout of
such dividends in relation to our earnings growth.

     We are pleased to report that shareholders' equity totaled $8.7 million at
June 30, 1998, or $41.55 per common share.  As of June 30, 1998, Blue Ash's
regulatory capital position has been built to a level that considerably exceeds
all current federally-mandated minimum capital requirements.  Blue Ash's
regulatory capital at that date was almost two times greater than the most
stringent of the minimum regulatory capital requirements.

     Our vision of the future sees an industry where not only competition, but
ever-continuing change creates daily challenges and opportunities.  Also of
great importance is the ability to effectively compete with other financial
services providers, an area where Towne Financial continues to be at somewhat
of a disadvantage.  With outdated, inequitable legislation, financial
institutions continue to pay a regulatory price while credit unions, insurance
companies and other financial entities face no such restrictions.  We accept
the fact that we will always have competitors; what we ask for is to compete as
equals.  We encourage


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our customers and shareholders to support fair and reasonable financial reform
legislation as we approach the next century.

     Our strong growth and earnings performance in fiscal 1998 was achieved
against a backdrop of an industry in flux, with continuing consolidation and
new competitors on the horizon.  In today's volatile environment, we are
competing for customers not only with other financial institutions, but also
with the major mutual fund companies, brokerage houses, credit card companies
and insurers.  In fiscal 1998, the blurring of the lines in the financial
services industry began accelerating more rapidly.  Not only did banks join
together, but also numerous mergers of banks and brokerage houses, insurance
companies and brokerages, and banks and credit card companies were announced or
completed.  We believe this trend will continue, and ultimately a dozen or so
companies will hold a dominant share of the financial services business.  The
leaders in this new financial services industry will be those companies that
find the most innovative ways to help customers simplify their financial lives.
The industry, the consumer and the economy have changed and we will continue
to do so as well.  Operating efficiently and containing costs will be a key
ingredient in our future success.  We believe that Towne Financial's strength
and prudent business approach enable us to compete successfully in today's
business, regulatory and economic environment, as well as tomorrow's.  To know
where you are going, you have to have some idea where you have been.  Over the
years we have had the good fortune to grow and succeed.  With the solid
foundation established by Blue Ash's growth through operations and branch
expansion, we feel confident looking toward the opportunities and challenges of
the future.

     Our future remains challenging and quite exciting.  We are encouraged by
the opportunities that lie before us - new communities, new products, new
customers and a new commitment to community banking.  As always, we remain
committed to greater service and greater achievement, as being part of a
growing, successful company is extremely rewarding.  We hope that you will
continue to be a part of our success, and we truly thank you for your support,
loyalty and trust in Towne Financial.

                                        Sincerely,



                                        /s/ William S. Siders
                                        William S. Siders
                                        Executive Vice President
                                        and Managing Officer


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<PAGE>   8


                    BUSINESS OF TOWNE FINANCIAL CORPORATION


     Towne Financial Corporation ("Towne Financial", or the "Corporation"), an
Ohio corporation, is a unitary savings and loan holding company which owns all
of the issued and outstanding common shares of The Blue Ash Building and Loan
Company ("Blue Ash", or the "Company"), a savings and loan association
incorporated under the laws of the State of Ohio.  In 1992, Towne Financial
acquired all of the common shares issued by Blue Ash upon its conversion from a
mutual savings and loan association to a stock savings and loan association
(the "Conversion").  Since the completion of this transaction, Towne
Financial's activities have been limited primarily to holding the common shares
of Blue Ash.  Future references to the Corporation or the Company are utilized
herein as the context requires.

     Blue Ash's overall operating philosophy has evolved from the fundamental
goal of providing affordable home ownership for the communities it serves and
providing a safe, competitive return for its depositors.  Serving the
Cincinnati, Ohio, area since 1908, Blue Ash conducts business from its main
office at 4811 Cooper Road in Blue Ash, Ohio, and from three full-service
branch offices located in Mason, Cherry Grove and Amelia.  Specifically, Blue
Ash considers its principal market areas to be the northeastern and eastern
areas of Cincinnati, Ohio.  During fiscal 1998, Blue Ash increased its lending
presence in Northern Kentucky and the western side of Cincinnati by increasing
its advertising and marketing efforts in those areas and by hiring two new loan
officers for purpose of originating loans there.  In addition to the Company's
efforts to continue expanding operations into new markets and increasing the
Company's assets and profitability, Blue Ash continued to expand and improve
its customer retail services during fiscal 1998 in order to successfully
compete in today's ever-changing business and economic environment.  Blue Ash
actively utilized the Federal Home Loan Mortgage Corporation "Loan Prospector"
system for processing secondary market loans, which it had invested in during
fiscal 1997.  By utilizing this system, more potential loan borrowers qualified
for low fixed-rate mortgage loans and greater time efficiencies were realized
for the benefit of the loan customer, both of which gave Blue Ash a distinct
competitive advantage.  Blue Ash also extended its "free checking" program to
all its offices during fiscal 1998 in order to continue attracting new
customers and obtain a greater volume of lower cost core deposits.

     As a community-oriented financial institution, Blue Ash offers a range of
retail banking services to residents of the Greater Cincinnati area through its
four offices.  Blue Ash is principally


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engaged in the business of attracting deposits from the general public and
using such deposits, together with borrowings and other funds, to originate
first mortgage loans secured by one-to-four family residential real estate
located in Blue Ash's lending area.  Blue Ash also originates loans for the
construction of one-to-four family residential real estate, loans secured by
multi-family (over four units) real estate, nonresidential real estate, land,
home equity line of credit loans secured by residential real estate, passbook
and secured consumer loans.  Blue Ash also invests in U.S. Government and
agency obligations, corporate debt securities, municipal obligations,
interest-bearing deposits and certificates of deposit in other financial
institutions, federal funds sold, government guaranteed mortgage-backed and
related securities and other investments permitted by applicable law.  Funds
for lending and other investments are obtained primarily from savings deposits,
borrowings, loan repayments and proceeds from the sale of loans in the
secondary market.  Blue Ash's revenues are primarily derived from interest
income on real estate loans, interest income on mortgage-backed and related
securities, gain on sale of loans in the secondary market, and to a lesser
extent, interest income on investments and interest-bearing deposits, servicing
fee income on loans sold, fees from lending and deposit activities, gain on
sale of securities designated as available for sale, and gain on sale of real
estate acquired through foreclosure and other assets.  Blue Ash's most
significant expenses are interest on deposits and borrowings and administrative
expenses related to personnel, occupancy and equipment, federal deposit
insurance premiums, data processing services, franchise taxes, advertising and
federal income taxes.

     As a savings and loan holding company, Towne Financial is subject to
regulation, supervision and examination by the Office of Thrift Supervision of
the United States Department of the Treasury (the "OTS").  As a savings and
loan association incorporated under the laws of the State of Ohio, Blue Ash is
subject to regulation, supervision and examination by the OTS, the Federal
Deposit Insurance Corporation (the "FDIC") and the Ohio Division of Financial
Institutions (the "Division").  Deposits in Blue Ash are insured up to the
applicable limits by the Savings Association Insurance Fund (the "SAIF") of the
FDIC.  Blue Ash is also a member of the Federal Home Loan Bank of Cincinnati
(the "FHLB") and is further subject to certain regulations of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") governing
reserves required to be maintained against deposits and certain other matters.
The business and regulation of Blue Ash are also subject to legislative changes
from time to time.


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<PAGE>   10


                      MARKET FOR TOWNE FINANCIAL'S COMMON
                   SHARES AND RELATED SECURITY HOLDER MATTERS


     There were 208,500 common shares of Towne Financial outstanding on
September 9, 1998, held of record by approximately 125 shareholders.  At the
present time, there is no active public trading market for the Corporation's
common shares.  The common shares are listed over-the-counter through the
National Daily Quotation Bureau, Inc.

     Towne Financial had not declared or paid any cash dividends through June
30, 1997.  On August 20, 1997, however, Towne Financial declared its first ever
quarterly cash dividend of $.10 per share.  During fiscal 1998, there were a
total of four quarterly cash dividends of $.10 per share declared and paid on
208,500 outstanding common shares totaling $.40 per share, or $84,000.
Dividends are paid based upon the determination of the Board of Directors of
the Corporation that such payments are consistent with the short-term and
long-term interests of Towne Financial.  The factors affecting this
determination include Towne Financial's current and projected earnings,
operating results, financial condition, regulatory restrictions, future growth
plans and other relevant factors.

     The principal source of earnings to Towne Financial on an unconsolidated
basis consists of dividends, if any, on Blue Ash's stock paid to Towne
Financial.  Consequently, declarations of cash dividends by Towne Financial
will depend upon dividend payments by Blue Ash to Towne Financial, which
payments are subject to various restrictions.  During fiscal 1998, Blue Ash
declared capital distributions in the form of dividends of $150,000 to be
distributed to Towne Financial for the payment by Towne Financial of cash
dividends to its shareholders and for other general corporate purposes.

     In addition to certain federal income tax considerations, OTS regulations
impose limitations on the payment of dividends and other capital distributions
by savings and loan associations.  Under OTS regulations applicable to
converted savings associations, Blue Ash is not permitted to pay a cash
dividend on its common shares if Blue Ash's regulatory capital would, as a
result of the payment of such dividend, be reduced below the amount required
for the Liquidation Account (the account established for the purpose of
granting a limited priority claim on the assets of Blue Ash in the event of a
complete liquidation to those members of Blue Ash before the conversion who
maintain a savings account at Blue Ash after the


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conversion) or applicable regulatory capital requirements prescribed by the
OTS.

     As a condition to regulatory approval of the stock conversion and
reorganization to the holding company form of organization, Blue Ash agreed to
limit the amount of dividends payable to Towne Financial.  Regulations of the
OTS impose limitations on the payment of dividends and other capital
distributions by savings associations.  Under such regulations, a savings
association that, immediately prior to, and on a pro forma basis after giving
effect to a proposed capital distribution (including a dividend) has total
capital (as defined by OTS regulations) that is equal to or greater than the
amount of its fully phased-in capital requirement is generally permitted
without OTS approval (but subsequent to 30 days prior notice to the OTS of the
planned dividend) to make capital distributions, including dividends, during a
calendar year in an amount not to exceed the sum of (i) 100% of its net
earnings to date during the calendar year, plus an amount equal to one-half of
the amount by which its total capital-to-assets ratio exceeded its fully
phased-in capital-to-assets ratio at the beginning of the calendar year or (ii)
75% of its net earnings for the most recent four quarters.  Savings
associations with total capital in excess of the fully phased-in capital
requirement that have been notified by the OTS that they are in need of more
than normal supervision will be subject to restrictions on dividends.  A
savings association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without the prior approval of
the OTS.

     Blue Ash currently meets its fully phased-in capital requirement and,
unless the OTS determines that Blue Ash is an institution requiring more than
normal supervision, Blue Ash may pay dividends in accordance with the foregoing
provisions of the OTS regulations.  Unrestricted retained earnings of Blue Ash
at June 30, 1998, available for payment of dividends to Towne Financial under
the foregoing regulations, were at least $2.3 million.


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<PAGE>   12



                             SELECTED CONSOLIDATED
                      FINANCIAL INFORMATION AND OTHER DATA

     The following tables set forth certain information concerning the
consolidated financial condition, earnings and other data regarding Towne
Financial at the dates and for the years indicated.  The consolidated financial
information should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere herein.  For additional
information about the Corporation, reference is also made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations."


<TABLE>
<CAPTION>
Selected consolidated financial
condition and other data:
                                                         At June 30,
                                    ------------------------------------------------------
                                      1998        1997         1996       1995      1994
                                    --------    --------     -------    -------    -------
                                                   (Dollars in thousands)
<S>                                 <C>         <C>          <C>        <C>        <C>
Total Amount of:
  Assets                            $117,790    $102,558     $92,214    $79,484    $69,405
  Interest-bearing deposits (1)        5,485       1,613       2,756      2,477      1,367
  Investment securities
    designated as available for
    sale - at market                     809         ---         ---        ---        ---
  Investment securities held to
    maturity - at amortized cost         809       1,399       1,300        500      1,228
  Mortgage-backed securities
    designated as available
    for sale - at market              18,354      15,269      15,680     11,803      8,959
  Mortgage-backed securities
    held to maturity - at
    amortized cost                    14,641      11,463      11,948     13,173     14,607
  Loans receivable - net (2)          72,358      66,817      55,071     45,783     38,771
  Deposits                            94,988      81,794      75,618     59,784     52,031
  Advances from the Federal
    Home Loan Bank                    12,674      12,000       8,424      8,318     10,000
  Obligations for securities
    sold under agreements to 
    repurchase                           ---         ---         ---      3,504        ---
  Shareholders' equity - net,
    restricted (3)                     8,663       7,638       7,157      6,883      6,357

Number of:
  Real estate loans
    outstanding (4)(5)                 1,007         960         853        749        644
  Deposit accounts                     8,198       7,521       7,609      6,772      6,239
  Full-service offices                     4           4           4          4          3
</TABLE>
_________________________
Footnotes on page 13


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<PAGE>   13


<TABLE>
<CAPTION>
                                                            Year ended June 30,
                                         ----------------------------------------------------------
                                          1998         1997         1996         1995         1994
                                         ------       ------       ------       ------       ------
                                                   (In thousands, except per share data)
<S>                                      <C>          <C>          <C>          <C>          <C>
Summary of earnings:
  Interest income                        $8,462       $7,192       $6,410       $5,090       $4,564
  Interest expense                        5,396        4,461        4,063        2,859        2,593
                                         ------       ------       ------       ------       ------
  Net interest income                     3,066        2,731        2,347        2,231        1,971

  Provision for losses on loans              24           18           11           --           30
                                         ------       ------       ------       ------       ------
  Net interest income after
    provision for losses on loans         3,042        2,713        2,336        2,231        1,941
  Other income                              500          212          470          262          207
  General, administrative and
    other expense                         2,108        2,359        2,001        1,873        1,673
                                         ------       ------       ------       ------       ------
  Earnings before federal income
    taxes and cumulative effect of
    changes in accounting methods         1,434          566          805          620          475

  Federal income taxes                      496          201          284          229          142
                                         ------       ------       ------       ------       ------
  Earnings before cumulative effect
    of changes in accounting methods        938          365          521          391          333
  Cumulative effect of changes in
    accounting methods (6)                   --           --           --           --          299
                                         ------       ------       ------       ------       ------
  Net earnings                           $  938       $  365       $  521       $  391       $  632
                                         ======       ======       ======       ======       ======
Basic earnings per share (7):
  Earnings before cumulative
    effect of changes in
    accounting methods                   $ 4.50       $ 1.75       $ 2.51       $ 1.89       $ 1.61
  Cumulative effect of changes
    in accounting methods                    --           --           --           --         1.44
                                         ------       ------       ------       ------       ------
  Net earnings                           $ 4.50       $ 1.75       $ 2.51       $ 1.89       $ 3.05
                                         ======       ======       ======       ======       ======
Diluted earnings per share (7):
  Earnings before cumulative
    effect of changes in
    accounting methods                   $ 4.28       $ 1.69       $ 2.44       $ 1.86       $ 1.61
  Cumulative effect of changes
    in accounting methods                    --           --           --           --         1.44
                                         ------       ------       ------       ------       ------
  Net earnings                           $ 4.28       $ 1.69       $ 2.44       $ 1.86       $ 3.05
                                         ======       ======       ======       ======       ======
</TABLE>
________________________________
Footnotes on page 13

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<PAGE>   14


(1)  Includes federal funds sold, interest-bearing deposits in other financial
     institutions, certificates of deposit in other financial institutions and
     Federal Home Loan Bank stock.


(2)  Includes loans held for sale, which are recorded at the lower of cost or
     market value.


(3)  See Notes I and K of Notes to Consolidated Financial Statements regarding
     restrictions on equity.


(4)  Includes home equity line of credit loans.


(5)  Whole mortgage loans serviced by Blue Ash and sold in the secondary
     market are not included.


(6)  Includes cumulative effect of changes in accounting for income taxes
     (SFAS No. 109) and investments in certain debt and equity securities (SFAS
     No. 115).


(7)  All earnings per share amounts reflect the implementation of Statement of
     Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share,"
     which establishes new standards for computing and presenting earnings per
     share.  SFAS No. 128 requires institutions to present basic earnings per
     share and, if applicable, diluted earnings per share, respectively.
     Effective during the year ended June 30, 1998, the Corporation began
     presenting earnings per share pursuant to the provisions of SFAS No. 128.
     All earnings per share data relating to prior years have been restated to
     conform to the provisions of the Statement.  For additional information,
     see Note A-13 of Notes to Consolidated Financial Statements.

                                       13
<PAGE>   15
<TABLE>
<CAPTION>


                                          At or for the Year ended June 30,
                                     ------------------------------------------
Selected Financial Ratios (1):        1998     1997     1996     1995     1994
                                     ------   ------   ------   ------   ------
<S>                                  <C>      <C>      <C>      <C>      <C>

Interest rate spread (2):
     Average during year               2.68%    2.80%    2.66%    3.16%    2.72%
     End of year                       2.48     2.75     2.52     2.73     2.91

Net yield on average
     interest-earning assets           2.89     2.99     2.86     3.30     2.85

Average interest-earning assets
     as a percentage of average
     interest-bearing liabilities    104.06   103.86   104.04   103.21   103.58

Return on equity (net earnings
     divided by average equity) (3)   11.54     4.99     7.28     6.03    10.42

Return on assets (net earnings
     divided by average total
     assets) (3)                       0.84     0.38     0.60     0.54     0.85

Equity-to-assets ratio (average
     equity divided by average
     total assets)                     7.27     7.57     8.19     8.89     8.18

Allowance for loan losses as a
     percentage of non-performing
     loans at end of year             29.83    60.55    34.22    72.85    36.85

Allowance for loan losses as a
     percentage of total loans
     at end of year                    0.36     0.37     0.42     0.48     0.57

Non-performing loans as a
     percentage of total loans
     at end of year (4)                1.22     0.60     1.23     0.66     1.54

Non-performing assets as a
     percentage of total assets
     at end of year (4)                0.75     0.39     0.73     0.38     1.10

General, administrative and other
     expense as a percentage of
     average total assets (3)          1.88     2.44     2.29     2.56     2.26

Overhead efficiency ratio (3)(5)      59.51    80.65    71.31    75.13    77.89
</TABLE>
________________________________
Footnotes on page 15


                                       14

<PAGE>   16


(1)  With the exception of end of year ratios, all ratios are based on average
     monthly balances during the years presented.


(2)  Interest rate spread represents the difference between the weighted-
     average yield earned on interest-earning assets and the weighted-average
     rate paid on interest-bearing liabilities.


(3)  Before consideration of the non-recurring charge incurred in fiscal 1997
     for the SAIF recapitalization assessment, the ratios set forth above would
     have been as follows for the year ended June 30, 1997:

     Return on equity                 8.29%
     Return on assets                 0.63%
     General, administrative and
       other expense as a percentage
       of average total assets        2.06%
     Overhead efficiency ratio       68.14%


(4)  Non-performing loans consist of nonaccrual loans and accruing loans that
     are contractually past due 90 days or more, and non-performing assets
     consist of non-performing loans and real estate acquired by foreclosure or
     deed-in-lieu thereof.


(5)  The overhead efficiency ratio is equal to general, administrative and
     other expense as a percentage of the sum of net interest income after
     provision for losses on loans and other income.


                                        15

<PAGE>   17


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

     Towne Financial's activities have been limited primarily to holding the
common shares of Blue Ash since acquiring such common shares in connection with
the Conversion.  Prior to completion of the Conversion, the Corporation did not
own any material assets or transact any material business.  At June 30, 1998,
on an unconsolidated basis, Towne Financial had no significant assets other
than the capital stock of Blue Ash and had no significant liabilities.
Consequently, the following discussion and analysis focuses primarily on the
financial condition and results of operations of Blue Ash.


                        FORWARD-LOOKING STATEMENTS

     In the following pages, management presents an analysis of Towne
Financial's consolidated financial condition as of June 30, 1998, and the
consolidated results of operations for the year ended June 30, 1998, as
compared to prior years.  In addition to the historical information contained
herein, 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.  The forward-looking statements contained
herein include, but are not limited to, those with respect to the following
matters:

     1.   Management's analysis of the interest rate risk of Blue Ash as
          set forth under "Asset and Liability Management;"

     2.   Management's discussion of the liquidity of Blue Ash's assets
          and the regulatory capital of Blue Ash as set forth under "Liquidity
          and Capital Resources;"

     3.   The discussion of the anticipated effect of legislation that
          has or may be enacted as set forth under "Potential Impact on Future
          Results of Operations of Current and Pending Legislation;"

     4.   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 as set forth under "Year 2000 Compliance
          Issues;"

                                       16
<PAGE>   18



     5.   Management's opinion as to the effects of recent accounting
          pronouncements on Towne Financial's consolidated financial statements
          as set forth under "Effect of Recent Accounting Pronouncements;" and

     6.   Management's determination of the amount and adequacy of the
          allowance for loan losses as set forth under "Comparison of Financial
          Condition at June 30, 1998 and 1997," and "Comparison of Results of
          Operations for the Years Ended June 30, 1998 and 1997."


                                    GENERAL

     Blue Ash is primarily engaged in the business of attracting savings
deposits from the general public and investing such funds in real estate loans.
Blue Ash offers a full range of real estate lending, including construction
and permanent financing for residential, multi-family and nonresidential
properties.  Additional real estate loans for second mortgages and home equity
lines of credit are marketed as well.  To attract loan customers, Blue Ash
aggressively pursues relationships with realtors serving its lending area to
communicate the various lending programs and rates currently being offered.
Blue Ash also stresses its ability to quickly approve and close loans.
Advertisements in local newspapers and promotions to savings customers are also
used to generate loan activity.  Management feels it is offering a variety of
innovative loan programs designed to fit the needs of the community.  Programs
designed to meet the credit needs of its lending area include:  (i)
conventional mortgage loans for the purchase and refinancing of single and
multi-family dwellings which include 15 and 30-year fixed-rate loans and one,
two, three and five-year adjustable-rate loans; (ii) one-year adjustable-rate
mortgage loans secured by one-to-four family residential real estate that can
be converted to fixed-rate mortgages; (iii) one, two, three and five-year
adjustable and fixed-rate conventional mortgage loans for the purchase of
developed building lots by individuals and builders; (iv) 30-year fixed-rate
loans on nonowner-occupied one-to-four family residential investment
properties; (v) short-term (six months to one year) construction loans for the
construction of single and multi-family dwellings and nonresidential
properties; (vi) permanent adjustable-rate mortgage loans on nonresidential
properties, including a ten-year/one-year adjustable rate mortgage loan; (vii)
15-year fixed-rate mortgage loans with a twenty year amortization period on
multi-family and nonresidential properties; (viii) monthly adjustable-rate line
of credit loans secured by residential and nonresidential property; and (ix)
loans to individuals with deposit instruments and securities as collateral.  In
addition to investing in real estate loans, Blue Ash also invests in U.S.
Government and agency obligations, corporate debt securities, municipal 
obligations, interest-bearing deposits and certificates of deposit in other

                                       17
<PAGE>   19



financial institutions, federal funds sold, government guaranteed
mortgage-backed and related securities and other investments permitted by
applicable law.

     Blue Ash faces strong competition both in making real estate and other
loans and in attracting deposits.  Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks and mortgage
bankers who also make loans secured by real estate located in Blue Ash's
lending area.  Blue Ash competes for real estate loans principally on the basis
of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.  Blue Ash
faces substantial competition in attracting deposits from other savings
institutions, commercial banks, money market and mutual funds, and credit
unions in its lending area, including many large institutions which have
greater financial and marketing resources available to them.  The ability of
Blue Ash to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk and other factors.  Blue Ash competes for these
deposits by offering a variety of deposit accounts at competitive rates,
convenient business hours, convenient branch locations with inter-branch
deposit and withdrawal privileges and 24-hour ATM drive-up services.

     Blue Ash's profitability is primarily dependent upon its net interest
income, which is the difference between interest income on its loan,
mortgage-backed and investment portfolios and interest paid on deposits and
other borrowed funds.  Net interest income is directly affected by the relative
amounts of interest-earning assets and interest-bearing liabilities and the
interest rates earned or paid on such amounts.  Blue Ash's profitability is
also affected by the provision for loan losses as well as the level of other
income and other expense.  Other income consists primarily of service charges
and gains on the sale of loans and other assets.  General, administrative and
other expense includes salaries and employee benefits, occupancy and equipment
expenses, federal deposit insurance premiums, state franchise taxes, data
processing expenses, advertising expenses and miscellaneous other operating
expenses.

     The operating results of Blue Ash are also affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
regulatory policies of agencies that regulate financial institutions.  Blue
Ash's cost of funds is influenced by interest rates on competing investments
and general market rates of interest.  Lending activities are influenced by the
demand for real estate loans and other types of loans, which, in turn, is
affected by the interest rates at which such loans are made, general economic
conditions and the availability of funds for lending activities.

                                       18
<PAGE>   20


     Blue Ash's current business strategy is to operate as a well-capitalized,
profitable and independent community-oriented savings association dedicated to
financing home ownership and providing quality service to its customers.  Blue
Ash has sought to implement this strategy in recent years by:  (i) closely
monitoring the needs of customers and providing personal, quality customer
service; (ii) emphasizing the origination of both one-to-four and multi-family
residential mortgage loans in the Company's lending area; (iii) prudently
growing and expanding its earnings base through branch expansion and
acquisitions; (iv) minimizing interest rate risk exposure through the constant
matching of asset and liability maturities and rates; (v) increasing
residential and non-residential lending while maintaining high asset quality in
the loan portfolio; (vi) maintaining a strong retail deposit base; and (vii)
maintaining capital in excess of regulatory requirements.


                         ASSET AND LIABILITY MANAGEMENT

     The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates.  Blue Ash's interest rate spread,
which is the difference between the rates received on assets and the rates paid
on liabilities, is the principal determinant of income.  The interest rate
spread, and therefore net interest income, can vary considerably over time
because asset and liability repricing do not coincide.  Moreover, the long-term
or cumulative effect of interest rate changes can be substantial.  Interest
rate risk is defined as the sensitivity of an institution's earnings and net
asset value to changes in interest rates.  In general, financial institutions
are vulnerable to an increase in interest rates to the extent that
interest-bearing liabilities mature or reprice more rapidly than
interest-earning assets.

     The measurement and analysis of Blue Ash's exposure to changes in the
interest rate environment is referred to as asset and liability management.
Blue Ash's Board of Directors has formulated and implemented asset and
liability management policies designed to better match the maturities and
repricing terms of Blue Ash's interest-earning assets and interest-bearing
liabilities in order to minimize the adverse effects on Blue Ash's results of
operations of material and prolonged increases in interest rates.  Such
management policies are designed to accomplish Blue Ash's principal financial
objective of enhancing long-term profitability while reducing its interest rate
risk.  The principal elements of such policies are to:  (i) emphasize the
origination and purchase of adjustable-rate mortgage loans subject to market
conditions; (ii)

                                       19

<PAGE>   21


maintain excess liquidity in relatively short-term, interest-bearing
instruments; (iii) maintain a substantial portion of its investments and
mortgage-backed securities in instruments having adjustable interest rates;
(iv) sell fixed-rate mortgage loans to the extent practicable; (v) maintain
high levels of capital and strong asset quality; (vi) attract transaction
accounts which are considered to be more resistant to changes in interest rates
than certificate of deposit accounts; and (vii) lengthen the maturity of its
liabilities by seeking longer-term deposits and borrowings when practicable.

     As a result of implementing these asset and liability initiatives and
managing its exposure to changes in interest rates, Blue Ash has generally
acquired for its portfolio adjustable-rate assets; however, during fiscal 1997
and 1998, Blue Ash's loan portfolio has shifted more towards fixed-rate loans
in the portfolio as a result of a change in strategy adopted by the Board of
Directors and management to hold fixed-rate loans in the loan portfolio to the
extent practicable.  At June 30, 1998, $36.4 million, or 50.3%, of Blue Ash's
loan portfolio consisted of adjustable-rate loans and $30.0 million, or 89.9%,
of Blue Ash's mortgage-backed securities portfolio consisted of adjustable-rate
mortgage-backed and related securities.  At June 30, 1997, $41.3 million, or
61.9%, of Blue Ash's loan portfolio consisted of adjustable-rate loans and
$24.8 million, or 92.9%, of Blue Ash's mortgage-backed securities portfolio
consisted of adjustable-rate mortgage-backed and related securities.  As market
conditions and exposure to interest rate changes dictate, Blue Ash will
continue to originate for sale in the future certain fixed-rate residential
loans it deems necessary in order to minimize its interest rate risk exposure.
The Board of Directors and management regularly re-evaluate market conditions
as well as relevant regulatory considerations with a view to establishing a
desired level of interest rate sensitivity and identifying methods of achieving
such desired levels.  As a result of these efforts, Blue Ash's one year "gap"
(the difference between interest-earning assets deemed to mature or reprice in
one year and the amount of interest-bearing liabilities deemed to reprice
during such year) was a negative 1.7% of total assets at June 30, 1998.  Thus,
decreases in interest rates during this time period would generally increase
Blue Ash's net interest income, while increases in interest rates would
generally decrease Blue Ash's net interest income.

     A negative gap leaves Blue Ash's earnings vulnerable to rising interest
rates because when interest rates are rising the interest income earned on
assets may increase more slowly than the interest expense paid on Blue Ash's
liabilities as interest-bearing liabilities reprice at a faster pace than
interest-earning assets.  A decrease in interest rates would be expected to
cause interest

                                       20
<PAGE>   22


income to decline more slowly than interest expense.  However, despite Blue
Ash's negative gap, certain limitations are inherent when analyzing its gap
position.  For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates.  Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in the market
interest rates, while interest rates on other types may lag behind changes in
market rates.  Additionally, certain assets such as adjustable-rate mortgage
loans have features which restrict changes in interest rates on a short-term
basis and over the life of the asset.  Further, in the event of changes in
interest rates, prepayment and decay rates would likely deviate significantly
from those assumed in calculating the gap.  Finally, the ability of many
borrowers to afford the payments on their adjustable-rate mortgage loans may
decrease in the event of an interest rate increase.

     The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap".  An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period.  One method utilized by
Blue Ash to monitor its interest rate risk has been the analytical review of
interest rate risk reports prepared by the OTS.  Such reports provide a
detailed evaluation of Blue Ash's net portfolio value within different interest
rate scenarios and analyze Blue Ash's interest rate sensitivity gap, which is
defined as the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest-bearing liabilities
anticipated, based upon certain assumptions, to mature or reprice within that
same period.  A positive gap occurs when interest-earning assets exceed
interest-bearing liabilities repricing during a designated time period.
Conversely, a negative gap occurs when interest-bearing liabilities exceed
interest-earning assets repricing within a designated time period.  During a
period of falling interest rates therefore, the net interest income of an
institution with a positive gap may be adversely affected due to its
interest-earning assets repricing to a greater extent than its interest-bearing
liabilities, while an institution with a negative gap would likely have an
opposite result.  Conversely, during a period of rising interest rates, the net
interest income of an institution with a positive gap position may increase
since it is able to increase the yield on its interest-earning assets more
rapidly than the cost of its interest-bearing liabilities, while an institution
with a negative gap would likely have an opposite result.


                                        21

<PAGE>   23


     Management presently monitors and evaluates the potential impact of
interest rate changes upon the market value of Blue Ash's portfolio equity and
the level of net interest income on a quarterly basis.  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 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 June 30, 1998, Blue Ash had total assets of $117.8 million and
risk-based capital in excess of 14.8% which would have qualified Blue Ash for
this exemption had the new requirements been in effect at such date.

     At June 30, 1998, 2% of the present value of Blue Ash's assets was
approximately $2.4 million.  Because the interest rate risk of a 200 basis
point increase in market interest rates (which was greater than the interest
rate risk of a 200 basis point decrease) was $2.9 million at June 30, 1998,
Blue Ash would have been required to deduct $230,000 (50% of the $459,000
difference) from its capital in determining whether Blue Ash met its risk-based
capital requirement.  Despite such reduction, however, Blue Ash's risk-based
capital at June 30, 1998, if the new interest rate risk requirements were in
effect, would still have exceeded the regulatory requirement by approximately
$3.7 million, or 6.4%.


                                        22

<PAGE>   24


     The following table presents Blue Ash's NPV as of June 30, 1998 as
calculated by the OTS, based on information provided to the OTS by Blue Ash.


                             NET PORTFOLIO VALUE


<TABLE>
                                     Estimated
  Change in                           NPV as a
interest rates       Estimated       percentage         Amount        
(basis points)          NPV          of assets        of change       Percent

<S>                   <C>              <C>             <C>             <C>
     +400             $ 4,757           4.35%          $(7,446)        (61)%
     +300               7,242           6.42            (4,961)        (41)
     +200               9,326           8.04            (2,877)        (24)
     +100              11,072           9.33            (1,131)        ( 9)
       --              12,203          10.09                --          --
     -100              12,744          10.40               541           4
     -200              12,916          10.43               713           6
     -300              13,210          10.55             1,007           8
     -400              13,709          10.81             1,506          12
</TABLE>

     In managing its asset and liability mix, Blue Ash may, at times --
depending on the relationship between long and short-term interest rates, market
conditions and consumer preference -- place somewhat greater emphasis on
maximizing its interest rate spread than on strictly matching the interest rate
sensitivity of its assets and liabilities.  The Board of Directors believes that
the increased net earnings resulting from a modest mismatch in the maturity of
its asset and liability portfolios can, during periods of stable interest rates,
provide high enough returns to justify the increased exposure which can result
from such a mismatch.  In view of its positive gap position at the time and
other factors previously discussed, Blue Ash changed its strategy with respect
to fixed-rate mortgage loans in fiscal 1996.  Instead of originating for sale
all residential fixed-rate loans, management elected to portfolio fixed-rate
loans subject to certain interest rate risk limitations. This change in strategy
was largely due in part to the Board of Directors' and management's desire to
maximize, to the extent practicable, Blue Ash's interest rate spread and core
earnings.  As a result of originating fixed-rate loans for the portfolio in
fiscal 1996 and continuing so in fiscal 1997 and 1998, Blue Ash's overall
sensitivity to changes in interest rates increased from fiscal 1996 to fiscal
1998, and its overall one year gap went from a positive 3.9% at June 30, 1996 to
a negative 1.7% at June 30, 1998; however, during fiscal 1998, Blue Ash's
overall one year gap position improved from a negative 9.5% at June 30, 1997 to
a negative 1.7% at June 30, 1998.  By adopting a strategy of holding fixed-rate
loans for the portfolio to the extent practicable, the Board of Directors and
management anticipated such


                                        23

<PAGE>   25


an increase in interest rate exposure ratios and a negative one year gap
position and were willing to accept those things in exchange for improving Blue
Ash's interest rate spread and overall profitability in fiscal 1997 and 1998.
At June 30, 1998 there would have been a decrease in Blue Ash's NPV of
approximately 24% of the present value of its assets, assuming a 200 basis
point increase in interest rates.  At June 30, 1997, a 200 basis point increase
in interest rates would have produced a decline of approximately 30% in the
present value of its assets.  The reduced risks at June 30, 1998 associated
with interest rate sensitivity was attributed to management's strong efforts in
lengthening the maturities of its certificate of deposit accounts and
borrowings from the FHLB during a low interest rate environment.  While
interest-bearing liabilities increased by $13.8 million, or 14.7%, during
fiscal 1998, those liabilities repricing or maturing in the one year or less
categories actually declined by $1.1 million, or 1.7%.  At June 30, 1998, the
Board of Directors had a mandated target range for Blue Ash's interest rate
sensitivity gap for a 200 basis point increase in interest rates of (30%).  As
indicated in the table above, Blue Ash operated within this target range during
fiscal 1998.


                      LIQUIDITY AND CAPITAL RESOURCES

     Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings withdrawals and pay
operating expenses.  All financial institutions must manage their liquidity to
meet anticipated funding needs at a reasonable cost, and have contingency plans
to meet unanticipated funding needs or the loss of a funding source.

     Blue Ash's liquidity is a product of its operating, investing and
financing activities.  These activities are summarized below for the years
ended June 30, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
                                             For the Years ended
                                                    June 30,
                                     ------------------------------------
                                       1998          1997           1996
                                     -------       -------        -------
<S>                                 <C>           <C>            <C>                    
Net earnings for the year            $   938       $   365        $   521
  Adjustments to reconcile
  net earnings to net cash
  provided by (used in)
  operating activities                  (232)          350        ( 1,245)
                                     -------       -------        -------
Net cash provided by (used in)
  operating activities                   706           715        (   724)
Net cash used in
  investing activities               (11,731)      (11,428)       (11,713)
Net cash provided by
  financing activities                13,948         9,817         12,535
                                     -------       -------        -------
Net increase (decrease) in
  cash and cash equivalents            2,923          (896)            98
Cash and cash equivalents
  at beginning of year                 2,715         3,611          3,513
                                     -------       -------        -------
Cash and cash equivalents
  at end of year                     $ 5,638       $ 2,715        $ 3,611
                                     =======       =======        =======
</TABLE>
                                        24

<PAGE>   26


     The primary investing activities of Blue Ash include investing in loans
and mortgage-backed securities.  The origination of loans and purchases of
mortgage-backed securities have recently been funded primarily from loan and
mortgage-backed securities repayments, sales of loans and mortgage-backed
securities, maturities of investment securities and proceeds from deposits and
borrowings.  During the year ended June 30, 1998, purchases of mortgage-backed
securities totaled $17.6 million, loans receivable and loans held for sale
increased by $5.6 million, customer deposits increased by $13.2 million and
borrowings increased by $644,000.  During the year ended June 30, 1997,
purchases of mortgage-backed securities totaled $2.0 million, loans receivable
and loans held for sale increased by $11.7 million, customer deposits increased
by $6.2 million and borrowings increased by $3.6 million.  During the year
ended June 30, 1996, purchases of mortgage-backed securities totaled $16.5
million, loans receivable and loans held for sale increased by $9.3 million and
customer deposits increased by $15.8 million, while borrowings declined by $3.4
million.

     Blue Ash's primary sources of funds are deposits, borrowings, sales of
mortgage loans, sales of investments and mortgage-backed securities, maturities
of investment securities, amortization, prepayments and maturities of
outstanding loans and mortgage-backed securities and funds provided by
operations.  While scheduled loan and mortgage-backed securities amortization
and maturing interest-bearing deposits and investment securities are relatively
predictable sources of funds, deposit flows and loan and mortgage-backed
securities prepayments are greatly influenced by economic conditions, the
general level of interest rates and competition.  Blue Ash manages the pricing
of its deposits to maintain a deposit base deemed appropriate and desirable.
Blue Ash invests excess funds in FHLB overnight deposits, federal funds sold
and other short-term interest-earning assets which provide liquidity to meet
lending requirements.  The particular sources of funds utilized by Blue Ash
from time to time are selected based on comparative costs and availability.
Blue Ash has at various times decided not to pay rates on deposits as high as
the rates paid by its thrift and bank competitors.  As a result, Blue Ash has
borrowed funds from the FHLB of Cincinnati and from other commercial banks.  In
addition, Blue Ash has selectively obtained brokered deposits and other
out-of-state monies as a supplement to its local deposits when such funds are
attractively priced in relation to the local market.  At June 30, 1998, Blue
Ash had outstanding $12.7 million in advances from the FHLB, $30,000
outstanding on a loan for the Employee Stock Ownership Plan ("ESOP") from an
independent third party and $5.8 million in outstanding brokered deposits and
other out-of-state funds.  During fiscal 1995, as another alternative funding
source,


                                        25

<PAGE>   27


Blue Ash entered into reverse repurchase agreements, or collateralized
borrowings, with the Federal National Mortgage Association ("Fannie Mae").  A
reverse repurchase agreement (or "repo") is defined as a transaction involving
the sale of securities with an agreement to repurchase the exact same
securities at a pre-negotiated price on a predetermined future date.  In
practice, repos allow Blue Ash to borrow funds at a fixed or floating rate
using its investments and mortgage-backed securities as collateral.  Liquidity
can be added to Blue Ash's portfolio without parting with the specific assets.
At June 30, 1995, Blue Ash had outstanding borrowings under reverse repurchase
agreements of $3.5 million.  During fiscal 1996, all outstanding borrowings
under reverse repurchase agreements were repaid in full.

     The OTS requires minimum levels of liquid assets.  OTS regulations
presently require Blue Ash to maintain specified levels of "liquid" investments
in qualifying types of United States Government and agency obligations and
other permissible investments having certain maturity limitations and
marketability requirements. Such minimum requirement, which was revised by the
OTS in fiscal 1998, is an amount equal to 4% of the sum of Blue Ash's average
daily balance of net withdrawable deposit accounts and borrowings payable in
one year or less.  The liquidity requirement, which may be changed from time to
time by the OTS to reflect changing economic conditions, is intended to provide
a source of relatively liquid funds upon which Blue Ash may rely if necessary
to fund deposit withdrawals and other short-term funding needs.

     The liquidity of Blue Ash, as measured by the ratio of cash, cash
equivalents (not committed, pledged or required to liquidate specific
liabilities) and qualifying investments, mortgage-backed securities and loans
to the sum of net withdrawable savings plus borrowings payable within one year,
was 52.9% at June 30, 1998.  At June 30, 1998, Blue Ash's "liquid" assets
totaled approximately $40.0 million, which was approximately $37.0 million in
excess of the current $3.0 million OTS minimum requirement at such date.  Blue
Ash believes that the Company's liquidity posture at June 30, 1998 was adequate
to meet outstanding loan commitments and other cash requirements.

     Liquidity management is both a daily and long-term function.  Excess
liquidity is generally invested in short-term investments such as FHLB of
Cincinnati overnight deposits, time deposits or federal funds sold.  On a
longer-term basis, Blue Ash maintains a strategy of investing in various
mortgage-backed and related securities and lending products.  During the year
ended June 30, 1998, Blue Ash used its sources of funds primarily to meet its
ongoing commitments to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain its


                                        26

<PAGE>   28


portfolio of investments and mortgage-backed and related securities.  At June
30, 1998, Blue Ash had total outstanding commitments of approximately $1.8
million to originate residential one-to-four family real estate loans, $565,000
to originate a land development loan, $252,000 to originate a residential
multi-family loan and $71,000 to originate a nonresidential real estate loan.
At the same date, commitments under unused lines of credit secured by
one-to-four family residential property amounted to $2.9 million, commitments
under unused lines of credit secured by nonresidential real estate totaled
$37,000 and the unadvanced portion of loans in process and undisbursed loans
approximated $2.6 million.  Blue Ash also had $2.0 million in loans committed
to be sold in the secondary market at June 30, 1998.  Of these loans, $882,000
were originated on or prior to June 30, 1998 and classified as held for sale.
Additionally, Blue Ash committed to purchase approximately $1.8 million in
investment securities designated as available for sale at June 30, 1998.  As an
additional liquidity source, Blue Ash has a $5.0 million line of credit
facility with the FHLB of Cincinnati, which it renewed for another year during
fiscal 1998.  There were no amounts outstanding under such facility at June 30,
1998.  Certificates of deposit scheduled to mature in one year or less at June
30, 1998 totaled $53.4 million.  Management of Blue Ash believes that the
Company has adequate resources, including principal prepayments, repayments of
loans and mortgage-backed securities and other funding sources such as FHLB
advances and repos, to fund all of its commitments to the extent required and
to meet and exceed its foreseeable short-term and long-term liquidity needs.
Blue Ash could also decide to raise funds through the sale of loan products or
available for sale securities.  In addition, although Blue Ash has extended
commitments to fund loans or lines of credit, historically, Blue Ash has not
been required to fund all of its outstanding commitments.  Management believes
that a significant portion of maturing deposits will remain with Blue Ash as it
can adjust the rates of certificates of deposit in order to retain such
deposits in changing interest rate environments; however, there can be no
assurance that Blue Ash can retain all such deposits.

     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


                                        27

<PAGE>   29


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 mandates maintenance of shareholders' equity less all intangible
assets equal to 1.5% of adjusted total assets.  The core capital requirement
provides for the maintenance of 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 defined by OTS regulations.

     Management has determined that Blue Ash is in compliance with each of the
three capital requirements at June 30, 1998.  Specifically, Blue Ash's tangible
and core capital of $8.3 million, or 7.1% of total adjusted assets, exceeded
the respective minimum requirements of $1.8 million and $3.5 million at that
date by approximately $6.5 million, or 5.6% of total adjusted assets, and $4.8
million, or 4.1% of total adjusted assets.  Additionally, Blue Ash's risk-based
capital of approximately $8.6 million at June 30, 1998, or 14.8% of
risk-weighted assets (including a general loan loss allowance of $264,000),
exceeded the current 8.0% requirement of $4.7 million by approximately $3.9
million, or 6.8% 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.


                    IMPACT OF INFLATION AND CHANGING PRICES

     The consolidated financial statements of Towne Financial and related
consolidated financial data presented herein have been prepared in accordance
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in relative purchasing power of money over time due to
inflation.  The impact of inflation is reflected in the increased cost of Towne
Financial's operations.

     Unlike most industrial companies, virtually all of the assets and
liabilities of Towne Financial are monetary in nature.  As a


                                       28
<PAGE>   30


result, interest rates generally have a more significant impact on Towne
Financial's performance than do the effect of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services.  In the current interest rate
environment, the liquidity and maturity structures of Towne Financial's assets
and liabilities are critical to the maintenance of acceptable performance
levels.


                POTENTIAL IMPACT ON FUTURE RESULTS OF OPERATIONS
                       OF CURRENT AND PENDING LEGISLATION

     Legislation repealing the percentage of earnings bad debt reserve
provisions of the Internal Revenue Code previously applicable to qualifying
thrift institutions was enacted into law in fiscal 1997.  The legislation,
which is part of The Small Business Job Protection Act of 1996 (the "Jobs
Act"), requires all thrift institutions to pay tax on or recapture their excess
bad debt reserves accumulated since 1988.  The legislation substantially
equalizes the taxation of banks and thrift institutions, but it protects
thrifts from taxes on "bad debt reserves" established prior to 1988.  The Jobs
Act eliminates the percentage of taxable income method for deducting bad debt
reserves for all thrifts for tax years beginning after December 31, 1995 (July
1, 1996, as to Towne Financial).  Under the legislation, Towne Financial is
required to recapture approximately $487,000 of its bad debt reserves as
taxable income, which represents the post-1987 additions to the reserves, and
is unable to utilize the percentage of earnings method to compute its reserves
in the future.  Towne Financial has provided deferred taxes for this amount and
will be permitted to amortize the recapture of its bad debt reserves over six
years, beginning in fiscal 1999.

     Legislation has been introduced in Congress to eliminate the federal
regulation of savings and loan associations and to develop a common charter for
all financial institutions.  As a result, Towne Financial might become subject
to a different form of holding company regulation, which may limit the
activities in which it may engage and subject it to other additional regulatory
requirements, including separate capital requirements.  In addition, Congress
may eliminate the OTS, and Blue Ash may be regulated under federal law as a
bank or may be required to change its charter.  Such change in regulation or
charter would likely change the range of activities in which Blue Ash may
engage and would probably subject Blue Ash to more regulation by the FDIC.
Towne Financial and Blue Ash cannot predict when or whether Congress may
actually pass such legislation or whether such legislation will actually change
the regulation and permissible activities of Towne Financial and Blue Ash.
Although


                                       29
<PAGE>   31


such legislation may change the activities in which both Towne Financial and
Blue Ash may engage, it is not anticipated that current activities will be
materially affected by those activity limits.


                          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 six-digit date fields (YYMMDD) with the YY two-digit
field for the year 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 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


                                       30
<PAGE>   32


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 indicates that the greatest potential impact upon
Blue Ash is the risk related to vendors used by Blue Ash, particularly Blue
Ash's data processing service bureau.  Quarterly progress reports from the
service bureau indicate levels of manpower and expertise sufficient to amend
and test the adequacy of their computer programming and systems prior to the
arrival of the year 2000.  All other vendors used by Blue Ash have been
identified and requests for year 2000 certifications have been forwarded.

     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 is expected to be minimal.  The Action Team estimates that the
impact upon Blue Ash's results of operations, liquidity and capital resources
will be immaterial.


                   EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," that provides accounting guidance on transfers of financial
assets, servicing of financial assets and extinguishment of liabilities.  SFAS
No. 125 introduces an approach to accounting for transfers of financial assets
that provides a means of dealing with more complex transactions in which the
seller disposes of only a partial interest in the assets, retains rights or
obligations, makes use of special purpose entities in the transaction, or
otherwise has continuing involvement with the transferred assets.  The new
accounting method, referred to as the financial components approach, provides
that the carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values.  SFAS No.
125 provides criteria for determining whether control of assets has been
relinquished and whether a sale has occurred.  If the transfer does not qualify
as a sale, it is accounted for as a secured borrowing.  Transactions subject to
the provisions of SFAS No. 125 include, among others, transfers involving
repurchase agreements, securitizations of


                                       31
<PAGE>   33


financial assets, loan participations, factoring arrangements and transfers of
receivables with recourse.  An entity that undertakes an obligation to service
financial assets recognizes either a servicing asset or liability for the
servicing contract (unless related to a securitization of assets, and all the
securitized assets are retained and classified as held to maturity).  A
servicing asset or liability that is purchased or assumed is initially
recognized at its fair value.  Servicing assets and liabilities are amortized
in proportion to and over the period of estimated net servicing income or net
servicing loss and are subject to subsequent assessments for impairment based
on fair value.  SFAS No. 125 provides that a liability is removed from the
balance sheet only if the debtor either pays the creditor and is relieved of
its obligations for the liability or is legally released from being the primary
obligor.  SFAS No. 125 supersedes SFAS No. 122 and was effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after December 31, 1997, and was to be applied prospectively.  Earlier or
retroactive application was not permitted.  The adoption of SFAS No. 125 did
not have a material impact on Towne Financial's consolidated financial position
or results of operations.

     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, instead of primary and fully-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.  SFAS No. 128, which superseded
Accounting Principles Board ("APB") Opinion No. 15, was effective for interim
and annual periods ending after December 15, 1997, and prior year earnings per
share disclosures presented for comparative purposes (including those in
interim financial statements, summaries of earnings and selected financial
data) were to be restated.  Early application of SFAS No. 128 was not
permitted, although institutions could disclose pro forma earnings per share
amounts computed using SFAS No. 128 in financial statement notes in years
before the effective date.  Effective during the year ended June 30, 1998,
Towne Financial began presenting earnings per share pursuant to the provisions
of SFAS No. 128.  In accordance with the Statement, all prior year earnings per
share presentations for comparative purposes have been revised to conform to
SFAS No. 128.

     Simultaneously with the issuance of SFAS No. 128, the FASB issued SFAS No.
129, "Disclosure of Information About Capital Structure," which establishes
standards for disclosing information


                                       32
<PAGE>   34


about an institution's capital structure.  This Statement consolidated existing
accounting guidance relating to disclosure about an institution's capital
structure and contained no changes in disclosure requirements for institutions
that were subject to the previously existing requirements.  SFAS No. 129
applied to all institutions, public and nonpublic, and was effective for
financial statements issued for periods ending after December 15, 1997.  Public
companies generally have been required to make disclosures now required by SFAS
No. 129 and, therefore, it had no impact on Towne Financial.

     In June 1997, the FASB issued 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.  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 is effective
for fiscal years beginning after December 15, 1997, and requires restatement of
prior year financial statements presented for comparative purposes.  The
adoption of SFAS No. 130 relates solely to the disclosure provisions, and
therefore, will not have a material effect on Towne Financial's consolidated
financial position or results of operations.

     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.  For many
enterprises, the management approach will likely result in more segments being
reported.  In addition, SFAS No. 131 requires significantly more


                                       33
<PAGE>   35


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 is
effective for fiscal years beginning after December 15, 1997, but earlier
application is encouraged.  Segment information reported in earlier years is to
be restated to conform to the requirements of SFAS No. 131.  Enterprises will
not be required to report segment information in interim financial statements
in the year of adoption, but comparative financial information is required
beginning with the second year after adoption.  SFAS No. 131 is not expected to
have a material impact on Towne Financial's consolidated financial statements.

     In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises employers'
disclosures about pension and other post-retirement 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 is effective for fiscal years beginning
after December 15, 1997, with earlier application encouraged.  Restatement of
disclosures for earlier periods is required unless the information is not
readily available, in which case the notes to the financial statements shall
include all available information and a description of the information not
available.  Management does not expect the adoption of SFAS No. 132 to have a
material effect 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 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


                                       34
<PAGE>   36


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.


          COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND 1997

     At June 30, 1998, Towne Financial's consolidated assets totaled $117.8
million, representing an increase of $15.2 million, or 14.9%, over the $102.6
million asset level at June 30, 1997.  The increase in asset size experienced
during the year ended June 30, 1998 was funded principally through an increase
in deposits of $13.2 million, or 16.1%, and to a lesser extent, an increase in
borrowings of $644,000, or 5.3%, an increase in shareholders' equity of $1.1
million, or 13.4%, and an increase realized in all noninterest-bearing
liabilities of $369,000, or 34.6%.  Such increase in total assets was primarily
due to an increase in loans receivable and loans held for sale of $5.6 million,
or 8.3%, an increase in mortgage-backed securities of $6.3 million, or 23.4%,
and an increase in cash and cash equivalents of $2.9 million, or 107.7%.  The
current year's growth in assets followed an increase of $10.4 million, or
11.2%, during fiscal 1997.  Towne Financial's growth 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.


                                       35
<PAGE>   37


     Cash and due from banks, federal funds sold, interest-bearing deposits and
certificates of deposit in other financial institutions totaled approximately
$6.1 million at June 30, 1998, an increase of $2.9 million, or 92.0%, from June
30 1997 levels of $3.2 million.  The significant increase during fiscal 1998 in
cash, cash equivalents and certificates of deposit in other financial
institutions was largely driven by growth in deposits, which was  coupled with
a slowdown in the growth in the loan portfolio during the second half of fiscal
1998 as loan prepayments accelerated.  The increase in deposits of $13.2
million, or 16.1%, was primarily used to fund an increase of $5.6 million, or
8.3%, in loans receivable and loans held for sale and an increase of $6.3
million, or 23.4%, in mortgage-backed securities, while the remaining inflows
from an increased deposit base and, to a lesser extent, borrowed funds from the
Federal Home Loan Bank were invested into federal funds sold.  Growth in
deposits and borrowings outpaced growth in the loan and investment portfolios,
causing the buildup in cash and cash equivalents at June 30, 1998.

     Investment securities designated as available for sale and held to
maturity totaled $1.6 million at June 30, 1998, an increase of $219,000, or
15.7%, over June 30, 1997 levels of $1.4 million.  This increase in investment
securities reflected the purchase of U.S. Government agency obligations and
municipal obligations of $2.8 million, which was partially offset by proceeds
received from the maturity and call of U.S. Government agency obligations of
$2.1 million and proceeds received from sale of municipal obligations of
$496,000.  With interest rates declining during fiscal 1998, management elected
for the most part not to replace all of its called U.S. Government agency
obligations with newer ones, as yields on newer fixed-rate short-term callable
securities were not as attractive without further extending out the maturities
on these securities.  As a result, the excess funds 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, while in the meantime during the holding period
earning an attractive tax equivalent yield in a declining interest rate
environment.  The overall increase in investment securities during fiscal 1998
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 increased by approximately $6.3
million, or 23.4%, during the year ended June 30, 1998.  This increase in the
mortgage-backed securities portfolio was attributed to purchases of $12.7
million in collateralized mortgage obligations and adjustable-rate


                                       36
<PAGE>   38


participation certificates designated by management as available for sale,
purchases of $4.9 million in collateralized mortgage obligations designated as
held to maturity and a net decrease in unrealized market losses on securities
designated as available for sale of $210,000, all of which were partially
offset by proceeds from the sale of securities designated as available for
sale, net of gains, of $8.8 million, principal repayments and calls on
securities of $2.7 million and amortization of premiums and accretion of
discounts on securities, net, of $7,000.  Management elected to increase the
level of its mortgage-backed securities, especially during the last six months
of fiscal 1998 when 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.  Funding the growth in the mortgage-backed securities
portfolio was provided primarily from increased deposits, proceeds from the
sale of certain securities, principal repayment cash flows on existing
securities in the portfolio and utilization from time to time of advances from
the Federal Home Loan Bank.  During fiscal 1998, management elected to sell for
profit, due to favorable market conditions and improved pricing on securities
from a lower interest rate environment, certain of its floating-rate
collateralized mortgage obligations which the Corporation had a heavy
concentration in.  In addition, the Corporation sold an adjustable-rate
mortgage backed security in order to alleviate the greater prepayment risk
exposure inherent in the security resulting from a decline in long-term
interest rates throughout fiscal 1998.  The sale strategies employed during
fiscal 1998 had an additional benefit of allowing management to better
diversify its investment positions by reinvesting the proceeds from the sale of
securities into short to intermediate-term fixed-rate securities and other
floating-rate securities not previously emphasized, adjusting monthly, which
were primarily indexed to either the composite prime rate of 75% of the thirty
largest U.S. banks, as reported by The Wall Street Journal, or the 10-year U.S.
treasury rate.  By investing in short to intermediate-term fixed-rate
securities, specifically collateralized mortgage obligations, management
intended to capitalize if the Federal Reserve began cutting short-term interest
rates, which appear artificially high in relation to long-term interest rates.
The floating-rate securities tied to the composite prime rate were 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 fiscal 1998.  The floating-rate
securities tied to the 10-year treasury index were acquired to take advantage
of a future steepening yield curve environment.  As a result of these
acquisitions, management wanted to be in position to not only improve its
current overall


                                       37
<PAGE>   39


yield on mortgage-backed securities, but to more favorably capitalize in
differing interest rate environments.

     Loans receivable and loans held for sale increased in the aggregate by
approximately $5.6 million, or 8.3%, during the year ended June 30, 1998.  This
increase was largely attributed to loan disbursements, loan purchases and loans
originated for sale in the secondary market of $48.5 million, which were
partially offset by loan sales, net of gains, of $18.8 million and principal
repayments on loans of $24.2 million.  Growth in the loan portfolio was
primarily due to an increase of $4.3 million, or 8.5%, in one-to-four family
residential real estate and construction loans, an increase of $1.0 million, or
35.1%, in multi-family residential real estate loans and an increase of
$374,000, or 3.4%, in nonresidential real estate and land loans, all of which
were partially offset by a decrease of $72,000, or 2.7%, in home equity line of
credit loans and a decrease of $58,000, or 22.9%, in passbook loans to deposit
customers and other secured consumer loans.  Blue Ash's growth in the loan
portfolio has been the 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-deposits ratio.
During the second half of fiscal 1998, however, due to a decline in long-term
interest rates toward historical lows, management redirected its efforts and
strategies on originating for sale in the secondary market all conforming
single-family residential mortgage loans in order to reduce its exposure to
interest rate risk. From January 1, 1998 to June 30, 1998, the loan portfolio
actually decreased by $3.2 million, or 4.2%, as loan sales of $14.5 million and
principal repayments on loans of $14.8 million exceeded loan disbursements,
purchases and loans originated for sale of $26.1 million.  During this six
month 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.  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.


                                       38
<PAGE>   40


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 change in strategy of holding all loans in the portfolio
which was dictated by a declining interest rate environment, overall loan
portfolio growth and loan volume remained strong during the year ended June 30,
1998 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.

     At June 30, 1998, the Corporation's allowance for loan losses totaled
$264,000, an increase of $20,000, or 8.2%, over the $244,000 level represented
at June 30, 1997.  During the year ended June 30, 1998, the Corporation
increased its allowance for general loan losses by $20,000 and allowance for
specific loan losses by $4,000, which were partially offset by loan charge-offs
of $4,000.  The Corporation's internally-classified assets totaled
approximately $885,000 at June 30, 1998, as compared to $478,000 at June 30,
1997.  Non-performing and nonaccrual loans totaled $885,000, or 1.22% of loans
receivable and loans held for sale, at June 30, 1998, and $403,000, or 0.60% of
loans receivable and loans held for sale, at June 30, 1997.  The increase in
internally-classified and non-performing and nonaccrual loans during fiscal
1998 was solely due to an increase in delinquencies of single-family
residential mortgage loans.  Minimizing the effects of this increase in
internally-classified assets and non-performing and nonaccrual loans during
fiscal 1998 was the payoff in full of a delinquent single-family loan in the
amount of $187,000 subsequent to June 30, 1998.  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 June 30,
1998 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 effect 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 provision for general loan losses of $20,000 and
specific loan losses of $4,000 recorded during the year ended June 30, 1998 was
attributed to the overall growth of 8.3% in the loan


                                       39
<PAGE>   41


portfolio and to the increase in internally-classified and non-performing and
nonaccrual loans at June 30, 1998.  Management believed that the loan loss
allowance existing at June 30, 1998 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 June 30, 1998 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 June 30, 1998, the
Corporation's allowance for loan losses consisted entirely of general valuation
allowances, as defined by the regulations of the OTS, and represented 0.36% of
the total amount of loans outstanding, including those loans designated as held
for sale, and 30% of internally-classified assets.

     Deposits totaled $95.0 million at June 30, 1998, an increase of $13.2
million, or 16.1%, over the $81.8 million in deposits outstanding at June 30,
1997.  The increase in total overall deposits was primarily the result of an
increase in certificates of deposit of $13.5 million, or 21.5%, which was
partially offset by a decrease in transaction accounts (NOW accounts, money
market deposit accounts, passbook accounts and Christmas club accounts) of
$268,000, or 1.4%.  The increase in certificates of deposit (primarily
certificates of deposit with original terms to maturity of two years or less)
during the year ended June 30, 1998 was attributed to an increase in
certificate of deposit balances obtained from the local market area of $12.5
million, or 21.6%, and an increase in brokered deposits of $985,000, or 20.4%.
In an effort to sustain deposit growth during the year ended June 30, 1998,
Blue Ash continued its strategy of selectively obtaining brokered deposits and
out-of-state funds to supplement its local deposit base.  These deposits were
typically obtained at interest rates at or below local market interest rates
and had terms to maturity of two years or less.  Given its other available
funding alternatives, Blue Ash has the ability to suspend brokered deposit
activity at any time and has the ability to repay its maturities on all
brokered deposits without placing any undue risk on its liquidity position or
cost of funds.  However, as long as demand for new loan production remains
strong, 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
certificates of deposit from its local market area during the year ended June
30, 1998 was attributed to the influx of new accounts resulting from continued
strong marketing efforts and competitive pricing on certificate of deposit
accounts.  The decrease in transaction accounts, primarily from money market
deposit accounts and NOW accounts, which are subject to daily


                                       40
<PAGE>   42


repricing, was primarily due to the decline of $687,000 in the outstanding
balance of attorney loan closing checking accounts and the transfer of funds
from money market accounts into higher yielding certificate of deposit
investments and other investment alternatives such as mutual funds or the stock
market, which were both partially offset by an increase in customer checking
accounts. As part of its efforts to increase the deposit base, management made
a more assertive effort over the last two years 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.  Specifically, in
order to better market checking accounts to its customers, Blue Ash introduced
a new "free checking" account program in June 1997 at its Mason office.  This
program was set up to attract a greater volume of checking accounts at that
office and to lower deposit costs.  During the year ended June 30, 1998, this
new checking program helped increase the outstanding balance of checking
accounts by 56.8% and the number of checking accounts at the Mason office by
101.1%.  Due to the initial success of the program at the Mason office, the
"free checking" program was extended to all the offices during the year ended
June 30, 1998.  As a result of this "free checking" program and all other
marketing and selling efforts to date, the outstanding balance of all checking
accounts increased by $568,000, or 19.4%, the number of overall checking
accounts increased by 17.4% and the outstanding balance of passbook and club
accounts increased by $144,000, or 1.8%, during the year ended June 30, 1998.
The overall growth in deposits during the year ended June 30, 1998 reflected
management's continuing efforts to maintain steady growth and was consistent
with management's short-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 June 30, 1998, increased by $644,000, or 5.3%, from $12.1 million
at June 30, 1997 to $12.7 million at June 30, 1998.  This increase in
borrowings during the year ended June 30, 1998 was primarily due to proceeds of
$10.0 million received from advances from the Federal Home Loan Bank, which was
partially


                                       41
<PAGE>   43


offset by repayments of $9.3 million from advances from the Federal Home Loan
Bank.  During the year ended June 30, 1998, Blue Ash repaid the remaining
$800,000 outstanding balance on its line-of-credit facility with the Federal
Home Loan Bank by obtaining an $800,000 one-year LIBOR-based advance, adjusting
monthly.  An additional $700,000 one-year LIBOR-based advance, adjusting
monthly, was also utilized for short-term funding of the asset growth versus
offering special rates on short-term deposits.  In attempts to restructure its
borrowings by extending out its maturities and lowering its overall cost of
borrowings, management elected to take advantage of special borrowing offerings
from the Federal Home Loan Bank during fiscal 1998.  Blue Ash obtained a $3.5
million convertible fixed-rate ten-year/one-year advance with an interest rate
of 5.15% in March 1998 and a $2.5 million convertible fixed-rate
ten-year/one-year advance with an interest rate of 5.24% in June 1998.  These
rates were below the treasury rates of comparable final maturities because Blue
Ash was allowing the Federal Home Loan Bank at its option to convert these
fixed-rate advances on a quarterly basis to LIBOR-based adjustable-rate
advances after the first year of the advances.  If the Federal Home Loan Bank
does not convert the advances to LIBOR floating rates on the initial option
date, the advances will remain at the original fixed rates until final maturity
in ten years or the next quarterly option date.  If the Federal Home Loan Bank
does convert the advances to LIBOR, then Blue Ash may pay off the advances in
whole or in part on any of the quarterly repricing dates with no fee.  By
obtaining these convertible fixed-rate advance offerings at interest rates of
5.15% and 5.24%, respectively, approximately $2.9 million in one-year
LIBOR-based advances were repaid in March 1998, $600,000 in one-year
LIBOR-based advances were repaid in April 1998 and $2.5 million in maturing
five-year fixed-rate advances were repaid in June 1998, enabling Blue Ash to
lower its overall cost of funds on borrowings.  The adjustable-rate LIBOR-based
advances which were repaid had an average cost of approximately 5.63% and the
maturing five-year fixed-rate advances had an average cost of 5.55%.  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.  In future periods,


                                       42
<PAGE>   44


management may acquire additional Federal Home Loan Bank advances to fund loan
production, to acquire investments and mortgage-backed securities, or as a tool
to manage the interest rate risk of Blue Ash.

     Shareholders' equity totaled $8.7 million at June 30, 1998, an increase of
$1.1 million, or 13.4%, over the total of $7.6 million at June 30, 1997.  The
increase in shareholders' equity was due primarily to net earnings for the year
of $938,000, a reduction in required contributions of the Employee Stock
Ownership Plan of $30,000 and a decrease in unrealized market losses on
securities designated as available for sale, net of related tax effects, of
$141,000, all of which were partially offset by the payment of dividends to
shareholders of $84,000.  At June 30, 1998, shareholders' equity as a
percentage of total assets was 7.4%.


                    COMPARISON OF THE RESULTS OF OPERATIONS
                   FOR THE YEARS ENDED JUNE 30, 1998 AND 1997

     General

     Net earnings amounted to $938,000 for the year ended June 30, 1998,
representing an increase of $573,000, or 157.0%, over the $365,000 in net
earnings recorded for the year ended June 30, 1997. The improvement in earnings
level for the year ended June 30, 1998 was primarily attributable to an
increase in net interest income after provision for losses on loans of
$329,000, or 12.1%, an increase in other income of $288,000, or 135.8%, and a
decrease in general, administrative and other expense of $251,000, or 10.6%.
The increase in earnings level before federal income taxes of $868,000, or
153.4%, resulted in an increase in the provision for federal income taxes of
$295,000, or 146.8%.  The Corporation's net earnings for the year ended June
30, 1997 were negatively impacted by a special assessment levied on all savings
institutions insured by SAIF of the FDIC to recapitalize the SAIF to the
required statutory level in accordance with legislation enacted into law in
fiscal 1997.  Excluding the nonrecurring after-tax charge of $242,000 due to
the special assessment, the Corporation would have shown net earnings of
$607,000, or $2.81 per share on a diluted basis, for the year ended June 30,
1997.  Excluding the SAIF charge in fiscal 1997, net earnings for the year
ended June 30, 1998 still would have represented an increase in net earnings of
$331,000, or 54.5%, and an increase in diluted earnings per share of $1.47, or
52.3%, over fiscal 1997.


                                       43
<PAGE>   45


     Net Interest Income and Provision for Losses on Loans

     The Corporation's net interest income increased by $335,000, or 12.3%,
during the year ended June 30, 1998, as compared to the year ended June 30,
1997.  The increase in net interest income during fiscal 1998 was primarily the
result of an increase in total interest income, due to increases in the average
outstanding balances of all the Corporation's interest-earning assets (loans,
mortgage-backed securities, investment securities and other interest-earning
assets), and to increases in the weighted-average rates earned on loans and
other interest-earning assets, which were partially offset by declines in the
weighted-average rates earned on mortgage-backed securities and investment
securities.  Total interest income on the Corporation's interest-earning assets
increased by $1.3 million, or 17.7%, during fiscal 1998 due to overall
increases of $14.9 million, or 16.3%, in the average outstanding balances of
such assets, which were coupled with overall increases of 9 basis points (100
basis points equals 1%), or 1.1%, in the weighted-average yields earned on such
assets.  The increase in total interest income during fiscal 1998 was partially
offset by an increase in total interest expense, primarily due to increases in
the average outstanding balances of deposits and borrowings and to an increase
in the weighted-average rate paid on deposits, which were partially offset by a
decrease in the weighted-average rate paid on borrowings.  Total interest
expense on the Corporation's interest-bearing liabilities for fiscal 1998, as
compared to fiscal 1997, increased by $935,000, or 21.0%, due to overall
increases of $14.1 million, or 16.1%, in the average outstanding balances of
such liabilities, which were coupled with overall increases of 21 basis points,
or 4.1%, in the weighted- average yields paid on the Corporation's
interest-bearing liabilities.  The upward movement in the average yields earned
on the Corporation's interest-earning assets compared to the average yields
paid on the Corporation's interest-bearing liabilities reflected liabilities
repricing upward more rapidly than assets. Such changes in yields earned and
paid were reflected in the interest rate spread, which had decreased from 2.80%
during fiscal 1997 to 2.68% during fiscal year 1998, and the net yield (net
interest income as a percentage of average interest-earning assets), which had
decreased from 2.99% during fiscal 1997 to 2.89% during fiscal 1998.  The major
factors contributing to the decreases in the interest rate spread and the net
yield year-to-year were the decline in long-term interest rates toward
historical lows and the extremely flat yield curve which developed toward the
second half of fiscal 1998, which made it more difficult for the Corporation to
earn a significant positive spread on new deposit and new borrowing activity.


                                       44
<PAGE>   46


     Interest income on loans increased by $1.1 million, or 20.4%, during the
year ended June 30, 1998, as compared to the year ended June 30, 1997.  The
increase in interest income on loans during fiscal 1998 was due to an increase
of $11.6 million, or 19.1%, in the average balance of loans outstanding, which
was coupled with an increase of 10 basis points, or 1.2%, in the
weighted-average rate earned on loans.  The increase in the average outstanding
balance of loans year-to-year reflected a continuation of loan demand in which
loan originations and purchases exceeded loan principal repayments, sales and
payoffs.  The growth in the loan portfolio was also attributed to management's
ongoing strategy to portfolio fixed-rate mortgage loans subject to certain
interest rate risk limitations.  The increase in the average yield earned on
loans was principally the result of management's strategy to hold fixed-rate
mortgage loans to the extent practicable, so as to improve interest rate spread
and overall net earnings.  The greater percentage of outstanding fixed-rate
mortgage loans in the loan portfolio during fiscal 1998, the greater volume of
originations of multi-family and nonresidential loans, the upward repricing of
existing adjustable-rate ("teaser") mortgage loans and strong consumer
preferences toward originating fixed-rate mortgages as opposed to lower rate
adjustable mortgages in a relatively stable but lower interest rate environment
are other contributing factors leading to overall higher loan yields during
fiscal 1998, all of which were partially offset by the acceleration of
prepayments on higher yielding fixed-rate mortgage loans held in the portfolio
during the second half of fiscal 1998.

     Interest income on mortgage-backed securities designated as available for
sale and held to maturity increased by $76,000, or 4.3%, during the year ended
June 30, 1998, as compared to the year ended June 30, 1997.  The increase in
interest income on mortgage-backed securities during fiscal 1998 was the result
of a increase in the average outstanding balance of mortgage-backed securities
of $1.6 million, or 5.9%, which was partially offset by a decline in the
weighted-average rate earned on such assets of 10 basis points, or 1.6%.  The
increase in the average outstanding balance of mortgage-backed securities
reflected the purchases of fixed-rate and floating-rate collateralized mortgage
obligations, 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 second half of
fiscal 1998, 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


                                       45
<PAGE>   47


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 supplemented the 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 year-to-year generally reflected the greater
principal repayments on higher yielding securities due to a declining interest
rate environment in fiscal 1998 and the downward movement in the U.S. treasury
rates which a certain segment of the Corporation's adjustable-rate and
floating-rate mortgage-backed securities and collateralized mortgage
obligations are tied to in determining interest rate changes.  Such decreases
in the U.S. treasury indexes were partially offset by an increase in the
eleventh district cost of funds index on which a large part of the
Corporation's adjustable-rate and floating-rate securities portfolio are tied
to in determining interest rate changes.

     Interest and dividend income on investment securities and other
interest-earning assets increased in the aggregate by $125,000, or 61.6%,
during the year ended June 30, 1998, as compared to the year ended June 30,
1997.  The increase during fiscal 1998 was primarily due to increases of
$275,000, or 22.2%, and $1.4 million, or 75.3%, in the average outstanding
balances of investment securities and other interest-earning assets (primarily
interest-bearing deposits in other financial institutions), respectively, and
to an increase in the weighted-average rate earned on other interest-earning
assets of 86 basis points, or 14.2%, all of which were partially offset by a
decline of 48 basis points, or 6.5%, in the weighted-average rate earned on
investment securities.  The increase in the average outstanding balance of
investment securities was principally due to the purchase of callable U.S.
Government agency obligations and municipal obligations.  U.S. Government
agency obligations were generally acquired for liquidity purposes as well as to
provide the Corporation with attractive, above market interest rates to
compensate for the call feature inherent in these securities. Such callable
securities were principally viewed by management as "yield enhancers,"
especially during a flat yield curve environment that predominately existed at
the time of many of these purchases, and helped improve the Corporation's
overall yield on investment securities from past levels.  During the second
half of fiscal 1998 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


                                       46
<PAGE>   48


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 yields 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 year-to-year,
as newer securities' purchases were obtained at lower rates than those
securities previously purchased.  The increase in other interest-earning assets
was attributed in part to increased liquidity needs resulting from significant
asset growth year-to-year and growth in deposits and borrowings outpacing
growth in loans and investments.  The increase in the weighted-average rate
earned on such assets year-to-year was the direct result of an increase in
short-term interest rates by the Federal Reserve in March 1997 and the purchase
of high yielding short-term certificate of deposit investments for the
portfolio which were primarily acquired in fiscal 1997.  These certificate of
deposit investments were primarily adjustable in nature and interest rate
changes moved in the opposite direction of market interest rates.

     Interest expense on deposits, the largest component of the Corporation's
interest-bearing liabilities, increased by $847,000, or 22.3%, during the year
ended June 30, 1998, as compared to the year ended June 30, 1997.  The increase
in interest expense on deposits during fiscal 1998 was due to an increase of
$12.7 million, or 16.5%, in the average balance of deposits outstanding, which
was coupled with an increase of 25 basis points, or 5.1%, in the
weighted-average rate paid on deposits.  The increase in the average balance of
deposits outstanding during the years 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 $13.1 million, or
22.7%, which was partially offset by a decline of $437,000, or 2.3%, 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, during fiscal 1998, management 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 the average
outstanding balance of deposits was necessary to predominately fund the growth
in the loan and mortgage-backed securities portfolios.


                                       47
<PAGE>   49


The increase in the weighted-average rate paid on deposit accounts year-to-year
reflected higher market rates of interest.  Specifically, the weighted-average
rate paid on certificates of deposit increased from 5.68% during fiscal 1997 to
5.86% during fiscal 1998, while the weighted-average rate paid on transaction
accounts decreased slightly from 2.70% during fiscal 1997 to 2.64% during
fiscal 1998.

     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, increased by $88,000, or
13.2%, during the year ended June 30, 1998, as compared to the year ended June
30, 1997.  The increase in interest expense on borrowings during fiscal 1998
was attributed to an increase of $1.5 million, or 13.3%, in the average
outstanding balance of borrowings, which was partially offset by a decline of 1
basis point, or 0.2%, in the weighted-average rate paid on borrowings.  Such
increase in the average outstanding balance of borrowings year-to-year 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 fiscal 1998, the
weighted-average rate paid on borrowings declined to 6.05%, a reduction of 1
basis point, or 0.2%, from 6.06% during fiscal 1997.  This decline  in the
weighted-average rate paid year-to-year generally reflected management's
restructuring efforts of its borrowing mix by lengthening out maturities in a
lower interest rate environment that prevailed throughout fiscal 1998.
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 Blue Ash the opportunity to reduce its costs of funds
on $6.0 million of borrowings by approximately 43 basis points.  Reducing the
weighted-average rate paid on borrowings through restructuring was partially
offset by the maturity of $2.5 million in low fixed-rate advances in fiscal
1997 and the higher costs associated with certain adjustable-rate advances
acquired in fiscal 1998 in comparison to those acquired in past years.

     The Corporation's provision for losses on loans increased by $6,000, or
33.3%, during the year ended June 30, 1998, as compared to the year ended June
30, 1997.  The provision for losses on


                                       48
<PAGE>   50


loans, which was comprised of discretionary additions to the general loan loss
allowance and specific loan losses, 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 fiscal 1998 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 have resulted in minimal loan losses (charge-offs) over the past five
years.  The Corporation's provision for losses on loans during the year ended
June 30, 1998 was principally attributable to loan portfolio growth of 8.3%,
and to increases in internally-classified assets and non-performing and
nonaccrual loans.  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 June 30, 1998.  However, future
adjustments to 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 increased during the year ended June 30, 1998 by $329,000, or
12.1%, as compared to the year ended June 30, 1997.

     Other Income

     Total other income increased by $288,000, or 135.8%, from $212,000 during
the year ended June 30, 1997 to $500,000 during the year ended June 30, 1998.
The primary reasons for this rise in other income during fiscal 1998 were an
increase in gain on sale of mortgage loans of $301,000, or 470.3%, an increase
in gain on sale of mortgage-backed securities designated as available for sale
of $14,000, or 100.0%, an increase in gain on sale of investment securities of
$3,000, an increase in service fees, charges and other operating income of
$14,000, or 40.0%, and a decrease in loss on sale of real estate acquired
through foreclosure of $1,000, all of which were partially offset by a decrease
in loan servicing fees of $45,000, or 45.0%.


                                       49
<PAGE>   51


     The increase in gain on sale of mortgage loans of $301,000, or 470.3%,
year-to-year was the result of an increase of $328,000 in gains (including
mortgage servicing rights pursuant to SFAS No. 125) on the sale of mortgage
loans in the secondary market, which was partially offset by the absence in
fiscal 1998 of $27,000 in unrealized market gains on loans identified as held
for sale during fiscal 1997.  The Corporation recognized gains on the sale of
mortgage loans in the secondary market of $365,000 and $37,000 during the years
ended June 30, 1998 and 1997, 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 dramatically during
fiscal 1998, as the demand for fixed-rate single-family residential mortgage
loans was stronger within Blue Ash's lending area than during fiscal 1997 due
to a lower interest rate environment prevailing during fiscal 1998.  As a
result, proceeds from the sale of loans in the secondary market increased from
$1.9 million during fiscal 1997 to $18.9 million during fiscal 1998, an
increase of $17.0 million, or 870.7%, and loans originated for sale in the
secondary market increased from $1.7 million during fiscal 1997 to $18.9
million during fiscal 1998, an increase of $17.2 million, or 996.1%.  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 fiscal
1998, management began placing 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 two 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 increases in gain on sale of mortgage-backed securities of $14,000, or
100.0%, and investment securities of $3,000 during the year ended June 30, 1998
were due to increased sales activity.  During fiscal 1998, there were proceeds
of $8.9 million from the sale of mortgage-backed securities and $496,000 from
the sale of investment securities, while there was only $1.1 million in total
sales proceeds from securities during fiscal 1997.  Such sales activity in
fiscal 1998 was predicated upon the declining interest rate environment that
prevailed and better diversifying the mortgage-backed securities portfolio so
as to improve the Corporation's overall yield and market performance to varying
interest rate environments.  The decrease in loan servicing fees of $45,000, or
45.0%, during fiscal 1998 was principally attributed to a decline of
approximately $480,000, or 1.1%, in the average outstanding balance of loans
sold in the secondary market and to


                                       50
<PAGE>   52


other financial institutions, which was coupled with an increase of $39,000 in
expenses for amortization and impairment of originated mortgage servicing
rights under SFAS No. 125 due to a greater mortgage servicing rights portfolio
during fiscal 1998 and to accelerated prepayments of mortgages associated with
a declining interest rate environment.  The increase in service fees, charges
and other operating income of $14,000, or 40.0%, reflected increased fees
generated year-to-year from NOW accounts, construction loan draws, mortgage
loan modifications and conversions of adjustable-rate mortgage loans to fixed,
which were partially offset by a reduction in fee income received from
correspondent lenders for nonconforming loans.

     General, Administrative and Other Expense

     Total general, administrative and other expense decreased by $251,000, or
10.6%, during the year ended June 30, 1998, as compared to the year ended June
30, 1997.  The components of this decrease in total general, administrative and
other expense during fiscal 1998 were comprised of a decrease in federal
deposit insurance premiums of $414,000, or 88.7%, a decrease in amortization of
goodwill of $4,000, or 10.5%, and a decrease in data processing expense of
$1,000, or 1.0%, all of which were partially offset by an increase in employee
compensation and benefits of $129,000, or 12.9%, an increase in occupancy and
equipment expense of $22,000, or 6.2%, an increase in advertising expense of
$6,000, or 6.7%, an increase in state franchise tax expense of $4,000, or 4.3%,
and an increase in other operating expense of $7,000, or 3.2%.

     The driving factor behind the significant decline in total general,
administrative and other expense during fiscal 1998 was the decrease in federal
deposit insurance premiums of $414,000, or 88.7%, which was due to the one-time
special assessment of $366,000 to recapitalize the SAIF to federally-mandated
levels and to reduced deposit insurance premiums of $48,000 following the
September 1996 SAIF recapitalization.  Excluding the SAIF special assessment,
however, total general, administrative and other expense would have only
increased from $2.0 million during fiscal 1997 to $2.1 million during fiscal
1998, an increase of $115,000, or 5.8%.

     The principal category of the Corporation's general, administrative and
other expense is employee compensation and benefits.  The increase in this
expense category of $129,000, or 12.9%, during fiscal 1998, as compared to
fiscal 1997, was primarily due to normal merit increases, increases in loan
officer salaries due to a restructuring in the method of compensating these
employees, increases in employee group health insurance premiums,


                                       51
<PAGE>   53


increases in expenses related to the ESOP due to the payout of benefits to
terminated employees, increases in loan officer bonus expense as a result of a
greater lending volume, increases in annual bonus expense to employees and
officers stemming from a higher earnings level and increases in certain
payroll-related taxes such as social security taxes, all of which were
partially offset by a decrease in director medical reimbursement expenses and
an increase of $87,000, or 82.9%, in deferred loan origination costs in
accordance with SFAS No. 91 as a result of an approximate $19.6 million, or
67.6%, increase in total lending volume year-to-year and increased loan
personnel costs per loan during fiscal 1998.

     The increase in occupancy and equipment expense of $22,000, or 6.2%, was
largely due to increases in office building repair and maintenance, furniture
and fixture expenses, telephone expense, postage and expenses associated with
ATM processing.  The increase in advertising expense of $6,000, or 6.7%, 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.  The decrease of $1,000, or 1.0%, 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 Ash's contract with its third party provider of data processing
services during fiscal 1998, which was partially offset by an increased average
deposit base as well as growth in lending operations.  The increase in state
franchise tax expense of $4,000, or 4.3%, was primarily attributed to an
enhanced equity capital position year-to-year.  The increase in other operating
expense of $7,000, or 3.2%, was primarily due to increases in supervisory
assessments, directors' and officers' insurance, organizational dues and
subscriptions, charitable contributions, NOW accounts, filing fees of public
documents, printing expenses of annual report to shareholders, office supplies
as a result of an expanded loan and savings operation and legal expenses
pertaining to problem loans and adoption of the Corporation's 1997 Stock Option
Plan, all of which were partially offset by a reduction in outside consulting
services, real estate owned expenses and nonrecurring miscellaneous expenses.

     Federal Income Taxes

     The provision for federal income taxes totaled $496,000 for the year ended
June 30, 1998, as compared to $201,000 for the year ended June 30, 1997, an
increase of $295,000, or 146.8%. The increase in the provision for federal
income taxes reflected the higher level of pre-tax earnings for the year ended
June 30, 1998, an increase of $868,000, or 153.4%, from $566,000 during the
year


                                       52

<PAGE>   54


ended June 30, 1997 to $1.4 million during the year ended June 30, 1998.  As
previously discussed, the one-time charge to replenish the SAIF had a
detrimental impact on net earnings for the year ended June 30, 1997.  As a
result, the level of federal income tax expense for each of the years ended
June 30, 1998 and 1997 generally reflected the level of pre-tax earnings for
such years.  The Corporation's effective tax rates amounted to 34.6% and 35.5%
for the years ended June 30, 1998 and 1997, respectively.


                    COMPARISON OF THE RESULTS OF OPERATIONS
                   FOR THE YEARS ENDED JUNE 30, 1997 AND 1996

     General

     Net earnings amounted to $365,000 for the year ended June 30, 1997, a
decrease of $156,000, or 29.9%, from the $521,000 in net earnings recorded for
the year ended June 30, 1996.  The decrease in net earnings was primarily
attributable to an increase in general, administrative and other expense of
$358,000, or 17.9%, and a decrease in other income of $258,000, or 54.9%, which
were partially offset by an increase in net interest income after provision for
losses on loans of $377,000, or 16.1%.  The decrease in earnings level before
federal income taxes of $239,000, or 29.7%, resulted in a decrease in the
provision for federal income taxes of $83,000, or 29.2%.  As previously
discussed, the earnings level of $365,000 for the year ended June 30, 1997 was
greatly affected by a nonrecurring $242,000 after-tax charge to net earnings,
or $1.12 per diluted share, for the FDIC special assessment to recapitalize the
SAIF to the required statutory level in accordance with the legislation enacted
into law during fiscal 1997.  Excluding the detrimental effects on net earnings
of the one-time SAIF recapitalization charge, net earnings for the year ended
June 30, 1997 would have been recorded at $607,000, as compared to $521,000 for
the year ended June 30, 1996, an increase of $86,000, or 16.5%.

     Net Interest Income and Provision for Losses on Loans

     The Corporation's net interest income increased by $384,000, or 16.4%,
during the year ended June 30, 1997, as compared to the year ended June 30,
1996.  The increase in net interest income during fiscal 1997 was primarily the
result of an increase in total interest income, due to increases in the average
outstanding balances of loans, mortgage-backed securities and investment
securities, and to increases in the weighted-average rates earned on loans and
investment securities, which were partially offset by a decrease in the average
outstanding balance of other interest-


                                       53
<PAGE>   55


earning assets and to declines in the weighted-average rates earned on
mortgage-backed securities and other interest-earning assets.  Total interest
income on the Corporation's interest-earning assets increased by $782,000, or
12.2%, during fiscal 1997 due to overall increases of $9.2 million, or 11.3%,
in the average outstanding balances of such assets, which were coupled with
overall increases of 7 basis points, or 0.9%, in the weighted-average yields
earned on such assets.  The increase in total interest income during fiscal
1997 was partially offset by an increase in total interest expense, primarily
due to increases in the average outstanding balance of deposits and borrowings,
which were partially offset by declines in the weighted-average rates paid on
deposits and borrowings.  Total interest expense on the Corporation's
interest-bearing liabilities for fiscal 1997, as compared to fiscal 1996,
increased by $398,000, or 9.8%, due to overall increases of $9.0 million, or
11.4%, in the average outstanding balances of such liabilities, which were
partially offset by overall declines of 7 basis points, or 1.4%, in the
weighted-average rates paid on the Corporation's interest-bearing liabilities.
The upward movement in the average yields earned on the Corporation's
interest-earning assets compared to the downward movement in the average yields
paid on the Corporation's interest-bearing liabilities reflected a widening of
the interest rate spread during fiscal 1997, which correlated into increased
core earnings.  Such positive movement in yields earned and paid was reflected
in the interest rate spread, which had increased from 2.66% in fiscal 1996 to
2.80% in fiscal 1997, while the net yield (net interest income as a percentage
of average interest-earning assets) increased from 2.86% in fiscal 1996 to
2.99% in fiscal 1997. The major factor contributing to the increases in the
interest rate spread and net yield year-to-year was believed to be management's
concerted efforts in growing the loan portfolio by holding in the portfolio the
majority of fixed-rate loans originated in the fiscal 1997 interest rate
environment.

     Interest income on loans increased by $811,000, or 18.3%, during the year
ended June 30, 1997, as compared to the year ended June 30, 1996.  The increase
in interest income on loans during fiscal 1997 was due to an increase of $9.2
million, or 17.9%, in the average balance of loans outstanding, which was
coupled with an increase 3 basis points, or 0.3%, in the weighted-average rate
earned on loans.  The increase in the average outstanding balance of loans
year-to-year reflected a continuation of loan demand in which loan originations
and purchases exceeded loan principal repayments, sales and payoffs.  The
growth in the loan portfolio was also attributed to management's decision to
portfolio fixed-rate loans in the fiscal 1997 interest rate environment subject
to certain interest rate risk limitations.  The increase in the average yield
earned on loans was principally the result of management's strategy to hold
fixed-rate mortgage loans, so as to


                                       54
<PAGE>   56


improve interest rate spread and overall net earnings.  The greater percentage
of outstanding fixed-rate mortgage loans in the loan portfolio in fiscal 1997,
the upward repricing of existing adjustable-rate ("teaser") mortgage loans and
strong consumer preferences toward originating fixed-rate mortgages as opposed
to lower rate adjustable mortgages in a relatively stable interest rate
environment are other contributing factors leading to overall higher loan
yields in fiscal 1997.  All these factors were coupled with a generally higher
interest rate environment prevailing during fiscal 1997.

     Interest income on mortgage-backed securities designated as available for
sale and held to maturity decreased by $10,000, or 0.6%, during the year ended
June 30, 1997, as compared to the year ended June 30, 1996.  The decrease in
interest income on mortgage-backed securities was the result of a decrease in
the weighted-average rate earned on such assets of 9 basis points, or 1.4%,
which was partially offset by an increase in the average outstanding balance of
mortgage-backed securities of $238,000, or 0.9%.  The increase in the average
balance of mortgage-backed securities outstanding during fiscal 1997 reflected
the purchase of floating-rate collateralized mortgage obligations designated as
available for sale, the purchase of collateralized mortgage obligations
designated as held to maturity for liquidity and diversification purposes, the
purchase of an adjustable-rate participation certificate and the sale of
securities in fiscal 1996, all of which were partially offset by principal
repayments on securities with respect to the underlying loans and the sale of
securities in fiscal 1997.  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.  The
increased volume of mortgage-backed securities, which supplemented the growth
in the loan portfolio, helped improve the Corporation's overall interest rate
spread and net earnings level.  The increase in the average balance of
mortgage-backed securities outstanding, however, began shrinking during the
second half of fiscal 1997 as management shifted more proceeds from sales of
securities and principal repayments towards the origination of loans.
Management's primary objective during fiscal 1997 was to grow the loan
portfolio by shifting funds from other asset categories to the extent
practicable.  The decline in the weighted-average yield earned on
mortgage-backed securities generally reflected the downward movement of
interest rate changes on the Corporation's adjustable-rate and floating-rate
mortgage-backed securities and collateralized mortgage obligations.


                                       55
<PAGE>   57


     Interest and dividend income on investment securities held to maturity and
other interest-earning assets decreased in the aggregate by $19,000, or 8.6%,
during the year ended June 30, 1997, as compared to the year ended June 30,
1996.  The decrease during fiscal 1997 was due primarily to a decrease of
$657,000, or 26.2%, in the average balance outstanding of other
interest-earning assets and a decline of 53 basis points, or 8.0%, in the
weighted-average rate earned on other interest-earning assets, which were
partially offset by an increase of $446,000, or 56.3%, in the average balance
outstanding of investment securities and an increase of 15 basis points, or
2.1%, in the weighted-average rate earned on investment securities.  The
increase in the average outstanding balance of investment securities during
fiscal 1997 was largely attributable to the purchase of callable U.S.
Government agency obligations in both fiscal 1997 and 1996, which was partially
offset by the call of some of these securities and the maturities of other
investment securities during fiscal 1997.  Such callable obligations were
generally offered at attractive, above-market rates in order to compensate the
buyer for the call feature and helped improve the Corporation's overall yield
on investment securities and interest rate spread.  The increase in the
weighted-average rate earned on investment securities during fiscal 1997 was
due to the purchase of callable U.S. Government agency obligations at rates
generally higher than those securities called or matured in fiscal 1997,
resulting from a generally higher interest rate environment.  The reduction in
other interest-earning assets was the function of a steadily growing lending
operation, while the decline in yield earned on such short-term liquid assets
was due in part to two interest rate reductions by the Federal Reserve in
fiscal 1996, which was partially offset by one interest rate increase in fiscal
1997.

     Interest expense on deposits increased by $356,000, or 10.4%, during the
year ended June 30, 1997, as compared to the year ended June 30, 1996.  The
increase in interest expense on deposits during fiscal 1997 was due to an
increase of $8.2 million, or 12.0%, in the average balance of deposits
outstanding, which was partially offset by a decrease of 8 basis points, or
1.6%, in the weighted- average rate paid on deposits.  The increase in the
average balance of deposits outstanding during the fiscal years 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 $8.7 million, or 17.8%, which was partially offset by a decline of $461,000,
or 2.3%, 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


                                       56
<PAGE>   58


selling efforts by management and competitive pricing strategies.  In addition,
during fiscal 1997, management began utilizing more frequently 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 the average outstanding
balance of deposits was necessary to predominately fund the growth in the loan
portfolio.  The decrease in the weighted- average rate paid on deposit accounts
year-to-year reflected lower market rates of interest during fiscal 1997, as
compared to fiscal 1996.  Specifically, the weighted-average rate paid on
certificates of deposit decreased from 5.88% in fiscal 1996 to 5.68% in fiscal
1997, which was coupled with a decrease in the weighted-average rate paid on
transaction accounts from 2.84% in fiscal 1996 to 2.70% in fiscal 1997.

     Interest expense on borrowings, consisting primarily of fixed-rate Federal
Home Loan Bank advances, adjustable-rate LIBOR-based advances and line of
credit advances and, to a lesser extent, an adjustable-rate loan of the ESOP,
increased by $42,000, or 6.7%, during the year ended June 30, 1997, as compared
to the year ended June 30, 1996.  The increase in interest expense on
borrowings during fiscal 1997 was attributed to an increase of $785,000, or
7.7%, in the average outstanding balance of borrowings, which was partially
offset by a decrease of 5 basis points, or 0.8%, in the weighted-average rate
paid on borrowings.  The increase in the average outstanding balance of
borrowings year-to-year 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.  Such increase in the average
outstanding balance of borrowings was partially offset by significant principal
repayments on Federal Home Loan Bank advances and other short-term borrowings
in fiscal 1996.  These repayments in fiscal 1996 were funded with excess
liquidity and deposit inflows, as it was management's intent of principally
growing the Corporation through an increased deposit base.  During fiscal 1997,
however, advances from the Federal Home Loan Bank were utilized by management
as an alternative funding source 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 as previously discussed.  During
fiscal 1997, the weighted-average rate paid on borrowings declined to 6.06%, a
decrease of 5 basis points, or 0.8%, from 6.11% in fiscal 1996.  This decrease
in the weighted-average rate paid year-to-year generally reflected the lower
costs of new borrowings in comparison to borrowings obtained in prior years.
Additionally, the interest rates paid on the adjustable rate portion of Federal
Home Loan Bank advances in fiscal 1997 were generally lower than the interest


                                       57
<PAGE>   59


rates paid on that portion in fiscal 1996, as management utilized such advances
during periods of lower interest rates.

     The Corporation's provision for losses on loans increased by $7,000, or
63.6%, during the year ended June 30, 1997, as compared to the year ended June
30, 1996.  The provision for losses on loans was comprised solely 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 fiscal 1997 was predicated upon the
overall loan portfolio growth and management's review of non-performing and
nonaccrual loans and anticipated losses on loans for the year.

     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 increased during the year ended June 30, 1997 by $377,000, or
16.1%, as compared to the year ended June 30, 1996.

     Other Income

     Total other income decreased by $258,000, or 54.9%, from $470,000 during
the year ended June 30, 1997 to $212,000 during the year ended June 30, 1996.
The principal causes for this decline in other income were a decrease in gain
on sale of mortgage loans of $97,000, or 60.2%, a decrease in gain on sale of
mortgage-backed securities designated as available for sale of $135,000, or
90.6%, a decrease in loan servicing fees of $13,000, or 11.5%, an increase in
loss on sale of real estate acquired through foreclosure of $1,000 and a
decrease in service fees, charges and other operating income of $12,000, or
25.5%.

     The decrease in gain on sale of mortgage loans was the result of a
reduction in secondary market activities during fiscal 1997, as compared to
fiscal 1996, due to management's strategy of holding in the loan portfolio
certain fixed-rate mortgage loans subject to certain interest rate risk
limitations.  The Corporation recognized cash gains on the sale of mortgage
loans in the secondary market of $17,000 and $125,000 during fiscal 1997 and
1996, respectively.  As a result, proceeds from the sale of loans in the
secondary market declined from $8.2 million in fiscal 1996 to $1.9 million in
fiscal 1997, and loans originated for sale in the secondary market decreased
from $9.4 million in fiscal 1996 to $1.7 million in fiscal 1997.  Prior to
management's change in strategy of


                                       58
<PAGE>   60


originating fixed-rate mortgage loans in fiscal 1996, loan sales were
frequently utilized as a means of minimizing interest rate risk as well as
generating additional funds for lending and other purposes.

     The decrease in gain on sale of mortgage-backed securities of $135,000, or
90.6%, was due to the significant decline in sales activity during fiscal 1997,
as compared to fiscal 1996.  Proceeds from the sale of mortgaged-backed
securities were $1.1 million and $10.8 million during fiscal 1997 and 1996,
resulting in gains of $14,000 and $149,000, respectively.  Such greater sales
activity in fiscal 1996 was undertaken by management for diversification
purposes and to realize profits, arising from a favorable interest rate
environment, that had accumulated on certain floating-rate collateralized
mortgage obligations which were tied to a particular lagging market index.  The
decrease in loan servicing fees of $13,000, or 11.5%, during fiscal 1997 was
principally attributed to a decline of approximately $3.6 million, or 7.6%,
year-to-year in the average outstanding balance of loans sold in the secondary
market and to other financial institutions, which was coupled with an increase
of $4,000, or 66.7%, in expense for amortization and impairment of originated
mortgage servicing rights under SFAS No. 125.  The decline in service fees,
charges and other operating income of $12,000, or 25.5%, reflected the
increased costs incurred by the Corporation in the origination of no-cost line
of credit loans which were more prevalent in fiscal 1997 and the reduction in
fees received from correspondent lenders, which were partially offset by
increased fees generated year-to-year from NOW accounts.  In addition, the
Corporation recognized a loss of $1,000 during fiscal 1997 on the sale of real
estate acquired through foreclosure (single-family residence).

     General, Administrative and Other Expense

     Total general, administrative and other expense increased by $358,000, or
17.9%, during the year ended June 30, 1997, as compared to the year ended June
30, 1996.  The components of this increase in total general, administrative and
other expense during fiscal 1997 were comprised of an increase in employee
compensation and benefits of $36,000, or 3.7%, an increase in federal deposit
insurance premiums of $323,000, or 224.3%, an increase in state franchise tax
expense of $9,000, or 10.7%, an increase in data processing expense of $6,000,
or 6.5%, and an increase in advertising expense of $3,000, or 3.5%, all of
which were partially offset by a decrease in occupancy and equipment expense of
$14,000, or 3.8%, and a decrease in other operating expense of $5,000, or 2.2%.

     The increase in employee compensation and benefits of $36,000, or 3.7%,
during fiscal 1997, as compared to fiscal 1996, was


                                       59
<PAGE>   61


primarily due to normal merit increases, increases in employee group health
insurance premiums and decreases in deferred loan origination costs in
accordance with SFAS No. 91 as a result of an approximate $568,000, or 1.9%,
decrease in total lending volume year-to-year, all of which were partially
offset by decreases in employee salaries due to a temporary reduction in the
work staff in the savings and mortgage operations, decreases in contributions
to the ESOP plan and decreases in certain payroll-related taxes such as workers
compensation premiums and state unemployment taxes.

     The increase of $323,000 in federal deposit insurance premiums was due to
the one-time special assessment of $366,000 to recapitalize the SAIF to
federally-mandated levels and to an increased average deposit base
year-to-year, which were partially offset by a reduction of $72,000 in regular
SAIF premium assessments after enactment of the SAIF legislation as previously
discussed.  The increase in data processing expense of $6,000, or 6.5%, also
reflected an increased average deposit base as well as growth in lending
operations.  The increase in state franchise tax expense of $9,000, or 10.7%,
was primarily attributed to an enhanced equity capital position year-to-year.
The increase of $3,000, or 3.5%, in advertising expense 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.  The decrease in occupancy and equipment expense of
$14,000, or 3.8%, was largely due to the reduction in office building repair
and maintenance expenses and expenses associated with ATM processing, which
were partially offset by higher light, heat and utilities costs and furniture,
fixtures and equipment expenses.  The decrease in other operating expense of
$5,000, or 2.2%, during fiscal 1997 was due in part to a decrease in NOW
processing expenses and a decrease in office supplies and stationery costs,
which were partially offset by an increase in supervisory assessments resulting
from a greater asset base and an increase in consulting fees associated with
analyzing new loan origination software and upgrading the Corporation's
computer system.

     Federal Income Taxes

     The provision for federal income taxes totaled $201,000 for the year ended
June 30, 1997, compared to $284,000 for the year ended June 30, 1996, a
decrease of $83,000, or 29.2%.  The decrease in the provision for federal
income taxes reflected the lower level of pre-tax earnings for the year ended
June 30, 1997, a decrease of $239,000, or 29.7%.  As previously discussed, the
one-time charge to replenish the SAIF had a detrimental impact on net earnings
for the year ended June 30, 1997.  As a result, the level of federal income tax
expense for each of the years ended June 30, 1997 and 1996 generally reflected
the level of pre-tax earnings for such years.


                                       60
<PAGE>   62
                                    [ LOGO ]


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Towne Financial Corporation

We have audited the accompanying consolidated statements of financial condition
of Towne Financial Corporation and Subsidiary as of June 30, 1998 and 1997, and
the related consolidated statements of earnings, shareholders' equity and cash
flows for each of the three years ended June 30, 1998, 1997 and 1996.  These
consolidated financial statements are the responsibility of the Corporation's
management.  Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Towne
Financial Corporation and Subsidiary as of June 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years ended June 30, 1998, 1997 and 1996, in conformity with generally
accepted accounting principles.




/s/ Grant Thornton LLP

Cincinnati, Ohio
September 4, 1998


                                       61
<PAGE>   63


                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                    June 30,
                       (In thousands, except share data)



<TABLE>
<CAPTION>
       ASSETS                                                                1998      1997
<S>                                                                      <C>       <C>
Cash and due from banks                                                  $  1,419  $  2,310
Federal funds sold                                                          3,900       200
Interest-bearing deposits in other financial institutions                     319       205
                                                                         --------  --------

       Cash and cash equivalents                                            5,638     2,715



Certificates of deposit in other financial institutions                       469       466
Investment securities designated as available for sale - at market            809         -
Investment securities held to maturity - at amortized cost, approximate
 market value of $812 and $1,399 at June 30, 1998 and 1997                    809     1,399
Mortgage-backed securities designated as available for sale - at market    18,354    15,269
Mortgage-backed securities held to maturity - at amortized cost,
 approximate market value of $14,592 and $11,267 at June 30,
 1998 and 1997                                                             14,641    11,463
Loans held for sale - at lower of cost or market                              882         -
Loans receivable - net                                                     71,476    66,817
Office premises and equipment - at depreciated cost                         2,250     2,335
Federal Home Loan Bank stock - at cost                                        797       742
Accrued interest receivable on loans                                          678       562
Accrued interest receivable on mortgage-backed securities                     189       166
Accrued interest receivable on investments and interest-
 bearing deposits                                                              25        31
Goodwill - net of accumulated amortization                                    333       367
Prepaid expenses and other assets                                             425       226
Prepaid federal income taxes                                                   15         -
                                                                         --------  --------

       Total assets                                                      $117,790  $102,558
                                                                         ========  ========
</TABLE>


                                       62
<PAGE>   64

<TABLE>
<CAPTION>
       LIABILITIES AND SHAREHOLDERS' EQUITY                                  1998      1997
<S>                                                                       <C>       <C>
Deposits                                                                 $ 94,988  $ 81,794
Advances from the Federal Home Loan Bank                                   12,674    12,000
Loan of Employee Stock Ownership Plan                                          30        60
Advances by borrowers for taxes and insurance                                 300       260
Accounts payable on mortgage loans serviced for others                        492       368
Accrued interest payable                                                       38        28
Other liabilities                                                             175       138
Accrued federal income taxes                                                    -         9
Deferred federal income taxes                                                 430       263
                                                                         --------  --------

       Total liabilities                                                  109,127    94,920

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;
  208,500 shares issued and outstanding at June 30, 1998 and 1997             209       209
 Additional paid-in capital                                                 1,680     1,680
 Retained earnings - substantially restricted                               6,841     5,987
 Less required contributions for shares acquired by
  Employee Stock Ownership Plan (ESOP)                                        (30)      (60)
 Unrealized losses on securities designated as available for
  sale - net of related tax effects                                           (37)     (178)
                                                                         --------  --------

       Total shareholders' equity                                           8,663     7,638
                                                                         --------  --------

       Total liabilities and shareholders' equity                        $117,790  $102,558
                                                                         ========  ========
</TABLE>












The accompanying notes are an integral part of these statements.


                                       63
<PAGE>   65



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF EARNINGS

                              Year ended June 30,
                     (In thousands, except per share data)



<TABLE>
<CAPTION>
                                                                 1998    1997     1996
<S>                                                            <C>     <C>      <C>
Interest income
 Loans                                                         $6,301  $5,232   $4,421
 Mortgage-backed securities                                     1,833   1,757    1,767
 Investment securities                                            104      91       57
 Interest-bearing deposits and other                              224     112      165
                                                               ------  ------   ------
      Total interest income                                     8,462   7,192    6,410

Interest expense
 Deposits                                                       4,639   3,792    3,436
 Borrowings                                                       757     669      627
                                                               ------  ------   ------
      Total interest expense                                    5,396   4,461    4,063
                                                               ------  ------   ------

      Net interest income                                       3,066   2,731    2,347

Provision for losses on loans                                      24      18       11
                                                               ------  ------   ------
      Net interest income after provision for losses on loans   3,042   2,713    2,336

Other income (loss)
 Loan servicing fees                                               55     100      113
 Gain on sale of mortgage loans                                   365      64      161
 Gain on sale of mortgage-backed securities                        28      14      149
 Gain on sale of investment securities                              3       -        -
 Loss on sale of real estate acquired through foreclosure           -      (1)       -
 Service fees, charges and other operating                         49      35       47
                                                               ------  ------   ------
      Total other income                                          500     212      470

General, administrative and other expense
 Employee compensation and benefits                             1,131   1,002      966
 Occupancy and equipment                                          375     353      367
 Data processing                                                   98      99       93
 Federal deposit insurance premiums                                53     467      144
 Franchise taxes                                                   97      93       84
 Advertising                                                       95      89       86
 Amortization of goodwill                                          34      38       38
 Other operating                                                  225     218      223
                                                               ------  ------   ------
      Total general, administrative and other expense           2,108   2,359    2,001
                                                               ------  ------   ------

      Earnings before federal income taxes                      1,434     566      805

Federal income taxes
 Current                                                          401     163      210
 Deferred                                                          95      38       74
                                                               ------  ------   ------
      Total federal income taxes                                  496     201      284
                                                               ------  ------   ------

      NET EARNINGS                                             $  938  $  365   $  521
                                                               ======  ======   ======

      EARNINGS PER SHARE
       Basic                                                   $ 4.50  $ 1.75   $ 2.51
                                                               ======  ======   ======

       Diluted                                                 $ 4.28  $ 1.69   $ 2.44
                                                               ======  ======   ======
</TABLE>


The accompanying notes are an integral part of these statements.


                                       64
<PAGE>   66



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                For the years ended June 30, 1998, 1997 and 1996
                     (In thousands, except per share data)
                                                                      
<TABLE>
<CAPTION>
                                                                                                  UNREALIZED
                                                                                                       GAINS
                                                                                     REQUIRED    (LOSSES) ON
                                                                                CONTRIBUTIONS     SECURITIES
                                                          ADDITIONAL               FOR SHARES  DESIGNATED AS
                                                  COMMON     PAID-IN  RETAINED       ACQUIRED      AVAILABLE
                                                  SHARES     CAPITAL  EARNINGS        BY ESOP       FOR SALE   TOTAL

<S>                                               <C>     <C>         <C>       <C>            <C>            <C>
Balance at July 1, 1995                             $208      $1,669    $5,101          $(118)          $ 23  $6,883

Stock options exercised                                -           6         -              -              -       6
Principal repayments on loan of ESOP                   -           -         -             29              -      29
Net earnings for the year ended June 30, 1996          -           -       521              -              -     521
Unrealized losses on securities designated as
 available for sale - net of related tax effects       -           -         -              -           (282)   (282)
                                                  ------  ----------  --------  -------------  -------------  ------

Balance at June 30, 1996                             208       1,675     5,622            (89)          (259)  7,157

Stock options exercised                                1           5         -              -              -       6
Principal repayments on loan of ESOP                   -           -         -             29              -      29
Net earnings for the year ended June 30, 1997          -           -       365              -              -     365
Unrealized gains on securities designated as
 available for sale - net of related tax effects       -           -         -              -             81      81
                                                  ------  ----------  --------  -------------  -------------  ------

Balance at June 30, 1997                             209       1,680     5,987            (60)          (178)  7,638

Principal repayments on loan of ESOP                   -           -         -             30              -      30
Net earnings for the year ended June 30, 1998          -           -       938              -              -     938
Cash dividends of $.40 per share                       -           -       (84)             -              -     (84)
Unrealized gains on securities designated as
 available for sale - net of related tax effects       -           -         -              -            141     141
                                                  ------  ----------  --------  -------------  -------------  ------

Balance at June 30, 1998                            $209      $1,680    $6,841           $(30)          $(37) $8,663
                                                  ======  ==========  ========  =============  =============  ======
</TABLE>




The accompanying notes are an integral part of these statements.


                                       65
<PAGE>   67



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                              Year ended June 30,
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                  1998     1997     1996
<S>                                                           <C>       <C>      <C>
Cash flows provided by (used in) operating activities:
 Net earnings for the year                                     $   938  $   365  $   521
 Adjustments to reconcile net earnings to net
 cash provided by (used in) operating activities:
  Amortization of premiums and accretion of discounts
   on mortgage-backed securities, net                                7       11       28
  Gain on sale of investment securities                             (3)       -        -
  Gain on sale of mortgage-backed securities                       (28)     (14)    (149)
  Provision for losses on loans                                     24       18       11
  Gain on sale of mortgage loans                                  (136)     (44)     (73)
  Accretion of discounts on loans                                   (2)       -        -
  Amortization of deferred loan origination fees                   (39)     (42)     (37)
  Loans originated for sale in the secondary market            (18,897)  (1,724)  (9,374)
  Proceeds from sale of loans in the secondary market           18,918    1,949    8,201
  Depreciation and amortization                                    159      153      152
  Loss on sale of real estate acquired through foreclosure           -        1        -
  Federal Home Loan Bank stock dividends                           (55)     (50)     (46)
  Amortization of goodwill                                          34       38       38
  Increases (decreases) in cash due to changes in:
   Accrued interest receivable on loans                           (116)     (19)     (91)
   Accrued interest receivable on mortgage-backed securities       (23)       9      (12)
   Accrued interest receivable on investments and
    interest-bearing deposits                                        6      (11)      (6)
   Prepaid expenses and other assets                              (199)      18       27
   Accrued interest payable                                         10       (8)       -
   Other liabilities                                                37       (1)      27
   Federal income taxes
    Current                                                        (24)      28      (15)
    Deferred                                                        95       38       74
                                                              --------  -------  -------
      Net cash provided by (used in) operating activities          706      715     (724)
                                                              --------  -------  -------
</TABLE>


                                       66
<PAGE>   68



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                              Year ended June 30,
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                                     1998      1997      1996
<S>                                                                                                 <C>       <C>      <C>
Cash flows provided by (used in) investing activities:
 Proceeds from sale of investment securities designated as
  available for sale                                                                              $   496  $      -  $      -
 Proceeds from maturities of investment securities held to maturity                                   250       410         -
 Proceeds from called investment securities held to maturity                                        1,850       400       400
 Purchase of investment securities designated as available for sale                                (1,299)        -         -
 Purchase of investment securities held to maturity                                                (1,510)     (909)   (1,200)
 Proceeds from sale of mortgage-backed securities designated
  as available for sale                                                                             8,884     1,148    10,803
 Proceeds from called mortgage-backed securities held to maturity                                     500         -         -
 Purchase of mortgage-backed securities designated as available
  for sale                                                                                        (12,674)   (1,672)  (14,045)
 Purchase of mortgage-backed securities held to maturity                                           (4,926)     (349)   (2,430)
 Principal repayments on mortgage-backed securities designated as:
  Available for sale                                                                                  959     1,081     1,468
  Held to maturity                                                                                  1,225       815     1,246
 Loan disbursements                                                                               (28,908)  (26,835)  (20,069)
 Purchase of loans                                                                                   (671)     (258)      (49)
 Loan principal repayments                                                                         24,170    15,189    12,102
 Purchase of office premises and equipment                                                            (74)      (80)      (39)
 (Increase) decrease in certificates of deposit in other financial
  institutions - net                                                                                   (3)     (368)       100
                                                                                                  -------  --------  --------
       Net cash used in investing activities                                                      (11,731)  (11,428)  (11,713)

Cash flows provided by (used in) financing activities:
 Issuance of and credits to deposit accounts                                                       88,782    83,717    72,257
 Withdrawals from deposit accounts                                                                (75,588)  (77,541)  (56,423)
 Proceeds from Federal Home Loan Bank advances                                                     10,000     3,776     9,706
 Repayments of Federal Home Loan Bank advances                                                     (9,326)     (200)   (9,600)
 Repayments of obligations for securities sold under
  agreements to repurchase                                                                              -         -    (3,504)
 Advances by borrowers for taxes and insurance                                                         40        31        89
 Accounts payable on mortgage loans serviced for others                                               124        28         4
 Proceeds from the exercise of stock options                                                            -         6         6
 Dividends paid on common shares                                                                      (84)        -         -
                                                                                                  -------  --------  --------
       Net cash provided by financing activities                                                   13,948     9,817    12,535
                                                                                                  -------  --------  --------

Net increase (decrease) in cash and cash equivalents                                                2,923     (896)        98

Cash and cash equivalents at beginning of year                                                      2,715     3,611     3,513
                                                                                                  -------  --------  --------

Cash and cash equivalents at end of year                                                          $ 5,638  $  2,715  $  3,611
                                                                                                  =======  ========  ========
</TABLE>


                                       67
<PAGE>   69



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                              Year ended June 30,
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                  1998    1997    1996
<S>                                                             <C>     <C>     <C>
Supplemental disclosure of cash flow information:
 Cash paid during the year for:
  Federal income taxes                                          $  425  $  135  $  225
                                                                ======  ======  ======

  Interest on deposits and borrowings                           $5,386  $4,469  $4,063
                                                                ======  ======  ======

Supplemental disclosure of noncash investing activities:
 Foreclosed mortgage loans transferred to real estate acquired
  through foreclosure                                           $    -  $  108  $    -
                                                                ======  ======  ======

 Loans disbursed to finance the sale of real estate acquired
  through foreclosure                                           $    -  $  107  $    -
                                                                ======  ======  ======

 Transfers of loans from held for sale to held for investment
  classification                                                $    -  $1,755  $    -
                                                                ======  ======  ======

 Transfers of loans held for investment to held for sale
  classification                                                $  766  $   59  $  210
                                                                ======  ======  ======

 Recognition of mortgage servicing rights in accordance
  with Statement of Financial Accounting Standards No. 125      $  229  $   20  $   88
                                                                ======  ======  ======

 Loan charge-offs                                               $    4  $    5  $    -
                                                                ======  ======  ======

 Transfers of mortgage-backed securities from held to maturity
  to available for sale classification                          $    -  $    -  $2,371
                                                                ======  ======  ======

 Unrealized gains (losses) on securities designated
  as available for sale - net of related tax effects            $  141  $   81  $ (282)
                                                                ======  ======  ======
</TABLE>
















The accompanying notes are an integral part of these statements.


                                       68
<PAGE>   70



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES

  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
  expense 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.

  The financial information presented herein has been prepared in accordance
  with generally accepted accounting principles ("GAAP") and general accounting
  practices within the financial services industry.  In preparing consolidated
  financial statements in accordance with GAAP, management is required to make
  estimates and assumptions that affect the reported amounts of assets and
  liabilities and the disclosure of contingent assets and liabilities at the
  date of the consolidated financial statements and revenues and expenses
  during the reporting period.  Actual results could differ from such
  estimates.

  The following is a summary of the Corporation's significant accounting
  policies which have been consistently applied in the preparation of the
  accompanying consolidated financial statements.

  1.  Principles of Consolidation

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

  The consolidated financial statements include the accounts of the Corporation
  and the Company.  Condensed financial statements of the Corporation as of
  June 30, 1998 and 1997 and for the years ended June 30, 1998, 1997 and 1996
  are presented in Note M.  Future references are made to either the
  Corporation or the Company as the context requires.  All significant
  intercompany balances and transactions have been eliminated in the
  accompanying consolidated financial statements.


                                       69
<PAGE>   71



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  2.  Investment Securities and Mortgage-Backed Securities

  The Corporation accounts for investment securities and mortgage-backed
  securities in accordance with Statement of Financial Accounting Standards
  ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
  Securities."  SFAS No. 115 requires the classification of certain debt and
  equity securities as held to maturity, trading or available for sale.  SFAS
  No. 115 also addresses the accounting and reporting for investments in equity
  securities that have readily determinable fair values (market value) and for
  all investments in debt securities.  Such investments are classified in three
  categories and accounted for as follows:  (i) debt securities that the
  Corporation has the positive intent and ability to hold to maturity are
  classified as held to maturity and reported at amortized cost; (ii) debt and
  equity securities that are held for current resale are classified as trading
  securities and reported at fair value, with unrealized gains and losses
  included in earnings, and (iii) debt and equity securities not classified as
  either securities held to maturity or trading securities are classified as
  securities available for sale and reported at fair value, with unrealized
  gains and losses excluded from earnings and reported as a separate component
  of shareholders' equity.  Under SFAS No. 115, securities that could be sold
  in the future because of changes in interest rates or other factors are not
  classified as held to maturity.  As required by SFAS No. 115, management
  determines the appropriate classification of investment securities and
  mortgage-backed securities at the time of purchase.

  The Corporation's investment securities are classified as either held to
  maturity or available for sale.  Investment securities which are classified
  as held to maturity are recorded at cost, with any premium or discount
  amortized or accreted to maturity of the security.  It is management's
  positive intent to hold such securities until maturity, and the Corporation
  has the ability to hold the securities until maturity.  Investment securities
  which are classified as available for sale are stated at fair value, with
  unrealized gains and losses excluded from earnings and reported net of tax as
  a separate component of shareholders' equity until realized.  This
  classification includes securities that may be sold in response to changes in
  interest rates, the securities prepayment risk, liquidity needs, the
  availability of and the yield on alternative investments and funding sources.
  The Corporation's investment securities are comprised of U.S. Government
  agency obligations, municipal obligations and corporate equity securities at
  June 30, 1998, and solely of U.S. Government agency obligations at June 30,
  1997.  Amortization and accretion of premiums and discounts on investment
  securities are recorded using the interest method.  Gains and losses on the
  sale of securities are recognized using the specific identification method.


                                       70
<PAGE>   72



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  2.  Investment Securities and Mortgage-Backed Securities (continued)

  The Corporation classifies its mortgage-backed securities into two
  classifications depending on certain underlying characteristics of the
  securities. Mortgage-backed securities classified as held to maturity are
  stated at the unpaid principal amount outstanding (cost), adjusted for
  unamortized premiums and unaccreted discounts.  Premiums and discounts are
  amortized and accreted into operations using the interest method over the
  estimated average life of the underlying loans collateralizing the
  securities.  The mortgage-backed securities classified as held to maturity
  are carried at cost, as it is management's intent, and the Corporation has
  the ability to hold the securities until maturity.  In considering the
  Corporation's ability to hold securities, collateralized mortgage obligations
  are reviewed for possible regulatory mandated divestiture under existing
  banking regulations.  Mortgage-backed securities classified as available for
  sale are stated at fair value, with unrealized gains and losses excluded from
  earnings and reported net of tax as a separate component of shareholders'
  equity until realized.  Mortgage-backed securities classified as available
  for sale are those that management intends to sell or that would be sold for
  liquidity purposes, changes in interest rates, prepayment risk and
  asset/liability management reasons, even if there is not a present intention
  of such a sale.  At June 30, 1998 and 1997, the Corporation's shareholders'
  equity reflected unrealized losses on securities designated as available for
  sale, net of applicable tax effects, of $37,000 and $178,000, respectively.
  Realized gains and losses on the sale of mortgage-backed securities are
  recognized using the specific identification method.

  Trading account securities are held for resale in anticipation of short-term
  market movements and are carried at fair value, with unrealized holding gains
  and losses reflected in earnings.  There were no investment securities and
  mortgage-backed securities designated as trading securities at June 30, 1998
  and 1997.

  3.  Mortgage Banking Activities

  The Company conducts mortgage banking operations via the sale of certain
  loans or participating interests in loans in order to generate servicing
  income and to provide additional funds for lending.  Loans held for sale are
  identified at the point of origination and are carried at the lower of cost
  or market, determined in the aggregate.  Market is determined on the basis of
  rates quoted in the secondary mortgage market.  Net unrealized losses are
  recognized through a valuation allowance by charges against income.  In
  computing cost, deferred loan origination costs (fees) are added to (deducted
  from) the principal balances of the related loans.  Gains and losses on the
  sale of loans are based on the carrying amount of the loans sold under the
  specific identification method.  At June 30, 1998, loans held for sale were
  carried at cost.  At June 30, 1997, there were no loans identified as held
  for sale.

  During fiscal 1997, the Company transferred approximately $1.8 million in
  fixed-rate loans from a held for sale to a held for investment classification
  to better serve its objectives of sustaining loan portfolio growth and
  improving its overall yield on loans.  These loans were valued at the lower
  of cost or market, determined in the aggregate, at the date of transfer.


                                       71
<PAGE>   73



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  3.  Mortgage Banking Activities (continued)

  The Company retains the servicing on loans sold and agrees to remit to the
  investor loan principal and interest at agreed-upon rates.  These rates can
  differ from the loan's contractual interest rate resulting in a "yield
  differential".  In addition to previously deferred loan origination fees and
  cash gains, gains on sale of loans can represent the present value of the
  future yield differential less a normal servicing fee, capitalized over the
  estimated life of the loans sold.  Normal servicing fees are determined by
  reference to the stipulated minimum servicing fee set forth by the government
  agencies to which the loans are sold.  Such servicing fees are representative
  of the Company's normal servicing costs.  The resulting capitalized excess
  servicing fee is amortized to operations over the life of the loans using the
  interest method.  If prepayments are higher than expected, an immediate
  charge to operations is made.  If prepayments are lower, then the related
  adjustments are made prospectively.

  The Company accounts for mortgage servicing rights in accordance with SFAS
  No. 125, "Accounting for Transfers and Servicing of Financial Assets and
  Extinguishments of Liabilities," which requires that the Company recognize as
  separate assets, rights to service mortgage loans for others, regardless of
  how those servicing rights are acquired.  An institution that acquires
  mortgage servicing rights through either the purchase or origination of
  mortgage loans and sells those loans with servicing rights retained allocates
  some of the cost of the loans to the mortgage servicing rights.  SFAS No. 125
  eliminates the accounting distinction between servicing rights acquired
  through purchase transactions and those acquired through loan originations.
  Pursuant to the provisions of SFAS No. 125, the relative fair value of
  mortgage servicing rights (normal servicing fee income less applicable
  servicing costs) is allocated to the cost of loans sold for purposes of
  determining gain or loss.  SFAS No. 125 also requires that an institution
  allocate the cost of purchasing or originating the mortgage loans between the
  mortgage servicing rights and the loans when mortgage loans are securitized,
  if it is practicable to estimate the fair value of mortgage servicing rights.
  Additionally, SFAS No. 125 requires that capitalized mortgage servicing
  rights and capitalized excess servicing receivables be assessed for
  impairment.  Impairment is measured based on fair value.  In determining fair
  value, and the amount of impairment, if any, an institution would stratify
  mortgage servicing rights based on the predominant risk characteristics of
  the underlying loans serviced, such as loan type, loan size and note rate.

  During the years ended June 30, 1998, 1997 and 1996, approximately $229,000,
  $20,000 and $88,000 of mortgage servicing rights were capitalized in
  connection with SFAS No. 125.  Mortgage servicing rights are amortized in
  proportion to, and over the period of, estimated net servicing income over
  the estimated life of the servicing portfolio.  Amortization expense totaled
  $36,000, $8,000 and $5,000 for the years ended June 30, 1998, 1997 and 1996,
  respectively.  The estimated fair value of capitalized mortgage servicing
  rights was approximately $274,000 and $93,000 at June 30, 1998 and 1997.


                                       72
<PAGE>   74



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  3.  Mortgage Banking Activities (continued)

  The mortgage servicing rights recorded by the Company, calculated in
  accordance with the provisions of SFAS No. 125, were segregated into pools
  for valuation purposes, using as pooling criteria the loan term and coupon
  rate.  Once pooled, each grouping of loans was evaluated on a discounted
  earnings basis to determine the present value of future earnings that a
  purchaser could expect to realize from each portfolio.  Earnings were
  projected from a variety of sources including loan servicing fees, interest
  earned on float, net interest earned on escrows, miscellaneous income, and
  costs to service the loans.  The present value of future earnings is the
  "economic" value for the pool, i.e., the net present value to an acquirer of
  the acquired servicing.

  The carrying amount of the mortgage servicing rights is measured for
  impairment each quarter.  If the carrying value of an individual pool exceeds
  its fair value, a valuation allowance is established.  At June 30, 1998 and
  1997, there was a total valuation allowance established for impairment of
  $14,000 and $2,000, respectively.

  4.  Loans Receivable

  Loans held in portfolio are stated at the principal amount outstanding,
  adjusted for deferred loan origination fees and costs, the allowance for
  losses on loans and discounts arising from the reclassification of loans from
  held for sale to held for investment.  Discounts on loans are accreted to
  operations using the interest method over the average life of the underlying
  loans.

  Interest is accrued as earned unless the collectibility of the loan is in
  doubt.  Uncollectible interest on loans that are contractually past due is
  charged off, or an allowance is established based on management's periodic
  evaluation.  The allowance is established by a charge to interest income
  equal to all interest previously accrued, and income is subsequently
  recognized only to the extent that cash payments are received until, in
  management's judgment, the borrower's ability to make periodic interest and
  principal payments has returned to normal, in which case the loan is returned
  to accrual status.  If the ultimate collectibility of the loan is in doubt,
  in whole or in part, all payments received on nonaccrual loans are applied to
  reduce principal until such doubt is eliminated.


                                       73
<PAGE>   75



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  5.  Loan Origination and Commitment Fees

  The Company accounts for loan origination fees in accordance with SFAS No. 91
  "Accounting for Nonrefundable Fees and Costs Associated with Originating or
  Acquiring Loans and Initial Direct Costs of Leases."  Pursuant to the
  provisions of SFAS No. 91, origination fees received from loans, net of
  certain direct origination costs, are deferred and amortized to interest
  income using the interest method, giving effect to actual loan prepayments.
  Additionally, SFAS No. 91 generally limits the definition of loan origination
  costs to the direct costs attributable to originating a loan, i.e.,
  principally actual personnel costs.  Fees received for loan commitments that
  are expected to be drawn upon, based on the Company's experience with similar
  commitments, are deferred and amortized over the life of the related loan
  using the interest method.  Fees for other loan commitments are deferred and
  amortized over the loan commitment period on a straight-line basis.

  6.  Allowance for Losses on Loans

  It is the Company's policy to provide valuation allowances for estimated
  losses on loans based on past loss experience, changes in the composition of
  the loan portfolio, current trends in the level of delinquent and specific
  problem loans, adverse situations that may affect the borrower's ability to
  repay, the estimated value of any underlying collateral and current and
  anticipated economic conditions in its primary lending areas.  When the
  collection of a loan becomes doubtful, or otherwise troubled, the Company
  records a loan loss provision equal to the difference between the fair value
  of the property securing the loan and the loan's carrying value, although
  collection efforts continue and future recoveries may occur.  In providing
  valuation allowances, costs of holding real estate, including the cost of
  capital, are considered.  Major loans, including development projects, and
  major lending areas are reviewed periodically to determine potential problems
  at an early date.  The allowance for loan losses is increased by charges to
  earnings and decreased by charge-offs (net of recoveries).

  The Company accounts for impaired loans in accordance with SFAS No. 114,
  "Accounting by Creditors for Impairment of a Loan."  SFAS No. 114 amends SFAS
  Nos. 5 and 15 to clarify that a creditor should evaluate the collectibility
  of both contractual interest and contractual principal on all loans when
  assessing the need for loan loss reserves.  In October 1994, the Financial
  Accounting Standards Board ("FASB") issued SFAS No. 118, "Accounting by
  Creditors for Impairment of a Loan - Income Recognition and Disclosure,"
  which amends SFAS No. 114 to allow a creditor to use existing methods for
  recognizing interest income on impaired loans.  SFAS No. 114, as amended by
  SFAS No. 118 as to certain income recognition provisions and financial
  statement disclosure requirements, is applicable to all creditors and to all
  loans that are individually and specifically evaluated for impairment,
  uncollateralized as well as collateralized, except those loans that are
  accounted for at fair value or at the lower of cost or fair value.  SFAS No.
  114 requires that the expected loss of interest income on nonperforming loans
  be taken into account when calculating loan loss reserves and that specified
  impaired loans be measured based upon the present value of


                                       74
<PAGE>   76



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  6.  Allowance for Losses on Loans (continued)

  expected future cash flows discounted at the loan's effective interest rate
  or, as an alternative, at the loan's observable market price or fair value of
  the collateral if the loan is collateral dependent.  SFAS No. 114 does not
  apply to large groups of small balance, homogeneous loans that are
  collectively evaluated for impairment, leases or debt securities as defined
  under SFAS No. 115.  A loan is defined under SFAS No. 114 as impaired when,
  based on current information and events, it is probable that a creditor will
  be unable to collect all amounts due according to the contractual terms of
  the loan agreement.  In applying the provisions of SFAS No. 114, the Company
  considers its investment in one-to-four family and multi-family residential
  loans, home equity lines of credit loans and passbook loans to be homogeneous
  and therefore excluded from separate identification for evaluation of
  impairment.  With respect to the Company's investment in nonresidential
  loans, and its evaluation of any impairment thereon, such loans are
  collateral dependent and as a result are carried as a practical expedient at
  the lower of cost or fair value.  Collateral dependent loans which are more
  than ninety days delinquent are considered to constitute more than a minimum
  delay in repayment and are evaluated for impairment under SFAS No. 114 at
  that time.  SFAS No. 114 also requires an institution to account for a
  troubled debt restructuring involving a modification of terms at fair value
  as of the date of restructuring.

  The carrying values of impaired loans are periodically adjusted to reflect
  cash payments, revised estimates of future cash flows and increases in the
  present value of expected cash flows due to the passage of time.  Cash
  payments representing interest income are reported as such.  Other cash
  payments are reported as reductions in carrying value, while increases or
  decreases due to changes in estimates of future payments and due to the
  passage of time are reported as provision for loan losses expense.

  For impairment recognized in accordance with SFAS No. 114, as amended, the
  entire change in present value of expected cash flows is reported as
  provision for loan losses expense in the same manner in which impairment
  initially was recognized or as a reduction in the amount of bad debt expense
  that otherwise would be reported.  Interest on impaired loans is reported on
  the cash basis.  Impaired loans are loans that are considered to be
  permanently impaired in relation to principal or interest based on the
  original contract.  Impaired loans are charged off in the same manner as all
  loans subject to charge off.  At June 30, 1998 and 1997, the Company did not
  have any loans that would be defined under SFAS No. 114 as impaired.


                                       75
<PAGE>   77



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  7.  Office Premises and Equipment

  Office premises and equipment are carried at cost less accumulated
  depreciation and include expenditures which extend the useful lives of
  existing assets.  Maintenance, repairs and minor renewals are expensed as
  incurred.

  For financial reporting, depreciation and amortization are provided for in
  amounts sufficient to relate the cost of depreciable assets to operations,
  principally on the straight-line and accelerated methods over the useful
  lives of the assets, estimated to be thirty to forty years for buildings, ten
  to fifteen years for building improvements, fifteen to twenty years for land
  improvements  and five to ten years for furniture, fixtures and equipment.
  An accelerated depreciation method is used for tax reporting purposes.

  8.  Real Estate Acquired through Foreclosure

  Real estate properties acquired through loan foreclosure are initially
  recorded at fair value at the date of foreclosure establishing a new cost
  basis.  An increase in the loan valuation allowance is recorded for any write
  down in the loan's carrying value to fair value at the date of foreclosure.
  After foreclosure, valuations are periodically performed by management and
  the real estate acquired through foreclosure is carried at the lower of cost
  or fair value.  Real estate loss provisions are recorded if the properties'
  fair value subsequently declines below the value determined at the recording
  date.  In determining the lower of cost or fair value after foreclosure,
  costs relating to development and improvement of property are capitalized.
  Costs relating to holding real estate acquired through foreclosure, net of
  rental income, are charged against earnings as incurred.  The specific
  identification method is used to determine gain or loss on the sale of real
  estate acquired through foreclosure.  There was no real estate acquired
  through foreclosure at June 30, 1998 and 1997.

  9.  Amortization of Goodwill

  Goodwill arising from an acquisition is being amortized to operations using
  the straight-line method over a fifteen year period.

  At June 30, 1998, goodwill consisted of the following:


<TABLE>
<CAPTION>
                               ORIGINAL    UNAMORTIZED
                                BALANCE      BALANCE
  <S>                          <C>         <C>
                                    (In thousands)

  Goodwill                        $504        $333
                                  ====        ==== 
</TABLE>


                                       76
<PAGE>   78



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  9.  Amortization of Goodwill (continued)

  The approximate scheduled amortization with respect to goodwill is as
  follows:

                                                                         

<TABLE>
<CAPTION>
                                                        FUTURE
                  FISCAL YEAR ENDING JUNE 30,     AMORTIZATION
                                                (In thousands)
                  <S>                           <C>
                     1999                                 $ 34
                     2000                                   34
                     2001                                   34
                     2002                                   34
                     2003                                   34
                     2004 and years thereafter             163
                                                          ----
                                                          $333
                                                          ====
</TABLE>



  Management periodically evaluates the carrying value of goodwill in relation
  to the continuing earnings capacity of the acquired assets and assumed
  liabilities.

  In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
  of Long-Lived Assets and Long-Lived Assets to be Disposed Of."  SFAS No. 121
  provides guidance on when to recognize and how to measure impairment losses
  of long-lived assets and certain identifiable intangibles and how to value
  long-lived assets to be disposed of.  The Corporation adopted SFAS No. 121
  effective July 1, 1996, as required, without material effect on consolidated
  financial condition or results of operations.

  10.  Federal Income Taxes

  The Corporation accounts for federal income taxes in accordance with the
  provisions of SFAS No. 109, "Accounting for Income Taxes."  SFAS No. 109
  established financial accounting and reporting standards for the effects of
  income taxes that result from the Corporation's activities within the current
  and previous years.  Pursuant to the provisions of SFAS No. 109, a deferred
  tax liability or deferred tax asset is computed by applying the current
  statutory tax rates to net taxable or deductible temporary differences
  between the tax basis of an asset or liability and its reported amount in the
  consolidated financial statements that will result in taxable or deductible
  amounts in future periods.  Deferred tax assets are recorded only to the
  extent that the amount of net deductible temporary differences or
  carryforward attributes may be utilized against current year earnings,
  carried back against prior years' earnings, offset


                                       77
<PAGE>   79



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  10.  Federal Income Taxes (continued)

  against taxable temporary differences reversing in future periods, or
  utilized to the extent of management's estimates of taxes payable on future
  taxable income.  A valuation allowance is provided for deferred tax assets to
  the extent that the value of net deductible temporary differences and
  carryforward attributes exceeds management's estimates of taxes payable on
  future taxable income.  Deferred tax liabilities are provided on the total
  amount of net temporary differences taxable in the future.

  The Corporation's principal temporary differences between pretax financial
  income and taxable income result primarily from the past practice of
  preparing the federal income tax return on the cash basis of accounting,
  while the consolidated financial statements are prepared on the accrual basis
  of accounting, and from different methods of accounting for deferred loan
  origination fees and costs, Federal Home Loan Bank stock dividends, book and
  tax bad debt deductions, the general loan loss allowance, capitalized
  mortgage servicing rights, deferred compensation and gains on the sale of
  mortgage loans utilizing the net yield method.  Additionally, a temporary
  difference is also recognized for depreciation expense utilizing accelerated
  methods for federal income tax purposes.

  The Corporation and the Company file a consolidated federal income tax
  return.  There is a tax allocation agreement in effect between the
  Corporation and the Company.

  11.  Employee Benefits and Retirement Plan

  Coincident with conversion to the stock form of organization, Towne Financial
  established an Employee Stock Ownership Plan ("ESOP") which provides
  retirement benefits for substantially all employees who have completed six
  months of service and have attained the age of 21.  The Corporation
  recognized expense totaling $50,000, $28,000 and $32,000 related to the ESOP
  for the years ended June 30, 1998, 1997 and 1996, respectively.

  The Company provides incentive compensation through a discretionary bonus
  plan to substantially all employees.  Bonus compensation is determined
  annually solely at the discretion of the Board of Directors.  The provision
  for bonus compensation under this plan totaled approximately $167,000,
  $109,000 and $103,000 for the years ended June 30, 1998, 1997 and 1996,
  respectively.


                                       78
<PAGE>   80



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  11.  Employee Benefits and Retirement Plan (continued)

  In addition to providing employees with access to a discretionary bonus plan,
  the Company provides a medical reimbursement plan to all outside directors.
  The Company's obligation under the medical reimbursement plan is for the
  payment or reimbursement of qualifying medical care expenses incurred in any
  plan year by a director up to a maximum amount of $4,000 each per year.
  Qualifying medical care expenses are defined under the plan as those expenses
  not covered by the director's primary health plan.  Expense under the medical
  reimbursement plan totaled approximately $4,000, $5,000 and $6,000 for the
  years ended June 30, 1998, 1997 and 1996, respectively.

  12.  Stock Option and Incentive Plans

  The Corporation has a Stock Option and Incentive Plan (the "Plan"), which was
  adopted and approved in fiscal 1993, that provides for the issuance of 20,000
  shares of authorized, but unissued shares of common stock to management and
  the Board, at an option price of not less than the fair market value of such
  shares at the date of grant of each option.  The Board of Directors granted
  all of the available options under the Plan within four months upon
  completion of the Company's conversion to the stock form of organization at
  an exercise price of $11.50 per share.  Each option granted under the Plan is
  exercisable within a ten year period according to a prescribed schedule.  No
  option is exercisable after the expiration of ten years from the date it is
  granted.  During fiscal 1994, options for 2,500 shares were surrendered,
  while options for 2,500 shares were reissued at an exercise price of $12.00
  per share.  Options for 500 shares were exercised in each of the three years
  ended June 30, 1997, 1996 and 1995.  During fiscal 1998, there were no
  options exercised, leaving 18,500 unexercised shares outstanding under the
  Plan at June 30, 1998.

  On August 20, 1997, the Board of Directors of the Corporation approved and
  adopted the Towne Financial Corporation 1997 Stock Option Plan (the "1997
  Plan") which was approved by a majority of the shareholders of the
  Corporation.  The objective of the 1997 Plan was to enable the Corporation to
  compete successfully in attracting, retaining and providing incentives to the
  directors, officers and key employees of the Corporation and its subsidiary,
  thereby encouraging them to acquire a proprietary and vested interest in the
  growth and performance of the Corporation, and, in general, to generate an
  increased incentive to contribute to the Corporation's future success and
  prosperity, thus enhancing the value of the Corporation for the benefit of
  the shareholders.  Pursuant to the 1997 Plan, a maximum of 20,000 shares of
  common stock was reserved for issuance by the Corporation upon the granting
  of options to certain directors, officers and key employees of the
  Corporation or its subsidiary from time to time under the 1997 Plan.  Any
  shares of common stock issued under the 1997 Plan will be authorized but
  unissued shares or issued shares which have been reacquired by the
  Corporation.  On January 28, 1998, all 20,000 shares of authorized, but


                                       79
<PAGE>   81



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  12.  Stock Option and Incentive Plans (continued)

  unissued shares of common stock under the 1997 Plan were granted to
  directors, officers and certain key employees at an exercise price as
  determined by the Board of Directors of $27.50, representing the fair market
  value of the common shares of the Corporation at the date of grant.  The
  options granted are exercisable (i) as to not more than 20% of the total
  number of shares which may be purchased under the options, during the first
  year after the grant of the options; (ii) as to not more than 40% during the
  first two years of the grant of the options; (iii) as to not more than 60%
  during the first three years after the grant of the options; (iv) as to not
  more than 80% during the first four years after the grant of the options; and
  (v) the total number of shares not previously exercised during the remaining
  term of the options.  The right of cumulation does exist in that, to the
  extent not previously exercised or terminated, option installments can
  accumulate and be exercisable, in whole or in part, in any subsequent period,
  but no installment of the options will be exercisable later than ten years
  from the date the options are granted.  At June 30, 1998, none of the options
  granted under the 1997 Plan were eligible to be exercised by the
  participants.

  13.  Earnings Per Share and Dividends 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.  SFAS No.
  128, which superseded Accounting Principles Board ("APB") Opinion No. 15, was
  effective for interim and annual periods ending after December 15, 1997, and
  prior period earnings per share disclosures presented for comparative
  purposes (including those in interim financial statements, summaries of
  earnings and selected financial data) were required to be restated.
  Effective during the year ended June 30, 1998, the Corporation began
  presenting earnings per share pursuant to the provisions of SFAS No. 128.  In
  accordance with the Statement, the fiscal 1997 and 1996 earnings per share
  presentations have been revised to conform to SFAS No. 128.

  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 years
  presented.  Basic earnings per share for each of the three years ended June
  30, 1998, 1997 and 1996 has been computed based on 208,500, 208,232 and
  207,538 weighted-average shares of common stock outstanding, respectively.
  Unlike the primary earnings per share calculation of 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.


                                       80
<PAGE>   82



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  13.  Earnings Per Share and Dividends Per Share (continued)

  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 219,218, 216,189 and 213,738 for each of
  the three years ended June 30, 1998, 1997 and 1996, respectively.

  On August 20, 1997, the Board of Directors of the Corporation declared a
  first ever quarterly cash dividend of $.10 per share. During fiscal 1998,
  there were a total of four quarterly cash dividends of $.10 per share
  declared and paid on 208,500 outstanding common shares totaling $84,000.

  14.  Cash and Cash Equivalents

  For purposes of reporting cash flows, cash and cash equivalents includes cash
  and due from banks, federal funds sold and interest-bearing deposits due from
  other financial institutions with original maturities of less than ninety
  days.

  15.  Fair Value of Financial Instruments

  SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
  requires disclosure of the fair value of financial instruments, both assets
  and liabilities whether or not recognized in the consolidated statement of
  financial condition, for which it is practicable to estimate that value.  For
  financial instruments where quoted market prices are not available, fair
  values are based on estimates using present value and other valuation
  methods.

  The methods used are greatly affected by the assumptions applied, including
  the discount rate and estimates of future cash flows.  Because of the
  judgment and subjective considerations required in determining appropriate
  and reasonable assumptions, the derived fair value estimates cannot be
  substantiated by comparison to independent markets.  Further, the amounts
  which could be realized in immediate settlement of the instrument could vary
  significantly from the fair value estimate depending upon bulk versus
  individual settlements or sales as well as other factors.  SFAS No. 107
  excludes certain financial instruments and all nonfinancial instruments from
  its disclosure requirements.  Accordingly, the aggregate net fair value
  amounts presented do not represent the underlying value of the Corporation.


                                       81
<PAGE>   83



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  15.  Fair Value of Financial Instruments (continued)

  The following methods and assumptions were used by the Corporation in
  estimating its fair value disclosures for financial instruments at June 30,
  1998 and 1997:

          Cash and Cash Equivalents:  The carrying amounts presented in the
          consolidated statements of financial condition for cash and cash
          equivalents are deemed to approximate fair value due to the frequency
          of repricing of these items.

          Certificates of Deposit in Other Financial Institutions:  The
          carrying amounts presented in the consolidated statements of
          financial condition for certificates of deposit in other financial
          institutions are deemed to approximate fair value.

          Investment Securities Designated as Available for Sale, Investment
          Securities Held to Maturity, Mortgage-Backed Securities Designated as
          Available for Sale and Mortgage-Backed Securities Held to Maturity:
          For investments and mortgage-backed securities, fair value is deemed
          to equal the quoted market price or dealer quote.

          Loans Held for Sale:  For loans designated as held for sale, fair
          value is determined on the basis of rates quoted in the secondary
          mortgage market.

          Loans Receivable:  The loan portfolio has been segregated into
          categories with similar characteristics, such as one-to-four family
          residential, home equity lines of credit, multi-family residential,
          nonresidential real estate and land.  These loan categories were
          further delineated into fixed-rate and adjustable-rate loans.  The
          fair values for the resultant loan categories were computed via
          discounted cash flow analysis, using current interest rates offered
          for loans with similar terms to borrowers of similar credit quality.
          For loans on deposit accounts and consumer and other loans, fair
          values were deemed to equal the historic carrying values.  The
          historical carrying amount of accrued interest on loans is deemed to
          approximate fair value.

          Federal Home Loan Bank Stock:  The carrying amount presented in the
          consolidated statements of financial condition is deemed to
          approximate fair value since a quoted market price is not available
          on Federal Home Loan Bank stock.


                                       82
<PAGE>   84



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  15.  Fair Value of Financial Instruments (continued)

          Deposits:  The fair value of NOW accounts, passbook and club accounts
          and money market deposits is deemed to approximate the amount payable
          on demand at June 30, 1998 and 1997.  Fair values for fixed-rate
          certificates of deposit have been estimated using a discounted cash
          flow calculation using the interest rates currently offered for
          deposits of similar remaining maturities.

          Advances from the Federal Home Loan Bank:  The fair value of Federal
          Home Loan Bank advances has been estimated using discounted cash flow
          analysis, based on the interest rates currently offered for advances
          of similar remaining maturities or, when available, quoted market
          prices.

          Loan of Employee Stock Ownership Plan (ESOP):  The fair value of the
          ESOP loan is deemed to approximate the historical carrying value due
          to the daily repricing of the loan's interest rate.

          Escrow Deposits and Amounts Due on Loans Serviced for Others:  The
          carrying value of advances by borrowers and amounts due on loans
          serviced for others is deemed to approximate fair value.

          Commitments to Extend Credit:  For fixed-rate and adjustable-rate
          loan commitments, the fair value estimate considers the difference
          between current levels of interest rates and committed rates.


                                       83
<PAGE>   85



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

  15.  Fair Value of Financial Instruments (continued)

       Based on the foregoing methods and assumptions, the carrying value and
  fair value of the Corporation's financial instruments are as follows at June
  30:


<TABLE>
<CAPTION>
                                                                  1998                1997
                                                          CARRYING      FAIR  CARRYING      FAIR
                                                             VALUE     VALUE     VALUE     VALUE
                                                                    (In thousands)
<S>                                                       <C>       <C>       <C>       <C>
Financial assets:
 Cash and cash equivalents                                $  5,638  $  5,638  $  2,715  $  2,715
 Certificates of deposit in other financial institutions       469       469       466       466
 Investment securities designated as available
  for sale                                                     809       809         -         -
 Investment securities held to maturity                        809       812     1,399     1,399
 Mortgage-backed securities designated as available
  for sale                                                  18,354    18,354    15,269    15,269
 Mortgage-backed securities held to maturity                14,641    14,592    11,463    11,267
 Loans held for sale                                           882       888         -         -
 Loans receivable - net                                     71,476    73,723    66,817    68,625
 Federal Home Loan Bank stock                                  797       797       742       742
                                                          --------  --------  --------  --------

                                                          $113,875  $116,082  $ 98,871  $100,483
                                                          ========  ========  ========  ========

Financial liabilities:
 Deposits                                                 $ 94,988  $ 95,263  $ 81,794  $ 81,838
 Advances from the Federal Home Loan Bank                   12,674    12,550    12,000    11,840
 Loan of Employee Stock Ownership Plan                          30        30        60        60
 Advances by borrowers and amounts due on loans
  serviced for others                                          792       792       628       628
                                                          --------  --------  --------  --------

                                                          $108,484  $108,635  $ 94,482  $ 94,366
                                                          ========  ========  ========  ========

Off-balance sheet commitments:
 Commitments to extend credit (notional amount of
  $2,715 and $3,849 at June 30, 1998 and 1997)            $      -  $  2,757  $      -  $  3,884
                                                          ========  ========  ========  ========
</TABLE>


  16.  Reclassifications

  Certain prior year amounts have been reclassified to conform to the June 30,
  1998 consolidated financial statement presentation.


                                       84
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                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES

  The amortized cost and estimated fair values of investment securities at June
  30, including those designated as available for sale, are summarized as
  follows:

<TABLE>
<CAPTION>
                                                   1998                  1997
                                                      ESTIMATED             ESTIMATED
                                           AMORTIZED       FAIR  AMORTIZED       FAIR
                                                COST      VALUE       COST      VALUE
                                                      (In thousands)
<S>                                        <C>        <C>        <C>        <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE:
 U. S. Government agency obligations            $247       $249     $    -     $    -
 Municipal obligations                           559        559          -          -
 Corporate equity securities                       -          1          -          -
                                                ----       ----     ------     ------

                                                $806       $809     $    -     $    -
                                                ====       ====     ======     ======

INVESTMENT SECURITIES HELD TO MATURITY:
 U.S. Government agency obligations             $809       $812     $1,399     $1,399
                                                ====       ====     ======     ======
</TABLE>


  At June 30, 1998, the estimated fair value appreciation of the Corporation's
  investment securities designated as available for sale in excess of cost
  totaled $3,000, which was comprised solely of gross unrealized gains.  The
  estimated fair value appreciation of the Corporation's investment securities
  held to maturity in excess of cost totaled $3,000, which was comprised of
  gross unrealized gains of $5,000 and gross unrealized losses of $2,000.  At
  June 30, 1997, the Corporation's estimated fair value of investment
  securities held to maturity was equal to the cost carrying value, consisting
  of gross unrealized gains of $5,000 and gross unrealized losses of $5,000.

  The amortized cost and estimated fair values of U.S. Government agency
  obligations and municipal obligations, including those designated as
  available for sale, at June 30, 1998, by term to maturity, are shown below.
  Expected maturities on certain U.S. Government agency obligations and
  municipal bonds may differ from contractual maturities because the issuer may
  have the right to call the obligations without prepayment penalties.


<TABLE>
<CAPTION>
                                                             ESTIMATED
                                                    AMORTIZED     FAIR
                                                         COST    VALUE
                                                       (In thousands)
         <S>                                        <C>        <C>
         INVESTMENT SECURITIES AVAILABLE FOR SALE:
          Due after five years through ten years         $247     $249
          Due after ten years through twenty years        312      312
          Due after twenty years                          247      247
                                                         ----     ----

                                                         $806     $808
                                                         ====     ====

         INVESTMENT SECURITIES HELD TO MATURITY:
          Due within five years or less                  $210     $211
          Due after five years through ten years          199      203
          Due after ten years through twenty years        400      398
                                                         ----     ----

                                                         $809     $812
                                                         ====     ====
</TABLE>


                                       85
<PAGE>   87



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)

  Proceeds from the sale of investment securities designated as available for
  sale during the year ended June 30, 1998 totaled $496,000, resulting solely
  in gross realized gains of $3,000 on such sales.

  The amortized cost, gross unrealized gains, gross unrealized losses and
  estimated fair values of mortgage-backed securities at June 30, 1998 and 1997
  (including those designated as available for sale), are shown below.

<TABLE>
<CAPTION>
                                                                      1998
                                                                GROSS       GROSS  ESTIMATED
                                                AMORTIZED  UNREALIZED  UNREALIZED       FAIR
                                                     COST       GAINS      LOSSES      VALUE
                                                           (In thousands)
<S>                                             <C>        <C>         <C>         <C>
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
 Federal Home Loan Mortgage Corporation
  Participation certificates                      $ 1,649         $ 5       $(21)    $ 1,633
  Collateralized mortgage obligations               8,894          10        (22)      8,882
 Federal National Mortgage Association
  Participation certificates                        1,936           -        (14)      1,922
  Collateralized mortgage obligations               5,934           3        (20)      5,917
                                                  -------         ---       -----    -------

                                                  $18,413         $18       $(77)    $18,354
                                                  =======         ===       =====    =======

MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
 Federal Home Loan Mortgage Corporation
  Participation certificates                      $   932         $ -       $ (9)    $   923
  Collateralized mortgage obligations               5,633          31        (14)      5,650
 Federal National Mortgage Association
  Participation certificates                          706           3         (3)        706
  Collateralized mortgage obligations               5,987           1        (46)      5,942
 Small Business Administration
  Participation certificates                          867           -        (11)        856
 Residential Funding Corporation
  Collateralized mortgage obligations                 189           -           -        189
 Salomon Brothers, Inc.
  Collateralized mortgage obligations                  19           -           -         19
 Guardian Savings and Loan Association
  Collateralized mortgage obligations                 308           -         (1)        307
                                                  -------         ---       -----    -------

                                                  $14,641         $35       $(84)    $14,592
                                                  =======         ===       =====    =======
</TABLE>


                                       86
<PAGE>   88



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)

<TABLE>
<CAPTION>
                                                                       1997
                                                                GROSS       GROSS  ESTIMATED
                                                AMORTIZED  UNREALIZED  UNREALIZED       FAIR
                                                     COST       GAINS      LOSSES      VALUE
                                                           (In thousands)
<S>                                             <C>        <C>         <C>         <C>
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
 Federal Home Loan Mortgage Corporation
  Participation certificates                      $ 1,881         $11      $ (27)    $ 1,865
  Collateralized mortgage obligations               2,363           -        (24)      2,339
 Federal National Mortgage Association
  Participation certificates                          679           8         (7)        680
  Collateralized mortgage obligations               9,504          13       (245)      9,272
 Santa Barbara Savings and Loan
  REMIC participation certificates                    737           -         (6)        731
 The Prudential Home Mortgage Securities
  Company, Inc.
   Collateralized mortgage obligations                374           8           -        382
                                                  -------         ---      ------    -------

                                                  $15,538         $40      $(309)    $15,269
                                                  =======         ===      ======    =======

MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
 Federal Home Loan Mortgage Corporation
  Participation certificates                      $ 1,106         $ 9      $  (4)    $ 1,111
  Collateralized mortgage obligations               3,987           -        (57)      3,930
 Federal National Mortgage Association
  Participation certificates                          854           5         (6)        853
  Collateralized mortgage obligations               4,173          14       (141)      4,046
 Government National Mortgage Association
  Collateralized mortgage obligations                  80           1           -         81
 Small Business Administration
  Participation certificates                        1,046           1         (9)      1,038
 Residential Funding Corporation
  Collateralized mortgage obligations                 189           -         (9)        180
 Salomon Brothers, Inc.
  Collateralized mortgage obligations                  28           -           -         28
                                                  -------         ---      ------    -------

                                                  $11,463         $30      $(226)    $11,267
                                                  =======         ===      ======    =======
</TABLE>


                                       87
<PAGE>   89



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)

  The carrying values of mortgage-backed securities at June 30, 1998, including
  those designated as available for sale, are shown below by contractual terms
  to maturity.  Expected maturities will differ from contractual maturities
  because borrowers may generally prepay obligations without prepayment
  penalties.

<TABLE>
<CAPTION>
                                                                  CARRYING
                                                                     VALUE
                                                             (In thousands)
             <S>                                                   <C>
             MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
              Due within one year                                  $   205
              Due after one year through three years                 1,600
              Due after three years through five years               1,385
              Due after five years through ten years                 4,932
              Due after ten years through twenty years               8,319
              Due after twenty years                                 1,913
                                                                   -------
                                                                   $18,354
                                                                   =======
</TABLE>

<TABLE>
              <S>                                                 <C>
             MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
              Due within one year                                  $ 2,204
              Due after one year through three years                 1,425
              Due after three years through five years               1,026
              Due after five years through ten years                 2,792
              Due after ten years through twenty years               6,002
              Due after twenty years                                 1,192
                                                                    ------
                                                                   $14,641
                                                                   =======
</TABLE>


  Proceeds from the sale of mortgage-backed securities designated as available
  for sale during the years ended June 30, 1998, 1997 and 1996 totaled $8.9
  million, $1.1 million and $10.8 million, respectively, resulting in gross
  realized gains of $40,000, $14,000 and $175,000 during the years ended June
  30, 1998, 1997 and 1996, respectively, and gross realized losses of $12,000
  and $26,000 during the years ended June 30, 1998 and 1996.


                                       88
<PAGE>   90



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)

  In fiscal 1996, a one-time reassessment of the Corporation's mortgage-backed
  securities designated as held to maturity was undertaken, as permitted by the
  FASB's "Special Report" related to implementation of SFAS No. 115.  This
  special report allowed the Corporation to reclassify any of its securities,
  including held to maturity debt securities, without calling into question the
  intent of the Corporation to hold debt securities to maturity in the future.
  Any transfers from the held to maturity category to an available for sale
  classification resulted in unrealized gains or losses being recognized as a
  separate component of shareholders' equity, net of related tax effects.  In
  connection with this special report, management elected to restructure the
  Corporation's securities portfolio, and transferred mortgage-backed
  securities held to maturity with an amortized cost of $2.4 million to
  mortgage-backed securities designated as available for sale in order to
  permit more responsiveness to changes in interest rates and other balance
  sheet management factors.  At the date of transfer, the mortgage-backed
  securities transferred from a held to maturity classification had net
  unrealized market losses of $36,000.


NOTE C - LOANS RECEIVABLE

  The composition of the loan portfolio at June 30 is summarized as follows:


<TABLE>
<CAPTION>
                                                   1998     1997
                                                  (In thousands)
               <S>                               <C>      <C>
               Residential real estate
                One-to-four family residential   $51,790  $49,549
                Home equity lines of credit        2,627    2,699
                Multi-family residential           4,215    3,009
                Construction                       3,802    2,277
               Nonresidential real estate         10,797   10,437
               Land                                  659      631
               Deposit account                       111      250
               Consumer and other                     84        3
                                                 -------  -------
                                                  74,085   68,855
               Less:
                Undisbursed portion of loans in
                 process                          (2,186)  (1,632)
                Deferred loan origination fees      (159)    (162)
                Allowance for loan losses           (264)    (244)
                                                 -------  -------

                                                 $71,476  $66,817
                                                 =======  =======
</TABLE>


                                       89
<PAGE>   91



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE C - LOANS RECEIVABLE (continued)

  As depicted above, the Company's lending efforts have historically focused on
  one-to-four family residential and multi-family residential real estate
  loans, which comprise approximately $60.0 million, or 84%, of the total loan
  portfolio at June 30, 1998, and approximately $55.7 million, or 83%, of the
  total loan portfolio at June 30, 1997.  Generally, such loans have been
  underwritten on the basis of no more than an 80% loan-to-value ratio, which
  has historically provided the Company with more than adequate collateral
  coverage in the event of default.  Nevertheless, the Company, as with any
  lending institution, is subject to the risk that residential real estate
  values could deteriorate in its primary lending area of southwestern Ohio,
  thereby impairing collateral values.  However, management is of the belief
  that residential real estate values in the Company's primary lending area are
  presently stable.

  As discussed previously, the Company has sold whole loans and participating
  interests in loans in the secondary market, retaining servicing on the loans
  sold.  Loans sold and serviced for others totaled approximately $48.8
  million, $41.6 million and $47.6 million at June 30, 1998, 1997 and 1996,
  respectively.

  In the ordinary course of business, the Company has made loans to some of its
  directors, officers and their related business interests.  All related party
  loans are made on substantially the same terms, including interest rates and
  collateral, as those prevailing at the time for comparable transactions with
  unrelated persons and do not involve more than the normal risk of
  collectibility.  There were no loans outstanding to officers and directors at
  June 30, 1998.  The aggregate dollar amount of loans outstanding to officers
  and directors was approximately $3,000 and $8,000 at June 30, 1997 and 1996,
  respectively.  During the year ended June 30, 1998, there were no loans
  disbursed to officers and directors, while principal repayments of $3,000
  were received from officers and directors.


NOTE D - ALLOWANCE FOR LOAN LOSSES

  The activity in the allowance for loan losses is summarized as follows for
  the years ended June 30:


<TABLE>
<CAPTION>
                                              1998    1997    1996
                                                 (In thousands)
           <S>                                <C>     <C>     <C>

           Balance at beginning of year       $244    $231    $220
           Provision for losses on loans        24      18      11
           Charge-off of loans                  (4)     (5)      -
                                              ----    ----    ----
           Balance at end of year             $264    $244    $231
                                              ====    ====    ====
</TABLE>


                                       90
<PAGE>   92



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE D - ALLOWANCE FOR LOAN LOSSES (continued)

  At June 30, 1998, the Company's allowance for loan losses was comprised
  solely of a general loan loss allowance, which is includible as a component
  of regulatory risk-based capital.

  At June 30, 1998, 1997 and 1996, the Company had nonaccrual and
  non-performing loans totaling $885,000, $403,000 and $675,000, respectively.
  Interest income which would have been recognized if such nonaccrual loans had
  performed pursuant to contractual terms totaled approximately $3,000, $1,000
  and $4,000 for the years ended June 30, 1998, 1997 and 1996.

  The Company had no loans designated as impaired as described in SFAS No. 114
  at June 30, 1998 and 1997, nor were any loans so designated during the years
  ended June 30, 1998 and 1997.


NOTE E - OFFICE PREMISES AND EQUIPMENT

  Office premises and equipment at June 30 are comprised of the following:


<TABLE>
<CAPTION>
                                                          1998     1997
                                                         (In thousands)
       <S>                                              <C>      <C>
       Office buildings and improvements                 $1,908   $1,884
       Furniture, fixtures and equipment                    959      909
                                                        -------  -------
                                                          2,867    2,793

        Less accumulated depreciation and amortization   (1,173)  (1,014)
                                                        -------  -------

                                                          1,694    1,779

       Land                                                 556      556
                                                        -------  -------

                                                         $2,250   $2,335
                                                        =======  =======
</TABLE>


                                       91
<PAGE>   93



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE F - DEPOSITS

  Deposits consist of the following major classifications at June 30:


<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE                                    1998               1997
                                                  AMOUNT       %     AMOUNT       %
                                                          (Dollars in thousands)
<S>                                              <C>         <C>     <C>        <C>
Passbook and club accounts
 1998 - 2.78%                                    $ 8,232     8.7%
 1997 - 2.78%                                                        $ 8,088     9.9%
NOW accounts, including noninterest-
 bearing deposits of $956 in 1998 and
 $1,514 in 1997
 1998 - 2.08%                                      4,109     4.3
 1997 - 2.06%                                                          4,228     5.2
Money market deposit accounts
 1998 - 3.17%                                      6,673     7.0
 1997 - 3.10%                                                          6,966     8.5
                                                 -------   -----     -------   -----

Total demand, transaction and passbook deposits   19,014    20.0      19,282    23.6

Certificates of deposit
 Original maturities of
  Less than 12 months
   1998 - 5.46%                                   11,618    12.2
   1997 - 5.60%                                                       12,711    15.6
  12 months
   1998 - 5.71%                                   12,683    13.4
   1997 - 5.75%                                                        8,832    10.8
  15 months
   1998 - 5.85%                                   24,237    25.5
   1997 - 5.88%                                                       20,934    25.6
  18 months
   1998 - 5.80%                                    4,211     4.4
   1997 - 5.62%                                                        1,972     2.4
  24 months
   1998 - 5.89%                                    5,119     5.4
   1997 - 5.77%                                                        4,095     5.0
  30 months
   1998 - 5.86%                                    1,585     1.7
   1997 - 6.06%                                                        1,745     2.1
  35 months
   1998 - 5.93%                                    4,026     4.2
   1997 - 5.93%                                                        1,177     1.4
  48 months
   1998 - 6.16%                                      288     0.3
   1997 - 5.82%                                                          316     0.4
  60 months
   1998 - 5.77%                                    2,193     2.3
   1997 - 5.62%                                                        1,706     2.1
Individual retirement accounts
   1998 - 5.95%                                   10,014    10.6
   1997 - 5.96%                                                        9,024    11.0
                                                 -------   -----     -------   -----
Total certificates of deposit                     75,974    80.0      62,512    76.4
                                                 -------   -----     -------   -----
Total deposits                                   $94,988   100.0%    $81,794   100.0%
                                                 =======   =====     =======   =====
</TABLE>


                                       92
<PAGE>   94



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE F - DEPOSITS (continued)

The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $7.1 million and $6.3 million at June
30, 1998 and 1997, respectively.  Deposit amounts within individual deposit
accounts exceeding $100,000 are not federally insured.

During fiscal 1998 and 1997, the Company received and accepted brokered
deposits, which amounted to $5.8 million, or 6.1% of total deposits at June 30,
1998, and $4.8 million, or 5.9% of total deposits at June 30, 1997.

Interest expense on deposit accounts for the years ended June 30 is summarized
as follows:


<TABLE>
<CAPTION>
                                           1998           1997          1996
                                                 (In thousands)
<S>                                      <C>            <C>           <C>
Passbook and club accounts               $  221         $  228        $  245
NOW accounts                                 61             66            62
Money market deposit accounts               215            227           254
Certificates of deposit                   4,142          3,271         2,875
                                         ------         ------        ------
                                         $4,639         $3,792        $3,436 
                                         ======         ======        ====== 
</TABLE>

Maturities of outstanding certificates of deposit are summarized as follows at
June 30:

<TABLE>
<CAPTION>
                                                         1998        1997
                                                         (In thousands)
<S>                                                   <C>            <C>
Less than three months                                $12,785        $11,309
Three months to six months                             15,097         12,536
Six months to one year                                 25,537         25,026
One to two years                                       15,754          8,921
Two to three years                                      4,286          3,410
Three to four years                                       284          1,119
Over four years                                         2,231            191
                                                      -------        -------
                                                      $75,974        $62,512
                                                      =======        =======
</TABLE>

                                       93
<PAGE>   95



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK

  Advances from the Federal Home Loan Bank, collateralized at June 30, 1998 and
  1997 by pledges of certain residential mortgage loans totaling $19.0 million
  and $18.0 million, and the Company's investment in Federal Home Loan Bank
  stock are summarized as follows at June 30:

 
<TABLE>
<CAPTION>
      INTEREST                        MATURING IN FISCAL
      RATE                            YEAR ENDING IN         1998     1997
                                                           (In thousands)
      <S>                             <C>                 <C>      <C>
      5.55% - 5.75%                        1998           $     -  $ 5,326
      5.80%                                2001             2,600    2,600
      6.20% - 8.05%                        2002               828      828
      6.50%                                2003             2,500    2,500
      7.85% - 8.30%                        2005               740      740
      8.10%                                2006                 6        6
      5.15% - 5.24%                        2008             6,000        -
                                                          -------  -------

                                                          $12,674  $12,000
                                                          =======  =======

      Weighted-average interest rate                        5.82%    6.05%
                                                          =======  =======
</TABLE>


  During fiscal 1998, the Company restructured its outstanding borrowings by
  paying off monthly adjustable short-term borrowings and obtaining $6.0
  million in convertible fixed-rate ten-year/one-year Federal Home Loan Bank
  advances with a weighted-average interest rate of 5.19% and final maturity of
  ten years.  The interest rates on these convertible fixed-rate advances are
  guaranteed for a minimum of one year.  Thereafter, for the remaining nine
  years, the Federal Home Loan Bank has quarterly options to convert the
  interest rates on these advances to the floating 3-month LIBOR rate in effect
  at the time.  If and when the Federal Home Loan Bank exercises the conversion
  to LIBOR, the Company can then pay off the advances without penalty.  If the
  Federal Home Loan Bank does not convert any of the advances to the LIBOR
  rate, the advances will remain at the original fixed rates until final
  maturity in ten years.


NOTE H - LOAN OF EMPLOYEE STOCK OWNERSHIP PLAN

  As discussed previously in Note A-11, the Corporation established an ESOP
  which initially acquired 20,700 shares of common stock in the conversion
  offering.  In order to fund the acquisition of stock, the ESOP borrowed
  $207,000 from an independent third-party lender, payable over a seven year
  period.  The sole security for the loan is the acquired stock and, while
  neither the Company nor the Corporation have guaranteed the loan, future
  contributions to retire the loan will be paid to the ESOP from current or
  retained earnings.  Accordingly, the Corporation has deducted the remaining
  unpaid amount of the loan of the ESOP from shareholders' equity with the
  corresponding future payments reflected as a liability.  At June 30, 1998,
  the ESOP held 20,048 shares of the Corporation's common stock, of which
  approximately 3,779 shares had not been allocated to participants as of that
  date.

                                       94
<PAGE>   96



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE I - FEDERAL INCOME TAXES

The provision for federal income taxes on earnings differs from that computed at
the statutory corporate tax rate for the years ended June 30 as follows:


<TABLE>
<CAPTION>
                                                            1998   1997    1996
                                                              (In thousands)   
<S>                                                         <C>    <C>     <C>
Federal income taxes computed at the statutory rate         $488   $192    $274
Increase (decrease) in taxes resulting from:
 Amortization of goodwill                                     11     11      11
 Tax-exempt interest                                          (1)    (1)     (1)
 Exercise of nonqualified stock options                       (3)    (2)      -
 Other                                                         1      1       -
                                                            ----   ----    ----
    Federal income tax provision per consolidated
     financial statements                                   $496   $201    $284
                                                            ====   ====    ====
</TABLE>


Deferred federal income tax expense results from temporary differences between
the financial reporting and tax basis of assets and liabilities. A
reconciliation of the sources of the Corporation's temporary differences at the
statutory corporate tax rate to the amount of deferred federal income tax
expense is as follows for the years ended June 30:

<TABLE>
<CAPTION>
                                                                      1998   1997   1996
                                                                        (In thousands)
<S>                                                                    <C>    <C>    <C>
EFFECT OF TEMPORARY DIFFERENCES AT STATUTORY CORPORATE TAX RATE:
 Loan origination fees and costs deferred for financial
  reporting but recognized currently for tax purposes                  $36    $30    $28
 Federal Home Loan Bank stock dividends                                 18     17     16
 Differences between book and tax depreciation                           1      6     16
 Effect of change from cash to accrual method for tax purposes           -     (1)   (18)
 Deferred compensation, accrued for financial reporting,
  deductible for tax purposes when paid                                (12)    (3)   (18)
 Capitalized mortgage servicing rights                                  61      4     28
 Unrealized gains and losses on loans held for sale                     (2)    (9)    10
 General loan losses, deductible for financial reporting,
  recognized when finalized for tax purposes                            (7)    (6)    (2)
 Percentage of earnings bad debt deduction                               -      -     14
                                                                       ---    ---    ---
    Deferred federal income tax expense per                                          
     consolidated financial statements                                 $95    $38    $74
                                                                       ===    ===    ===
</TABLE>


                                       95
<PAGE>   97



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE I - FEDERAL INCOME TAXES (continued)

  The composition of the Corporation's net deferred tax liability at June 30 is
  as follows:


<TABLE>
<CAPTION>
        TAXES (PAYABLE) REFUNDABLE ON TEMPORARY            1998     1997
        DIFFERENCES AT STATUTORY CORPORATE TAX RATE:     (In thousands)
        <S>                                              <C>      <C>
        Deferred tax liabilities:
         Federal Home Loan Bank stock dividends         $  (140) $  (122)
         Deferred loan origination costs                    (55)     (19)
         Book/tax depreciation differences                 (118)    (117)
         Capitalized interest                                (1)      (1)
         Deferred premium on loans sold                      (1)      (1)
         Capitalized mortgage servicing rights              (93)     (32)
         Percentage of earnings bad debt deduction         (165)    (165)
                                                        -------  -------
            Total deferred tax liabilities                 (573)    (457)

        Deferred tax assets:
         Deferred compensation                               32       20
         Unrealized gains on loans held for sale              2        -
         Unrealized losses on securities designated as
          available for sale                                 19       91
         General loan loss allowance                         90       83
                                                        -------  -------
            Total deferred tax assets                       143      194
                                                        -------  -------

            Net deferred tax liability                  $  (430) $  (263)
                                                        =======  =======
</TABLE>


The Company was allowed a special bad debt deduction based on a percentage of
earnings, generally limited to 8% of otherwise taxable income, or the amount of
qualifying and nonqualifying loans outstanding and subject to certain
limitations based on aggregate loans and deposit account balances at the end of
the year. The cumulative tax bad debt reserve in excess of book allowance for
loan losses for which a tax liability had not been recorded totaled
approximately $1.1 million at June 30, 1998.  If the amounts that qualify as
deductions for federal income taxes are later used for purposes other than bad
debt losses, including distributions in liquidation, such distributions will be
subject to federal income taxes at the then current corporate income tax rate.
The approximate amount of the unrecognized deferred tax liability relating to
the cumulative bad debt deduction is $377,000 at June 30, 1998.

Legislation repealing the percentage of earnings bad debt reserve provisions of
the Internal Revenue Code previously applicable to qualifying thrift
institutions was enacted into law in fiscal 1997.  The legislation, which is
part of The Small Business Job Protection Act of 1996 (the "Jobs Act"), requires
all thrift institutions to pay tax on or recapture their excess bad debt
reserves accumulated since 1988.  The legislation substantially equalizes the
taxation of banks and thrift institutions, but it protects thrifts from taxes on
bad debt reserves established prior to 1988.  Under the law in effect prior to
the enactment of the Jobs Act, a thrift institution annually could elect to
deduct bad debts under either (i) the percentage of taxable

                                       96
<PAGE>   98



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE I - FEDERAL INCOME TAXES (continued)

  income method applicable only to thrift institutions, or (ii) the experience
  method that was also available to small banks.  For tax years beginning
  before July 1, 1996, the Company used the percentage of taxable income method
  because that method provided a higher bad debt deduction than the experience
  method.  The Jobs Act eliminates the percentage of taxable income method for
  deducting bad debt reserves for all thrifts for tax years beginning after
  December 31, 1995 (July 1, 1996, as to the Corporation).  All thrifts are
  required to recapture or pay tax on all or a portion of their bad debt
  reserves added since the base year (i.e., the last taxable year beginning
  before January 1, 1988).  The amount of reserves to be recaptured is
  dependent upon whether or not an institution is a "large institution" (i.e.,
  assets exceed $500 million) under the bad debt rules for commercial banks.
  Large institutions have to switch to the specific charge-off method.
  Institutions with assets of $500 million or less, such as the Company, are
  permitted to use the experience method to compute their bad debt deduction.

  An institution is required to recapture the excess of its bad debt reserves
  over the balance of the bad debt reserves outstanding at the end of the base
  year ratably over a six year period beginning with the first taxable year
  after December 31, 1995.  Institutions can postpone the payment of these
  taxes for up to two years if they meet a residential loan requirement during
  tax years beginning before January 1, 1998.  Generally, to meet the
  residential loan requirement, an institution's mortgage lending activity must
  equal or exceed its average mortgage lending activity for the six taxable
  years preceding 1996, adjusted for inflation.

  SFAS No. 109 requires thrift institutions to maintain a deferred tax
  liability for the excess of the bad debt reserves at year end over the bad
  debt reserves outstanding at the end of the base year.  As a result, there
  will be no impact on the Corporation's provision for federal income taxes
  resulting from the recapture of the excess reserves.  As the tax on the
  recapture is paid, the Corporation will reduce its deferred tax liability
  accordingly.  For the Corporation, this excess bad debt reserve amounts to
  approximately $487,000 at June 30, 1998.  The approximate amount of the
  deferred tax liability relating to the excess cumulative bad debt reserve is
  $165,000 at June 30, 1998.  This amount will have to be ratably paid out over
  a six year period beginning in fiscal 1999, as the Corporation met the
  residential loan requirement so as to exclude itself from recapturing its
  excess bad debt reserves in fiscal 1997 and 1998.

  The repeal of the thrift bad debt reserve provisions also means that the
  merger of a thrift into a commercial bank will not trigger the recapture of
  the base year reserve.  As a result, it will no longer be necessary to
  recognize additional financial statement income tax expense related to the
  recapture of the base year reserve.  Recapture of pre-1988 reserves resulting
  from certain distributions, such as dividends and stock repurchases, or
  because an institution ceases to qualify as a bank, are not exempt under the
  new legislation.

                                       97
<PAGE>   99



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE J - COMMITMENTS AND CONTINGENT LIABILITIES

  The Company is a party to financial instruments with off-balance sheet risk
  in the normal course of business to meet the financing needs of its customers
  including commitments to extend credit.  Such commitments involve, to varying
  degrees, elements of credit and interest-rate risk in excess of the amount
  recognized in the consolidated statement of financial condition.  The
  contract or notional amounts of the commitments reflect the extent of the
  Company's involvement in such financial instruments.

  The Company's exposure to credit loss in the event of nonperformance by the
  other party to the financial instrument for commitments to extend credit is
  represented by the contractual notional amount of those instruments.  The
  Company uses the same credit policies in making commitments and conditional
  obligations as those utilized for on-balance-sheet instruments.

  Commitments to extend credit are agreements to lend to a customer as long as
  there is no violation of any condition established in the contract.
  Commitments generally have fixed expiration dates or other termination
  clauses and may require payment of a fee.  Since many of the commitments may
  expire without being drawn upon, the total commitment amounts do not
  necessarily represent future cash requirements.  In extending commitments,
  the Company evaluates each customer's creditworthiness on a case-by-case
  basis.  The amount of collateral obtained, if it is deemed necessary by the
  Company upon extension of credit, is based on management's credit evaluation
  of the counterparty.  Collateral on loans may vary but the preponderance of
  loans granted generally include a mortgage interest in real estate as
  collateral.

  At June 30, 1998, the Company had total outstanding commitments of
  approximately $1.8 million to originate residential one-to-four family real
  estate loans on the basis of at least an 80% loan-to-value ratio, of which
  $198,000 were comprised of adjustable-rate loans at interest rates ranging
  from 8.50% to 11.00%, and $1.6 million were comprised of fixed-rate loans at
  interest rates ranging from 7.00% to 8.88%.  The Company also had total
  outstanding commitments of approximately $565,000 to originate a land
  development loan, $252,000 to originate a residential multi-family loan
  secured by a ten-unit apartment building and $71,000 to originate a
  nonresidential real estate loan secured by an office building.  Such loan
  commitments consisted of adjustable-rate loans with interest rates ranging
  from 8.75% to 9.50%.  Additionally, the Company had unused lines of credit
  under home equity loans of approximately $2.9 million at June 30, 1998 and
  unused collateralized lines of credit secured by nonresidential real estate
  of $37,000.  In the opinion of management, all loan commitments equaled or
  exceeded prevalent market interest rates as of June 30, 1998, and such
  commitments have been underwritten on the same basis as that of the existing
  loan portfolio.  Management believes that all loan commitments are able to be
  funded through cash flow from operations and existing excess liquidity.  Fees
  received in connection with these commitments have not been recognized in
  earnings.

                                       98
<PAGE>   100



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE J - COMMITMENTS AND CONTINGENT LIABILITIES (continued)

  The Company has $2.0 million in loans committed to be sold in the secondary
  market at June 30, 1998.  Of these loans, approximately $882,000 were
  originated on or prior to June 30, 1998 and classified as held for sale.
  Additionally, the Company committed to purchase approximately $1.8 million in
  investment securities designated as available for sale at June 30, 1998.

  The Company has a $5.0 million line of credit facility with the Federal Home
  Loan Bank of Cincinnati, which the Company entered into during fiscal 1998.
  There were no amounts outstanding under such facility at June 30, 1998.

  The Company was committed under a data processing services agreement in the
  aggregate amount of approximately $423,000 at June 30, 1998.  During fiscal
  1998, the Company renewed its contract with its third party provider for data
  processing services for an additional five year term expiring in May 2003.
  The future minimum annual payments expected to be incurred under the renewed
  contract are as follows:


<TABLE>
          YEAR ENDING JUNE 30,                         (In thousands)
          <S>                                          <C>
               1999                                         $ 86
               2000                                           86
               2001                                           86
               2002                                           86
               2003                                           79
                                                            ----

               Total future minimum payments expected       $423
                                                            ====
</TABLE>


  At June 30, 1998, the Company was also committed under a master data
  processing agreement with Midwest Payment Systems ("MPS") primarily to be a
  member of the "Jeanie" network in order to provide electronic banking
  services to its customers via automatic teller machines ("ATMs").  During
  fiscal 1997, the Company amended its original agreement with MPS by extending
  the initial five year term of the contract by an additional five years in
  lieu of certain cost concessions by MPS.  The future minimum annual payments
  expected to be incurred under the contract are as follows:


<TABLE>
          YEAR ENDING JUNE 30,                         (In thousands)
          <S>                                          <C>
               1999                                         $ 20
               2000                                           20
               2001                                           20
               2002                                           20
               2003                                           20
               2004 and years thereafter                      18
                                                            ----

               Total future minimum payments expected       $118
                                                            ====
</TABLE>

                                       99
<PAGE>   101



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE J - COMMITMENTS AND CONTINGENT LIABILITIES (continued)

  Additionally, the Company was committed under a financial institution venture
  agreement with MPS at June 30, 1998.  Under the agreement, MPS and the
  Company agree to cooperatively provide for the placement and operation of
  ATMs at certain of the Company's office locations.  In accordance with the
  original terms of the agreement, all revenues generated and expenses incurred
  in operating the ATMs were shared equally between MPS and the Company.
  During fiscal 1997, however, the venture agreement between MPS and the
  Company was amended to extend the initial five year term an additional two
  years and for both parties to share equally in the monthly net profits of the
  joint venture over the first $100, which must first be paid to MPS.  In lieu
  of these changes in the agreement, the Company was given certain cost
  concessions regarding installation costs of the ATMs.  The amended term of
  this venture agreement is for seven years and expires in fiscal 2003.


NOTE K - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL

  The Company is subject to minimum regulatory capital standards promulgated by
  the Office of Thrift Supervision ("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 its financial statements.  Under capital adequacy
  guidelines and the regulatory framework for prompt corrective action, the
  Company must meet specific capital guidelines that involve quantitative
  measures of the Company's assets, liabilities and certain off-balance sheet
  items as calculated under regulatory accounting practices.  The Company'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.  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 June 30, 1998.  In
  computing risk-weighted assets, the Company 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%.

  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 the Company's excess regulatory capital position if the
  proposal is adopted in its present form.

                                      100
<PAGE>   102



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE K - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)

  As of June 30, 1998 and 1997, management believes that the Company met all
  capital adequacy requirements to which it is subject.


       AS OF JUNE 30, 1998

<TABLE>
<CAPTION>
                                                                 TO BE "WELL-
                                                              CAPITALIZED" UNDER
                                           FOR CAPITAL        PROMPT CORRECTIVE
                        ACTUAL          ADEQUACY PURPOSES     ACTION PROVISIONS
                    -------------     ---------------------   ------------------
                    AMOUNT  RATIO     AMOUNT       RATIO      AMOUNT     RATIO
                                      (Dollars in thousands)
<S>                 <C>     <C>       <C>          <C>        <C>        <C>
Tangible Capital    $8,295   7.1%     *$1,762      *1.5%      *$5,874    * 5.0%

Core Capital        $8,295   7.1%     *$3,524      *3.0%      *$7,049    * 6.0%

Risk-based Capital  $8,559  14.8%     *$4,640      *8.0%      *$5,800    *10.0%
</TABLE>


       AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
                                                                TO BE "WELL-
                                                              CAPITALIZED" UNDER
                                           FOR CAPITAL        PROMPT CORRECTIVE
                       ACTUAL           ADEQUACY PURPOSES     ACTION PROVISIONS
                    -------------     ---------------------   -----------------
                    AMOUNT  RATIO     AMOUNT       RATIO      AMOUNT     RATIO
                                      (Dollars in thousands)
<S>                 <C>     <C>       <C>          <C>        <C>        <C>
Tangible Capital    $7,437   7.3%     *$1,537      *1.5%      *$5,123   * 5.0%

Core Capital        $7,437   7.3%     *$3,074      *3.0%      *$6,148   * 6.0%

Risk-based Capital  $7,681  14.8%     *$4,138      *8.0%      *$5,173   *10.0%
</TABLE>


  The Company's management believes that, under the current regulatory capital
  regulations, the Company will continue to meet its minimum capital
  requirements in the foreseeable future.  However, events beyond the control
  of the Company, such as increased interest rates or a downturn in the economy
  in the Company's market area, could adversely affect future earnings and
  consequently, the ability to meet future regulatory capital requirements.

* Greater than or equal to.

                                      101

<PAGE>   103



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE K - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)

  The deposit accounts of the Company and of other savings associations are
  insured by the Federal Deposit Insurance Corporation ("FDIC") through the
  Savings Association Insurance Fund ("SAIF").  The reserves of the SAIF were
  below the level required by law, because a significant portion of the
  assessments paid into the fund were used to pay the cost of prior thrift
  failures.  The deposit accounts of commercial banks are insured by the FDIC
  through the Bank Insurance Fund ("BIF"), except to the extent such banks have
  acquired SAIF deposits.  Both the SAIF and the BIF are required by law to
  attain and thereafter maintain a reserve ratio of 1.25% of insured deposits.
  The reserves of the BIF met the level required by law in May 1995.  As a
  result of the respective reserve levels of the funds, deposit insurance
  assessments paid by healthy savings associations exceeded those paid by
  healthy commercial banks by approximately $.19 per $100 in deposits in 1995.
  In 1996, no BIF assessments were required for healthy commercial banks except
  for a $2,000 minimum fee.  This premium disparity had a negative competitive
  impact on the Company and other institutions in the SAIF.

  Legislation was enacted to recapitalize the SAIF and provided for a special
  assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995,
  in order to increase SAIF reserves to the level required by law.  The Company
  held $55.8 million in deposits at March 31, 1995, resulting in an assessment
  of approximately $366,000, or $242,000 after-tax, which was charged to
  operations in fiscal 1997.


NOTE L - STOCK OPTION AND INCENTIVE PLANS

  As previously discussed in Note A-12, the Corporation has a Stock Option and
  Incentive Plan that was approved and adopted in fiscal 1993 that provided for
  the issuance of 20,000 shares of authorized, but unissued shares of common
  stock at the fair market value at the date of grant.  These shares were fully
  granted to the officers and directors of the Corporation in connection with
  the conversion to the stock form of organization.  In fiscal 1998, the Board
  of Directors approved and adopted a second Stock Option and Incentive Plan
  for the purpose of granting another 20,000 shares of common stock at the fair
  market value to the officers, directors and key employees of the Corporation.
  These shares were fully granted during fiscal 1998 and are exercisable over
  a ten year period, with one-fifth of the options awarded becoming exercisable
  on each of the first five anniversaries of the date of grant.

  On July 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for
  Stock-Based Compensation," which contains a fair value-based method for
  valuing stock-based compensation that entities may use, which measures
  compensation cost at the grant date based on the fair value of the award.
  Compensation is then recognized over the service period, which is usually the
  vesting period.  Alternatively, SFAS No. 123 permits entities to continue to
  account for employee stock options and similar equity instruments under APB
  Opinion No. 25, "Accounting for Stock Issued to Employees."  Entities that
  continue to account for stock options using APB Opinion No. 25 are required
  to make pro forma disclosures of net earnings and earnings per share, as if
  the fair value-based method of accounting defined in SFAS No. 123 had been
  applied.

                                      102



<PAGE>   104



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE L - STOCK OPTION AND INCENTIVE PLANS (continued)

  The Corporation applies APB Opinion No. 25 and related Interpretations in
  accounting for its stock option plans.  Accordingly, no compensation cost has
  been recognized for the plans.  Had compensation cost for the Corporation's
  stock option plans been determined based on the fair value at the grant dates
  for awards under the plans consistent with the accounting method utilized in
  SFAS No. 123, the Corporation's net earnings and earnings per share would
  have been reduced to the pro forma amounts indicated below:


<TABLE>
<CAPTION>
                                                    1998   1997   1996
         <S>                          <C>          <C>    <C>    <C>
         Net earnings (In thousands)  As reported   $938   $365   $521
                                                   =====  =====  =====

                                        Pro-forma   $829   $365   $521
                                                   =====  =====  =====

         Earnings per share
          Basic                       As reported  $4.50  $1.75  $2.51
                                                   =====  =====  =====

                                        Pro-forma  $3.98  $1.75  $2.51
                                                   =====  =====  =====

          Diluted                     As reported  $4.28  $1.69  $2.44
                                                   =====  =====  =====

                                        Pro-forma  $3.78  $1.69  $2.44
                                                   =====  =====  =====
</TABLE>


  The fair value of each option grant is estimated on the date of grant using
  the modified Black-Scholes options-pricing model with the following
  weighted-average assumptions used for grants in fiscal 1998:  dividend yield
  of 1.5%, expected volatility of 20.0%, a risk-free interest rate of 5.5% and
  expected lives of ten years.

  A summary of the status of the Corporation's stock option plans as of June
  30, 1998, 1997 and 1996, and changes during the years ending on those dates
  is presented below:


<TABLE>
<CAPTION>
                                      1998                 1997               1996
                                        WEIGHTED-            WEIGHTED-          WEIGHTED-
                                          AVERAGE              AVERAGE            AVERAGE
                                         EXERCISE             EXERCISE           EXERCISE
                                SHARES      PRICE    SHARES      PRICE  SHARES      PRICE
<S>                               <C>     <C>        <C>     <C>        <C>     <C>
Outstanding at beginning of year  18,500   $11.57    19,000     $11.57  19,500     $11.56
Granted                           20,000    27.50         -          -       -          -
Exercised                              -        -       500      11.50     500      11.50
                                  ------   ------    ------     ------  ------     ------

Outstanding at end of year        38,500   $19.84    18,500     $11.57  19,000     $11.57
                                  ======   ======    ======     ======  ======     ======

Options exercisable at year-end    6,500   $11.58     6,000     $11.54   3,000     $11.58
                                  ======   ======    ======     ======  ======     ======
Weighted-average fair value of
 options granted during the year           $ 9.57                  N/A                N/A
                                           ======               ======             ======
</TABLE>

                                      103



<PAGE>   105



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE L - STOCK OPTION AND INCENTIVE PLANS (continued)

  The following information applies to options outstanding at June 30, 1998:


<TABLE>
          <S>                                          <C>
          Number outstanding                                    38,500
          Range of exercise prices                     $11.50 - $27.50
          Weighted-average exercise price                       $19.84
          Weighted-average remaining contractual life       7.06 years
</TABLE>


  The Black-Scholes option valuation model was developed for use in estimating
  the fair value of traded options which have no vesting restrictions and are
  fully transferable.  In addition, option valuation models require the input
  of highly subjective assumptions including the expected stock price
  volatility.  Because the Corporation's stock options have characteristics
  significantly different from those of traded options, and because changes in
  the subjective input assumptions can materially affect the fair value
  estimate, in management's opinion, the existing models do not necessarily
  provide a reliable single measure of the fair value of its stock options.


                                      104


<PAGE>   106



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE M - CONDENSED FINANCIAL STATEMENTS OF TOWNE FINANCIAL
     CORPORATION

  The following condensed financial statements summarize the financial position
  of Towne Financial Corporation as of June 30, 1998 and 1997, and the results
  of its operations and its cash flows for each of the three years ended June
  30, 1998, 1997 and 1996.

                          TOWNE FINANCIAL CORPORATION
                       STATEMENTS OF FINANCIAL CONDITION
                                    June 30,
                                 (In thousands)

<TABLE>
<CAPTION>
        ASSETS                                           1998    1997
     <S>                                               <C>     <C>     
     Cash                                                $   43  $   13
     Investment in The Blue Ash Building and
       Loan Company                                       8,618   7,630
     Prepaid expenses and other assets                        5      13
                                                         ------  ------

        Total assets                                     $8,666  $7,656
                                                         ======  ======

        LIABILITIES AND SHAREHOLDERS' EQUITY

     Accounts payable and other liabilities              $    3  $   18

     Shareholders' equity
       Common shares                                        209     209
       Additional paid-in capital                         4,966   4,966
       Retained earnings                                  3,555   2,701
       Less required contributions for shares acquired
         by ESOP                                            (30)    (60)
       Unrealized losses on securities designated as
         available for sale - net of related tax effects    (37)   (178)
                                                         ------  ------

        Total shareholders' equity                        8,663   7,638
                                                         ------  ------

        Total liabilities and shareholders' equity       $8,666  $7,656
                                                         ======  ======
</TABLE>

                                      105



<PAGE>   107



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE M - CONDENSED FINANCIAL STATEMENTS OF TOWNE FINANCIAL
     CORPORATION (continued)

                          TOWNE FINANCIAL CORPORATION
                             STATEMENTS OF EARNINGS
                              Year ended June 30,
                                 (In thousands)

<TABLE>
<CAPTION>
                                                        1998  1997  1996
       <S>                                              <C>   <C>   <C>
       Revenue
        Dividends received from subsidiary              $150  $  -  $ 56
        Equity in undistributed earnings of subsidiary   817   407   492
                                                        ----  ----  ----

           Total revenue                                 967   407   548

       Expenses
        Management fees                                   12    12    12
        Amortization of organizational costs               -     4     5
        Other operating                                   36    51    63
                                                        ----  ----  ----

           Total expenses                                 48    67    80
                                                        ----  ----  ----

           Net earnings before tax credits               919   340   468

       Federal income tax credits                        (19)  (25)  (53)
                                                        ----  ----  ----

           Net earnings                                 $938  $365  $521
                                                        ====  ====  ====
</TABLE>


                          TOWNE FINANCIAL CORPORATION
                            STATEMENTS OF CASH FLOWS
                              Years ended June 30,
                                 (In thousands)

<TABLE>
<CAPTION>
                                                            1998   1997   1996
  <S>                                                      <C>    <C>    <C>
  Cash flows provided by (used in) operating activities:
   Net earnings for the year                               $ 938  $ 365  $ 521
   Adjustments to reconcile net earnings to net cash
   provided by (used in) operating activities:
    Undistributed earnings of subsidiary                    (817)  (407)  (492)
    Amortization of organizational costs                       -      4      5
    Increases (decreases) in cash due to changes in:
     Prepaid expenses and other assets                         8     46    (59)
     Accounts payable and other liabilities                  (15)   (33)    47
                                                           -----  -----  -----
      Net cash provided by (used in) operating activities    114    (25)    22

  Cash flows provided by (used in) financing activities:
   Proceeds from the exercise of stock options                 -      6      6
   Payment of dividends on common shares                     (84)     -      -
                                                           -----  -----  -----
      Net cash provided by (used in) financing activities    (84)     6      6
                                                           -----  -----  -----

  Net increase (decrease) in cash and cash equivalents        30    (19)    28

  Cash and cash equivalents at beginning of year              13     32      4
                                                           -----  -----  -----

  Cash and cash equivalents at end of year                 $  43  $  13  $  32
                                                           =====  =====  =====
</TABLE>


                                      106




<PAGE>   108



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE M - CONDENSED FINANCIAL STATEMENTS OF TOWNE FINANCIAL
     CORPORATION (continued)

  The Corporation's activities during fiscal 1998, 1997 and 1996 were solely
  limited to holding the Company's stock.  As previously discussed in Note
  A-13, there were cash dividends of $84,000 declared and paid on 208,500
  outstanding common shares of the Corporation during fiscal 1998.  There was
  no payment of cash dividends to the shareholders during fiscal 1997 and 1996.

  As a condition to regulatory approval of the stock conversion and
  reorganization to the holding company form of organization, the Company
  agreed to limit the amount of dividends payable to the Corporation.
  Regulations of the OTS impose limitations on the payment of dividends and
  other capital distributions by savings associations.  Under such regulations,
  a savings association that, immediately prior to, and on a pro forma basis
  after giving effect to a proposed capital distribution, has total capital (as
  defined by OTS regulations) that is equal to or greater than the amount of
  its fully phased-in capital requirement is generally permitted without OTS
  approval (but subsequent to 30 days prior notice to the OTS of the planned
  dividend) to make capital distributions during a calendar year in the amount
  of up to the greater of (i) 100% of its net earnings to date during the
  calendar year plus an amount equal to one-half of the amount by which its
  total capital-to-assets ratio exceeded its fully phased-in capital-to-assets
  ratio at the beginning of the calendar year or (ii) 75% of its net earnings
  for the most recent four quarters.  Pursuant to such OTS dividend
  regulations, the Company had the ability to pay dividends of approximately
  $2.3 million to the Corporation at June 30, 1998.


NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

  The following table summarizes the Corporation's consolidated quarterly
  results for the years ended June 30, 1998 and 1997.  Certain amounts, as
  previously reported, have been reclassified to conform to the 1998
  presentation.


<TABLE>
<CAPTION>
                                                                   FOR THE THREE MONTH PERIODS ENDED
                                                     SEPTEMBER 30,   DECEMBER 31,     MARCH 31,    JUNE 30,
                                                              1997           1997          1998        1998
                                                              (In thousands, except for share data)
<S>                                                  <C>             <C>              <C>          <C>         
Total interest income                                       $2,019         $2,116        $2,162      $2,165
Total interest expense                                       1,289          1,349         1,363       1,395
                                                            ------         ------        ------      ------
    Net interest income                                        730            767           799         770

Provision for losses on loans                                    6              6             6           6
                                                            ------         ------        ------      ------
    Net interest income after provision 
      for losses on loans                                      724            761           793         764
Other income                                                    65             86           215         134
General, administrative and other expense                      504            504           539         561
                                                            ------         ------        ------      ------
    Earnings before income taxes                               285            343           469         337

Federal income taxes                                            99            119           162         116
                                                            ------         ------        ------      ------

    Net earnings                                            $  186         $  224        $  307      $  221
                                                            ======         ======        ======      ======

    Earnings per share
     Basic                                                  $  .89         $ 1.08        $ 1.47      $ 1.06
                                                            ======         ======        ======      ======

     Diluted                                                $  .85         $ 1.02        $ 1.40      $ 1.01
                                                            ======         ======        ======      ======
</TABLE>

                                      107




<PAGE>   109



                   TOWNE FINANCIAL CORPORATION AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1998, 1997 and 1996


NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (continued)

<TABLE>
<CAPTION>
                                                                       FOR THE THREE MONTH PERIODS ENDED
                                                             SEPTEMBER 30,   DECEMBER 31,    MARCH 31,    JUNE 30,
                                                                      1996           1996         1997        1997
                                                                     (In thousands, except for share data)
<S>                                                          <C>             <C>             <C>          <C>         
Total interest income                                               $1,714         $1,778       $1,805      $1,895
Total interest expense                                               1,079          1,101        1,112       1,169
                                                                    ------         ------       ------      ------
   Net interest income                                                 635            677          693         726

Provision for losses on loans                                            5              4            4           5
                                                                    ------         ------       ------      ------
   Net interest income after provision 
     for losses on loans                                               630            673          689         721
Other income                                                            68             64           40          40
General, administrative and other expense                              864            495          485         515
                                                                    ------         ------       ------      ------
   Earnings (loss) before income taxes (credits)                      (166)           242          244         246

Federal income taxes (credits)                                         (54)            84           86          85
                                                                    ------         ------       ------      ------

   Net earnings (loss)                                              $ (112)        $  158       $  158      $  161
                                                                    ======         ======       ======      ======

   Earnings (loss) per share
     Basic                                                          $ (.54)        $  .76       $  .76      $  .77
                                                                    ======         ======       ======      ======

     Diluted                                                           N/A         $  .73       $  .74      $  .74
                                                                    ======         ======       ======      ======
</TABLE>
                                      108



<PAGE>   110



                             CORPORATE INFORMATION
                   BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

                          TOWNE FINANCIAL CORPORATION
                               BOARD OF DIRECTORS

Neil S. Strawser, Director and Chairman of the Board
Ralph E. Heitmeyer, Director and President
William S. Siders, Director and Executive Vice President
Herb L. Krombholz, Director and Vice President
William T. Thornell, Director and Vice President

                               EXECUTIVE OFFICERS

William S. Siders, Executive Vice President
William T. Thornell, Vice President
Joseph L. Michel, Vice President, Treasurer and
     Chief Financial Officer
Mildred Martin, Secretary

                     THE BLUE ASH BUILDING AND LOAN COMPANY
                               BOARD OF DIRECTORS

Neil S. Strawser, Director and Chairman of the Board
Ralph E. Heitmeyer, Director and President
William S. Siders, Director, Executive Vice President and
     Managing Officer
Herb L. Krombholz, Director and Vice President
William T. Thornell, Director, Vice President and Chief
     Lending Officer

                               EXECUTIVE OFFICERS

William S. Siders, Executive Vice President and
     Managing Officer
William T. Thornell, Vice President and Chief Loan Officer
Joseph L. Michel, Vice President, Treasurer and
     Chief Financial Officer
Mildred Martin, Secretary

Director Emeritus:             John M. Kuhnell


Executive Offices:             Towne Financial Corporation
                               4811 Cooper Road
                               Blue Ash, Ohio 45242

                                      109
<PAGE>   111

Branch Locations:               MAIN OFFICE
                                4811 Cooper Road
                                Blue Ash, Ohio 45242
                                (513) 791-1870

                                AMELIA OFFICE   
                                1187 Ohio Pike
                                Amelia, Ohio 45102
                                (513) 753-7283

                                BEECHMONT OFFICE
                                8620 Beechmont Avenue
                                Cincinnati, Ohio 45255
                                (513) 474-4977

                                MASON OFFICE
                                6501 Mason-Montgomery Road
                                Mason, Ohio 45040
                                (513) 459-9660

Independent Auditors:           Grant Thornton LLP
                                Cincinnati, Ohio

Legal Counsel:                  Cors & Bassett
                                Cincinnati, Ohio

Shareholder Services:           Towne Financial acts as its own
                                transfer agent and registrar.

Annual Meeting:                 The Annual Meeting of Shareholders of Towne
                                Financial Corporation will be held on October
                                28, 1998, at 10:00 a.m., Eastern Standard Time,
                                at the main office of Blue Ash, 4811 Cooper
                                Road, Blue Ash, Ohio 45242.  Shareholders are
                                cordially invited to attend.  A formal notice of
                                the meeting, together with a proxy statement and
                                a proxy card, accompanies this Annual Report.

Form 10-KSB Annual
Report:                         A copy of Towne Financial's Annual Report
                                on Form 10-KSB, as filed with the Securities and
                                Exchange Commission, will be available at no
                                charge to shareholders upon request to:


                          Towne Financial Corporation
                                4811 Cooper Road
                              Blue Ash, Ohio 45242


                ATTN: Joseph L. Michel, Chief Financial Officer


                                      110