<PAGE>   1


                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                  FORM 10-KSB

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                        For the Year Ended June 30, 1998
  
                        Commission File Number: 0-20144

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

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

4811 Cooper Road, Blue Ash, Ohio                  45242
--------------------------------------------------------------------------------
(Address of principal executive offices)        (Zip Code)

Issuer's telephone number:  (513) 791-1870

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

     Securities registered pursuant to Section 12(g)
     of the Exchange Act:
         Common Shares, par value $1.00 per share
     -----------------------------------------------                            
                                 (Title of Class)

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.  Yes  X   No
                                                                        ---

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

     The issuer's revenues for the year ended June 30, 1998 were $8,962,000.

     The aggregate market value of the voting shares held by non-affiliates of
the issuer as of September 9, 1998, computed by reference to the price at which
common shares last traded, was $3,487,000.  (The exclusion from such amount of
the market value of the shares owned by any person shall not be deemed an
admission by the issuer that such person is an affiliate of the issuer.)

     208,500 of the issuer's common shares were issued and outstanding on
September 9, 1998.




<PAGE>   2



                     DOCUMENTS INCORPORATED BY REFERENCE

     The following sections of the Towne Financial Corporation Annual Report to
Shareholders for the year ended June 30, 1998 are incorporated by reference
into Part II of this Form 10-KSB:

     1.   Market for Towne Financial's Common Shares and Related Security
          Holder Matters;

     2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations; and

     3.   Consolidated Financial Statements.

     The following sections of the definitive Proxy Statement for the 1998
Annual Meeting of Shareholders of Towne Financial Corporation are incorporated
by reference into Part III of this Form 10-KSB:

     1.   Election of Directors;

     2.   Executive Officers Who Are Not Directors;

     3.   Executive Compensation;

     4.   Voting Securities; and

     5.   Certain Transactions.

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


                                       2





<PAGE>   3


SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

     Certain of the matters discussed under the caption "Description of
Business" may constitute forward-looking statements for purposes of the
Securities Act of 1933 and the Securities Exchange Act of 1934, as amended, and
as such may involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the
Corporation, as defined herein, to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements.  Important factors that could cause the actual results, performance
or achievement of the Corporation to differ materially from the Corporation's
expectations are disclosed in this document including, without limitation,
those statements made in conjunction with any forward-looking statements under
"Description of Business".  All written or oral forward-looking statements
attributable to the Corporation are expressly qualified in their entirety by
such factors.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

     Towne Financial Corporation ("Towne Financial", or the "Corporation"), an
Ohio corporation incorporated under the laws of the State of Ohio on August 20,
1991, 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.  On May 1, 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").  In connection with the Conversion, the Corporation issued and
sold 207,000 shares of its common stock, par value $1.00 per share ("Common
Shares"), at a price of $10.00 per share.  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.  Future
references to the Corporation or the Company are utilized herein as the context
requires.


     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, Amelia and Cherry Grove.
Specifically, Blue Ash's primary market areas are considered to be the
northeastern and eastern areas of Cincinnati, Ohio.  Additionally, during
fiscal 1998, Blue Ash began aggressively marketing its lending products and
services to the areas of Northern Kentucky and the western portions of the City
of Cincinnati with the hiring of two new loan officers to



                                       3
<PAGE>   4



specifically concentrate on servicing those areas.  At June 30, 1998, Blue Ash
had total assets of $117.8 million, deposits of $95.0 million and shareholders'
equity of $8.7 million.

     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.  As a
community-oriented association, Blue Ash offers a wide range of retail banking
services to residents of the greater Cincinnati area through all of its
offices.  Blue Ash provides ATM drive-up services through the Jeanie network at
its main office in Blue Ash and branch offices in Cherry Grove and Mason.  Blue
Ash also offers a Visa credit card program to its customers in conjunction with
another financial institution and provides its customers with "checkless" debit
card services as an alternative to writing checks for day-to-day purchases of
goods and services.  During fiscal 1997, Blue Ash introduced a new "free
checking" account program for its Mason office in order to attract new
customers and to lower cost of funds on new deposits.  This "free checking"
program was extended to all offices in fiscal 1998.  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 is principally 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 investment activities are obtained
primarily from savings deposits, borrowings and loan and mortgage-backed
securities repayments.  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 and gain on
sale of real estate



                                       4
<PAGE>   5



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 an Ohio corporation, Towne Financial is authorized to engage in any
activity permitted by Ohio General Corporation Law. 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 "unitary" savings and loan holding company
(i.e., one that has only one savings association subsidiary), the Corporation
is generally not restricted under existing law in the types of business
activities in which it or its subsidiary, other than Blue Ash, may engage
provided that Blue Ash maintains a specific amount of its assets in
housing-related and certain other investments.  See "Regulation -- Holding
Company Regulation."

     As a savings and loan association incorporated under the laws of the State
of Ohio, Blue Ash is subject to comprehensive regulation, supervision and
examination by the OTS, the Federal Deposit Insurance Corporation (the "FDIC")
and the Ohio Department of Commerce, 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"), which
is one of the 12 regional banks comprising the FHLB system.  Blue Ash 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 certain deposits and other matters.  The business and
regulation of Blue Ash are also subject to legislative changes from time to
time.  See "Regulation."


     The United States Congress is considering legislation to eliminate the
separate federal regulation of savings and loan associations, and the
Department of the Treasury is preparing a report for Congress on the
development of 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



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

     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.  Consequently, the following discussion focuses primarily on
the business of Blue Ash.

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 8.


                                       6

<PAGE>   7



<TABLE>
<CAPTION>
                                                  Year ended June 30,
                                    ---------------------------------------------- 
Summary of earnings:                 1998      1997      1996      1995      1994
                                    ------    ------    ------    ------    ------ 
                                        (In thousands, except per share data)
<S>                                 <C>       <C>       <C>       <C>       <C>

     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 8.


                                       7



<PAGE>   8


(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.




                                       8
<PAGE>   9
<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     6.02    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>
_________________________

(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:

<TABLE>
<CAPTION>
     <S>                                <C>
     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%
</TABLE>

(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.

                                       9
<PAGE>   10


LENDING ACTIVITIES

     GENERAL.  The primary source of revenue to Blue Ash is interest and fee
income derived from its lending activities.  Blue Ash's primary lending
activity is the origination, for the portfolio, of conventional first mortgage
loans for the purchase or refinancing of residential real property secured by
one-to-four family homes located in Blue Ash's lending area.  Depending on
certain interest rate risk considerations and the level of interest rates, in
general, and whether the rates on these loans are fixed-rate, Blue Ash may sell
such loans in the secondary market. Loans for the construction of one-to-four
family homes, mortgage loans on multi-family properties containing five units
or more, nonresidential properties, and secured home equity line of credit
loans, are also offered by Blue Ash.  Blue Ash has not originated for its
portfolio any loans insured by the Federal Housing Authority or loans
guaranteed by the Veterans Administration; however, Blue Ash is a correspondent
lender of Federal Housing Administration loans. Blue Ash originates and
processes loans insured by the Federal Housing Administration for a local
mortgage company, which, in turn, underwrites, closes and services the loans.
During fiscal 1998, Blue Ash was approved by the Housing Urban Development as a
direct-endorsed lender to originate Federal Housing Administration loans.  From
time to time, Blue Ash has also acted as a correspondent lender of
nonconforming loans.  Blue Ash originates and processes loans that are not in
conformity with its current lending and underwriting standards for a local
mortgage company, which, in turn, underwrites, closes and services the loans.
In addition to mortgage lending, Blue Ash makes a limited amount of consumer
loans, including loans secured by deposit accounts and automobile loans, to its
employees.  To a lesser extent, to diversify its portfolio, Blue Ash from time
to time purchases residential and other loans from other lending institutions.

     Federal regulations permit Blue Ash to invest without limitation in
residential mortgage loans and up to four times its capital in loans secured by
nonresidential or commercial real estate.  Blue Ash is also permitted to invest
in secured and nonsecured consumer loans in an amount not exceeding 35% of its
total assets; however, such 35% limit may be exceeded for certain types of
consumer loans, such as home equity, property improvement and education loans.
In addition, Blue Ash is permitted to invest up to 10% of its total assets in
secured (by other than real estate) and unsecured loans for commercial,
corporate, business or agricultural purposes.


                                       10
<PAGE>   11


     LOAN PORTFOLIO COMPOSITION.  The following table presents certain
information with respect to the composition of Blue Ash's loan portfolio,
including loans held for sale, in dollar amounts and in percentages, by type of
loan and by type of security, as of the dates indicated.

<TABLE>
<CAPTION>
                                                             At June 30,
                                        --------------------------------------------------------
                                              1998                1997               1996
                                        -----------------   -----------------   ----------------
                                                 Percent             Percent           Percent
                                                 of total            of total          of total
                                         Amount   loans      Amount   loans     Amount  loans
                                         ------  ---------   ------   --------  ------  --------
                                                         (Dollars in thousands)
<S>                                  <C>       <C>      <C>       <C>       <C>        <C>
Type of loan:
     Residential real estate:
     Construction                       $ 3,802     5.3%    $ 2,277     3.4%     $ 2,512     4.6%
     1-4 family and multi-family(1)      59,512    82.2      55,257    82.7       42,739    77.6
     Nonresidential real estate(2)       10,797    14.9      10,437    15.6       11,561    21.0
     Land                                   659     0.9         631     1.0          884     1.6
     Deposit account(3)                     111     0.2         250     0.4           96     0.2
     Consumer and other                      84     0.1           3      --            8      --
                                        -------   -----     -------   -----      -------   -----

     Total loans (before net items)      74,965   103.6      68,855   103.1       57,800   105.0

Less:
     Undisbursed portion of
     loans in process                    (2,186)   (3.0)     (1,632)   (2.5)      (2,341)   (4.3)
     Deferred loan origination
     fees                                  (157)   (0.2)       (162)   (0.2)        (157)   (0.3)
     Allowance for loan losses             (264)   (0.4)       (244)   (0.4)        (231)   (0.4)
                                        -------   -----     -------   -----      -------   -----
     Total loans - net(4)               $72,358   100.0%    $66,817   100.0%     $55,071   100.0%
                                        =======   =====     =======   =====      =======   =====
Type of security:
     Residential real estate
     1-4 family                         $59,099    81.7%    $54,525    81.6%     $42,318    76.9%
     Other dwelling units                 4,215     5.8       3,009     4.5        2,933     5.3
     Nonresidential real estate          10,797    14.9      10,437    15.6       11,561    21.0
     Land                                   659     0.9         631     1.0          884     1.6
     Deposit account                        111     0.2         250     0.4           96     0.2
     Other                                   84     0.1           3      --            8      --
                                        -------   -----     -------   -----      -------   -----
     Total loans (before net items)      74,965   103.6      68,855   103.1       57,800   105.0

Less:
     Undisbursed portion of
     loans in process                    (2,186)   (3.0)     (1,632)   (2.5)      (2,341)   (4.3)
     Deferred loan origination
     fees                                  (157)   (0.2)       (162)   (0.2)        (157)   (0.3)
     Allowance for loan losses             (264)   (0.4)       (244)   (0.4)        (231)   (0.4)
                                        -------   -----     -------   -----      -------   -----
     Total loans - net(4)               $72,358   100.0%    $66,817   100.0%     $55,071   100.0%
                                        =======   =====     =======   =====      =======   =====
</TABLE>
_____________________________

(1)  Includes home equity line of credit loans underwritten on the same basis
     as first mortgage loans and second mortgage loans.
(2)  Includes second mortgage loans.
(3)  Loans have interest rates that adjust in accordance with the rates paid
     on Blue Ash's deposit accounts.
(4)  Includes loans held for sale of $882,000 and $1.9 million at June 30,
     1998 and 1996, respectively, which are recorded at the lower of cost or
     market value.  There were no loans identified as held for sale at June 30,
     1997.


                                       11


<PAGE>   12

     LOANS.  The following table sets forth certain information as of June 30,
1998, regarding the dollar amount of loans maturing in Blue Ash's portfolio,
including loans held for sale, based on their contractual terms to maturity.
Demand loans, loans having no stated schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less.  The
table as presented takes into account normal amortization of Blue Ash's loan
portfolio and does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>
                               Due during the year ending      Due 3-5   Due 5-10   Due 10-20    Due 20 or
                                       June 30,                 years      years      years     more years
                              ----------------------------      after      after      after        after
                                1999      2000       2001      6/30/98    6/30/98    6/30/98      6/30/98     Total
                              -------    ------     ------     -------   --------   ---------   ----------   ------- 
                                                                   (In thousands)
<S>                           <C>        <C>        <C>        <C>       <C>        <C>          <C>          <C>
Mortgage loans(1)(2):
One-to-four family
 residential(3)(4):
Adjustable                     $  265    $  710     $  771      $1,762    $ 3,905     $ 9,777     $ 4,452    $21,642
Fixed                             592       639        689       1,420      4,616      11,572      15,854     35,382
Multi-family
 residential:
Adjustable                         65        68         74         174        534       1,672         970      3,557
Fixed                             232        41         18          37         --          --          --        328
Nonresidential:
Adjustable                        632       344        370         822      2,079       5,093       1,090     10,430
Fixed                              10        11         11          28         88          30          --        178
Land:
Adjustable                        243       254         95          --         --          --          --        592
Fixed                               9        10         11          24         --          --          --         54
Nonmortgage loans:
Deposit account loans             111        --         --          --         --          --          --        111
Consumer and other                 84        --         --          --         --          --          --         84
                               ------    ------     ------      ------    -------     -------     -------    -------
 Total loans-net               $2,243    $2,077     $2,039      $4,267    $11,222     $28,144     $22,366    $72,358
                               ======    ======     ======      ======    =======     =======     =======    =======
</TABLE>
___________________________

(1)  Amounts shown are net of unaccreted discounts on loans transferred to
     held for investment of $23,000, undisbursed portion of loans in process of
     $2,186,000, deferred loan origination fees of $157,000 and allowance for
     loan losses of $264,000.

(2)  Includes construction loans and second mortgage loans.

(3)  Includes home equity line of credit loans underwritten on the same basis
     as first mortgage loans.

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

     The following table sets forth the dollar amount of all loans, after net
items, due after one year from June 30, 1998, which have predetermined interest
rates or floating or adjustable interest rates.


<TABLE>
<CAPTION>
                                                             Floating or
                                           Predetermined      adjustable
                                               rates            rates
                                           -------------     ------------
                                                  (In thousands)
     <S>                                  <C>              <C>
     Mortgage loans(1)(2):
     One-to-four family residential           $34,790           $21,377
     Multi-family residential                      96             3,492
     Nonresidential                               168             9,798
     Land                                          45               349
                                              -------           -------
     Total loans-net                          $35,099           $35,016
                                              =======           =======
</TABLE>
______________________________

(1)  Includes construction loans, second mortgage loans and home equity line
     of credit loans.

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


                                       12
<PAGE>   13


     REAL ESTATE LENDING STANDARDS.  Effective in fiscal 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices.  These lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies adopted by the federal
banking agencies in December 1992 ("Guidelines").  The Guidelines set forth
uniform regulations prescribing standards for real estate lending.  Real estate
lending is defined as an extension of credit secured by liens on interests in
real estate or made for the purpose of financing the construction of a building
or other improvements to real estate, regardless of whether a lien has been
taken on the property.

     The policies must address certain lending considerations set forth in the
Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements.  These policies must also
be appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually.  The LTV ratio framework, with a LTV ratio being
the total amount of credit to be extended divided by the appraised value of the
property at the time the credit is originated, must be established for each
category of real estate loans.  If not a first lien, the lender must combine
all senior liens when calculating this ratio.  The Guidelines, among other
things, establish the following supervisory LTV limits:  raw land (65%); land
development (75%); construction (commercial, multi-family and nonresidential)
(80%); improved property (85%) and one-to-four family residential
(owner-occupied) (no maximum ratio; however, any LTV ratio in excess of 90%
should require appropriate insurance or readily marketable collateral).  Blue
Ash's loan policy complies with such Guidelines.


     LOAN CONCENTRATIONS.  Blue Ash's primary lending activity is the
origination of first mortgage loans to enable borrowers to purchase or
refinance residential real property in its lending area.  Blue Ash's lending
area is defined as Hamilton, Clermont, Butler, Warren and Brown Counties in
Southwestern Ohio; Dearborn County in Southeastern Indiana; and Kenton,
Campbell, Boone and Grant Counties in Northern Kentucky.  Blue Ash's lending
efforts have historically focused on one-to-four family residential and
multi-family residential real estate loans, which comprised approximately $60.9
million, or 84%, of the total loan portfolio, including loans held for sale, at
June 30, 1998 and $55.7 million, or 83%, of the total loan portfolio, including
loans held for sale, 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
provided Blue Ash with more than adequate collateral coverage in the event of
default.  Nevertheless, Blue Ash, as with any lending institution, is subject
to the risk that residential real estate values could deteriorate in its
lending area, thereby impairing collateral values.  However, management is of
the belief that residential real estate values in Blue Ash's lending area are



                                       13
<PAGE>   14



presently stable.  At June 30, 1998, virtually all of Blue Ash's residential
real estate loans consisted of "conventional" loans, which means that they are
not insured by the Federal Housing Administration or guaranteed by the
Department of Veteran Affairs.

     ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS.  The primary lending
activity of Blue Ash has been the origination of permanent conventional loans
secured by one-to-four family residences, primarily single-family residences,
located within Blue Ash's primary lending area of Southwestern Ohio.  In
addition, Blue Ash makes second mortgage loans, as well as home equity line of
credit loans underwritten on the same basis as first mortgage loans.  Blue Ash
also has a small percentage of loans secured by property located outside its
primary lending area of Southwestern Ohio including a small percentage secured
by real estate located in Indiana and Kentucky.  Each of such loans is secured
by a mortgage on the underlying real estate and improvements thereon, if any.

     When originating one-to-four family residential mortgage loans, Blue Ash
evaluates both the borrower's ability to make principal and interest payments
and the value of the property that will secure the loan.  All property securing
one-to-four family real estate loans made by Blue Ash is appraised by
independent appraisers selected by Blue Ash and subject to review by the
management of Blue Ash.  Blue Ash requires evidence of marketable title and
lien position, as well as title insurance in certain circumstances, on all
loans secured by real property and requires fire and extended coverage casualty
insurance in amounts at least equal to the principal amount of the loan or the
value of improvements on the property, depending on the type of loan.  Blue Ash
may also require flood insurance to protect the property securing its interest.


     OTS regulations limit the amount which Blue Ash may lend in relationship
to the appraised value of the real estate and improvements at the time of loan
origination.  In accordance with such regulations, Blue Ash is permitted to
lend up to 100% of the appraised value of the real property securing a loan
(the ratio of the principal amount of the loan to the appraised value of the
property securing the loan is referred to as the "loan-to-value ratio" or
"LTV").  However, as a matter of policy, Blue Ash generally does not make
conventional loans with loan-to-value ratios exceeding 80% and makes loans with
loan-to-value ratios in excess of 80% only when secured by first liens on
owner-occupied one-unit residences.  On loans with loan-to-value ratios in
excess of 80%, Blue Ash generally requires that private mortgage insurance
("PMI") be obtained, with coverage of 25%-33% of the appraised value of the
property.  In rare cases where the LTV is over 80% but less than 90%, the PMI
requirement can be waived if the borrower is strong financially, the credit
history is exceptional and the property securing the mortgage loan is in
excellent condition.  Loans with loan-to-value ratios in excess of 80% are
generally required to have a mortgage escrow account from which disbursements
are made for real estate taxes, hazard and flood insurance, and PMI.
Additionally, Blue Ash originates under very specific



                                       14
<PAGE>   15



guidelines, fixed-rate second mortgage loans and home equity line of credit
loans with LTVs over 80% but less than 90% on owner-occupied single-family
residences without the requirement of PMI.  The loan amount on these loans are
limited to $25,000 and the properties securing these loans must be in very good
condition, the borrowers' credit history must be perfect over the past two
years, the borrowers must have good job stability and the borrowers must have
an established savings pattern.

     Adjustable-rate mortgage loans ("ARMs") are offered by Blue Ash for terms
of up to 30 years for one-to-four family owner-occupied and nonowner-occupied
properties.  During fiscal 1996, Blue Ash increased its term to maturity from
25 years to 30 years on loans secured by nonowner-occupied one-to-four family
properties.  The interest rate adjustment periods on the ARMs are either
one-year, two-year, three-year, or one-year following an initial rate set for
three-years or five-years.  The interest rate adjustments on all the ARMs
presently originated by Blue Ash are tied to changes in the weekly average
yield on U.S. Treasury securities, adjusted to a constant maturity of one-year
as made available by the Board of Governors of the Federal Reserve System (the
"Index").  The interest rate for the ARM period is increased or decreased by
the amount of change in the Index between the date the interest rate was set
and the date of the ARM adjustment rounded to the nearest one-eighth of one
percent.  Rate adjustments are computed by adding a stated margin (between
2.75% and 3.50% at June 30, 1998 for single-family owner-occupied property and
between 3.25% - 3.75% on nonowner-occupied one-to-four family property at June
30, 1998) to the Index.  The maximum allowable adjustment at each adjustment
date is usually 2% with a maximum adjustment of 6% over the term of the loan.
Blue Ash also offers a "convertible" one-year ARM loan which is secured by
either one or two-family owner-occupied property.  This convertible ARM is
similar to the standard one-year ARM in all features, except that the borrower
under the one-year "convertible" ARM has the option to convert it to a
fixed-rate mortgage loan any time after the first payment is made up to five
years after the origination date.  The stated margin on the "convertible"
one-year ARM is 3.25% at June 30, 1998, which differs from the stated margin of
2.75% on the standard one-year ARM at June 30, 1998.


     Blue Ash offers ARMs with initial rates lower than the sum of the Index
plus the margin ("introductory" rates), determined by Blue Ash based on various
factors, including market conditions and competitive rates for loans having
similar features offered by other lenders for such initial periods.  The
initial rate is also dependent, in part, on how often the rate can be adjusted.
The initial interest rates on Blue Ash's one or two-family owner-occupied
ARMs, assuming an origination fee of 1% of the loan amount charged, ranged from
6.13% to 7.88% per annum at June 30, 1998.  The initial interest rates on Blue
Ash's nonowner-occupied one-to-four family investment ARMs, assuming a 1%
origination fee, ranged from 7.75% to 8.25% per annum at June 30, 1998.
Further, the initial interest rate offered on the one-year "convertible" ARM
was 6.00% per annum at June 30, 1998 with no origination fees.  Such



                                       15
<PAGE>   16



ARM loans are subject to increased risk of delinquency or default due to
increasing monthly payments as the interest rates on such loans increase to the
fully-indexed level, although such increase is considered in Blue Ash's
underwriting of such loans.  At June 30, 1998, Blue Ash offered initial
interest rates on the ARMs it originates that were 0.63% to 2.00% below the
rate that would be indicated by reference to the repricing formula.  On the
"convertible" one-year ARM, the introductory rate was 2.63% below the
fully-indexed rate at June 30, 1998.  Blue Ash's delinquency experience on its
ARMs has generally been satisfactory to date.  In addition, the loans in Blue
Ash's portfolio generally contain a due on sale clause, and Blue Ash does not
generally permit ARMs to be assumed by borrowers.  Blue Ash does not offer ARMs
with negative amortization and the terms and conditions of the ARMs offered by
Blue Ash, including the index for interest rates, may vary from time to time.

     Blue Ash has in the past issued ARMs tied to different indexes.  One such
index was the three-year constant maturity U.S. Treasury Index.  Another index
was the monthly average cost of savings, borrowings and advances of members of
the FHLB of San Francisco ("the Eleventh District Cost of Funds Index").
Interest rates on ARMs tied to the Eleventh District Cost of Funds Index are
adjusted periodically to a rate typically equal to 225-325 basis points (100
basis points equals 1%) over this index.

     Blue Ash originates ARMs secured by junior mortgages on residential
properties of single-family units with maturities of up to 10 years.  The ARMs
are adjusted monthly to a rate typically equal to either zero, 100, 200 or 250
basis points above the "bank prime loan" rate as reported in The Wall Street
Journal.  The maximum total loan-to-value ratio, taking into account all liens
on the security property, for second mortgage adjustable-rate loans secured by
owner-occupied residential properties of single-family units is generally 80%,
although Blue Ash may lend up to 95% under certain circumstances.  Blue Ash
originated approximately $1.6 million in adjustable-rate second mortgage loans
during the year ended June 30, 1998, and such loans outstanding of $2.0 million
represented 2.8% of total net loans, including loans held for sale, at June 30,
1998.

     Blue Ash's total adjustable-rate one-to-four family residential real
estate loan portfolio was approximately $21.6 million at June 30, 1998, and
represented 38.0% of the one-to-four family residential real estate loan
portfolio at such date.  In addition, Blue Ash had outstanding commitments to
fund $198,000 in one-to-four family ARMs at interest rates ranging from 8.50%
to 11.00% at June 30, 1998.


     Historically, Blue Ash originated for retention in its own portfolio
fixed-rate loans secured by one-to-four family residential real estate.  In the
early 1980s, in order to reduce its exposure to changes in interest rates, Blue
Ash began to emphasize the origination of ARMs.  In late 1989, however, in
response to decreasing interest rates, Blue Ash began to increase



                                       16
<PAGE>   17



the amount of fixed-rate mortgage loans it originated.  Throughout 1990 and
1991, the demand for fixed-rate mortgage loans continued to increase as
interest rates declined.  In response to the increasing volume of fixed-rate
loan originations, in 1991 Blue Ash began selling to the Federal Home Loan
Mortgage Corporation (the "FHLMC") virtually all of its conforming fixed-rate
mortgage loans originated.  Such strategy was employed by management in order
to reduce Blue Ash's interest rate risk exposure of generally holding
fixed-rate loans in the portfolio during low interest rate environments.

     In reviewing its asset and liability mix as well as the interest rate
sensitivity to such assets and liabilities during fiscal 1996, Blue Ash changed
its strategy from that initially adopted in 1991 with respect to fixed-rate
mortgage loans.  Instead of originating for sale all residential fixed-rate
loans, management elected to portfolio fixed-rate loans subject to certain
interest rate risk limitations. Such a strategy adopted by Blue Ash was
predicated upon its positive gap position in fiscal 1996 and its primary
objective of maximizing net interest income rather than strictly matching the
interest rate sensitivity of its assets and liabilities, so as to increase its
interest rate spread and core earnings.  Management chose to sell fewer loans
because the interest rate environment made holding loans in Blue Ash's
portfolio and funding lending activities through net deposit inflows more
beneficial.  It was management's belief that Blue Ash could retain a greater
percentage of fixed-rate loans in the portfolio without subjecting Blue Ash to
an inordinate amount of interest rate risk exposure attendant with holding
fixed-rate loans in the portfolio.  As a result of this change in strategy and
absent a declining interest rate environment, secondary market activities were
limited in fiscal 1997.  This strategy change in originating fixed-rate
mortgage loans during fiscal 1996 was carried over into fiscal 1997 and was
consistent with Blue Ash's long-term goals and objectives of continued growth
and increased profitability.  In addition, this change in strategy gave Blue
Ash the added flexibility of originating loans for sale or retaining them in
the portfolio depending upon interest rate and market conditions and asset and
liability management goals.

     During fiscal 1998, however, as interest rates on mortgage loans steadily
declined, Blue Ash reemphasized the origination of loans for the secondary
market as the demand for low fixed-rate mortgage loans intensified within Blue
Ash's lending area.  When interest rates are at historically low levels,
minimizing interest rate risk exposure, effecting changes in its asset and
liability mix and generating income from sale of loans become more important
than strictly growing the loan portfolio through the retention of all loans.
If interest rates remain at low levels, 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 monitoring its exposure to interest rate risk.





                                       17
<PAGE>   18


     Fixed-rate mortgage loans, which are eligible for resale in the secondary
market, were offered by Blue Ash with terms to maturity of 30 years at interest
rates of 7.38% - 7.88%, 20 years at interest rates of 7.25% - 7.75% and 15
years at interest rates of 7.00% - 7.50% at June 30, 1998.  Fixed rate mortgage
loans originated for retention in the loan portfolio were offered by Blue Ash
with terms to maturity of 30 years at interest rates of 8.00% - 8.38%, 20 years
at interest rates of 7.88% - 8.25% and 15 years at interest rates of 7.75% -
8.00%.  Substantially all of the fixed-rate mortgage loans in Blue Ash's loan
portfolio contain a due-on-sale clause providing that Blue Ash may declare the
unpaid amount due and payable upon the sale of or transfer of any interest in
the property securing the loan.  Blue Ash enforces these due-on-sale clauses to
the extent permitted by law.  Fixed-rate loans secured by one-to-four family
residential real estate loans, amounting to $35.4 million, constituted 62.0% of
Blue Ash's loan portfolio for these types of loans at June 30, 1998.  Blue Ash
had outstanding commitments of $1.6 million to fund fixed-rate mortgage loans
at rates ranging from 7.00% to 8.88% at June 30, 1998, of which the majority
were subsequently disbursed in July 1998.

     Blue Ash's one-to-four family residential real estate loan portfolio,
which includes loans held for sale, construction loans and home equity line of
credit loans, was approximately $57.0 million at June 30, 1998, and represented
78.8% of total net loans at such date.  At such date, loans secured by
one-to-four family residential real estate with outstanding balances of $1.3
million, or 2.3% of the total one-to-four family residential real estate loan
balance, were delinquent 30 days or more.  See "Delinquent Loans,
Non-performing Assets and Classified Assets."


     MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS.  In addition to loans on
one-to-four family properties, Blue Ash makes loans secured by multi-family
properties (generally apartment buildings) containing over four units.
Multi-family loans were generally made with terms to maturity of up to 20
years.  During fiscal 1997, however, Blue Ash changed its terms on originating
multi-family loans by offering them with terms to maturity of up to 25 years
and a 30-year amortization period.  Such loans are currently made with both
adjustable interest rates and fixed interest rates.  Multi-family loans are
limited to an 80% loan-to-value ratio and secondary financing is permitted by
the seller up to 10% of the purchase price of the property.  A subordination
agreement has to be signed and the project must support both loans with a
positive cash flow.  The interest rate adjustment periods offered on
adjustable-rate multi-family unit loans are generally one-year or three-year,
and are tied to the one-year and three-year Treasury Securities' rates,
respectively.  Blue Ash also offers a ten-year/one-year adjustable-rate loan
that adjusts every year following an initial rate set for ten years.  This ARM
is initially tied to the ten-year U.S. Treasury index and then the one-year
U.S. Treasury index at each adjustment date thereafter.  Rate adjustments are
computed by adding a stated margin, typically 3.50%, to the Index.  The
periodic interest rate cap (the maximum amount by which the interest rate may
be increased or decreased in



                                       18
<PAGE>   19



a given period) on Blue Ash's ARMs for multi-family mortgages is generally
2.0%, with a lifetime interest rate cap of 6.0%.  The ten-year/one-year ARM has
no periodic interest rate cap and a lifetime interest rate cap of 6.0%.  During
fiscal 1998, Blue Ash began offering fixed-rate multi-family loans with terms
to maturity of 15 years and an amortization period of 20 years.  The interest
rate being offered on this new loan program was 8.75% at June 30, 1998, with
loan origination fees of 2% of the loan amount being charged.

     Multi-family lending is generally viewed as exposing the lender to a
greater risk than one-to-four family residential lending.  Such loans typically
involve higher loan principal amounts and repayment of the loans generally is
dependent, in large part, on sufficient income generated by the project to
cover operating expenses and loan repayments.  Market values may vary as a
result of economic events or governmental regulations outside the control of
the borrower or lender, such as rent control laws, which impact the future cash
flow of the affected properties.  Corresponding to the greater lending risk is
a generally higher interest rate applicable to multi-family residential
lending.  Blue Ash believes that its experience in making multi-family
residential loans and its loan underwriting criteria are factors in reducing
Blue Ash's exposure to such credit risk.  Blue Ash generally requires that the
property securing the loan generate a positive cash flow after giving effect to
debt service and other expenses.  Blue Ash's underwriting criteria include:  an
evaluation of the reputation of the borrower; the amount of the borrower's
equity in the project; sales and leasing information and projections; and cash
flow projections.  Blue Ash also attempts to reduce the risk associated with
multi-family lending by obtaining personal guarantees on loans made to
corporations and partnerships, and where deemed necessary, Blue Ash obtains
additional collateral.  In addition, Blue Ash currently requires that borrowers
agree to submit financial statements annually to enable Blue Ash to monitor
these loans more effectively.


     At June 30, 1998, Blue Ash had $3.9 million in outstanding multi-family
residential real estate loans representing 5.4% of total net loans at that
date.  Regarding the multi-family real estate portfolio, there were two loans
totaling $1.3 million at June 30, 1998 which had balances of $500,000 or more.
Blue Ash's multi-family real estate consist primarily of loans secured by
apartment buildings which are primarily located in its lending area.
Generally, these apartment buildings are small with an average of 6 to 12
units.  However, occasionally, the loans are secured by larger developments.
Blue Ash's largest multi-family real estate loan, which is a participation loan
that is serviced by another financial institution, amounted to $660,000 at June
30, 1998 and was secured by a 49-unit apartment complex. Blue Ash's second
largest multi-family real estate loan amounted to $595,000 at June 30, 1998 and
was secured by a 48-unit apartment complex.  The secured property on both of
these loans are located in Blue Ash's lending area and both were performing
according to their original loan terms at June 30, 1998.  The real estate
securing all



                                       19
<PAGE>   20



multi-family loans is located in Blue Ash's primary lending area of
Southwestern Ohio.  Blue Ash had total commitments outstanding to originate
$252,000 in multi-family residential loans at June 30, 1998.  Such commitments
consisted solely of one adjustable-rate loan at an initial rate of 8.75%,
secured by a 10-unit apartment building.  At June 30, 1998 there were no loans
secured by multi-family residential real estate that were delinquent 30 days or
more.  See "Delinquent Loans, Non-Performing Assets and Classified Assets."

     CONSTRUCTION LOANS.  Blue Ash makes construction loans on residential and
nonresidential real estate properties.  Specifically, Blue Ash originates
construction loans to individuals for the construction of their residences as
well as to builders and, to a lesser extent, developers, for the construction
of one-to-four family residences and condominiums, the development of
one-to-four family lots and the development of multi-family and nonresidential
property in Blue Ash's lending area.

     Construction loans to individuals for their residences are typically
structured to be converted to permanent loans at the end of the construction
phase, which normally runs six months.  These construction loans have rates and
terms which match any one-to-four family loan offered by Blue Ash, except that
during the construction phase the borrower pays interest only.  Loan
origination fees of 1% are typically charged.  Residential construction loans
are generally underwritten pursuant to the same guidelines used for originating
permanent residential loans.  The majority of the construction loans originated
by Blue Ash are made to owner-occupants for construction of single-family
homes.  At June 30, 1998, Blue Ash had $1.0 million of outstanding construction
loans, net of undisbursed loans in process and deferred loan origination fees,
to borrowers intending to live in the properties upon completion of
construction.  Of these construction loans to individual borrowers, there were
no loans delinquent 30 days or more at June 30, 1998.  See "Delinquent Loans,
Non-Performing Assets and Classified Assets".

     Construction loans to builders of one-to-four family residences require
the payment of interest only and typically have terms to maturity of 12 to 24
months.  These loans may provide for the payment of interest and loan fees from
loan proceeds and carry interest rates which float with changes in the specific
prime rate.  At June 30, 1998, such loans were being offered at an interest
rate of 1% over the composite prime rate of 75% of the thirty largest U.S.
banks, as reported by The Wall Street Journal.  Loan origination fees of 1% are
typically charged.  At June 30, 1998, Blue Ash had $990,000 in construction
loans, net of undisbursed loans in process and deferred loan origination fees,
to builders of one-to-four family residences with no loans over $332,000.  Of
these residential loans to builders, there were no loans delinquent 30 days or
more at June 30, 1998.  See "Delinquent Loans, Non-Performing Assets and
Classified Assets."





                                       20
<PAGE>   21


     Blue Ash also makes loans to builders for the purpose of developing
one-to-four family lots.  These loans typically have terms of up to five years,
with an amortization period of ten years and a maximum LTV of 75%.  These loans
are adjustable and the interest rates have been historically based on 2% over
the specific prime rate.  Loan origination fees of 2% are typically charged.
The principal on these loans is typically paid down as lots are sold.  At June
30, 1998, Blue Ash had no loans classified as development loans. However, Blue
Ash had total outstanding commitments of approximately $565,000 to originate a
land development loan at June 30, 1998 with an adjustable interest rate of the
specified prime rate plus 1%.  Finally, Blue Ash, from time to time, makes
loans to individuals and builders for multi-family and nonresidential
construction.  At June 30, 1998, Blue Ash had two multi-family construction
loans that were purchased from another financial institution with a net balance
of $242,000, which were secured by various buildings within a large
multi-building condominium project.

     Construction loans for nonowner-occupied properties generally involve
greater underwriting and default risks than do loans secured by mortgages on
existing properties due to the concentration of principal in a limited number
of loans and borrowers and the effects of general economic conditions on real
estate developments, developers, managers and builders.  In addition,
construction loans in general are more difficult to evaluate and monitor.  Loan
funds are advanced upon the security of the project under construction, which
is more difficult to value before the completion of construction.  Moreover,
because of the uncertainties inherent in estimating construction costs, it is
relatively difficult to evaluate accurately the LTVs and the total loan funds
required to complete a project.  In the event a default on a construction loan
occurs and foreclosure follows, Blue Ash would have to take control of the
project and attempt either to arrange for completion of construction or dispose
of the unfinished project.  Blue Ash attempts to mitigate this risk by, among
other things, making its construction loans to developers and builders with
whom it is familiar and who, in the opinion of management, have established a
record of successful development or construction for sale.  Blue Ash's
construction loans generally are secured by property located in its lending
area, and the economy of such lending area has been relatively stable.  Blue
Ash generally requires that construction loans be made with recourse to the
borrower.


     NONRESIDENTIAL REAL ESTATE LOANS.  In order to enhance portfolio yield and
decrease the average term to repricing of its assets, Blue Ash also makes loans
secured by nonresidential real estate consisting primarily of retail
properties, warehouses, churches, office buildings and loans secured by a few
special-purpose buildings.  Such nonresidential loans are made with adjustable
rates and fixed rates of interest and have terms to maturity of up to 25 years
and a maximum LTV of 75%.  During fiscal 1997, Blue Ash changed its terms
regarding the origination of nonresidential real estate loans.  Instead of
originating such



                                       21
<PAGE>   22



loans with terms to maturity of 20 years, Blue Ash extended the term to
maturity to 25 years with a 30-year amortization period.  The interest rate
adjustment periods offered on adjustable-rate nonresidential loans are
one-year, three-year and ten-year, and are tied to the one-year, three-year and
ten-year Treasury Securities' rates, respectively.  Rate adjustments are
computed by adding a stated margin, typically 3.5%, to the Index.  The periodic
interest rate cap on Blue Ash's ARMs for nonresidential mortgages is generally
2.0%, with a lifetime interest rate cap of 6.0%.  Blue Ash also has a
ten-year/one-year ARM that adjusts every year after an initial ten-year rate
set.  This ARM is initially tied to the 10-year U.S. Treasury index and then
the one-year U.S. Treasury index on each adjustment date thereafter.  Unlike
the one-year and three-year ARM, there is no periodic cap on the
ten-year/one-year ARM.  During fiscal 1998, Blue Ash began offering fixed-rate
nonresidential loans with terms to maturity of 15 years and an amortization
period of 20 years.  The interest rate being offered on this new loan program
was 8.75% at June 30, 1998, with loan origination fees of 2% of the loan amount
typically charged.

     Nonresidential real estate lending is generally considered to involve a
higher degree of risk then residential lending due to the relatively larger
loan amounts and the effects of general economic conditions on the successful
operation of income-producing properties.  If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired.  Blue Ash generally requires that the
property securing the loan generate a positive cash flow after giving effect to
debt service and other expenses.  Blue Ash has endeavored to reduce the risk in
nonresidential lending by evaluating the credit history and past performance of
the borrower, the location of the real estate, the quality of management
constructing and operating the property, the debt service ratio, the quality
and characteristics of the income stream generated by the property and
appraisals supporting the property's valuation. Blue Ash also reviews any
tenant leases and requires that the payments under such leases be assigned to
the Company. Blue Ash currently requires borrowers to agree to submit financial
statements annually to allow Blue Ash to effectively monitor the loan.
Additionally, Blue Ash's nonresidential loans are relatively small and are
secured by small nonresidential properties which are frequently occupied by the
borrower.  Management believes that these types of nonresidential properties,
especially in Blue Ash's lending area, have not been as depressed as in other
regions of the country.  Blue Ash follows strict underwriting guidelines before
originating these types of loans, and Blue Ash does not originate such loans
beyond its normal lending territory.  Finally, unlike with multi-family
lending, no secondary financing is permitted on nonresidential loans.

     Under OTS capital regulations, Blue Ash is required to maintain higher
amounts of capital for nonresidential real estate loans as compared to
qualifying residential mortgage loans, to reflect a perceived higher degree of
credit risk associated with such assets.  See "Regulation -- Regulatory Capital
Requirements."




                                       22
<PAGE>   23


     Blue Ash is currently, and has in the past, been active in the
origination of loans secured by nonresidential real estate properties.  At June
30, 1998, nonresidential real estate loans outstanding totaled $10.6 million
and represented 14.7% of the total net loan portfolio.  This compared to $10.2
million in nonresidential real estate loans outstanding at June 30, 1997, or
15.3% of total net loans. The great majority of this nonresidential loan
portfolio was created during fiscal 1994 and 1993 as a result of loan
originations of $7.6 million and $6.6 million, respectively.  Loan originations
during fiscal 1998, 1997 and 1996 amounted to only $2.9 million, $2.3 million
and $749,000, respectively, as Blue Ash was not as actively involved in such
nonresidential lending to the same degree as fiscal 1994 and 1993.  Blue Ash's
largest nonresidential loan is secured by a wedding reception and banquet
facility located in Mason, Ohio.  Such loan had a net outstanding balance of
$805,000 at June 30, 1998.  Blue Ash's second largest nonresidential loan is
secured by a warehouse/office structure located in Sharonville, Ohio.  Such
loan had a net outstanding balance of $715,000 at June 30, 1998.  Blue Ash's
third largest nonresidential real estate loan in the portfolio amounted to
$687,000 at June 30, 1998 and was secured by six warehouse/storage buildings
located in Fairfield, Ohio.  All three of these loans are located in Blue Ash's
lending area and were performing according to their original loan terms at June
30, 1998.  Blue Ash had total outstanding commitments of approximately $71,000
to originate nonresidential real estate loans at June 30, 1998.  Such
commitments consisted solely of one adjustable-rate loan, secured by a
one-story office building, with an interest rate of 8.75%.  At June 30, 1998,
Blue Ash had $55,000 in outstanding nonresidential loans that were delinquent
30 days or more.  See "Delinquent Loans, Non-Performing Assets and Classified
Assets."

     LAND LOANS.  Blue Ash makes loans secured by unimproved real estate.
These land loans are originated as adjustable-rate loans for terms up to five
years, with an amortization period of ten years and a maximum LTV of 75%.  The
interest rates on these loans are generally based on the specified prime rate
as previously discussed plus 2%.  At June 30, 1998, Blue Ash had $646,000, or
0.9% of total net loans, in outstanding land loans.  At such date, Blue Ash had
$75,000 in outstanding land loans that were delinquent 30 days or more.  See
"Delinquent Loans, Non-Performing Assets and Classified Assets."


     CONSUMER LOANS.  Blue Ash makes consumer loans almost exclusively to
depositors on the security of their deposit accounts.  Such loans are made at
adjustable rates of interest, and the principal amount of the loan cannot
exceed 90% of the face value of the pledged deposit.  Interest is due monthly
or quarterly, and principal is due on demand.  The interest rate on these loans
is usually 2% above the rate paid on the amount used for collateral.
Additionally, on a rare occasion, Blue Ash originates loans secured by
actively-traded stock in public companies at 50% of the value of the stock and
originates automobile loans solely to its employees at an adjustable rate of
interest equal to the specified prime rate as previously discussed.



                                       23
<PAGE>   24



These automobile loans are not available to the directors or executive
officers.  At June 30, 1998, Blue Ash had approximately $111,000, or 0.2% of
total net loans, invested in deposit loans to its customers and $84,000, or
0.1%, invested in stock loans.

     HOME EQUITY LINES OF CREDIT AND SECOND MORTGAGES.  Blue Ash offers home
equity line of credit loans.  These are typically secured by second mortgages.
The line of credit agreements currently being offered by Blue Ash provide that
borrowers can obtain advances up to their credit limit for a period of ten
years, and at that time, they must repay in full any outstanding balance.  Home
equity line of credit loans generally have interest rates which adjust monthly
based on changes in the composite prime rate of 75% of the thirty largest U.S.
banks, as reported by The Wall Street Journal.  Blue Ash typically originates
home equity line of credit loans based on a combined LTV of not more than 80%
for the first mortgage and the line of credit.  However, Blue Ash does offer
home equity line of credit loans up to a total LTV of 90% based upon certain
specified criteria, with a maximum loan amount of $25,000.  In order to qualify
for such terms, the property securing the loan has to be in very good condition
and the borrower has to have good job stability, perfect credit history over
the last two years and an established savings pattern.  Additionally, second
mortgage loans are originated for terms to maturity of up to ten years at fixed
rates of interest.  Such loans are secured by a second mortgage on the property
which Blue Ash typically holds a first mortgage.

     During the year ended June 30, 1998, Blue Ash originated $2.2 million in
home equity line of credit loans.  The outstanding loan balance of such loans,
totaling $2.6 million, represented 3.6% of the total net loans outstanding at
June 30, 1998.  At such date, home equity line of credit loans of $176,000 were
delinquent 30 days or more.  See "Delinquent Loans, Non-Performing Assets and
Classified Assets."

     COMMERCIAL LOANS.  Blue Ash does not issue any letters of credit and
originate or purchase any loans for commercial, business or agricultural
purposes, other than loans secured by real estate.

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


     Loan applications for permanent mortgage loans are taken by one of Blue
Ash's branch managers or loan officers.  Blue Ash obtains a credit report,
verification of employment and other documentation concerning the
credit-worthiness of the borrower.  An  appraisal of the fair market value of
the real estate which will be given as security for the loan is prepared by an
independent fee appraiser approved by the Board of Directors.  For residential
properties, an environmental study is conducted only if the appraiser or a
director has reason to believe that an environmental



                                       24
<PAGE>   25



problem may exist.  For most nonresidential properties, an environmental report
is required.  For most multi-family and nonresidential mortgage loans, a
personal guarantee of the borrower's obligation to repay the loan is required.
Blue Ash also obtains information with respect to prior projects completed by
the borrower.  Upon completion of the appraisal and the receipt of information
on the borrower, the application for a loan is submitted to the Loan Committee
and/or the Board of Directors for approval or rejection.  Any loan application
which does not conform in all respects with Blue Ash's underwriting guidelines
are reviewed and accepted or rejected by the full Board of Directors.

     In the approval process for the loans it originates, Blue Ash assesses the
applicant's ability to make principal and interest payments on the loan and the
value of the property securing the loan.  On ARM loans, Blue Ash currently
qualifies the applicant based on his or her ability to repay the loan based on
the fully-indexed rate, not the introductory rate.  At June 30, 1998, Blue
Ash's introductory ARM rates are approximately 63 to 263 basis points below the
fully-indexed rates.

     If a mortgage loan application is approved, an attorney's opinion of title
is obtained on the real estate which will secure the mortgage loan.  Blue Ash
does not obtain title insurance, unless the property securing the loan is a
planned unit development ("PUD") or a condominium on a fixed-rate loan or the
property is multi-family or nonresidential real estate.  Borrowers are required
to carry satisfactory fire and casualty insurance and flood insurance, if
applicable, and to name Blue Ash as an insured mortgagee.

     The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs.  Blue
Ash also evaluates the feasibility of the proposed construction project and the
experience and record of the builder.

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

     Certain of Blue Ash's loans carry prepayment penalties and provisions that
the entire balance of the loan is due upon sale of the property securing the
loan.


     LOAN ORIGINATIONS, PURCHASES AND SALES.  During the past several years,
Blue Ash has been actively originating new fixed-rate and adjustable-rate
loans.  Adjustable-rate loans originated by Blue Ash are generally held in Blue
Ash's loan portfolio.  Fixed-rate loans are originated in a manner which will
facilitate their sale in the secondary market, even though Blue Ash might
retain for the portfolio certain of these loans.  In the early 1980's, Blue Ash
originated mortgage loans only at adjustable rates.  In the late 1980's, Blue
Ash began originating a limited



                                       25
<PAGE>   26



amount of fixed-rate mortgage loans, most of which it held in its portfolio.
In late 1991, Blue Ash commenced selling substantially all of its fixed-rate
mortgage loans it had originated.  During fiscal 1996, however, Blue Ash
changed its strategy with respect to fixed-rate loans.  Instead of originating
for sale substantially all of its fixed-rate loans, Blue Ash elected to retain
these loans for the portfolio subject to certain interest rate risk
considerations.  Such a change in strategy was due in part to Blue Ash's
positive gap position in fiscal 1996 and was consistent with its long-term
goals and objectives of continued growth and profitability.  During fiscal
1998, however, Blue Ash reemphasized the origination of loans for sale in the
secondary market as interest rates declined toward historical lows.  When loans
are sold, Blue Ash retains the responsibility for servicing the loans, and
serviced $48.8 million, $41.6 million and $47.6 million of loans held by others
at June 30, 1998, 1997 and 1996, respectively.  Blue Ash receives servicing
income of 0.25% to 0.38% per year on the principal balance of the loans it
services.

     Blue Ash has generally not participated in loans originated by other
institutions to a large extent.  However, Blue Ash has in its portfolio
participations originated and serviced by others totaling $1.5 million at June
30, 1998.  Blue Ash will consider further participation in loans in the future
if management deems it to be in the interest of Blue Ash.





                                       26
<PAGE>   27


     The following table presents Blue Ash's origination, purchase and sale
activities with respect to its loans and mortgage-backed securities during the
years indicated.

<TABLE>
<CAPTION>
                                                 Year  ended  June 30,    
                                               --------------------------
                                               1998       1997       1996
                                               ----       ----       ----
                                                     (In thousands)
     <S>                                     <C>        <C>       <C>
     Loans originated:
     Construction                            $ 3,891    $ 2,509    $ 2,866
     1-to-4 family                            36,923     20,115     23,341
     Home equity lines of credit               2,158      2,578      1,387
     5 or more units                           1 604        530        505
     Nonresidential real estate                2,902      2,345        749
     Land                                         79        187        500
     Deposit account                             164        402         83
     Consumer and other                           84         --         12
                                             -------    -------    -------

     Total loans originated(1)               $47,805    $28,666    $29,443
                                             =======    =======    =======
     Loans and mortgage-backed
     securities purchased:
     Loans                                   $   671    $   258    $    49
     Insured, guaranteed or
     collateralized mortgage-backed
     securities(2)                            17,600      2,021     16,475
                                             -------    -------    -------
     Total loans and mortgage-
     backed securities purchased             $18,271    $ 2,279    $16,524    
                                             =======    =======    =======
     Loans and mortgage-backed
     securities sold:
     Residential real estate loans           $17,674    $ 1,949    $ 8,201
     Nonresidential real estate loans          1,244         --         --
     Mortgage-backed securities(3)             8,884      1,148     10,803
                                             -------    -------    -------
     Total loans and mortgage-
     backed securities sold                  $27,802    $ 3,097    $19,004
                                             =======    =======    =======
</TABLE>

___________

(1)  Includes loans originated for sale in the secondary market.

(2)  Includes securities designated as available for sale and held to
     maturity.

(3)  Includes securities designated as available for sale.

     OTS regulations generally limit the aggregate amount that a savings
association can lend to one borrower to an amount equal to 15% of the
association's unimpaired capital and unimpaired surplus (collectively,
"Unimpaired Capital").  A savings association may loan to one borrower an
additional amount not to exceed 10% of the association's Unimpaired Capital if
the additional amount is fully secured by certain forms of "readily marketable
collateral."  Real estate is not considered "readily marketable collateral."
In addition, the regulations require that loans to certain related or
affiliated borrowers be aggregated for purposes of such limits.  Two exceptions
to these limits permit loans to one borrower of up to $500,000 "for any
purpose" and, subject to certain conditions, including OTS prior approval,
loans to one borrower for the development of domestic residential housing units
in amounts up to the lesser of $30,000,000, or 30% of the savings association's
Unimpaired Capital.



                                       27

<PAGE>   28


     Based upon such limits, Blue Ash was able to lend approximately $1.3
million to any one borrower at June 30, 1998.  Blue Ash's five largest loans or
groups of loans to one borrower, including related entities, aggregated
$877,000, $817,000, $811,000, $721,000 and $692,000 at June 30, 1998.  The
$877,000 loan concentration consisted of seven nonowner-occupied single-family
residences and one land loan which are all concentrated within the same general
local area.  The $817,000 loan concentration consisted of one nonresidential
property secured by a wedding reception and banquet facility in Blue Ash's
lending area.  The $811,000 loan concentration consisted of two
nonowner-occupied single-family mortgage loans, one line of credit loan secured
by a single-family nonowner-occupied residence and one line of credit loan
secured by land in Blue Ash's lending area.  All of Blue Ash's five largest
loans or groups of loans were performing in accordance with their original loan
terms at June 30, 1998 and all were located in Blue Ash's lending area.

     LOAN ORIGINATION AND OTHER FEES.  In addition to interest earned on loans,
Blue Ash realizes loan origination fee and other fee income from its lending
activities and also realizes income from late payment charges, application
fees, prepayments of loans, loan modifications, changes in property ownership
and for other miscellaneous services.  Loan origination fees, or "points," are
paid by borrowers for mortgage loans.

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


     DELINQUENT LOANS, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS.  When a
borrower fails to make a required payment on a loan, Blue Ash attempts to cause
the deficiency to be cured by contacting the borrower.  In most cases,
deficiencies are cured promptly.  For mortgage loans, a notice is mailed to the
borrower after a payment is 15 days past due and a late penalty is assessed
against the borrower at such time.  After a payment is 30 days past due, the
loan is scheduled for individual attention.  Additional late notices are sent
to the borrower followed by a telephone call, if necessary.  After a payment is
60 days past due, Blue Ash sends the borrower a notice of default.  Blue Ash
then reviews the status of such loan more closely and, if appropriate,
appraises the condition of the property and reviews the financial circumstances
of the borrower.  Based upon the results of any such investigation, Blue Ash
may:  (i) counsel the borrower to develop a repayment program for the
collection of past due amounts; (ii) seek evidence, in the form of a listing
contract, of efforts by the borrower to sell the property if the borrower has
stated that he is attempting to sell; or (iii) request a deed-in-lieu of
foreclosure.  When a loan becomes delinquent more than 90 days, foreclosure
proceedings or other proceedings, as necessary, are generally initiated to
minimize any potential loss.  This process may be accelerated for consumer
borrowers or other borrowers if Blue Ash feels that



                                       28
<PAGE>   29



acceleration may be warranted based on underlying circumstances.  A decision as
to whether and when to initiate foreclosure proceedings is based on such
factors as the amount of the outstanding loan in relation to the original
indebtedness, the extent of the delinquency and the borrower's ability and
willingness to cooperate in curing delinquencies.  If a foreclosure occurs, the
real estate is sold at public sale and may be purchased by Blue Ash.

     Real estate acquired by Blue Ash as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
When property is acquired, at the date of acquisition, it is initially recorded
at fair value establishing a new cost basis and any writedown or writeup
resulting therefrom is charged or credited to the allowance for possible loan
losses.  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 less estimated selling expenses.  Real estate loss
provisions are recorded if the properties' fair value subsequently declines
below the value determined at the recording date.  If the fair value of real
estate acquired through foreclosure less estimated selling expenses
subsequently increases and is greater than the carrying amount, the real estate
valuation allowance is reduced to, but not below zero.  Increases or decreases
in the real estate valuation are charged or credited to income.  Between the
date a loan becomes delinquent and the date it is acquired by Blue Ash, all
costs incurred in maintaining Blue Ash's interest in the property are
capitalized in an amount which may not exceed the estimated fair value.  After
the date of acquisition, all costs incurred in maintaining the property are
expensed and costs incurred for the improvement or development of such property
are capitalized in an amount which may not exceed the estimated fair value less
the estimated disposition costs.  At June 30, 1998, Blue Ash did not have any
outstanding balance in real estate acquired through foreclosure.

     Under generally accepted accounting principles, Blue Ash is required to
account for certain loan modifications or restructurings as "troubled debt
restructurings."  In general, the modification or restructuring of a debt
constitutes a troubled debt restructuring if Blue Ash, for economic or legal
reasons related to the borrower's financial difficulties, grants a concession
to the borrower that Blue Ash would not otherwise consider.  Debt
restructurings or loan modifications for a borrower do not necessarily always
constitute troubled debt restructurings, however, and troubled debt
restructurings do not necessarily result in nonaccrual loans.  Blue Ash did not
have any loans which were classified as a troubled debt restructuring at June
30, 1998.


     Loans are placed on nonaccrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual.  When a loan is placed on nonaccrual status,
previously accrued but unpaid interest is deducted from interest income.  Blue
Ash does not accrue interest on real estate loans past due 90 days or more
unless, in the opinion of management, the value of the property securing the
loan



                                       29
<PAGE>   30



exceeds the outstanding balance of the loan (principal, interest and escrows)
and collection is probable.  Loans may be reinstated to accrual status when all
payments are brought current and, in the opinion of management, collection of
the remaining balance can be reasonably expected.  Blue Ash had $788,000,
$377,000 and $541,000 of accruing loans delinquent more than 90 days as of June
30, 1998, 1997 and 1996, respectively.

     The following table reflects the amount of loans in a delinquent status as
of the dates indicated, in dollar amounts and as a percentage of each category
of Blue Ash's loan portfolio.  The amounts presented represent the recorded
investment after deduction for specific valuation allowances of the related
loans, rather than the actual payment amounts which are past due.


<TABLE>
<CAPTION>
                                                              At June 30,                                              
                            --------------------------------------------------------------------------------------------
                                      1998 (1)                     1997                              1996             
                            ----------------------------   ----------------------------  -------------------------------
                                                Percent                         Percent                         Percent
                                                of total                        of total                        of total
                             Number  Amount(2)  loans(3)   Number    Amount(2)  loans(3)   Number   Amount(2)   loans(3)
                            -------  ---------  --------   ------    ---------  --------   ------   ---------   --------
                                                             (Dollars in thousands)
<S>                          <C>      <C>        <C>       <C>        <C>         <C>      <C>       <C>          <C>
Loan delinquent for(4):
  30-59 days                    9     $  398      0.55%      14       $  526      0.79%      9       $  422       0.77%
  60-89 days                    3        156      0.22        8          564      0.84       8          309       0.56
  90 days and over             13        885      1.22        8          403      0.60      10          675       1.22
                               --     ------      ----       --       ------      ----      --       ------       ----
    Total delinquent loans     25     $1,439      1.99%      30       $1,493      2.23%     27       $1,406       2.55%
                               ==     ======      ====       ==       ======      ====      ==       ======       ====
</TABLE>
__________________________________

(1)  At June 30, 1998, delinquencies of 30 days or more include 18 one-to-four
     family residential loans with outstanding balances totaling $1,133,000,
     four home equity line of credit loans with outstanding balances totaling
     $176,000, two land loans with outstanding balances totaling $75,000 and
     one nonresidential loan with an outstanding balance totaling $55,000.

(2)  Amounts shown are net of specific valuation allowances, undisbursed
     portion of loans in process and deferred loan origination fees.

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

(4)  The number of days a loan is delinquent is measured from the day the
     payment was due under the terms of the loan agreement.


     Blue Ash 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 the lower of cost or fair value.  Under SFAS No. 114, a loan is considered
impaired based on current information and events, if it is probable that Blue
Ash will be unable to collect the scheduled payments of principal or interest
when due according


                                       30
<PAGE>   31



to the contractual terms of the loan agreement.  The measurement of impaired
loans is generally based on the present value of expected future cash flows
discounted at the loan's interest rate, except that all collateral-dependent
loans are measured for impairment based on the fair value of the collateral.
At June 30, 1998 and 1997, Blue Ash had not identified any loans as being
impaired under SFAS No. 114, nor were any loans so designated during the years
ended June 30, 1998 and 1997.

     The following table sets forth information with respect to non-performing
assets identified by Blue Ash, including nonaccrual loans, accruing loans
delinquent 90 days or more, restructured loans, real estate acquired through
foreclosure and total non-performing assets, at the dates indicated.


<TABLE>
<CAPTION>
                                                     June 30,
                                            -------------------------
                                            1998       1997      1996
                                            ----       ----      ----
                                              (Dollars in thousands)
<S>                                         <C>        <C>       <C>
Accruing loans delinquent
     90 days or more                        $788       $377      $541

Loans accounted for on a
     nonaccrual basis:
     One-to-four family residential           97         26       134
     Nonresidential real estate               --         --        --
     Consumer and other                       --         --        --
                                            ----       ----      ----
Total nonaccrual loans                        97         26       134

Other non-performing assets                   --         --        --
                                            ----       ----      ----
Total non-performing assets                 $885       $403      $675
                                            ====       ====      ====
Total non-performing loans as
     a percentage of total loans            1.22%      0.60%     1.23%
                                            ====       ====      ====
Total non-performing assets as
     a percentage of total assets           0.75%      0.39%     0.73%
                                            ====       ====      ====
Specific loan loss allowance                $ --       $ --      $  5
General loan loss allowance
     (unallocated as to any
     specific loan type)                     264        244       226
                                            ----       ----      ----
Total loan loss allowance                   $264       $244      $231
                                            ====       ====      ====
Allowance for loan losses as a
     percentage of non-performing loans     29.8%      60.5%     34.2%
                                            ====       ====      ====
Allowance for loan losses as a
     percentage of non-performing assets    29.8%      60.5%     34.2%
                                            ====       ====      ====
</TABLE>


Blue Ash's nonaccrual loans at June 30, 1998 consisted of two single-family
residential loans with an aggregate book value, less specific valuation
allowances, if any, of $97,000.  Such


                                       31
<PAGE>   32



residential real estate loans were located in Blue Ash's designated lending
area.  At June 30, 1998, accruing loans delinquent more than 90 days consisted
of eleven loans totaling $788,000, of which nine loans totaling $713,000
consisted of single-family real estate and two loans of $75,000 consisted of
land.

     During the years ended June 30, 1998, 1997 and 1996, interest income which
would have been recognized if nonaccrual loans had performed pursuant to
contractual terms totaled approximately $3,000, $1,000 and $4,000,
respectively.  At June 30, 1998, there are no loans which are not currently
classified as nonaccrual, 90 days past due or restructured where known
information about the possible credit problems of borrowers caused management
to have serious doubts as to the ability of the borrowers to comply with
present loan repayment terms and which may result in disclosure of such loans
in the future.

     OTS regulations require that each insured savings institution classify its
own assets on a regular basis.  Problem assets are classified as "substandard,"
"doubtful" or "loss."  "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected.  "Doubtful"
assets have the same weaknesses as "substandard" assets, with the additional
characteristics that (i) the weaknesses make collection or liquidation in full
on the basis of currently existing facts, conditions and values questionable
and (ii) there is a high possibility of loss.  An asset classified "loss" is
considered uncollectible and of such little value that its continuance as an
asset of the institution is not warranted.  The regulations also contain a
"special mention" category consisting of assets which do not currently expose
an institution to a sufficient degree of risk to warrant classification but
which possess credit deficiencies or potential weaknesses deserving
management's close attention.

     Generally, Blue Ash classifies as "substandard" all loans that are
delinquent more than 90 days, unless management believes the delinquency status
is short-term due to unusual circumstances.  Loans delinquent fewer than 90
days may also be classified if the loans have the characteristics described
above rendering classification appropriate.  At June 30, 1998, Blue Ash's
classified assets totaled $885,000, or 0.8% of total assets.

                                       32
<PAGE>   33


     The aggregate amounts of Blue Ash's classified assets at the dates
indicated were as follows:

<TABLE>
<CAPTION>
                                                    June 30,            
                                           -------------------------
                                           1998       1997      1996
                                           ----       ----      ----
                                               (In thousands)
<S>                                       <C>         <C>      <C>
Classified assets:
     Special Mention                       $187       $ 75      $ --
     Substandard                            698        403       676
     Doubtful                                --         --        --
     Loss                                    --         --         5
                                           ----       ----      ----
     Total classified assets               $885       $478      $681
                                           ====       ====      ====
</TABLE>

     In connection with examinations of insured institutions, federal examiners
have authority to identify problem assets and, if appropriate, classify them.
If an institution does not agree with an examiner's classification of an asset,
it may appeal this determination to the District Director of the OTS.  Blue Ash
had no disagreements with the examiners regarding the classification of assets
at the time of the last examination.

     OTS regulations require that Blue Ash establish prudent general valuation
allowances for loan losses on any loan classified as substandard or doubtful.
If an asset, or portion thereof, is classified as loss, Blue Ash must either
establish specific allowances for losses in the amount of 100% of the portion
of the asset classified loss, or charge off such amount.  General loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses do not
qualify as regulatory capital.  Federal examiners may disagree with an insured
institution's classifications and amounts reserved.  For information concerning
a recent OTS proposal which provides specific guidance in establishing and
maintaining general loss allowances with respect to classified and other
assets, see "Allowance for Loan Losses."

     ALLOWANCE FOR LOAN LOSSES.  An allowance for loan losses is maintained at
a level that management considers adequate to provide for potential losses
based upon an evaluation of known and inherent risks in the loan portfolio.
The allowance for loan losses is based on estimated net realizable values
unless it is probable that loans will be foreclosed, in which case the
allowance for loan losses is based on fair value.  Senior management, with
oversight responsibility provided by the Board of Directors, reviews on a
quarterly basis the allowance for loan losses as it relates to a number of
relevant factors, including but not limited to, trends in the level of
non-performing assets and classified loans, current and anticipated economic
conditions in the designated lending area, past loss experience, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral and possible losses arising from specific problem
assets.  To a lesser extent, management also considers loan



                                       33
<PAGE>   34



concentrations to single borrowers and changes in the composition of the loan
portfolio.  The allowance is increased by provisions for losses on loans which
are charged against income.  For additional information, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note A-6 of Notes to Consolidated Financial Statements.

     While management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments, and net earnings could be significantly adversely
affected if circumstances differ substantially from the assumptions used in
making the final determination.  In addition, the OTS and the FDIC, as an
integral part of their examination process, periodically review Blue Ash's
allowance for loan losses.  Such agencies may require Blue Ash to recognize
additions to such allowance based on their judgments about information
available to them at the time of their examination.

     At June 30, 1998, 1997 and 1996, Blue Ash's allowance for loan losses
totaled $264,000, $244,000 and $231,000, respectively, none of which was
allocated to a particular type of loan at June 30, 1998 and 1997.  At June 30,
1996, Blue Ash's allowance for loan losses was comprised of a general loan
allowance totaling $226,000 and a specific loan loss allowance of $5,000.

     The following table sets forth an analysis of Blue Ash's allowance for
loan losses and selected ratios for the years indicated.


<TABLE>
<CAPTION>
                                       For the Year ended June 30,
                                       ---------------------------
                                       1998       1997        1996
                                       ----       ----        ----
                                        (Dollars in thousands)
<S>                                  <C>         <C>        <C>
Balance at beginning of year         $  244     $  231      $  220

Loans charged-off                        (4)        (5)         --
Recoveries                               --         --          --
Provision for losses on loans
     (charged to operations)             24         18          11
                                     ------     ------      ------
Balance at end of year               $  264     $  244      $  231
                                     ======     ======      ======
Ratio of net charge-offs to
     average loans outstanding during
     the year                            --%        --%         --%
                                     ======     ======      ======
Ratio of allowance for loan losses
     to nonaccrual loans              272.2%     938.5%      172.4%
                                     ======     ======      ======
Ratio of allowance for loan losses
     to total loans(1)                 0.36%      0.37%       0.42%
                                     ======     ======      ======
</TABLE>
__________________________
(1)  Includes loans held for sale, which are recorded at the lower of cost or
     market value.



                                       34

<PAGE>   35


     Blue Ash 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.  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 increase of $20,000 in the
allowance for loan losses during the year ended June 30, 1998 was attributed to
the overall growth in the loan portfolio of 8.3%, which was coupled with the
higher level of internally-classified assets at June 30, 1998.  Blue Ash's
internally-classified assets totaled approximately $885,000 at June 30, 1998,
as compared to $478,000 at June 30, 1997.  Management believed that existing
loan loss allowances at June 30, 1998 were adequate to cover unforeseen loan
losses based on the ongoing review of such internally-classified assets and
other factors previously discussed.

     Effective in fiscal 1994, the OTS, in conjunction with the Office of the
Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued an
Interagency Policy Statement on the Allowance for Loan and Lease Losses
("Policy Statement").  The Policy Statement, which effectively superseded
previous OTS proposed guidance, included guidance (i) on the responsibilities
of management for the assessment and establishment of an adequate allowance and
(ii) for the agencies' examiners to use in evaluating the adequacy of such
allowance and the policies utilized to determine such allowance.  The Policy
Statement also set forth quantitative measures for the allowance with respect
to assets classified substandard and doubtful, described below, and with
respect to the remaining portion of an institution's loan portfolio.
Specifically, the Policy Statement set forth the following quantitative
measures which examiners may use to determine the reasonableness of an
allowance:  (i) 50% of the portfolio that is classified doubtful; (ii) 15% of
the portfolio that is classified substandard and (iii) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming twelve months based on
facts and circumstances available on the evaluation date.  While the Policy
Statement set forth this quantitative measure, such guidance was not intended
as a "floor" or "ceiling."


     MORTGAGE-BACKED SECURITIES.  Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally U.S.
Government agencies and government-sponsored enterprises) that pool and
repackage the participation interests in the form of securities, to investors
such as Blue Ash.  Such U.S. Government agencies and government-sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA"), and the
Government National Mortgage Association ("GNMA").  Besides investing in
mortgage-backed securities insured or guaranteed by the FHLMC, the FNMA or the

                                       35
<PAGE>   36



GNMA, Blue Ash has also invested in mortgage-backed securities issued by the
Small Business Administration ("SBA").

     The FHLMC is a public corporation chartered by the U.S. Government.  The
FHLMC issues participation certificates backed principally by conventional
mortgage loans.  The FHLMC guarantees the timely payment of interest and the
ultimate return of principal.  The FNMA is a private corporation chartered by
the U.S. Congress with a mandate to establish a secondary market for
conventional mortgage loans.  The FNMA guarantees the timely payment of
principal and interest on FNMA securities.  FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks.  The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government-assisted housing
programs.  GNMA securities are backed by FHA-insured and VA-guaranteed loans,
and the timely payment of principal and interest on GNMA securities are
guaranteed by the GNMA and backed by the full faith and credit of the U.S.
Government.  Because the FHLMC, the FNMA and the GNMA were established to
provide support for low- and middle-income housing, there are limits to the
maximum size of loans that qualify for these programs.  For example, the FNMA
and the FHLMC currently limit their loans secured by a single-family,
owner-occupied residence to $227,150.  To accommodate larger-sized loans, and
loans that, for other reasons, do not conform to the agency programs, a number
of private institutions have established their own home-loan origination and
securitization programs.  The SBA is an agency of the U.S. Government.  The SBA
issues participation certificates backed principally by commercial real estate
and/or other business collateral.  The SBA was established by the U.S. Congress
with a mandate to increase the ability of small businesses to borrow money
thereby expanding and increasing employment.  The timely payment of principal
and interest on SBA securities is  guaranteed by the SBA and is backed by the
full faith and credit of the U.S. Government.


     Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities.  The
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as
the prepayment risk, are passed on to the certificate holder.  Accordingly, the
life of a mortgage-backed pass-through security approximates the life of the
underlying mortgages.  The actual maturity of a mortgage-backed security
varies, depending on when the mortgagors prepay or repay the underlying
mortgages.  Prepayments of the underlying mortgages may shorten the life of the
investment, thereby adversely affecting its yield to maturity and the related
market value of the mortgage-backed security.  The yield is based upon the
interest income and the amortization of the premium or accretion of the
discount related to the mortgage-backed security.  Premiums and discounts on
mortgage-backed securities are

                                       36
<PAGE>   37



amortized or accreted over the estimated term of the securities using the level
yield method.  The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed security, and these assumptions are reviewed periodically to
reflect the actual prepayment.  The actual prepayments of the underlying
mortgages depend on many factors, including the type of mortgage, the coupon
rate, the age of the mortgages, the geographical location of the underlying
real estate collateralizing the mortgages and general levels of market interest
rates.  The difference between the interest rates on the underlying mortgages
and the prevailing mortgage interest rates is an important determinant in the
rate of prepayments.  During periods of falling mortgage interest rates,
prepayments generally increase, and, conversely, during periods of rising
mortgage interest rates, prepayments generally decrease.  If the coupon rate of
the underlying mortgage significantly exceeds the prevailing market interest
rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages.  Prepayment experience
is more difficult to estimate for adjustable-rate mortgage-backed securities.

     At June 30, 1998, $6.1 million, or 18.4%, of Blue Ash's mortgage-backed
and related securities portfolio consisted of participation certificates.
These securities represented 5.1% of Blue Ash's total assets.  All of Blue
Ash's participation certificates at June 30, 1998 were fully guaranteed as to
principal and interest by the FHLMC, the FNMA, the GNMA and the SBA.

     Blue Ash's mortgage-backed and related securities include collateralized
mortgage obligations, as well as other mortgage-related securities
("CMO/REMICs"), as interest-rate sensitive portfolio investments.  CMO/REMICs
are securities derived by reallocating cash flows from mortgage-backed
securities or pools of mortgage loans in order to create multiple classes, or
tranches of securities with coupon rates that differ from the underlying
collateral as a whole.  Blue Ash invests in these as an interest-rate sensitive
investment portfolio alternative to mortgage loans.  CMO/REMICs have been
developed in response to investor concerns regarding the uncertainty of cash
flows associated with the prepayment option of the underlying mortgagor and are
typically issued by governmental agencies, governmentally-sponsored enterprises
and special purpose entities, such as trusts, corporations or partnerships,
established by financial institutions or other similar institutions.  A
CMO/REMIC can be collateralized by loans or securities which are insured or
guaranteed by the FHLMC, the FNMA or the GNMA.  In contrast to pass-through
mortgage-backed securities, in which cash flow is received pro rata by all
security holders, the cash flow from the mortgages underlying a CMO/REMIC is
segmented and paid in accordance with a predetermined priority to investors
holding various CMO/REMIC classes.  By allocating the principal and interest
cash flows from the underlying collateral among the separate CMO classes,
different classes of bonds are created, each with its own stated maturity,
estimated average life, coupon rate and prepayment characteristics.

                                       37
<PAGE>   38


     Prepayments in Blue Ash's mortgage-related securities portfolio may be
affected by declining and rising interest rate environments.  In a low and
declining interest rate environment, prepayments would be expected to increase.
In such an event, Blue Ash's CMO/REMICs purchased at a premium price could
result in actual yields to Blue Ash that are lower than anticipated yields.
Blue Ash's floating-rate CMO/REMICs would be expected to generate lower yields
as a result of the effect of falling interest rates on the indexes for
determining payment of interest.  Additionally, the increased principal
payments received may be subject to reinvestment at lower rates.  Conversely,
in a period of rising rates, prepayments would be expected to decrease, which
would make less principal available for reinvestment at higher rates. In a
rising rate environment, floating-rate instruments would generate higher yields
to the extent that the indexes for determining payment of interest did not
exceed the life-time interest rate caps.  Such prepayment may subject Blue
Ash's CMO/REMICs to yield and price volatility.

     Blue Ash's CMO/REMICs are predominately monthly adjustable-rate securities
indexed primarily to the 11th district cost of funds ("COFI").  This lagging
index has a close resemblance to the overall cost of funds of financial
institutions and has historically provided attractive yields.  Because of its
lagging effect, COFI tends to be more attractive during periods of falling
interest rates.  The remaining adjustable-rate securities in Blue Ash's
portfolio are indexed to either (i) the 10-year treasury ("CMT"), a long term
index that tends to be more attractive during periods of a steepening yield
curve, or (ii) the specified prime rate as previously discussed.  During fiscal
1998, Blue Ash added short-term to intermediate-term fixed-rate CMO/REMICs to
the securities portfolio as part of a portfolio realignment strategy to take
advantage of a declining interest rate environment and yield spreads on
fixed-rate securities at all time highs.  At June 30, 1998, there were
approximately $3.2 million in outstanding fixed-rate CMO/REMICs, of which $2.0
million were acquired during fiscal 1998.

     At June 30, 1998, $26.9 million, or 81.6%, of Blue Ash's mortgage-backed
and related securities portfolio consisted of CMO/REMICS.  Approximately $26.4
million, or 98.1%, of Blue Ash's CMO/REMIC's at June 30, 1998 were
collateralized by loans which are insured or guaranteed directly, or
indirectly, through mortgage-backed securities underlying the obligations by
the FHLMC, the FNMA or the GNMA.  The remaining 1.9% of the CMO/REMICs were
privately insured by corporations and other financial institutions.

     At June 30, 1998, Blue Ash's CMO/REMICs, representing 22.9% of total
assets, had a total market value of $26.9 million and amortized cost of $27.0
million.  Although management believes this unrealized loss of $58,000, or 0.2%
decline, to be temporary, a recovery to par value market prices is not
anticipated until a period of sustained falling interest rates.  During fiscal
1998, however, as market interest rates were declining toward historical lows,
Blue Ash recognized a market value recovery on its CMO/REMICs of approximately
$388,000, or 87.0%.



                                        38

<PAGE>   39


     The following table sets forth the purchases, sales, principal repayments
and other activity of Blue Ash's mortgage-backed securities portfolio,
including those designated as available for sale, for the years indicated.


<TABLE>
<CAPTION>
                                                  Year ended June 30,        
                                           --------------------------------
                                           1998           1997         1996
                                           ----           ----         ----
                                                   (In thousands)
<S>                                       <C>           <C>          <C>
Balance at beginning of year              $26,732        $27,628     $24,976
Mortgage-backed securities
     purchased                             17,600          2,021      16,475
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)            --         --
Gain on sale of mortgage-
     backed securities                         28             14         149
Principal repayments                       (2,184)        (1,896)     (2,714)
Amortization of premiums and
     accretion of discounts - net              (7)           (11)        (28)
Unrealized gains (losses) on
     securities designated as
     available for sale                       210            124        (427)
                                          -------        -------     -------
Balance at end of year                    $32,995        $26,732     $27,628
                                          =======        =======     =======
</TABLE>

     Mortgage-backed securities generally increase the quality of Blue Ash's
assets by virtue of the insurance or guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of Blue Ash.  At June 30, 1995, certain mortgage-backed
securities were used to collateralize outstanding borrowings under reverse
repurchase agreements.  The carrying value of such securities totaled
approximately $3.7 million at June 30, 1995.

     The Corporation accounts for certain investments in debt and equity
securities pursuant to 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


                                        39

<PAGE>   40



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 mortgage-backed securities at the time of purchase.

     The Corporation classifies its mortgage-backed securities into two
classifications depending on certain underlying characteristics of the
securities.  In considering the Corporation's ability to hold securities,
collateralized mortgage obligations are reviewed for possible regulatory
mandated divestiture under existing banking regulations.  In December 1995, a
one-time reassessment of the Corporation's mortgage-backed securities held to
maturity was undertaken, as permitted by the FASB under a special report
related to the implementation of SFAS No. 115.  In connection with this
one-time reassessment, the Corporation transferred mortgage-backed securities
with an amortized cost of $2.4 million from held to maturity to available for
sale in order to permit more responsiveness to changes in interest rates and
other balance sheet factors.  At June 30, 1998, the Corporation had
approximately 44% of its mortgage-backed securities classified as held to
maturity and 56% as available for sale.




                                        40

<PAGE>   41



     The following tables set forth certain information relating to Blue Ash's
mortgage-backed securities portfolio (including those designated as available
for sale) at June 30, 1998, 1997 and 1996.


<TABLE>
<CAPTION>
                                                            June 30, 1998
                                    -------------------------------------------------------------
                                                        Gross           Gross           Estimated
                                    Amortized        unrealized       unrealized          fair
                                      cost              gains           losses            value
                                    ---------        ----------       ----------        ---------
                                                      (In thousands)
<S>                                 <C>              <C>              <C>               <C>
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
                                     =======            ====          =====              ======= 
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
                                     =======            ====          =====              ======= 
</TABLE>


                                       41

<PAGE>   42



<TABLE>
<CAPTION>
                                                  June 30, 1997
                                 -----------------------------------------------
                                               Gross        Gross      Estimated
                                 Amortized   unrealized   unrealized     fair
                                   cost        gains        losses       value
                                 ---------   ----------   ----------   ---------
                                                   (In thousands)
<S>                               <C>           <C>         <C>         <C>
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
                                  =======       ====        =====       =======

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
                                  =======       ====        =====       =======
</TABLE>



                                                42

<PAGE>   43



<TABLE>
<CAPTION>
                                                          June 30, 1996
                                   ------------------------------------------------------------- 
                                                       Gross           Gross           Estimated
                                    Amortized        unrealized      unrealized           fair
                                       cost            gains           losses            value
                                    ---------        ----------      ----------        ---------
                                                          (In thousands)
<S>                                 <C>              <C>             <C>                <C>
Mortgage-backed securities
     held to maturity:
Federal Home Loan Mortgage
     Corporation
     Participation certificates      $ 1,286           $  8            $  (7)           $ 1,287
Collateralized mortgage
     obligations                       3,986             --              (94)             3,892
Federal National Mortgage
     Association
     Participation certificates          909              2               (5)               906
Collateralized mortgage
     obligations                       4,293              3             (170)             4,126
Government National
     Mortgage Association
     Collateralized mortgage
     obligations                         126             --               (1)               125
Small Business Administration 
     Participation certificates        1,119              3               (5)             1,117
Residential Funding Corporation
     Collateralized mortgage
     obligations                         189             --               (9)               180
Salomon Brothers, Inc.
     Collateralized mortgage
     obligations                          40             --               --                 40
                                     -------           ----            -----            -------
                                     $11,948           $ 16            $(291)           $11,673
                                     =======           ====            =====            =======

Mortgage-backed securities
     available for sale:
Federal Home Loan Mortgage
     Corporation
     Participation certificates      $ 1,773           $  7            $ (25)           $ 1,755
     Collateralized mortgage
     obligations                       2,793              8              (65)             2,736
Federal National Mortgage
     Association
     Participation certificates        1,805             16              (10)             1,811
     Collateralized mortgage
     obligations                       8,392             --             (322)             8,070
Santa Barbara Savings
     and Loan
     REMIC participation
     certificates                        937             --               (3)               934
The Prudential Home Mortgage
     Securities Company, Inc.
     Collateralized mortgage
     obligations                         373              1               --                374
                                     -------           ----            -----            -------
                                     $16,073           $ 32            $(425)           $15,680
                                     =======           ====            =====            =======
</TABLE>





                                        43

<PAGE>   44



     The carrying values of mortgage-backed securities, including those
designated as available for sale, are comprised of the following at June 30,
1998, 1997 and 1996.


<TABLE>
<CAPTION>
                                                     Carrying
                                                       value
                                         ---------------------------------
                                                      June 30,
                                         ---------------------------------
                                           1998         1997         1996
                                         -------      -------      -------
                                                 (In thousands)
<S>                                      <C>          <C>          <C>
Mortgage-backed securities held
to maturity - at amortized cost          $14,641      $11,463      $11,948
Mortgage-backed securities
designated as available
for sale - at fair value                  18,354       15,269       15,680
                                         -------      -------      -------
Total mortgage-backed securities         $32,995      $26,732      $27,628
                                         =======      =======      =======
</TABLE>



     For additional information relating to the Corporation's mortgage-backed
securities, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Notes A-2 and B of Notes to Consolidated
Financial Statements.

     INVESTMENT SECURITIES.  The investment policy of Blue Ash is designed
primarily to provide and maintain liquidity and to generate a favorable return
on investments without incurring undue  interest rate risk, credit risk and
investment portfolio asset concentrations.  Blue Ash invests in investment
securities in order to diversify its assets, manage cash flow, obtain yield and
maintain the minimum levels of liquid assets which savings institutions are
required to maintain.  Historically, Blue Ash has invested excess funds in
mortgage-backed securities rather than investment securities due to the higher
yield on mortgage-backed securities.  As a result, investment securities have
not comprised a significant portion of Blue Ash's assets.

     Blue Ash is authorized to invest in obligations issued or fully guaranteed
by the U.S. Government, certain federal agency obligations, certain time
deposits, negotiable certificates of deposit issued by commercial banks and
other insured financial institutions, investment grade corporate debt
securities, municipal obligations, federal funds sold, overnight deposits and
other specified investments.  Federal regulations require Blue Ash to maintain
an investment in FHLB of Cincinnati stock and a minimum amount of liquid assets
which savings institutions are required to maintain.



                                        44

<PAGE>   45


     The following table sets forth the composition of Blue Ash's investment
portfolio, including those designated as available for sale, and
interest-bearing deposits at the dates indicated.


<TABLE>
<CAPTION>
                                                                        At June 30,
                         ---------------------------------------------------------------------------------------------------------
                                        1998                                1997                                1996
                         ---------------------------------   ---------------------------------   ---------------------------------
                         Carrying  % of     Market   % of    Carrying  % of     Market   % of    Carrying  % of     Market   % of
                           value   total     value   total     value   total     value   total     value   total     value   total
                         --------  -----    ------   -----   --------  -----    ------   -----   --------  -----    ------   -----
                                                         (Dollars in thousands)
<S>                       <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>   
Investment securities:
     U.S. Government
     agency obligations   $1,058    14.9%   $1,061    14.9%   $1,399    46.5%   $1,399    46.5%   $1,000    24.7%   $  983    24.3%
     Corporate debt
     securities               --      --        --      --        --      --        --      --       200     4.9       199     4.9
     Municipal obligations   559     7.9       559     7.9        --      --        --      --       100     2.5       100     2.5
     Corporate equity
     securities                1      --         1      --        --      --        --      --        --      --       --       --
                          ------   -----    ------   -----    ------   -----    ------   -----    ------   -----    ------   -----
     Total investment
     securities            1,618    22.8     1,621    22.8     1,399    46.5     1,399    46.5     1,300    32.1     1,282    31.7
Other investments:
     Certificates of
     deposit in
     other financial
     institutions            469     6.6       469     6.6       466    15.5       466    15.5        98     2.4        98     2.4
     Interest-bearing
     deposits in other
     financial
     institutions            319     4.5       319     4.5       205     6.8       205     6.8        66     1.6        66     1.6
     Federal funds sold    3,900    54.9     3,900    54.9       200     6.6       200     6.6     1,900    46.8     1,900    47.1
     Federal Home Loan
     Bank stock              797    11.2       797    11.2       742    24.6       742    24.6       692    17.2       692    17.2
                          ------   -----    ------   -----    ------   -----    ------   -----    ------   -----    ------   -----
     Total investments
     and interest-
     bearing deposits     $7,103   100.0%   $7,106   100.0%   $3,012   100.0%   $3,012   100.0%   $4,056   100.0%   $4,038   100.0%
                          ======   =====    ======   =====    ======   =====    ======   =====    ======   =====    ======   =====
</TABLE>

     The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Blue Ash's investments, including those
designated as available for sale, and interest-bearing deposits at June 30,
1998.  All of such securities and interest-bearing deposits mature in
twenty-four years or less.


<TABLE>
<CAPTION>
                                                        At June 30, 1998
                                  ------------------------------------------------------------
                                  Five years or less    Five to ten years     After ten years
                                  ------------------   ------------------   ------------------
                                  Carrying   Average   Carrying   Average   Carrying   Average
                                    value     yield      value     yield     value      yield
                                  --------   -------   --------   -------   --------   -------
                                                   (Dollars in thousands)
<S>                                <C>        <C>        <C>       <C>       <C>        <C>

U.S. Government agency
     obligations                   $  210     6.06%     $  448     6.90%     $  400     7.00%
Municipal obligations                  --       --          --       --         559     6.78
Corporate equity securities             1     1.59          --       --          --       --
Certificates of deposit in
     other financial institutions     374     6.68          --       --          95     7.00
Interest-bearing deposits in
     other financial institutions     319     4.53          --       --          --       --
Federal funds sold                  3,900     5.42          --       --          --       --
Federal Home Loan Bank stock          797     7.25          --       --          --       --
                                   ------     ----      ------     ----      ------     ----
     Total investments and
     interest-bearing deposits     $5,601     5.74%     $  448     6.90%     $1,054     6.88%
                                   ======     ====      ======     ====      ======     ====
</TABLE>


                                        45

<PAGE>   46


<TABLE>
<CAPTION>
                                                 At June 30, 1998
                                     ------------------------------------------
                                               Total investments and
                                             interest-bearing deposits
                                     ------------------------------------------
                                      Average                          Weighted
                                       life      Carrying     Market    average
                                     in years      value       value     yield
                                     --------    --------     ------   --------
                                              (Dollars in thousands)
<S>                                    <C>        <C>         <C>        <C>
U.S. Government agency
     obligations                        9.04      $1,058      $1,061      6.77%
Municipal obligations                  17.55         559         559      6.78
Corporate equity securities               --           1           1      1.59
Certificates of deposit in
     other financial institutions       4.41         469         469      6.74
Interest-bearing deposits in
     other financial institutions         --         319         319      4.53
Federal funds sold                        --       3,900       3,900      5.42
Federal Home Loan Bank stock              --         797         797      7.25
                                       -----      ------      ------      ----
     Total investments and
     interest-bearing deposits          3.02      $7,103      $7,106      5.98%
                                       =====      ======      ======      ====
</TABLE>

     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, to date, has
not engaged and does not intend to engage in the immediate future in trading
investment securities.

     At June 30, 1998, investments in the debt and/or equity securities of any
one non-governmental issuer did not exceed more than 10% of the Corporation's
total equity.  For additional information relating to the Corporation's
investment securities, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes A-2 and B of Notes to
Consolidated Financial Statements.

SOURCES OF FUNDS


     GENERAL.  Deposits have traditionally been the primary source of Blue
Ash's funds for use in lending and other investment activities.  In addition to
deposits, Blue Ash derives funds from interest payments and principal
repayments/prepayments on loans and


                                        46

<PAGE>   47



mortgage-backed securities, income on earning assets, service charges and gains
on the sale of mortgage loans and other assets.  Repayments on loans and
mortgage-backed securities are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions.  Borrowings from the FHLB and the Federal
National Mortgage Association ("Fannie Mae") are being used on a relatively
short-term basis to compensate for reductions in the availability of funds from
other sources.  Borrowings from the FHLB are also being used on a longer-term
basis for general business purposes.

     DEPOSITS.  Blue Ash's deposit products include a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW") accounts,
money market deposit accounts, regular passbook savings accounts, Christmas
club accounts, term certificate accounts and individual retirement accounts
("IRAs").  Interest rates paid, maturity terms, service fees and withdrawal
penalties for the various types of accounts are established periodically by
management of Blue Ash based on its liquidity requirements, growth goals and
interest rates paid by competitors.  Deposit account terms vary, with the
principal differences being the minimum balance required, the time periods the
funds must remain on deposit and the interest rate.  Blue Ash relies primarily
on competitive pricing policies, advertising and customer service to attract
and retain these deposits.


     Blue Ash has been competitive in the types of accounts and in interest
rates it has offered on its deposit products, but does not necessarily seek to
match the highest rates paid by competing institutions.  With the significant
decline in interest rates paid on deposit products, Blue Ash, in fiscal 1994,
experienced disintermediation of deposits into competing investment products.
During the rising interest rate environment in fiscal 1995, however, Blue Ash
increased its deposit base as depositors transferred funds back into
certificate of deposit accounts, which became more attractive as market rates
increased.  The increase in the deposit base continued in fiscal 1998, 1997 and
1996 due to the aggressive marketing efforts and competitive pricing strategies
employed by the management of Blue Ash.  During fiscal 1996, Blue Ash
introduced a limited 9-month, 15-month and 35-month certificate of deposit
program in an effort to generate additional deposits.  These certificate of
deposit programs were more competitively priced than standard certificate of
deposit programs and resulted in approximately $13.7 million in new deposits
and rollover deposits from maturing certificates of deposit in fiscal 1996.  In
an effort to sustain continued deposit growth during fiscal 1998 and 1997, Blue
Ash strategically obtained brokered deposits and other out-of-state funds to
supplement its deposit base.  These deposits were typically obtained at
interest rates at or below local market interest rates being offered and had
terms to maturity of typically fifteen months or less.  The increased need for
brokered deposits in fiscal 1998 and 1997 stemmed from the greater


                                        47

<PAGE>   48



level of competition among other banks and savings and loan institutions for
local certificate of deposit balances and management's reluctance to
aggressively price above market and seek at all times certificates of deposit
from its local market area.  During the year ended June 30, 1998, outstanding
brokered deposits increased by $985,000, or 20.4%, from $4.8 million at June
30, 1997 to $5.8 million at June 30, 1998.  During the year ended June 30,
1997, outstanding brokered deposits increased by $4.1 million, from $695,000 at
June 30, 1996 to $4.8 million at June 30, 1997.  The overall growth in deposits
over the last three years was consistent with management's short-term and
long-term goals.  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.  Although market demand generally
dictates which deposit maturities and rates will be accepted by the public,
Blue Ash intends to continue to promote longer-term deposits to the extent
possible and is consistent with its asset and liability management goals.
Further, given its other available funding alternatives, Blue Ash has the
ability to suspend brokered deposit activity at any time and has the ability to
fund its maturities on all brokered deposits without placing undue risk on its
liquidity position or cost of funds.

     At June 30, 1998, Blue Ash's certificates of deposit totaled $76.0
million, or 80.0% of total deposits.  Of such amount, approximately $53.4
million in certificates of deposit mature within one year.  Based on past
experience and Blue Ash's prevailing pricing strategies, management believes
that a substantial percentage of such certificates will renew with Blue Ash at
maturity.  If there is a significant deviation from historical experience, Blue
Ash can utilize borrowings from the FHLB or Fannie Mae as an alternative to
this source of funds.



                                        48

<PAGE>   49



     The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Blue Ash at the dates indicated.

<TABLE>
<CAPTION>
                                                                 At June 30,
                                      ----------------------------------------------------------------
                                             1998                   1997                   1996
                                      -------------------    ------------------    -------------------  
                                                  Percent               Percent                Percent
                                                 of total              of total               of total
                                       Amount    deposits     Amount   deposits      Amount   deposits
                                      -------    --------    -------   --------    -------    --------
                                                          (Dollars in thousands)
<S>                                     <C>        <C>       <C>       <C>      <C>     <C>
Transaction accounts:
Passbook and club accounts(1)         $ 8,232       8.7%     $ 8,088       9.9%     $ 8,398      11.1%
NOW accounts(2)                         4,109       4.3        4,228       5.2        3,148       4.2
Money market deposit
     accounts(3)                        6,673       7.0        6,966       8.5        7,438       9.8
                                      -------     -----      -------     -----      -------     -----
     Total transaction accounts        19,014      20.0       19,282      23.6       18,984      25.1

Certificates of deposit(4):
     2.00 - 3.99%                          --        --           --        --           --        --
     4.00 - 5.99%                      60,657      63.9       50,370      61.6       46,642      61.7
     6.00 - 7.99%                      15,317      16.1       12,142      14.8        9,992      13.2
     8.00 - 9.99%                          --        --           --        --           --        --
                                      -------     -----      -------     -----      -------     -----
     Total certificates of deposit     75,974      80.0       62,512      76.4       56,634      74.9
                                      -------     -----      -------     -----      -------     -----
     Total deposits                   $94,988     100.0%     $81,794     100.0%     $75,618     100.0%
                                      =======     =====      =======     =====      =======     =====
</TABLE>
______________________________

(1)  Blue Ash's weighted-average interest rates paid on passbook and club
     accounts fluctuate with the general movement of interest rates.  The
     weighted-average rates on passbook and club accounts were 2.78%, 2.78% and
     2.78% at June 30, 1998, 1997 and 1996, respectively.

(2)  Blue Ash's weighted-average interest rate paid on NOW accounts fluctuates
     with the general movement of interest rates.  At June 30, 1998, 1997 and
     1996, the weighted-average rates on NOW accounts were 2.08%, 2.06% and
     2.12%, respectively.

(3)  Blue Ash's weighted-average interest rate paid on money market deposit
     accounts fluctuates with the general movement of interest rates.  At June
     30, 1998, 1997 and 1996, the weighted-average rates on money market
     deposit accounts were 3.17%, 3.10% and 3.18%, respectively.

(4)  Individual Retirement Accounts ("IRAs") are included within the various
     certificate of deposit balances.  IRAs totaled $10.0 million, $9.0 million
     and $8.3 million at June 30, 1998, 1997 and 1996, respectively.



                                        49

<PAGE>   50


     The following table presents, by various interest rate categories, the
remaining maturity information for Blue Ash's certificates of deposit at June
30, 1998.

<TABLE>
<CAPTION>
                                            Amount Due
                      ----------------------------------------------------
                                   Over       Over
                        Up to    1 year to  2 years to    Over
Interest Rate         one year    2 years    3 years    3 years     Total
-------------         --------   ---------  ----------  -------    -------
                                          (In thousands)
<S>                    <C>        <C>         <C>        <C>       <C>
2.00 - 3.99%           $    --    $    --     $   --     $   --    $    --
4.00 - 5.99%            45,694     10,952      2,893      1,118     60,657
6.00 - 7.99%             7,725      4,802      1,393      1,397     15,317
8.00 - 9.99%                --         --         --         --       --
                       -------    -------     ------     ------    -------
  Total certificates
     of deposit        $53,419    $15,754     $4,286     $2,515    $75,974
                       =======    =======     ======     ======    =======
</TABLE>

     The following table presents the amount of Blue Ash's certificates of
deposit of $100,000 or more by the time remaining until maturity at June 30,
1998.

<TABLE>
<CAPTION>

     Maturity                    At June 30, 1998
     --------                    ----------------
                                  (In thousands)
     <S>                              <C>
     Three months or less             $1,493
     Over 3 months to 6 months         1,523
     Over 6 months to 12 months        1,673
     Over twelve months                2,376
                                      ------
     Total                            $7,065
                                      ======
</TABLE>

     The following table sets forth Blue Ash's deposit account balance activity
for the years indicated.

<TABLE>
<CAPTION>
                                            Year ended June 30,
                                       ----------------------------
                                         1998       1997      1996
                                       -------    -------   -------
                                          (Dollars in thousands)
<S>                                    <C>        <C>       <C>
Beginning balance                      $81,794    $75,618   $59,784
Deposits                                85,129     80,544    69,259
Withdrawals                            (75,588)   (77,541)  (56,423)
                                       -------    -------   -------
Net increase before
  interest credited                      9,541      3,003    12,836
Interest credited                        3,653      3,173     2,998
                                       -------    -------   -------
Ending balance                         $94,988    $81,794   $75,618
                                       =======    =======   =======
     Net increase                      $13,194    $ 6,176   $15,834
                                       =======    =======   =======
     Percent increase                    16.13%      8.17%    26.49%
                                         =====       ====     =====
</TABLE>




                                        50

<PAGE>   51


     BORROWINGS.  Deposits are the primary source of funds for Blue Ash's
lending and investment activities and for its general business purposes.  If
the need arises, Blue Ash may supplement its funds with advances from the FHLB
of Cincinnati to meet withdrawal requirements on its deposit accounts.  As of
June 30, 1998, Blue Ash had outstanding $12.7 million in advances from the FHLB
of Cincinnati.  Blue Ash also had outstanding borrowings of $30,000 which were
used to fund the Employee Stock Ownership Plan.  Principal and interest (based
on Fifth Third Bank's Prime Rate) are payable semi-annually over seven (7)
years.  See Notes A-11 and H of Notes to Consolidated Financial Statements.

     The FHLB functions as a central reserve bank providing credit for savings
institutions and certain other member financial institutions.  As a member,
Blue Ash is required to own capital stock in the FHLB of Cincinnati and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States Government), provided
certain standards related to creditworthiness have been met.  Advances are made
pursuant to several different programs.  Each credit program has it own
interest rate and range of maturities.  The FHLB of Cincinnati prescribes the
acceptable uses for the advances made pursuant to each program.  Depending on
the program, limitations on the amount of advances are based either on a fixed
percentage of an institution's net worth or on the FHLB's assessment of the
institution's creditworthiness.  The FHLB of Cincinnati is required to review
its credit limitations and standards at least once every six months.  Under
current regulations, an institution must meet certain qualifications to be
eligible for FHLB advances.  The extent to which an institution is eligible for
such advances will depend upon whether it meets the Qualified Thrift Lender
Test (the "QTL Test").  See "Regulation - OTS Regulations -- Qualified Thrift
Lender Test."  If an institution meets the QTL Test, it will be eligible for
100% of the advances it would otherwise be eligible to receive.  If an
institution does not meet the QTL Test, it will be eligible for such advances
only to the extent it holds specified QTL Test assets.  At June 30, 1998, Blue
Ash was in compliance with the QTL test.



                                        51

<PAGE>   52


     The following table sets forth the maximum month-end and average balances
of FHLB advances for the years indicated.

<TABLE>
<CAPTION>
                                                 Year ended June 30,
                                              ---------------------------
                                              1998        1997       1996
                                              ----        ----       ----
                                               (Dollars in thousands)
<S>                                         <C>          <C>        <C>
Maximum amount of FHLB
     advances outstanding during
     year                                   $13,274      $12,000    $10,924

Average amount of FHLB
     advances outstanding during
     year                                   $12,469      $10,971    $ 9,076

Weighted-average interest rate of
     FHLB advances outstanding during
     year based on month-end balances          6.04%        6.04%      6.11%

Amount of FHLB advances outstanding
     at end of year                         $12,674      $12,000    $ 8,424

Weighted-average interest rate of
     FHLB advances outstanding at end
     of year                                   5.82%        6.05%      5.82%
</TABLE>

     As an alternative borrowing source, Blue Ash has utilized borrowings from
Fannie Mae.  From time to time, Blue Ash enters into transactions in which it
agrees to transfer to Fannie Mae certain investments and mortgage-backed
securities against the transfer of funds by Fannie Mae, with a simultaneous
agreement by Fannie Mae to transfer to Blue Ash such securities at a date
certain or on demand, against the transfer of funds by Blue Ash.  In substance,
these transactions ("reverse repurchase agreements") represent borrowings
collateralized by specific securities.  In practice, reverse repurchase
agreements allow Blue Ash to borrow funds at a fixed or floating interest rate
using its securities as collateral.  Blue Ash can add liquidity to the
portfolio without parting with the specific assets.

     Borrowings under reverse repurchase agreements are exempt from deposit
insurance premiums and federal reserve requirements.  While reverse repurchase
agreements are structured legally as a sale/repurchase transaction, they are
accounted for as a financing.  As a result, no gain or loss is recorded.
Finally, Blue Ash as a borrower under these agreements, is entitled to all
security payments (principal, interest and prepayments) made during the terms
of these borrowings.  At June 30, 1998, Blue Ash did not have any outstanding
borrowings under reverse repurchase agreements with the Fannie Mae.




                                        52

<PAGE>   53


     The following table sets forth the maximum month-end and average balances
of borrowings under reverse repurchase agreements for the years indicated.

<TABLE>
<CAPTION>
                                                       Year ended June 30,    
                                                 -----------------------------
                                                 1998       1997          1996
                                                 ----       ----          ----
                                                    (Dollars in Thousands)
<S>                                             <C>        <C>           <C>
Maximum amount of obligations for
     securities sold under agreements
     to repurchase during year                  $   --     $   --        $3,504

Average amount of obligations for
     securities sold under agreements to
     repurchase during year                         --         --         1,080

Weighted-average interest rate of
     outstanding obligations for securities
     sold under agreements to repurchase
     during year based on month-end balances        --%        --%         6.09%

Amount of obligations for securities
     sold under agreements to repurchase
     at end of year                                 --         --            --

Weighted-average interest rate for
     outstanding obligations for securities
     sold under agreements to repurchase at
     end of year                                    --%        --%           --%
</TABLE>

AVERAGE BALANCES, INTEREST AMOUNTS, YIELDS AND RATES

     Net interest income is affected by (i) the difference ("interest rate
spread") between rates of interest earned on interest-earning assets and rates
of interest paid on interest-bearing liabilities and (ii) the relative amounts
of interest-earning assets and interest-bearing liabilities.  When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.  Savings
institutions have traditionally used interest rate spreads as a measure of net
interest income.  Another indication of an institution's net interest income is
its "net yield on interest-earning assets," which is net interest income
divided by average interest-earning assets.  The following table sets forth
certain information relating to Blue Ash's average balance sheet information
and reflects the average yield on interest-earning assets and the average cost
of interest-bearing liabilities for the years indicated.  Such yields and costs
are derived by dividing income or expense by the average monthly balances of
interest-earning assets or interest-bearing liabilities, respectively, for the
years presented.  During the years indicated, nonaccruing loans, if any, are
included in the net loan category.  Average balances are derived from month-end
balances.  Management does not believe that the use of month-end balances
instead of daily balances has caused any material difference in the information
presented.




                                        53

<PAGE>   54


<TABLE>
<CAPTION>
                                                                   Year ended June 30,
                            --------------------------------------------------------------------------------------------------
                                         1998                             1997                              1996
                            -------------------------------   ------------------------------   -------------------------------
                              Average     Interest              Average    Interest              Average     Interest
                            outstanding    earned/   Yield/   outstanding   earned/   Yield/   outstanding   earned/    Yield/
                              balance       paid      rate      balance      paid      rate      balance      paid       rate
                            -----------   --------   ------   -----------  --------   ------   -----------   --------   ------
                                                              (Dollars in thousands)
<S>                         <C>           <C>        <C>      <C>          <C>        <C>      <C>           <C>        <C>
Interest-earning
 assets:
 Loans receivable(1)         $ 72,332     $6,301     8.71%      $60,750     $5,232     8.61%     $51,542      $4,421     8.58%
 Mortgage-backed
 securities(2)                 29,080      1,833     6.30        27,457      1,757     6.40       27,219       1,767     6.49
 Investment securities(3)       1,513        104     6.87         1,238         91     7.35          792          57     7.20
 Interest-bearing
 deposits and other             3,237        224     6.92         1,847        112     6.06        2,504         165     6.59
                             --------     ------   ------       -------     ------   ------      -------      ------   ------
 Total interest-earning
  assets                      106,162      8,462     7.97        91,292      7,192     7.88       82,057       6,410     7.81
Non-interest earning
 assets                         5,654                             5,251                            5,270
                             --------                           -------                          -------
 Total assets                $111,816                           $96,543                          $87,327
                             ========                           =======                          =======
Interest-bearing
 liabilities:
 Passbooks                   $  8,016        221     2.76       $ 8,263        228     2.76      $ 8,293         245     2.95
 NOWs                           4,018         61     1.52         3,816         66     1.73        3,476          62     1.78
 MMDAs                          6,818        215     3.15         7,210        227     3.15        7,981         254     3.18
 Certificates                  70,650      4,142     5.86        57,560      3,271     5.68       48,859       2,875     5.88
                             --------     ------   ------       -------     ------   ------      -------      ------   ------
  Total deposits               89,502      4,639     5.18        76,849      3,792     4.93       68,609       3,436     5.01
 FHLB advances
  and other
  borrowings(4)                12,515        757     6.05        11,046        669     6.06       10,261         627     6.11
                             --------     ------   ------       -------     ------   ------      -------      ------   ------
 Total interest-
  bearing
  liabilities                 102,017      5,396     5.29        87,895      4,461     5.08       78,870       4,063     5.15
                                          ------   ------                   ------   ------                   ------   ------
Non-interest bearing
 liabilities                    1,674                             1,338                            1,303
                             --------                           -------                          ------- 
  Total liabilities           103,691                            89,233                           80,173
Shareholders' equity            8,125                             7,310                            7,154
                             --------                           -------                          ------- 
 Total liabilities and
  shareholders' equity       $111,816                           $96,543                          $87,327
                             ========                           =======                          ======= 
Net interest income;
 interest rate spread                     $3,066     2.68%                  $2,731     2.80%                  $2,347     2.66%
                                          ======   ======                   ======   ======                   ======   ======
Net yield (net interest
 income as a percent of
 average interest-earning   
 assets)                                             2.89%                             2.99%                             2.86%
                                                   ======                            ======                            ======
Average interest-earning
 assets to interest-bearing
 liabilities                                       104.06%                           103.86%                           104.04%
                                                   ======                            ======                            ======
</TABLE>
________________________________


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

(2)  Includes mortgage-backed securities held to maturity and mortgage-backed
     securities designated as available for sale.

(3)  Includes investment securities held to maturity and investment securities
     designated as available for sale.

(4)  Includes obligations for securities sold under agreements to repurchase
     and loan of The Blue Ash Building and Loan ESOP.




                                       54

<PAGE>   55


     Blue Ash monitors its interest rate risk, or sensitivity of its net
interest income to changes in interest rates, since the level of such risk
significantly affects certain of its operating strategies.  Net interest income
is subject to volatility due to (i) a mismatch in the timing of maturity or
repricing of interest-earning assets and interest-bearing liabilities and (ii)
changes in the relative levels of interest rates for different maturities along
the yield curve (i.e., the shape of the yield curve).  The Board of Directors
and management are responsible for reviewing asset/liability policies and Blue
Ash's interest rate risk position.

     One means of evaluating the sensitivity of an institution's net interest
income to changes in interest rates is to examine the extent to which its
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.  The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period.  A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities.  A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets.  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.

     The following table sets forth the amounts of Blue Ash's interest-earning
assets and interest-bearing liabilities outstanding at June 30, 1998, which
may, based upon certain assumptions, reprice or mature in each of the future
time periods shown.  Except as stated below, the amount of assets and
liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of the term to repricing or the
contractual term of the asset or liability.  Blue Ash's loan prepayment and
deposit decay rate assumptions are management's estimates derived from
regional, state and local data which management uses in monitoring Blue Ash's
interest rate risk position.




                                        55

<PAGE>   56

<TABLE>
<CAPTION>
                                          Over                                          Over
                                         three              Over one         Over       five    Over ten
                           One day      months    Over six   through        three    through     through      Over
                          to three      to six   months to     three      through        ten      twenty    twenty
                            months      months    one year     years   five years      years       years     years     Total
                          --------    --------   ---------  --------   ----------   --------    --------   -------  --------
                                                            (Dollars in thousands)
<S>                      <C>          <C>        <C>        <C>        <C>          <C>         <C>        <C>      <C>
Interest-earning assets:
   Mortgage loans
   One-to-four family
   residential
   Adjustable(1)          $  6,492    $  2,708    $  5,312  $  7,011   $    119    $     --     $     --   $    --  $ 21,642
   Fixed(2)                    148         148         296     1,328      1,420       4,616       11,572    15,854    35,382
   Multi-family
   residential
   Adjustable(3)               922         140         333       195         --       1,967           --        --     3,557
   Fixed(4)                     58          58         116        59         37          --           --        --       328
   Nonresidential
   Adjustable(3)(5)          1,686       1,413       3,710     1,445         --       2,176           --        --    10,430
   Fixed(4)                      2           3           5        22         28          88           30        --       178
   Land
   Adjustable(3)               513          67          12        --         --          --           --        --       592
   Fixed (4)                     2           3           4        21         24          --           --        --        54
   Nonmortgage loans
   Deposit accounts(3)         111          --          --        --         --          --           --        --       111
   Consumer and other(3)        84          --          --        --         --          --           --        --        84
   Mortgage-backed and
   related securities(6)
   Participation
   certificates              4,745         912         328         6          7          29           33        --     6,060
   CMO/REMICs               23,787          93         184     1,833        389         649           --        --    26,935
   Investment
   securities(7)                 1          --          --        --        210         448          712       247     1,618
   Interest-bearing
   deposits(8)               5,106          94          --         --       190          --           95        --     5,485
                          --------    --------    --------   --------  --------    --------     --------   -------  --------
   Total rate sensitive
   assets                 $ 43,657    $  5,639    $ 10,300  $  11,920  $  2,424    $  9,973     $ 12,442   $16,101  $112,456
                          ========    ========    ========  =========  ========    ========     ========   =======  ========  
Interest-bearing
   liabilities:
   Deposit accounts
   Passbook and club
   accounts(9)(10)        $    349    $    350    $    700  $   2,126  $  1,386    $  1,759     $  1,216   $   346  $  8,232
   NOW accounts(9)(11)         380         380         760      1,392       372         500          274        51     4,109
   Money market deposit
   accounts(9)(12)           1,318       1,318       2,636        526       329         378          152        16     6,673
   Certificates of
   deposit(13)              12,785      15,097      25,537     20,040     2,515          --           --        --    75,974
   Borrowings
   Federal Home Loan
   Bank advances(14)            --          --          --      2,600     3,328       6,746           --        --    12,674
   Loan of Employee
   Stock Ownership
   Plan(15)                     30          --          --         --        --          --           --        --        30
                          --------    --------    --------  ---------  --------    --------     --------   -------  --------
   Total rate
   sensitive
   liabilities            $ 14,862    $ 17,145    $ 29,633  $ 26,684   $  7,930    $  9,383     $  1,642   $   413  $107,692
                          ========    ========    ========  ========   ========    ========     ========   =======  ========
Interest rate
   sensitivity gap        $ 28,795    $(11,506)   $(19,333) $(14,764)  $ (5,506)   $    590     $ 10,800   $15,688  $  4,764
                          ========    ========    ========  ========   ========    ========     ========   =======  ========
Cumulative interest
   rate sensitivity gap   $ 28,795    $ 17,289    $ (2,044) $(16,808)  $(22,314)   $(21,724)    $(10,924)  $ 4,764  $  4,764
                          ========    ========    ========  ========   ========    ========     ========   =======  ========
Cumulative interest
   rate sensitivity gap
   as a percentage of
   total assets              24.45%      14.68%      (1.74%)  (14.27%)   (18.94%)    (18.44%)      (9.27%)    4.04%     4.04%
                          ========    ========    ========  ========   ========    ========     ========   =======  ========
Cumulative interest-
   earning assets as a
   percentage of interest-
   bearing liabilities       293.7%      154.0%       96.7%     81.0%      76.8%       79.4%        89.8%    104.4%    104.4%
                          ========    ========    ========  ========   ========    ========     ========   =======  ========
</TABLE>

_________________________________
Footnotes on page 57.



                                        56


<PAGE>   57


(1)  Includes adjustable-rate first mortgage loans, second mortgage loans,
     construction loans and home equity line of credit loans based on
     contractual term to repricing.

(2)  Includes fixed-rate first mortgage loans, second mortgage loans and
     construction loans which are assumed to reprice in accordance with
     prepayment assumptions based on regional, state and local data for savings
     associations in the State of Ohio.  Such prepayment assumptions have also
     been derived from prepayment assumption models previously utilized by the
     OTS through June of 1998.  Assumed annual prepayment rates ranging from 7%
     to 18%, based on the loan coupon rate, were used.

(3)  Based on contractual term to repricing.

(4)  Based on contractual term to maturity and assuming annual prepayment
     rates used, ranging from 8% to 15%.

(5)  Includes adjustable-rate first mortgage loans, second mortgage loans and
     construction loans.

(6)  Includes adjustable-rate mortgage-backed and related securities based on
     contractual term to repricing and fixed-rate mortgage-backed and related
     securities which are assumed to reprice in accordance with prepayment
     assumptions based on regional, state and local data for savings
     associations and assumption models utilized previously by the OTS as
     previously indicated.  For fixed rate mortgage-backed and related
     securities, assumed annual prepayment rates ranging from 7% to 18%, based
     on the loan coupon rate, were used.

(7)  Based on contractual term to maturity.

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

(9)  Based on an approximation of OTS assumptions and certain assumptions
     based on regional, state and local data for savings associations in the
     State of Ohio.

(10) Assumes an annual decay rate of 17% for the first three years, 16% for
     the fourth and fifth years and 14% thereafter on the cumulative declining
     balance.

(11) Assumes an annual decay rate of 37% for the first year, 32% for the
     second and third years and 17% thereafter on the cumulative declining
     balance.

(12) Assumes an annual decay rate of 79% for the first year and 21% thereafter
     on the cumulative declining balance.

(13) Certificates of deposit are shown repricing based on contractual terms to
     maturity.

(14) Federal Home Loan Bank advances are shown repricing based on contractual
     terms to maturity.

(15) Loan of Employee Stock Ownership Plan is based on contractual term to
     repricing.


     As the above table indicates, Blue Ash has a negative cumulative gap for
assets and liabilities, maturing or repricing within one year, equal to 1.74% of
total assets.  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.  However, certain
shortcomings are inherent in the method of analysis presented in the above
table.  Although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates.  The interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other types of assets and liabilities may lag behind changes in market
interest rates.  Certain assets, such as adjustable-rate mortgages, have
features which restrict changes in interest rates, and prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table.  The ability of many borrowers to service their debt may
decrease in the event of an interest rate increase.

     Although the action taken by management of Blue Ash has reduced the
potential effects of changes in interest rates on Blue Ash's results of
operations, significant increases in interest


                                        57

<PAGE>   58


rates may adversely affect Blue Ash's net interest income because its
adjustable-rate, interest-earning assets generally are not as responsive to
changes in interest rates as its interest-bearing liabilities due to terms
which generally permit only annual adjustments to the interest rates and which
generally limit the amount which interest rates thereon can adjust at such time
and over the life of the related asset.

     The following table sets forth, for the years and at the date indicated,
the weighted average yields earned on Blue Ash's interest-earning assets, the
weighted average interest rates paid on interest-bearing liabilities, the
interest rate spread and the net yield on average interest-earning assets.
Such yields and costs are derived by dividing income or expense by the average
balances of assets or liabilities, respectively, for each year presented.
Average balances are derived from month-end balances.  Management does not
believe that the use of month-end balances instead of daily balances has caused
any material difference in the information presented.

<TABLE>
<CAPTION>
                                                       
                                                  At       Year ended June 30,
                                               June 30,   --------------------
                                                 1998     1998    1997    1996
                                               --------   ----    ----    ----
<S>                                            <C>        <C>     <C>     <C>
Weighted-average yield on loan portfolio         8.53%    8.71%   8.61%   8.58%
Weighted-average yield on mortgage-
     backed securities                           6.33     6.30    6.40    6.49
Weighted-average yield on investment
     securities                                  6.77     6.87    7.35    7.20
Weighted-average yield on other interest-
     earning assets                              5.75     6.92    6.06    6.59
Weighted-average yield on all interest-
     earning assets                              7.72     7.97    7.88    7.81
Weighted-average interest rate paid on
     deposits                                    5.16     5.18    4.93    5.01
Weighted-average interest rate paid on
     FHLB advances and other borrowings          5.83     6.05    6.06    6.11
Weighted-average interest rate paid on
     all interest-bearing liabilities            5.24     5.29    5.08    5.15
Interest rate spread (spread between
     weighted-average interest rate on all
     interest-earning assets and all
     interest-bearing liabilities)               2.48     2.68    2.80    2.66
Net yield (net interest income as a
     percentage of average interest-earning
     assets)                                      N/A     2.89    2.99    2.86
</TABLE>

RATE/VOLUME ANALYSIS

     The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected Blue Ash's interest income and expense during the years indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(change in volume


                                        58

<PAGE>   59



multiplied by prior year rate), (ii) changes in rate (change in rate multiplied
by prior year volume), (iii) changes in rate/volume (changes in rate multiplied
by changes in volume) and (iv) total change in rate and volume.

<TABLE>
<CAPTION>
                                                                     Year ended June 30,
                       ------------------------------------------------------------------------------------------------------------
                                  1998 vs. 1997                         1997 vs. 1996                      1996 vs. 1995
                       -----------------------------------   ----------------------------------   ---------------------------------
                              Increase                              Increase                             Increase
                         (Decrease) Due to                     (Decrease) Due to                    (Decrease) Due to
                       ----------------------                ----------------------               ----------------------
                                                   Total                                Total                                Total
                                        Rate/    Increase                     Rate/   Increase                     Rate/   Increase
                       Rate   Volume   Volume   (Decrease)   Rate   Volume   Volume  (Decrease)   Rate   Volume   Volume  (Decrease)
                       ----   ------   ------   ----------   ----   ------   ------  ----------   ----   ------   ------  ----------
                                                                    (In thousands)
<S>                    <C>    <C>      <C>      <C>          <C>    <C>      <C>     <C>          <C>    <C>      <C>     <C>
Interest income
 attributable to:
 Loans receivable(1)   $ 61   $  997    $ 11      $1,069    $  16    $ 790    $  5     $  811     $ 68   $  767   $  11     $  846
 Mortgage-backed
  securities(2)         (27)     104      (1)         76      (25)      15      --        (10)     121      282      26        429
 Investment
  securities(3)          (6)      20      (1)         13        1       32       1         34        4        2      --          6
 Other interest-
  earning assets(4)      16       84      12         112      (13)     (43)      3        (53)       6       32       1         39
                       ----   ------    ----      ------    -----    -----    ----     ------     ----   ------   -----     ------
  Total interest-
   earning assets      $ 44   $1,205    $ 21      $1,270    $ (21)   $ 794    $  9     $  782     $199   $1,083   $  38     $1,320
                       ====   ======    ====      ======    =====    =====    ====     ======     ====   ======   =====     ======

Interest expense
 attributable to:
 Passbooks             $ --   $   (7)   $ --      $   (7)   $  16    $  (1)   $ --     $  (17)    $  3   $   (8)  $  --     $   (5)
 NOWs                    (8)       3      --          (5)      (2)       6      --          4       (6)     (11)      1        (16)
 MMDAs                   --      (12)     --         (12)      (2)     (25)     --        (27)       5      (72)     (1)       (68)
 Certificates           104      744      23         871      (98)     511     (17)       396      264      877     149      1,290
                       ----   ------    ----      ------    -----    -----    ----     ------     ----   ------   -----     ------
  Total interest-
   bearing deposits      96      728      23         847     (118)     491     (17)       356      266      786     149      1,201
 FHLB advances and
  other borrowings(5)    (1)      89      --          88       (5)      48      (1)        42       62      (54)     (5)         3
                       ----   ------    ----      ------    -----    -----    ----     ------     ----   ------   -----     ------
  Total interest-
   bearing liabilities $ 95   $  817    $ 23      $  935    $(123)   $ 539    $(18)    $  398     $328   $  732   $ 144     $1,204
                       ====   ======    ====      ======    =====    =====    ====     ======     ====   ======   =====     ======

Increase in net 
 interest income                                  $  335                               $  384                               $  116
                                                  ======                               ======                               ======
</TABLE>
___________________________________

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

(2)  Includes mortgage-backed securities held to maturity, which are recorded
     at amortized cost, and mortgage-backed securities designated as available
     for sale, which are recorded at fair value.

(3)  Includes investment securities held to maturity, which are recorded at
     amortized cost, and investment securities designated as available for
     sale, which are recorded at fair value.

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

(5)  Includes obligations for securities sold under agreements to repurchase
     and loan of the ESOP.

COMPETITION

     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, consumer
finance companies, credit unions, leasing companies 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


                                        59

<PAGE>   60



interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides to borrowers.  Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels and other factors which
are not readily predictable.

     Blue Ash faces substantial competition in attracting deposits from other
savings institutions, commercial banks and credit unions and with the issuers
of commercial paper and other securities, such as shares in money market and
mutual funds 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, convenient locations and other factors.  Blue Ash
competes for these deposits by offering a variety of deposit accounts at
competitive rates, a customer oriented staff, convenient business hours,
convenient branch locations with inter-branch deposit and withdrawal privileges
and 24-hour ATM processing.

     Of the approximately 34 thrifts which have their principal offices in
Hamilton County, at June 30, 1998, Blue Ash ranked approximately 12th in asset
size and 11th in deposit share.

     FIRREA eliminated many of the distinctions between commercial banks and
savings institutions and holding companies and allowed bank holding companies
to acquire savings institutions.  FIRREA has generally resulted in an increase
in the competition encountered by savings institutions and has resulted in a
decrease in both the number of savings institutions and the aggregate size of
the savings industry.

     The size of financial institutions competing with Blue Ash is likely to
increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching.  Such increased
competition in this area may have an adverse effect upon Blue Ash.

PERSONNEL

     As of June 30, 1998, Blue Ash had 24 full-time employees and two part-time
employees.  Blue Ash believes that relations with its employees are excellent.
Blue Ash offers health, disability, life and dependent care benefits.  In
addition, Blue Ash offers certain retirement benefits.  None of the employees
of Blue Ash are represented by a collective bargaining unit.






                                        60

<PAGE>   61


                                     REGULATION

     Set forth below is a brief description of certain laws and regulations
which relate to the regulation of Towne Financial and Blue Ash.  The
description of these laws and regulations, as well as descriptions of laws and
regulations contained elsewhere herein, does not purport to be complete and is
qualified in its entirety by reference to applicable laws and regulations.

GENERAL

     Towne Financial is a savings and loan holding company within the meaning
of the Home Owners Loan Act of 1933, as amended (the "HOLA").  Consequently,
Towne Financial is subject to regulation, examination and oversight by the OTS
and must submit periodic reports thereto.  Because Towne Financial is a
corporation organized under Ohio law, it is also subject to provisions of the
Ohio Revised Code applicable to corporations generally.

     As a savings and loan association chartered under the laws of Ohio, Blue
Ash is subject to regulation, examination and oversight by the Superintendent
of the Division of Financial Institutions in the Department of Commerce of the
State of Ohio (the "Ohio Superintendent").  Because Blue Ash's deposits are
insured by the FDIC, Blue Ash also is subject to regulation and examination by
the OTS, as its primary federal regulator, and by the FDIC.  Blue Ash must file
periodic reports with the Ohio Superintendent and the OTS concerning its
activities and financial condition, including an independent audit.
Examinations are conducted periodically by these federal and state regulators
to determine whether Blue Ash is in compliance with various regulatory
requirements and is operating in a safe and sound manner.

     Because it accepts federally-insured deposits and offers transaction
accounts, Blue Ash is also subject to certain regulations issued by the Board
of Governors of the Federal Reserve System ("FRB") including without
limitation, Regulation B (Equal Credit Opportunity), Regulation D (Reserves),
Regulation E (Electronic Fund Transfers), Regulation Z (Truth in Lending) and
Regulation CC (Availability of Funds).  As creditors of loans secured by real
property, and as owners of real property, financial institutions such as Blue
Ash may be subject to potential liability under various statutes and
regulations applicable to property owners generally, including statutes and
regulations relating to the environmental condition of real property.

     Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS and Blue Ash may
be


                                        61

<PAGE>   62



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.

     In addition, Towne Financial might become subject to a different form of
holding company regulation which may limit the activities in which Towne
Financial may engage and subject Towne Financial to additional regulatory
requirements, including separate capital requirements.  Towne Financial cannot
predict when or whether Congress may actually pass legislation regarding Towne
Financial's and Blue Ash's regulatory requirements or charter.  Although such
legislation may change the activities in which Towne Financial and Blue Ash may
engage, it is not anticipated that the current activities of either Towne
Financial or Blue Ash will be materially affected by those activity limits.

OHIO CORPORATION LAW

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

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

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


                                        62

<PAGE>   63



apply to any business combination between a person who became an Interested
Shareholder prior to the adoption of such an amendment as if the amendment had
not been adopted.  Neither the Articles of Incorporation of Towne Financial nor
Blue Ash opt out of the protection afforded by Chapter 1704.

     CONTROL SHARE ACQUISITION.  Section 1701.831 of the Ohio Revised Code (the
"Control Share Acquisition Statute") requires that certain acquisition of
voting securities which would result in the acquiring shareholder owning 20%,
33-1/3%, or 50% of the outstanding voting securities of Towne Financial (a
"Control Share Acquisition") must be approved in advance by the holders of at
least a majority of the outstanding voting shares represented at a meeting at
which a quorum is present and a majority of the portion of the outstanding
voting shares is represented at such a meeting, excluding the voting shares
owned by the acquiring shareholder.  The Control Share Acquisition Statute was
intended, in part, to protect shareholders of Ohio corporations from coercive
tender offers.

     TAKEOVER BID STATUTE.  Ohio law also contains a statute regulating
takeover bids for any Ohio corporation, including savings and loan
associations.  Such statute provides that no offeror may make a takeover bid
unless (i) at least 20 days prior thereto the offeror announces publicly the
terms of the proposed takeover bid and files with the Ohio Division of
Securities (the "Securities Division") and provides the target company with
certain information in respect of the offeror, his ownership of the company's
shares and his plans for the company, and (ii) within ten days following such
filing either (a) no hearing is required by the Securities Division, (b) a
hearing is requested by the target company within such time but the Securities
Division finds no cause for hearing exists, or (c) a hearing is ordered and
upon such hearing the Securities Division adjudicates that the offeror proposes
to make full, fair and effective disclosure to offerees of all information
material to a decision to accept or reject the offer.

     The takeover bid statute also states that no offeror shall make a takeover
bid if he owns 5% or more of the issued and outstanding equity securities of
any class of the target company, any of which were purchased within one year
before the proposed takeover bid, and the offeror, before making any such
purchase, failed to announce his intention to gain control of the target
company, or otherwise failed to make full and fair disclosure of such intention
to the persons from whom he acquired such securities.  The United States
District Court for the Southern District of Ohio has determined that the Ohio
takeover bid statute is preempted by federal regulation.




                                        63

<PAGE>   64


OHIO SAVINGS AND LOAN LAW

     The Ohio Superintendent is responsible for the regulation, examination and
supervision of Ohio savings and loan associations in accordance with the laws
of the State of Ohio.  Ohio law prescribes the permissible investments and
activities of Ohio savings and loan associations, including the types of
lending that such associations may engage in and the investments in real
estate, subsidiaries and corporate or government securities that such
associations may make.  The ability of Ohio associations to engage in these
state-authorized investments and activities is subject to oversight and
approval by the FDIC, if such investments or activities are not permissible for
a federally chartered savings association.  See "Federal Deposit Insurance
Corporation -- State Association Activities."

     The Ohio Superintendent also has approval authority over any mergers
involving or acquisitions of control of Ohio savings and loan associations.
The Ohio Superintendent may initiate certain supervisory measures or formal
enforcement actions against Ohio associations.  Ultimately, if the grounds
provided by law exist, the Superintendent may place an Ohio association in
conservatorship or receivership.

     The Ohio Superintendent conducts regular examinations of Blue Ash
approximately every eighteen months.  Such examinations are usually conducted
jointly with one or both federal regulators.  The Ohio Superintendent imposes
assessments on Ohio associations based on their asset size to cover the cost of
supervision and examination.

     In addition to being governed by the laws of Ohio specifically governing
savings and loan associations, Blue Ash is also governed by Ohio corporate law,
to the extent such law does not conflict with the laws specifically governing
savings and loan associations.

OFFICE OF THRIFT SUPERVISION

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


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<PAGE>   65



provided by law exist, the OTS may appoint a conservator or receiver for a
savings association.

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

     OPERATING STANDARDS.  Pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the "Improvement Act"), the OTS was
required to prescribe standards for savings associations related to (i)
internal controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate exposure; (v)
asset growth; and (vi) compensation, fees and benefits.  The compensation
standards prohibited, as an unsafe and unsound practice, any employment
contract, compensation or benefit agreement, fee arrangement, perquisite, stock
option plan, post-employment benefit or other compensatory arrangement that
would provide any executive officer, employee, director or principal
shareholder with excessive compensation, fees or benefits or with compensation
that would result in a material financial loss to Blue Ash.  The OTS was also
charged by the Improvement Act with prescribing standards for savings
associations and their holding companies specifying (i) a maximum ratio of
classified assets to capital; (ii) minimum earnings sufficient to absorb losses
without impairing capital; and (iii) to the extent feasible, a minimum ratio of
market value to book value for publicly traded shares of Blue Ash or the
holding company.

     REGULATORY CAPITAL REQUIREMENTS.  Blue Ash is required by OTS regulations
to meet certain minimum capital requirements.  The following table sets forth
the amount and percentage level of regulatory capital of Blue Ash at June 30,
1998, and the amount by which it exceeds, fully phased-in requirements.
Tangible and core capital are reflected as a percentage of adjusted total
assets.  Risk-based (or total) capital, which consists of core and
supplementary capital, is reflected as a percentage of risk-weighted assets.
Assets are weighted at percentage levels ranging from 0% to 100% depending on
their relative risk.




                                        65

<PAGE>   66


<TABLE>
<CAPTION>
                                           At June 30, 1998
                                       ------------------------
                                       Amount           Percent
                                       ------           -------
                                        (Dollars in thousands)
<S>                                    <C>              <C>
Tangible Capital                       $8,295             7.1%
Requirement                             1,762             1.5
                                       ------            ----
Excess                                 $6,533             5.6%
                                       ======            ====
Core Capital                           $8,295             7.1%
Requirement                             3,524             3.0
                                       ------            ----
Excess                                 $4,771             4.1%
                                       ======            ====
Risk-based Capital                     $8,559            14.8%
Risk-based Requirement                  4,640             8.0
                                       ------            ----
Excess                                 $3,919             6.8%
                                       ======            ====
</TABLE>

     Current capital requirements call for tangible capital (which for Blue Ash
is equity capital under generally accepted accounting principles adjusted for
goodwill, excess mortgage servicing rights and unrealized losses on certain
securities designated as available for sale) of 1.5% of adjusted total assets,
core capital (which for Blue Ash consists solely of tangible capital) of 3.0%
of adjusted total assets and risk-based capital (which for Blue Ash consists of
core capital plus general valuation allowances of $264,000) of 8% of
risk-weighted assets.  The OTS has proposed to amend the core capital
requirement so that those institutions that do not have the highest examination
rating and an acceptable level of risk will be required to maintain core
capital from 4% to 5%, depending on the institution's examination rating and
overall risk.  Blue Ash does not anticipate that it will be adversely affected
if the core capital requirement regulation is amended as proposed.  Its current
core capital level is 7.1% of adjusted total assets.

     The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed.  Pursuant to that requirement, savings associations would have to
measure the impact of an immediate 200 basis point change in interest rates on
the value of its portfolio, as determined under the methodology established by
the OTS.  If the measured interest rate risk is above the level deemed normal
under the regulation, Blue Ash would have to deduct one-half of that excess
exposure from its total capital when determining its level of risk-based
capital.  In general, institutions with less than $300 million in assets and a
risk-based capital ratio of greater than 12% will not be subject to this
requirement.  Blue Ash currently qualifies for this exception.  Pending
implementation of the interest rate risk component, the OTS has the authority
to impose a higher individualized capital requirement on any savings


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<PAGE>   67



association it deems to have excess interest rate risk.  The OTS also may
adjust the risk-based capital requirement on an individual basis for any
association to take into account risks due to concentrations of credit and
non-traditional activities.

     Pursuant to the Improvement Act, the OTS has adopted regulations governing
prompt corrective action to resolve the problems of capital deficient and
otherwise troubled savings associations.  At each successively lower defined
capital category, an association is subject to more restrictive and numerous
mandatory or discretionary regulatory actions or limits, and the OTS has less
flexibility in determining how to resolve the problems of the institution.  The
OTS has defined these capital levels as follows:  (i) well-capitalized
associations must have total risk-based capital of at least 10%, core
risk-based capital (consisting only of items that qualify for inclusion in core
capital) of at least 6% and core capital of at least 5%; (ii) adequately
capitalized associations are those that meet the regulatory minimum of total
risk-based capital of 8%, core risk-based capital (consisting only of items
that qualify for inclusion in core capital) of 4% and core capital of 4%
(except for associations receiving the highest examination rating and with an
acceptable level of risk, in which case the level is at least 3%); (iii)
undercapitalized associations are those that do not meet regulatory limits, but
that are not significantly undercapitalized; (iv) significantly
undercapitalized associations have total risk-based capital of less than 6%,
core risk-based capital (consisting only of items that qualify for inclusion in
core capital) of less than 3% and core capital of less than 3%; and (v)
critically undercapitalized associations are those with core capital of less
than 2% of total assets.  In addition, the OTS generally can downgrade an
association's capital category, notwithstanding its capital level, if, after
notice and opportunity for hearing, the association is deemed to be engaging in
an unsafe or unsound practice because it has not corrected deficiencies that
resulted in it receiving a less than satisfactory examination rating on matters
other than capital or it is deemed to be in an unsafe or unsound condition.  An
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized.  Such an association will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business.  Furthermore, critically undercapitalized institutions
must be placed in conservatorship or receivership within 90 days of reaching
that capitalization level, except under limited circumstances.  Blue Ash's
capital at June 30, 1998 meets the standards for a well-capitalized
institution.

     The Improvement Act prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control
of the association if, after such distribution or payment, the association
would be undercapitalized.


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<PAGE>   68



In addition, each company controlling an undercapitalized association must
guarantee that the association will comply with its capital plan until the
association has been adequately capitalized on an average during each of four
preceding calendar quarters and must provide adequate assurances of
performance.  The aggregate liability pursuant to such guarantee is limited to
the lesser of (i) an amount equal to 5% of the association's total assets at
the time the institution became undercapitalized or (ii) the amount that is
necessary to bring the association into compliance with all capital standards
applicable to such association at the time the association fails to comply with
its capital restoration plan.

     LIQUIDITY.  All savings associations, including Blue Ash, are required
under the Home Owners' Loan Act to hold a prescribed amount of statutorily
defined liquid assets.  OTS regulations require that savings associations
maintain an average daily balance of liquid assets (cash, certain time
deposits, bankers' acceptances and specified United States government, state or
federal agency obligations) equal to a monthly average of not less than a
specified percentage of its net withdrawable savings deposits plus borrowings
payable in one year or less.  This liquidity requirement, which is currently
4%, may be changed from time to time to any amount within the range of 4% to
10%, depending upon economic conditions and the savings flows at all
associations.  Effective November 24, 1997, the OTS lowered the liquidity
requirements for savings associations from 5% to 4% of the institution's
liquidity base, the lowest level permitted by current law.  The OTS also
enacted other changes at that time, including the expansion of the categories
of liquid assets that count toward satisfaction of the liquidity requirement
and other technical revisions.  Specifically, the OTS eliminated a separate
limit that required savings associations to hold assets equal to 1% of the
institution's liquidity base in cash or short-term liquid assets, streamlined
the calculations used to measure compliance with liquidity requirements,
reduced the liquidity base by modifying the definition of net withdrawable
account to exclude accounts with maturities exceeding one year and removing the
requirement that certain obligations must mature in five years or less to
qualify as a liquid asset.  The net effect for most savings institutions, as
well as for Blue Ash, is that the above requirement makes it substantially
easier to meet the liquidity requirement as currently defined.  Monetary
penalties may be imposed upon associations failing to meet liquidity
requirements.  The eligible liquidity of Blue Ash, as computed under current
regulation at June 30, 1998, was approximately $40.0 million, or 52.9%, and
exceeded the then applicable 4.0% liquidity requirement of $3.0 million by
approximately $37.0 million, or 48.9%.

     QUALIFIED THRIFT LENDER TEST.  Savings associations are required to meet
the QTL test.  Prior to September 30, 1996, there was only one QTL test which
required savings associations to


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<PAGE>   69



maintain a specified level of investments in assets that are designated as
qualifying thrift investments ("QTI"), which are generally related to domestic
residential real estate and manufactured housing and include credit card,
student and small business loans, stock issued by any FHLB, the FHLMC or the
FNMA.  Under this test 65% of an institution's "portfolio assets" (total assets
less goodwill and other intangibles, property used to conduct business and 20%
of liquid assets) must consist of QTI on a monthly average basis in 9 out of
every 12 months.  Congress created a second QTL test, effective September 30,
1996, pursuant to which a savings association may also meet the QTL test under
the Internal Revenue Code of 1986, as amended (the "Code"), for thrift
institution status.  According to the test under the Code, at least 60% of the
institution's assets (on a tax basis) must consist of specified assets
(generally loans secured by residential real estate or deposits, educational
loans, cash and certain governmental obligations).  The OTS may grant
exceptions to the QTL test under certain circumstances.  If a savings
associations fails to meet the QTL Test, the association and its holding
company will be subject to certain operating and regulatory restrictions.  A
savings association that fails to meet the QTL Test will not be eligible for
new FHLB advances.  See "Federal Home Loan Banks."  At June 30, 1998, Blue Ash
had QTL investments equal to approximately 88.9% of its total portfolio assets.

     LENDING LIMITS.  OTS regulations generally limit the aggregate amount that
a savings association can lend to one borrower to an amount equal to 15% of the
association's Unimpaired Capital.  A savings association may loan to one
borrower an additional amount not to exceed 10% of the association's Unimpaired
Capital, if the additional amount is fully secured by certain forms of "readily
marketable collateral."  Real estate is not considered "readily marketable
collateral" and certain types of loans are not subject to these limits.  In
applying these limits, the regulations require that loans to certain related
borrowers be aggregated.  Notwithstanding the specified limits, an association
may lend to one borrower up to $500,000 "for any purpose" and, subject to
certain conditions including OTS prior approval, may lend to one borrower for
the development of domestic residential housing units in an amount up to the
lesser of $30,000,000, or 30% of the savings association's unimpaired capital
and surplus.  At June 30, 1998, Blue Ash was in compliance with these lending
limits.  See "Lending Activities -- Loan Originations, Purchases and Sales."

     TRANSACTIONS WITH INSIDERS AND AFFILIATES.  Loans to insiders are also
subject to Section 22(g) and (h) of the Federal Reserve Act ("FRA"), which
place restrictions on loans to executive officers, directors and principal
shareholders and their related interests.  Generally, such loans must conform
to limits on loans to one borrower, and the total of such loans to executive
officers, directors, principal shareholders and their related interests cannot
exceed the association's Unimpaired Capital.  Most loans to


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<PAGE>   70



directors, executive officers and principal shareholders must be approved in
advance by a majority of the "disinterested" members of the board of directors
of the association with any "interested" director not participating.  All loans
to directors, executive officers and principal shareholders must be made on
terms substantially the same as offered in comparable transactions with the
general public.  Loans to executive officers are subject to additional
restrictions.  Blue Ash was in compliance with such restrictions at June 30,
1998.

     All transactions between savings associations and their affiliates must
comply with Section 23A and 23B of the FRA.  An affiliate of a savings
association is any company or entity that controls, is controlled by or is
under common control with the savings association.  Towne Financial is an
affiliate of Blue Ash.  Generally, Sections 23A and 23B of the FRA (i) limit
the extent to which a savings association or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, (ii) limit the aggregate of all such
transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as those
provided in transactions with a non-affiliate.  The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions.  In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary.  Blue Ash was in
compliance with these requirements and restrictions at June 30, 1998.

     LIMITATIONS ON CAPITAL DISTRIBUTIONS.  The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, including dividend payments.  An association which has converted
to the stock form of organization is prohibited from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the net worth
of the association would be reduced below the amount required to be maintained
for the liquidation account established in connection with its mutual to stock
conversion.  OTS regulations also establish a three-tier system limiting
capital distributions according to ratings of associations based on their
capital level and supervisory condition.

     The first rating category is Tier 1, consisting of associations that,
before and after the proposed distribution, meet their fully phased-in capital
requirements.  Associations in this category may make capital distributions
during any calendar year equal to the greater of 100% of net earnings, current
year-to-date,


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<PAGE>   71



plus 50% of the amount by which the lesser of the association's tangible, core
or risk-based capital exceeds its fully phased-in capital requirement for such
capital component, as measured at the beginning of the calendar year, or the
amount authorized for a Tier 2 association.  A Tier 1 association deemed to be
in need of more than normal supervision by the OTS may be downgraded to a Tier
2 or Tier 3 association.  Blue Ash meets the requirements for a Tier 1
association and has not been notified of any need for more than normal
supervision.

     The second category, Tier 2, consists of associations that before and
after the proposed distribution meet their current minimum, but not fully
phased-in, capital requirements.  Associations in this category may make
capital distributions of up to 75% of net earnings over the most recent four
quarters.  Tier 3 associations do not meet current minimum capital requirements
and must obtain OTS approval of any capital distribution.  Tier 2 associations
that propose to make a capital distribution in excess of the noted safe harbor
level must also obtain OTS approval.  Tier 2 associations proposed to make a
capital distribution within the safe harbor provisions and Tier 1 associations
proposing to make any capital distribution need only submit written notice to
the OTS 30 days prior to such distribution.  The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.

     In December 1994, the OTS issued a proposal to amend the capital
distributions limits.  Under that proposal, associations which are not owned by
a holding company and which have a CAMEL examination rating of 1 or 2 could
make a capital distribution without notice to the OTS, if they remain
adequately capitalized, as described above, after the distribution is made.
Any other association seeking to make a capital distribution that would not
cause the association to fall below the capital levels to qualify as adequately
capitalized or better, would have to provide notice to the OTS.  Except under
limited circumstances and with OTS approval, no capital distributions would be
permitted if it caused the association to become undercapitalized or worse.

     In addition, as a subsidiary of Towne Financial, Blue Ash is required to
give the OTS 30 days notice prior to declaring any dividend on its stock.  The
OTS may object to the distribution during that 30-day period based on safety
and soundness concerns.  During fiscal 1998, Blue Ash declared and paid capital
distributions in the form of dividends of $150,000 to Towne Financial for the
payment by Towne Financial of cash dividends to its shareholders and for other
general corporate purposes.

     HOLDING COMPANY REGULATION.  Towne Financial is a unitary savings and loan
holding company within the meaning of the HOLA.  As such, Towne Financial is
registered with the OTS and is subject to OTS regulations, examination,
supervision and reporting


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<PAGE>   72



requirements.  Congress is considering legislation that may require that Towne
Financial become a bank holding company regulated by the FRB.  Bank holding
companies with more than $150 million in assets are subject to capital
requirements similar to those imposed on Blue Ash and have more extensive
interstate acquisition authority than savings and loan holding companies.  Bank
holding companies are subject to more restrictive activity and investment
limits than savings and loan holding companies.  No assurances can be given
that such legislation will be enacted, and Towne Financial cannot be certain of
the legislation's impact on its operations until it is enacted.

     The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary.  Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association
for cash without such savings association being deemed to be controlled by the
holding company.  Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.

     There are generally no restrictions on the activities of unitary savings
and loan holding companies and such companies are the only financial
institution holding companies which may engage in commercial activities and
expanded securities and insurance activities.  The broad latitude to engage in
activities under current law can be restricted, if the OTS determines that
there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association.  The OTS
may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association.  Notwithstanding the foregoing rules as to permissible
business activities of a unitary savings and loan holding company, if the
savings association subsidiary of a holding company fails to meet the QTL Test,
then such unitary holding company would become subject to the activities
restrictions applicable to multiple holding companies.  At June 30, 1998, Blue
Ash met the QTL Test.




                                        72

<PAGE>   73


     If Towne Financial were to acquire control of another savings institution,
other than through a merger or other business combination with Blue Ash, Towne
Financial would become a multiple savings and loan holding company.  Unless the
acquisition is an emergency thrift acquisition and each subsidiary savings
association meets the QTL Test, the activities of Towne Financial and any of
its subsidiaries (other than Blue Ash or other subsidiary savings associations)
would thereafter be subject to activity restrictions.  The HOLA provides that,
among other things, no multiple savings and loan holding company or subsidiary
thereof that is not a savings institution shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing or
liquidating assets owned by or acquired from a subsidiary savings institution,
(iv) holding or managing properties used or occupied by a subsidiary savings
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by federal regulation as of March 5, 1987, to be
engaged in by multiple holding companies, or (vii) those activities authorized
by the FRB as permissible for bank holding companies, unless the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies.  Those activities described in (vii) above must also be approved by
the OTS prior to being engaged in by a multiple holding company.

     The OTS may approve acquisitions resulting in the formation of a multiple
savings and loan holding company that controls savings associations in more
than one state, only if the multiple savings and loan holding company involved
controls a savings association that operated a home or branch office in the
state of the association to be acquired as of March 5, 1987, or if the laws of
the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions).  As under prior law, the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.

     No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment.  Any dividend declared during such period or without
the giving of such notice shall be invalid.




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<PAGE>   74


     FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF TOWNE FINANCIAL AND BLUE
ASH.  In addition to the Ohio law limitations on the merger and acquisition of
Towne Financial and Blue Ash previously discussed, federal limitations
generally require regulatory approval of acquisitions at specified levels.
State law similarly requires regulatory approval and also imposes certain
anti-takeover limitations.  Under pertinent federal law and regulations, no
person, directly or indirectly, or acting in concert with others, may acquire
control of Towne Financial or Blue Ash without 60 days prior notice to the OTS.
"Control" is generally defined as having more than 25% ownership or voting
power; however, ownership or voting power of more than 10% may be deemed
"control" if certain factors are present.  If the acquisition of control is by
a company, the acquiror must obtain approval, rather than give notice, of the
acquisition as a savings and loan holding company.

     Ohio law requires Superintendent approval of any acquisition of control of
Blue Ash directly or indirectly, including through Towne Financial.  Control is
deemed to be at least 15% ownership or voting power.  Ohio law permits
acquisitions of control by non-Ohio companies only if the law of the State of
the acquiror permits similar acquisitions in that State by Ohio companies.

     In addition, any merger of Blue Ash must be approved by the OTS as well as
the Superintendent.  Further, any merger of Towne Financial, in which Towne
Financial is not the resulting company, must also be approved by both the OTS
and the Superintendent as a holding company acquisition.

FEDERAL DEPOSIT INSURANCE CORPORATION.

     DEPOSIT INSURANCE.  The FDIC is an independent federal agency that insures
the deposits of federally-insured banks and thrifts, up to prescribed statutory
limits, and safeguards the safety and soundness of the banking and thrift
industries.  The FDIC maintains and administers two separate insurance funds,
the Bank Insurance Fund ("BIF") for commercial banks and state savings banks
and the SAIF for savings associations.  Blue Ash is a member of the SAIF and
its deposit accounts are insured by the FDIC, up to the prescribed limits.  The
FDIC has examination authority over all insured depository institutions,
including Blue Ash, and has authority to initiate enforcement actions against
federally-insured savings associations, if the FDIC does not believe the OTS
has taken appropriate action to safeguard safety and soundness and the deposit
insurance fund.

     The FDIC may terminate the deposit insurance of any insured depository
institution, including Blue Ash, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law,


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<PAGE>   75



regulation, order or any condition imposed by an agreement with the FDIC.  It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital.  If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC.  Management is aware of no existing circumstances which would
result in termination of Blue Ash's deposit insurance.

     SAIF members are generally prohibited from converting to the status of BIF
members or merging with or transferring assets to a BIF member before the date
on which the SAIF first meets or exceeds the designated reserve rates.  The
FDIC, however, may approve such a transaction in the case of a SAIF member in
default or if the transaction involves an insubstantial portion of the deposits
of each participant.  In addition, mergers, transfers of assets and assumptions
of liabilities may be approved by the appropriate bank regulator so long as
deposit insurance premiums continue to be paid to the SAIF for deposits
attributable to the SAIF members plus an adjustment for the annual rate of
growth of deposits in the surviving bank without regard to subsequent
acquisitions.  Each depository institution participating in a SAIF to BIF
conversion transaction is required to pay an exit fee to the SAIF and an
entrance fee to the BIF.  A savings association may adopt a commercial bank or
savings bank charter if the resulting bank remains a SAIF member.

     All state-chartered associations are generally limited to activities and
investments of the type and in the amount authorized for federally-chartered
associations, notwithstanding state law.  The FDIC is authorized to permit such
associations to engage in state-authorized activities or investments that do
not meet this standard if they meet their capital requirements, if it is
determined that such activities or investments do not pose a significant risk
to the SAIF.

     ASSESSMENTS.  The FDIC is required to maintain designated levels of
reserves in each fund.  The FDIC may increase assessment rates for either fund
if necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such rates if such
target level has been met.  The FDIC has established a risk-based assessment
system for both SAIF and BIF members.  Under this system, assessments vary
based on the risk the institution poses to its deposit insurance fund.  The
risk level is determined based on the institution's capital level and the
FDIC's level of supervisory concern about the institution.

     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
SAIF were below the level required by law,


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<PAGE>   76



because a significant portion of the assessments paid into the fund were used
to pay the cost of prior thrift failures. The reserves of the BIF met the level
required by law in May 1995. Because of the differing reserve levels of the
funds, deposit insurance assessments paid by healthy commercial banks were
reduced significantly below the level paid by healthy savings associations
effective in mid-1995.  Assessments paid by healthy savings associations
exceeded those paid by healthy commercial banks by approximately $.19 per $100
in deposits in late 1995.  This difference in assessment rates equaled
approximately $.23 per $100 in deposits in 1996, as no BIF assessments were
required for healthy commercial banks except for a minimum $2,000 fee.  This
premium disparity had a negative competitive impact on Blue Ash and other
institutions in the SAIF.

     The underfunded status of the SAIF had resulted in the introduction of
federal legislation intended to, among other things, recapitalize the SAIF and
address the resulting premium disparity.  On September 30, 1996, legislation
containing provisions for (i) recapitalizing the SAIF, (ii) providing for the
eventual merger of the SAIF with the BIF and (iii) reallocating payment of the
annual $780 million Financing Corporation ("FICO") bond obligation was enacted
into law.  These provisions, entitled the Deposit Insurance Funds Act of 1996
("DIFA"), imposed a one-time special assessment on institutions holding SAIF
deposits at March 31, 1995.  The special assessment was imposed to capitalize
the SAIF up the statutorily prescribed 1.25% designated reserve ratio and was
determined at 65.7 basis points per $100 of insured deposits.  Beginning
January 1, 1997, SAIF members were to have the same risk-based regular
assessment schedule as BIF members - 0 to 27 basis points.  Thus, for most
well-capitalized institutions like Blue Ash, there has been no regular
insurance premium assessed at the present time.  However, the enacted
legislation does include a formula for sharing payment in the FICO obligation
between members of the BIF and the SAIF.  From January 1, 1997 until December
31, 1999 under the formula, the FICO assessment rate for BIF-insured
institutions is approximately 1/5 of the FICO assessment rate for  SAIF-insured
institutions.  Thus, in addition to the regular deposit insurance assessment
(if any), BIF-insured institutions are assessed approximately $.013 per $100 in
deposits per year to cover the annual FICO payments while SAIF-insured
institutions are assessed approximately $.064 per $100 in deposits per year to
cover the annual FICO payments.  Starting in the year 2000 until the FICO bonds
are retired in 2019, banks and thrifts will pay the FICO assessment on a pro
rata basis which is estimated to be about 2.4 basis points per $100 of insured
deposits for all institutions.  Finally, the legislation provides for the BIF
and the recapitalized SAIF to be merged on January 1, 1999 into a new Deposit
Insurance Fund ("DIF"), provided that no insured depository institution is a
savings association on that date.




                                        76

<PAGE>   77


     The special assessment was payable to the FDIC on November 27, 1996, and
because the legislation was signed into law on September 30, the special
assessment was recorded on the Corporation's books as an expense on September
30, 1996.  Blue Ash had $55.8 million in deposits at March 31, 1995.  With the
special assessment at 65.7 basis points per $100 of insured deposits, Blue Ash
was required to pay $366,000 on a pre-tax basis.  This assessment was tax
deductible, and it reduced net earnings and capital by $242,000 for the year
ended June 30, 1997.  With the passage of this legislation, the annual SAIF
premiums are expected to be reduced by approximately $83,000 after
consideration of the tax effects.  By the year 2000, the one-time special
assessment is expected to be made up through the reduction in SAIF premiums.
While the one-time special assessment had a significant impact on fiscal 1997
earnings, the resulting lower annual premiums will benefit future years'
earnings.

     FINANCIAL REPORTING.  In accordance with the requirements of the
Improvement Act, the FDIC has proposed financial and regulatory reporting
requirements for institutions with assets of at least $500 million in assets.
Such institutions must submit an annual report to the FDIC and other
appropriate state and federal regulators, which contains audited statements by
acceptable audit firms and a management report on the institution's preparation
of financial statements, internal control systems and compliance with laws and
regulations relating to safety and soundness as designated by the FDIC.  Such
laws and regulations are those governing affiliate transactions, insider loans
and dividend restrictions.  FDIC guidelines contain procedures for ascertaining
the level of compliance in these areas.  The annual report must also contain a
report of the independent auditor attesting to and reporting on the management
report.  Institutions with assets of more than $3 billion must establish an
independent audit committee of their boards in accordance with the regulatory
requirements and the guidelines.


FRB REGULATIONS

     RESERVE REQUIREMENTS.  FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW accounts)
and non-personal time deposits.  FRB regulations currently require that
reserves of 3% of net transaction accounts up to $49.3 million (subject to an
exemption of up to $4.4 million), and that reserves of 10% be maintained
against that portion of total net transaction accounts in excess of $49.3
million.  At June 30, 1998, Blue Ash was in compliance with its reserve
requirements.  However, because required reserves must be maintained in the
form of vault cash or a noninterest-bearing account at a Federal Reserve
Association, the effect of this reserve requirement is to reduce an
institution's earning assets.




                                        77

<PAGE>   78


     TRUTH IN SAVINGS.  The Improvement Act included the Truth in Savings Act,
which requires the FRB to establish regulations providing for clear and uniform
disclosure of the rates, fees and terms of deposit accounts.  The FRB has
adopted regulations requiring specific disclosure before an account is opened,
in regularly provided statements and in advertisements, announcements and
solicitations initiated by a depository institution.  The regulations also
impose substantive limits on the methods used to determine the balance of an
amount on which interest is calculated.  These regulations became effective
June 21, 1993.  The required disclosure includes details of deposit account
yield information, minimum balance requirements and fee impact on the yield.
The regulations also establish certain recordkeeping requirements.

FEDERAL HOME LOAN BANKS

     The FHLBs provide credit to their members in the form of advances.  Blue
Ash is a member of the FHLB of Cincinnati and must maintain an investment in
the capital stock of that FHLB in an amount equal to the greater of 1.0% of the
aggregate outstanding principal amount of Blue Ash's residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or 5% of its advances from the FHLB.  Blue Ash is in compliance with this
requirement with an investment of stock in the FHLB of Cincinnati of $797,000
at June 30, 1998.

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

     Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs.  The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending to
first-time home buyers.  All long-term advances by each FHLB must be made only
to provide funds for residential housing finance.  The FHLB has established an
"Affordable Housing Program" to subsidize the interest rate of advances to
member associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates.  The FHLB of
Cincinnati reviews and accepts proposals for subsidies under said program twice
a year.  Blue Ash has participated in this program.




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<PAGE>   79


                                     TAXATION

FEDERAL TAXATION

     Towne Financial and Blue Ash file a consolidated federal income tax return
on a fiscal June 30 year basis using the accrual method of accounting.  Towne
Financial and Blue Ash are both subject to the federal tax laws and regulations
which apply to corporations generally.  Prior to the enactment of the Small
Business Jobs Protection Act (the "Act"), which was signed into law on August
20, 1996, certain thrift institutions, such as Blue Ash, were allowed
deductions for bad debts under methods more favorable than those granted to
other taxpayers.  Qualified thrift institutions could compute deductions for
bad debts using either the specific charge off method of Section 166 of the
Code or the reserve method of Section 593 of the Code.

     Under Section 593, a thrift institution annually could elect to deduct bad
debts under either (i) the "percentage of taxable income" method applicable
only to thrift institutions, or (ii) the "experience" method that also was
available to small banks.  Under the "percentage of taxable income" method, a
thrift institution generally was allowed a deduction for an addition to its bad
debt reserve equal to 8% of its taxable income (determined without regard to
this deduction and with additional adjustments).  Under the experience method,
a thrift institution was generally allowed a deduction for an addition to its
bad debt reserve equal to the greater of (i) an amount based on its actual
average experience for losses in the current and five preceding taxable years,
or (ii) an amount necessary to restore the reserve to its balance as of the
close of the base year.  A thrift institution could elect annually to compute
its allowable addition to bad debt reserves for qualifying loans either under
the experience method or the percentage of taxable income method.  For fiscal
tax years 1996 and 1995, Blue Ash used the percentage of taxable income method
because such method provided a higher bad debt deduction than the experience
method.

     Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995.  Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only
the specific charge off method.  The percentage of taxable income method of
accounting for bad debts is no longer available for any financial institution.

     A thrift institution required to change its method of computing reserves
for bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer and having been made with the consent of the
Secretary of the Treasury.


                                        79

<PAGE>   80



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

     For taxable years that begin after June 30, 1996, and before July 1, 1998,
if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken into
account as a Code Section 481(a) adjustment for the year will be suspended.  A
thrift meets the residential loan requirement if, for the tax year, the
principal amount of residential loans made by the thrift during the year is not
less than its base amount.  The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before July 1, 1996.

     A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential or church property and certain mobile
homes), but only to the extent that the loan is made to the owner of the
property.

     The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which requires recapture in the case of
certain excessive distributions to shareholders.  The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses).  Distribution of a cash
dividend by a thrift institution to a shareholder is treated


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<PAGE>   81



as made; first, out of the institution's post-1951 accumulated earnings and
profits; second, out of the pre-1988 reserves; and third, out of such other
accounts as may be proper.  To the extent a distribution by Blue Ash to Towne
Financial is deemed paid out of its pre-1988 reserves under these rules, the
pre-1988 reserves would be reduced and Blue Ash's gross income for tax purposes
would be increased by the amount which, when reduced by the income tax, if any,
attributable to the inclusion of such amount in its gross income, equals the
amount deemed paid out of the pre-1988 reserves.  As of June 30, 1998, Blue
Ash's pre-1988 reserves for tax purposes totaled approximately $1.1 million.
Blue Ash believes it had approximately $2.3 million of accumulated earnings and
profits for tax purposes as of June 30, 1998, which would be available for
dividend distributions, provided regulatory restrictions applicable to the
payment of dividends are met.  No representation can be made as to whether Blue
Ash will have current or accumulated earnings and profits in subsequent years.

     In addition to the regular income tax, Towne Financial and Blue Ash are
subject to a minimum tax.  An alternative minimum tax is imposed at a minimum
tax rate of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption.  Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986.  In
addition, 75% of the amount by which a corporation's "adjusted current
earnings" exceeds its alternative minimum taxable income computed without
regard to this preference item and prior to reduction by net operating losses,
is included in alternative minimum taxable income.  Net operating losses can
offset no more than 90% of alternative minimum taxable income.  The alternative
minimum tax is imposed to the extent it exceeds the corporation's regular
income tax.  Payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years.  In addition, for taxable years after
1986 and before 1996, Towne Financial and Blue Ash are also subject to
environmental tax equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2.0 million.

     Towne Financial has not undergone an audit by the Internal Revenue Service
at any time during the last five years.  In the opinion of management, any
examination of open returns would not result in a deficiency which could have a
material adverse effect on the financial condition of Towne Financial.

OHIO TAXATION

     Towne Financial is subject to the Ohio corporation franchise tax, which,
as applied to Towne Financial, is a tax measured by both net income and net
worth.  The rate of tax is the greater of (i) 5.1% on the first $50,000 of
computed Ohio taxable income and


                                        81

<PAGE>   82



8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% times
taxable net worth.

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

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

     Blue Ash is a "financial institution" for State of Ohio tax purposes.  As
such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of Blue Ash's book
net worth determined in accordance with generally accepted accounting
principles.  As a "financial institution," Blue Ash is not subject to any tax
based upon net income or net profits imposed by the State of Ohio.




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<PAGE>   83


ITEM 2. DESCRIPTION OF PROPERTY.

     As of June 30, 1998, Blue Ash conducted its business from its main office
in Blue Ash and from additional full-service branches located in Mason, Amelia
and Cherry Grove, Ohio.

     The following table sets forth certain information at June 30, 1998,
regarding the properties on which the main office and each branch office of
Blue Ash is located.


<TABLE>
<CAPTION>
                                Year         Owned                  Net
  Location                     Opened      or Leased            Book Value(1)
  ---------------------------  ------      ---------            -------------
  <S>                          <C>         <C>                  <C>
  Main Office
  ---------------------------
  4811 Cooper Road              1952         Owned                $775,000
  Cincinnati, Ohio  45242

  Full-Service Branch Offices
  ---------------------------
  1187 Ohio Pike                1980         Owned                $275,000
  Amelia, Ohio  45102

  8620 Beechmont Avenue         1993         Owned                $262,000
  Cincinnati, Ohio  45255

  6501 Mason-Montgomery Road    1994         Owned                $601,000
  Mason, Ohio  45040
</TABLE>
_________________________

(1)  At June 30, 1998, Blue Ash's furniture, fixtures and equipment had a net
     book value of $337,000.

ITEM 3. LEGAL PROCEEDINGS.

     Neither Towne Financial nor Blue Ash is aware of any material pending
legal proceedings.  From time to time, Blue Ash is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by Blue Ash.


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

      Not applicable.



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<PAGE>   84

                                       PART II

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.


     Incorporated by reference to the information contained in the Towne
Financial Corporation Annual Report to Shareholders for the year ended June 30,
1998 (the "Annual Report"), under the caption "Market for Towne Financial's
Common Shares and Related Security Holder Matters" on pp. 9-10 of the Annual
Report.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

     Incorporated by reference to the information under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pp. 16-60 of the Annual Report.

ITEM 7. FINANCIAL STATEMENTS.

     Incorporated by reference to the Consolidated Financial Statements
contained in the Annual Report.


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

    Not applicable.


                                  PART III

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


     Incorporated by reference to the information contained in the definitive
Proxy Statement for the 1998 Annual Meeting of Shareholders of Towne Financial
Corporation to be filed on or about September 25, 1998 (the "Proxy Statement")
under the captions "Election of Directors", "Executive Officers Who Are Not
Directors" and "Section 16(a) -- Beneficial Ownership Reporting Compliance."

ITEM 10. EXECUTIVE COMPENSATION.

     Incorporated by reference to the information contained in the Proxy
Statement under the caption "Executive Compensation."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     Incorporated by reference to the information contained in the Proxy
Statement under the caption "Voting Securities."



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<PAGE>   85


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Incorporated by reference to the information contained in the Proxy
Statement under the caption "Certain Transactions."

                                    PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

     (a) Exhibits.

3.1  Amended Articles of Incorporation of the Corporation incorporated by
     reference to Exhibit 3.2 to the Corporation's Registration Statement on
     Form S-1, Registration No. 33-43347, as amended (the "Registration
     Statement").

3.2  Code of Regulations of the Corporation incorporated by reference to
     Exhibit 3.3 to the Registration Statement.

10.1 1992 Stock Option Plan incorporated by reference to Exhibit 14(a)(3)10.4
     of the Form 10-K filed by the Corporation for the year ended June 30,
     1992.

10.2 1997 Stock Option Plan incorporated by reference to Exhibit 10.2 of the
     Form 10-KSB filed by the Corporation for the year ended June 30, 1997.

10.3 Form of Employment Agreement between The Blue Ash Building and Loan
     Company and William S. Siders.

10.4 Form of Employment Agreement between The Blue Ash Building and Loan
     Company and William T. Thornell.

10.5 Form of Employment Agreement between The Blue Ash Building and Loan
     Company and Joseph L. Michel.

13   Annual Report to Shareholders.

21   The only subsidiary of the Corporation is The Blue Ash Building and Loan
     Company, an Ohio corporation.

27   Financial Data Schedule.

     (b) Reports on Form 8-K.

     No reports on Form 8-K have been filed during the last quarter of the
fiscal year covered by this Report.



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<PAGE>   86


                                   SIGNATURES


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

TOWNE FINANCIAL CORPORATION

By:/s/ Ralph E. Heitmeyer

Date: September 22, 1998

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

By:/s/ Neil S. Strawser
     Neil S. Strawser
     Director and Chairman of the Board

Date: September 22, 1998

By:/s/ Ralph E. Heitmeyer
     Ralph E. Heitmeyer
     Director and President

Date: September 22, 1998

By:/s/ William S. Siders
     William S. Siders
     Director and Executive Vice President

Date: September 22, 1998

By:/s/ Herb L. Kromholz
     Herb L. Krombholz
     Director and Vice President

Date: September 22, 1998

By:/s/ William T. Thornell
     William T. Thornell
     Director and Vice President

Date: September 22, 1998

By:/s/ Joseph L. Michel
     Joseph L. Michel
     Chief Financial Officer, Vice
     President and Treasurer

Date: September 22, 1998



                                        86

<PAGE>   87

                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
         Exhibit                                          Sequentially
         Number              Description                 Numbered Pages
         -------  ---------------------------------      --------------
         <S>      <C>                                    <C>
         3.1      Amended Articles of Incorporation
                  (incorporated by reference).

         3.2      Code of Regulations
                  (incorporated by reference).

        10.1      1992 Stock Option Plan (incorporated
                  by reference).

        10.2      1997 Stock Option Plan (incorporated
                  by reference).

        10.3      Form of Employment Agreement between       88 - 98
                  The Blue Ash Building and Loan
                  Company and William S. Siders.

        10.4      Form of Employment Agreement between       99 - 110
                  The Blue Ash Building and Loan
                  Company and William T. Thornell.

        10.5      Form of Employment Agreement between      111 - 121
                  The Blue Ash Building and Loan
                  Company and Joseph L. Michel.

        13        Annual Report to Shareholders.            122 - 232

        21        The only subsidiary of the Corporation
                  is The Blue Ash Building and Loan
                  Company, an Ohio corporation.
 
        27        Financial Data Schedule.                     233
</TABLE>




                                       87
<PAGE>   88


                                   SIGNATURES


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

TOWNE FINANCIAL CORPORATION

By:/s/ Ralph E. Heitmeyer

Date: September 22, 1998

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

By:/s/ Neil S. Strawser
     Neil S. Strawser
     Director and Chairman of the Board

Date: September 22, 1998

By:/s/ Ralph E. Heitmeyer
     Ralph E. Heitmeyer
     Director and President

Date: September 22, 1998

By:/s/ William S. Siders
     William S. Siders
     Director and Executive Vice President

Date: September 22, 1998

By:/s/ Herb L. Kromholz
     Herb L. Krombholz
     Director and Vice President

Date: September 22, 1998

By:/s/ William T. Thornell
     William T. Thornell
     Director and Vice President

Date: September 22, 1998

By:/s/ Joseph L. Michel
     Joseph L. Michel
     Chief Financial Officer, Vice
     President and Treasurer

Date: September 22, 1998



                                        86