<PAGE>   1
                     U.S. Securities and Exchange Commission

                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)
          [X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                    SECURITIES EXCHANGE ACT  OF 1934

For the Fiscal Year Ended December 31, 1999
                          -----------------

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

             For the transition period from __________ to __________

                         Commission file number: 0-27980
                                                 -------

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

                  OHIO                                      34-1817924
     -------------------------------                   -------------------
     (State or other jurisdiction of                   (I.R.S. Employer
     incorporation or organization)                    Identification No.)

                    519 Broadway, East Liverpool, Ohio 43920
               ---------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone number: (330) 385-0770
                                               --------------

      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, no par value
                           ---------------------------
                                (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 past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X  No.
                                                                      ---    ---

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant'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. [X]

         The issuer's revenues for the fiscal year ended December 31, 1999,
totaled $10,692,000.

         Based upon information regarding the last sales price provided by The
Nasdaq Stock Market, the aggregate market value of the voting stock held by
non-affiliates of the Registrant on March 10, 2000, was $7,520,156.

                      As of March 10, 2000, 961,793 of the
               issuer's common shares were issued and outstanding.

                                       1

<PAGE>   2
                       DOCUMENTS INCORPORATED BY REFERENCE

         The following sections of the definitive Proxy Statement for the 2000
Annual Meeting of Shareholders of Potters Financial Corporation (the Proxy
Statement) are incorporated by reference into Part III of this Form 10-KSB:

1.       PROPOSAL ONE - ELECTION OF DIRECTORS;

2.       EXECUTIVE OFFICERS;

3.       COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS; and

4.       VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT.

                                     PART I


ITEM 1.       DESCRIPTION OF BUSINESS

GENERAL

Potters Financial Corporation (PFC) is a unitary savings and loan holding
company, incorporated on August 30, 1995 under the laws of the State of Ohio.
Potters Bank, also incorporated under Ohio law, is PFC's wholly-owned
subsidiary. As of January 3, 2000, Potters Bank converted from an Ohio-chartered
savings and loan association to an Ohio-chartered savings bank. Potters Bank
provides financial products and services through its three offices in and near
East Liverpool, Ohio and loan production offices in Boardman and Mentor, Ohio.
Potters Bank was incorporated in 1889 as The Potters Savings and Loan Company,
but changed its name in August 1998 to Potters Bank in an effort to simplify its
identity and provide a more direct description of the company. Both entities are
headquartered at 519 Broadway in East Liverpool, Ohio.

PFC's activities have been limited primarily to holding the common shares of
Potters Bank. Consequently, the following discussion focuses primarily on the
business of Potters Bank.

As a unitary savings and loan holding company, PFC is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of the Treasury (the OTS). As a savings and loan association
until January 3, 2000, Potters Bank was subject to regulation, supervision and
examination by the OTS, the Federal Deposit Insurance Corporation (the FDIC) and
the Ohio Division of Financial Institutions of the Ohio Department of Commerce
(the Division). As a savings bank, Potters Bank will be regulated, supervised
and examined by the FDIC and the Division. Deposits are insured up to applicable
limits by the FDIC. Potters Bank is also a member of the Federal Home Loan Bank
(FHLB) of Cincinnati.

Primary lending products are residential and commercial real estate loans, home
equity lines of credit, commercial and consumer loans. Substantially all loans
are secured by specific collateral. Funds are also invested in securities, and a
portfolio is maintained for liquidity management purposes. Lending activities
are primarily funded by attracting deposits. Primary deposit products include a
variety of checking, savings and certificate of deposit accounts. See "Lending
Activities". At December 31, 1999, Potters Bank employed a total of 58
individuals and had 41 full-time employees.

Income is derived primarily from interest and fees earned in connection with its
lending activities, and its principal expenses are interest paid on deposits and
borrowings and operating expenses.

                                       2
<PAGE>   3
In addition to the historical financial information included herein, the
disclosures contain forward-looking statements that involve risks and
uncertainties. Economic circumstances, operations and its actual results could
differ significantly from those discussed in these forward-looking statements.
Some of the factors that could cause or contribute to such differences are
discussed herein but also include changes in the economy and interest rates in
the nation and PFC's general market area. See Exhibit 99, "Safe Harbor Under the
Private Securities Litigation Reform Act of 1995," which is incorporated herein
by reference.

Without limiting the foregoing, some of the forward-looking statements included
herein are statements under the heading Lending Activities regarding
management's supposition that the success of local revitalization efforts may
generate more economic growth and construction and have a positive effect on
operations.

MARKET AREA

Headquartered in East Liverpool, Ohio, business is conducted through three
branch offices located in and near East Liverpool and loan production offices in
Boardman and Mentor, Ohio. The primary market area consists of the City of East
Liverpool, Ohio and includes portions of Columbiana and Jefferson Counties in
northeastern Ohio and northern Hancock County in West Virginia. The Boardman
loan production office focuses on originating loans in Mahoning and Trumball
Counties in northeastern Ohio and Beaver and Allegheny Counties in Pennsylvania,
while the Mentor loan production office focuses its originations in Geauga and
Lake Counties in northeast Ohio.

                                       3
<PAGE>   4
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA

The following table sets forth certain information concerning the financial
condition, earnings and other data at the dates and for the periods indicated
(1):

<TABLE>
<CAPTION>
                                                               At December 31,
                                      ---------------------------------------------------------------
                                          1999         1998         1997          1996         1995
                                      ------------  -----------  -----------   -----------  ---------
                                                           (Dollars in thousands)
<S>                                    <C>          <C>          <C>           <C>          <C>
SELECTED FINANCIAL CONDITION
DATA:
Total amount of:
   Assets                                $143,736     $134,474     $122,637     $114,172     $114,242
   Cash and cash equivalents                7,280       11,867        3,816        4,585       11,230
   Securities available for sale           22,751       23,714        5,474       10,878       10,952
   Securities held to maturity (2)          1,184          991       28,017       32,735       38,821
   Loans receivable, net                  108,360       94,911       82,093       62,450       49,889
   Deposits                               110,335      104,644      100,094       97,283       98,697
   Federal Home Loan Bank
    advances                               21,300       17,247        9,993        5,085        3,018
   Shareholders' equity,
    substantially restricted               11,020       11,157       11,006       10,576       11,189
</TABLE>

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

(1)  Information prior to 1996 is that of Potters Bank.
(2)  Securities held to maturity include investment in stock in the FHLB.

<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                  ---------------------------------------------------------
                                    1999         1998       1997         1996         1995
                                  -------       ------     ------       ------       ------
                                                   (Dollars in thousands)
<S>                               <C>           <C>        <C>          <C>          <C>
SUMMARY OF OPERATIONS:

Interest income                   $10,147       $9,262     $8,558       $8,206       $8,065
Interest expense                    5,241        5,032      4,671        4,529        4,271
                                  -------       ------     ------       ------       ------
Net interest income                 4,906        4,230      3,887        3,677        3,794
Provision for loan losses             (75)          --       (485)         249          245
                                  -------       ------     ------       ------       ------
Net interest income after
 provision for loan losses          4,981        4,230      4,372        3,428        3,549
Noninterest income:
 Gain on sales of loans,
  securities and other assets          43          167         33           --           12
 Other noninterest income             502          409        348          267          245
                                  -------       ------     ------       ------       ------
Total noninterest income              545          576        381          267          257
Total noninterest expense           3,460        3,098      2,927        3,688        2,977
                                  -------       ------     ------       ------       ------
Income before income tax            2,066        1,708      1,826            7          829
Income tax expense                    720          596        629           68           --
                                  -------       ------     ------       ------       ------

Net income (loss)                 $ 1,346       $1,112     $1,197       $  (61)      $  829
                                  =======       ======     ======       ======       ======

Earnings per share:
  Basic                           $  1.39       $ 1.08     $ 1.13       $ (.05)      $  .73
                                  =======       ======     ======       ======       ======

  Diluted                         $  1.35       $ 1.04     $ 1.10       $ (.05)      $  .72
                                  =======       ======     ======       ======       ======
</TABLE>

                                       4
<PAGE>   5
SELECTED FINANCIAL RATIOS
 AND OTHER DATA (1):

<TABLE>
<CAPTION>
                                                   At or for the year ended December 31,
                                      --------------------------------------------------------------
                                         1999        1998          1997         1996          1995
                                      ---------    ---------     ---------    ---------     --------
<S>                                   <C>          <C>           <C>          <C>           <C>
Performance ratios:
 Return (loss) on assets
  (ratio of net income (loss)
   to average total assets)              0.97%        0.87%         1.00%       (0.05)%       0.74%

Interest rate spread
 information:
 Average during period                   3.56         3.28          3.19         3.05         3.28
 End of period                           3.92         3.64          3.37         3.58         2.97

Net interest margin (ratio of
 net interest income to average
 interest-earning assets)                3.73         3.49          3.43         3.30         3.55

Ratio of operating expense
 to average total assets                 2.49         2.43          2.45         3.15         2.65

Return (loss) on equity
 (ratio of net income (loss)
 to average equity)                     11.85         9.58         10.72        (0.57)        7.88

Dividend payout ratio (ratio of
 dividends declared per share to
 net income per share)                  23.56        20.14         14.23      (208.33)       13.46

Asset quality ratios:
 Nonperforming assets
  to total assets at end
  of period                              0.22         0.17          0.17         1.51         2.21

Allowance for loan losses
 to nonperforming loans                644.62       987.05      1,035.27       152.20        91.88

Allowance for loan losses
 to total loans                          1.85         2.28          2.54         4.04         4.30

Capital ratios:
 Shareholders' equity to total
  assets at end of period                7.67         8.30          8.97         9.26         9.79

Average shareholders' equity
 to average assets                       8.17         9.10          9.34         9.27         9.36

Ratio of average interest-
 earning assets to average
 interest-bearing liabilities          104.07%      105.13%       105.60%      105.96%      105.97%

Number of full-service offices           3            3             3            4            4
</TABLE>

(1)  Information prior to 1996 is that of Potters Bank.

                                       5
<PAGE>   6
LENDING ACTIVITIES

GENERAL. Lending activity is concentrated in the origination and purchase of
conventional real estate loans secured by one-to-four family homes. Loans to
individuals to finance the construction of their primary residence and real
estate loans on multifamily properties containing five units or more are also
offered. Commercial real estate loans include a limited amount of acquisition
and development and commercial construction loans. Special real estate loans are
originated for targeted groups and home buyers recommended by the Community
Action Agency of Columbiana County, Ohio. One such program is a 3% down first
time home buyers loan program, which is insured by private mortgage insurance to
80% of the property value. No loans insured by the Federal Housing Authority or
loans guaranteed by the Veterans Administration have been originated, but the
approval process for both was begun in late 1999. In addition to real estate
lending, loan originations also include commercial loans and consumer loans,
including home equity lines of credit, automobile loans, loans secured by
deposit accounts and unsecured loans.

In order to maintain planned loan growth, loans have been purchased over the
last three years to supplement local loan originations. At December 31, 1999,
the loan portfolio included approximately $24.3 million, or 21.8% of total
loans, of one-to-four family real estate loans purchased, $13.4 million on
properties located in northwestern Ohio, $3.3 million on properties in
southwestern Ohio, $7.4 million on properties located in Hilton Head, South
Carolina and $200,000 locally. As of December 31, 1999, multifamily and
nonresidential real estate loan purchases totaling $1.9 million were secured by
properties located in southwest Ohio, $1.1 million in northwest Ohio and
$872,000 in the State of Colorado. The loan portfolio also included $6.8 million
of first mortgage home equity loans and $5.7 million of second mortgage loans
from various parts of the country, purchased from a bank in Indiana.

The economic environment of the East Liverpool, Ohio area has remained stable
over the last few years with some inflow of new business. Area efforts continue
in the revitalization of East Liverpool, and several new retail and service
sector businesses have opened their doors within the city limits in the recent
past, but no significant business or residential construction has taken place.
However, to the extent revitalization efforts are successful, the local economy
should gradually improve in the future, which may generate more economic growth
and construction and have a positive effect on the operations. No assurances can
be given that such efforts will be successful or that local, regional or
national economic factors will not significantly change in the near future.

                                       6
<PAGE>   7
LOAN PORTFOLIO COMPOSITION. The following table presents certain information in
respect of the composition of the loan portfolio at the dates indicated:

<TABLE>
<CAPTION>
                                                             At December 31,
                                            ------------------------------------------------
                                                      1999                      1998
                                                      ----                      ----
                                                            Percent                   Percent
                                                            of total                  of total
                                              Amount         loans        Amount       loans
                                              ------         -----        ------       -----
Type of loan and security:                                      (Dollars in thousands)
<S>                                          <C>             <C>         <C>          <C>
Secured by real estate (1):
  One-to-four family residences              $70,732         63.38%      $76,543      78.16%
  Loans held for sale                             55           .05           797        .81
  Multifamily residential (over 4 units)       3,055          2.74         2,010       2.05
  Nonresidential property                     14,257         12.77         8,350       8.53
                                             -------        ------       -------     ------
Total real estate loans                       88,099         78.94        87,700      89.55
Consumer and other loans:
  Home equity loans                           13,301         11.92         5,746       5.87
  Purchased second mortgage loans              5,715          5.12
  Secured, unsecured consumer
     loans and lines of credit                 2,309          2.07         2,102       2.15
  Commercial business                            472           .42           654        .67
  Other                                        1,716          1.53         1,726       1.76
                                             -------        ------       -------     ------
Total consumer and other loans                23,513         21.06        10,228      10.45
                                             -------        ------       -------     ------
Total loans                                  111,612        100.00%       97,928     100.00%
                                                            ======                   ======
Less:
  Loans in process                            (1,848)                     (1,167)
  Net deferred loan fees, unearned
    interest and unamortized
    discounts and premiums                       633                         361
  Allowance for loan losses                   (2,037)                     (2,211)
                                             -------                     -------
Total loans receivable, net                  $108,360                    $94,911
                                             ========                    =======
</TABLE>

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

(1) Includes construction loans secured by various types of real estate. The
amount of construction loans is not material.


                                       7
<PAGE>   8
LOAN MATURITY SCHEDULE. The following table sets forth certain information at
December 31, 1999 regarding the net dollar amount of loans maturing in the
portfolio, based on contractual terms to maturity. Demand loans, loans having no
stated schedule of repayments and no stated maturity and overdrafts are reported
as due in one year or less.

<TABLE>
<CAPTION>
                                           Real Estate                                Consumer and Other               Total
                  ---------------------------------------------------------------    ---------------------     ---------------------
                  One-to-four family (1)  Nonresidential         Multifamily
                  ----------------------  --------------         -----------
                            Weighted              Weighted               Weighted                 Weighted                  Weighted
                             Average               Average               Average                   Average                   Average
                   Amount     Rate      Amount      Rate      Amount       Rate       Amount        Rate       Amount         Rate
                   ------     ----      ------      ----      ------       ----       ------        ----       ------         ----
                                                                       (Dollars in thousands)
Due during
years ending
December 31,
------------
<S>               <C>         <C>      <C>          <C>       <C>          <C>       <C>            <C>       <C>             <C>
2000              $   490     8.71%    $ 1,660      9.41%     $  --         --       $ 1,026        8.66%     $  3,176        9.06%
2001 through
  2004              1,371     8.24         731      8.51          94       7.75%       2,926       10.48         5,122        9.56
2005 and
  following        68,926     7.92      11,866      8.79       2,961       7.95       19,561        9.69       103,314        8.36
                  -------              -------                ------                 -------                  --------

                  $70,787              $14,257                $3,055                 $23,513                  $111,612
                  =======              =======                ======                 =======                  ========
</TABLE>
---------

(1) Includes Construction Loans and Loans Held for Sale

The total amount of loans due after December 31, 2000 which have predetermined
interest rates is $47.6 million, while the total amount of loans due after such
date which have floating or adjustable rates is $60.8 million.

                                       8
<PAGE>   9
         The next table sets forth the composition of the loan portfolio by type
of security and by predetermined interest rates and floating or adjustable
interest rates at the dates indicated:

<TABLE>
<CAPTION>
                                                         At December 31,
                                       ---------------------------------------------------
                                                1999                           1998
                                       ----------------------          -------------------
                                        Amount        Percent           Amount     Percent
                                        ------        -------           ------     -------
Fixed-rate loans:                                     (Dollars in thousands)
<S>                                    <C>             <C>             <C>          <C>
  Real estate (1):
    One-to-four family                 $ 30,998        27.78%          $37,876      38.68%
    Multifamily (over 4 units)            1,531         1.37               368       0.37
    Nonresidential                          472         0.42               312       0.32
                                       --------       ------           -------     ------
      Total real estate loans            33,001        29.57            38,556      39.37
  Consumer and other loans               16,287        14.59             3,737       3.82
                                       --------       ------           -------     ------

      Total fixed-rate loans             49,288        44.16            42,293      43.19

Adjustable-rate loans:
  Real estate (1):
     One-to-four family                  39,789        35.65            39,464      40.30
     Multifamily (over 4 units)           1,524         1.37             1,642       1.67
     Nonresidential                      13,785        12.35             8,038       8.21
                                       --------       ------           -------     ------
       Total real estate loans           55,098        49.37            49,144      50.18
  Consumer and other loans                7,226         6.47             6,491       6.63
                                       --------       ------           -------     ------

       Total adjustable-rate loans       62,324        55.84            55,635      56.81
                                       --------       ------           -------     ------
       Total loans receivable           111,612       100.00%           97,928     100.00%
                                                                       =======     ======

Less:
  Loans in process                       (1,848)                        (1,167)
  Deferred fees, discounts
    and premiums                            633                            361
  Allowance for loan losses              (2,037)                        (2,211)
                                       --------                        -------

       Total loans receivable, net     $108,360                        $94,911
                                       ========                        =======
</TABLE>
---------

(1) Includes construction loans secured by various types of real estate. The
amount of construction loans is not material.

LOANS SECURED BY ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE. Lending activity is
concentrated in the origination of permanent conventional real estate loans
secured by one-to-four family residences, primarily single-family residences,
located within the primary market area and the purchase of real estate loans,
primarily adjustable-rate mortgages (ARMs). Loans are also originated to
individuals to finance the construction of their primary residences. Each loan
is secured by a mortgage on the underlying real estate and improvements thereon,
if any. At December 31, 1999, the one-to-four family residential real estate
loan portfolio was approximately $70.8 million, or 63.4% of total gross loans.

During 1999 and 1998, one-to-four family real estate loans were purchased to
supplement local loan originations. Such purchases totaled $1.4 million during
1999, all adjustable-rate real estate loans.

Fixed-rate loans on one-to-four family residences are made up to 97% of the
value of the real estate and improvements (the Loan-to-Value Ratio or LTV). The
principal amount of any loan which exceeds an 85% LTV at the time of origination
is usually covered by private mortgage insurance at the expense of the borrower.

                                       9
<PAGE>   10

As of December 31, 1999, approximately 43.8% of loans secured by one-to-four
family residences bore interest at a fixed rate. Fixed-rate loans are offered
for terms of up to 30 years. The majority of 30-year fixed-rate loans are sold
on a servicing released basis in the secondary mortgage market. Potters Bank has
acquired approval to sell such loans to the Federal Home Loan Mortgage
Corporation (FHLMC), which will enable the retention of the servicing on the
loans.

ARMs are offered for terms of up to 30 years. One-year, three-year and five-year
ARMs are originated, with interest rate adjustments tied to U.S. Treasury issues
adjusted to constant maturities. For a limited time during 1996, a seven-year
ARM product was offered. Interest rate adjustments on pre-1995 real estate loans
are tied to an index of the FHLB. The maximum allowable adjustment at each
repricing date is from 1.5% to 2.0% for ARMs, with a maximum adjustment on all
products of 6% over the term of the loan. The initial interest rate quoted on
ARMs is often lower than the fully-indexed rate to make adjustable-rate products
more appealing to customers. The initial rate on three-year and five-year ARMs
is typically higher than the initial rate on a one-year ARM to compensate for
the reduced interest rate sensitivity. At December 31, 1999, $39.8 million, or
56.2%, of one-to-four family real estate loans bore adjustable rates.

Two nonconforming real estate loan programs, with a maximum LTV of 89%, are
offered, charging a slightly higher interest rate on single family residential
mortgage loans to persons who are considered slightly higher credit risks. Such
loans involve greater underwriting and default risk than conforming real estate
loans. The increased risk is somewhat mitigated by charging a higher interest
rate than on conforming loans, stringent loan collection procedures, adherence
to regulatory limitations on the total of such loans and regulatory reporting
requirements to the Board of Directors. Such loans are also specifically
identified and addressed in management's ongoing review of the allowance for
loan losses, and a larger percentage of the allowance is allocated to the
nonconforming products than to conforming real estate loans. At December 31,
1999, such nonconforming real estate loans totaled $6.8 million, of which
$176,000 were 90 or more days delinquent.

Construction loans are made to individuals for the construction and permanent
financing of their primary residences. Such loans are offered with both fixed
and adjustable rates for terms of up to 30 years. During the first year, while
the residence is being constructed, the borrower is required to pay only
interest. Thereafter, the loans amortize over the remaining term.

Construction loans generally involve greater underwriting and default risks than
do loans secured by mortgages on existing properties due to the advance of loan
funds and the inherent uncertainties in estimating construction costs and loan
value prior to the completion of the project. In the event a default on a
construction loan occurs and foreclosure follows, control of the project would
be taken and attempts made either to arrange for completion of construction or
to dispose of the unfinished project. The increased risks inherent in
construction lending are not significant because construction loans, in the
aggregate, comprise less than 1% of the loan portfolio.

Loans are also made secured by land to be used in the eventual construction of a
borrowers' primary residence. Such loans are offered with fixed and adjustable
interest rates for terms of up to 5 years and a maximum LTV of 75%. Although
land loans are subject to greater risks than residential real estate loans,
attempts to mitigate such risks are made by basing the lending decision on an
evaluation of the past performance and credit history of the borrower and on the
market value of the underlying real estate.

LOANS SECURED BY MULTIFAMILY RESIDENTIAL REAL ESTATE. In addition to loans on
one-to-four family properties, loans secured by multifamily properties
containing over four units are offered. Multifamily loans are usually offered
for terms of up to 20 years and a maximum LTV of 80%. Such loans are currently
offered, predominantly with adjustable interest rates tied to the composite
prime rate of 75% of the 30 largest U.S. banks, as reported in The Wall Street
Journal (the Prime Rate).

                                       10
<PAGE>   11
During 1999, a fixed-rate multifamily loan on property located in Cincinnati
totaling $1.2 million was purchased.

Multifamily lending is generally considered to involve a higher degree of risk
than one-to-four family residential lending because the borrower typically
depends upon income generated by the apartment project to cover operating
expenses and debt service. The profitability of a project can be affected by
economic conditions, government policies and other factors beyond the control of
the borrower. Attempts to reduce the risk associated with multifamily lending
include evaluating the creditworthiness of the borrower and the projected income
from the project and obtaining personal guarantees on loans made to corporations
and partnerships. Borrowers are required to submit rent rolls and annual
financial statements to enable monitoring of the loan.

At December 31, 1999, loans secured by multifamily properties totaled
approximately $3.1 million, or 2.7% of total loans. Of such loans, none were
delinquent at December 31, 1999.

LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. At December 31, 1999, approximately
$14.3 million, or 12.8% of total loans, were secured by nonresidential real
estate properties. The majority of such loans have adjustable rates tied to the
Prime Rate with terms of up to 20 years. A portion of such loans have a balloon
payment at the end of the loan term with payments amortized over a maximum term
of 25 years. Among the properties securing nonresidential real estate loans are
office buildings, retail centers, restaurants, warehouses, residential
development and special purpose properties.

Although loans secured by nonresidential real estate typically have higher
interest rates and shorter terms to maturity than one-to-four family residential
real estate loans, nonresidential real estate lending is generally considered to
involve a higher degree of risk than residential lending due to the relatively
larger loan amounts and the effects of general economic conditions on the
successful operation of income-producing properties. Endeavors to reduce such
risk include evaluating the credit history and past performance of the borrower,
the location of the real estate, the quality of the borrower, the quality and
characteristics of the income stream generated by the property and appraisals
supporting the property's valuation. At December 31, 1999, no nonresidential
loans were more than 30 days delinquent or considered impaired. See "Delinquent
Loans, Nonperforming Assets and Classified Assets."

CONSUMER LOANS. A range of secured and unsecured consumer loans are offered to
area borrowers. Secured loans include home equity lines of credit, those made to
depositors on the security of their deposit accounts and automobile loans.
Secured and unsecured personal loans to homeowners and nonhomeowners and an
unsecured check overdraft line of credit are available to accommodate the credit
needs of the primary market area. Consumer loans, other than home equity lines
of credit, are made primarily at fixed rates of interest and for varying terms
based on the type of loan.

At December 31, 1999, Potters Bank had approximately $23.5 million, or 21.1% of
total loans, invested in consumer loans. During 1999, $6.8 million of first
mortgage home equity loans and $5.7 million of second mortgage loans were
purchased from a bank in Indiana.

Home equity lines of credit are secured by a first or second mortgage on the
borrowers' principal residence. Home equity lines of credit have a five- or
ten-year draw-down period followed by a corresponding five- or ten-year
repayment period and bear variable rates of interest. Home equity loan
promotions offer a low introductory interest rate which reverts to a margin over
the Prime Rate after a limited period of time. Home equity lines of credit can
be made up to 100% of the real estate value, depending upon the credit history,
including credit score, and past performance of the borrower.

Consumer loans, particularly consumer loans which are unsecured or are secured
by assets such as automobiles or mobile homes, which depreciate at a faster rate
than real estate, may entail greater risk than do residential real estate loans.
Repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance. The risk of default on

                                       11
<PAGE>   12
consumer loans increases during periods of recession, high unemployment and
other adverse economic conditions. Of such loans, $78,000 were 90 or more days
delinquent at December 31, 1999.

COMMERCIAL LOANS. At December 31, 1999, the loan portfolio included
approximately $472,000 in commercial loans and lines of credit. All such loans
have been made to businesses in the market area. The maximum amount of principal
committed to be advanced under such loans was $49,000 at December 31, 1999. The
loans are secured by equipment, receivables or vehicles and are indexed to the
Prime Rate.

Commercial loans have a high degree of risk because the primary source of
repayment is the borrower's income. The collateral pledged to secure such loans,
if any, is typically non-real estate collateral for which there may be no
established market. Attempts to limit the risk of loss on commercial loans
involve evaluating the financial condition of the business and its principals,
valuing the collateral, requiring personal guarantees and limiting the aggregate
dollar amount of such loans to any one borrower. Of such loans, none were
delinquent at December 31, 1999.

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

Before a real estate loan is extended, risks related to the borrower's ability
and willingness to repay the loan are assessed through a review of the
borrowers' credit report, verification of employment and other documentation. An
appraisal of the fair market value of the collateral used to secure the loan is
prepared by a fee appraiser approved by the Board of Directors. The application
for a loan is then reviewed in accordance with underwriting guidelines and
approved or denied. A tiered structure of credit authority levels based on loan
amount has been granted to loan officers and two members of senior management
with respect to loan approval. Specific loans exceeding lending authority levels
are taken to the Executive Committee of the Board of Directors, which is
comprised of three Board members. Any nonresidential real estate or commercial
loan exceeding $50,000 must be reviewed and approved or rejected by the
President and Chief Executive Officer, the Senior Lending Officer or the full
Board of Directors.

If a real estate loan application is approved, either a title guaranty or an
attorney's opinion of title is obtained on the real estate which will secure the
mortgage loan. Borrowers are required to carry satisfactory fire and casualty
insurance and flood insurance, if applicable, and to name Potters Bank as an
insured mortgagee.

The procedure for approval of construction loans is the same as for residential
real estate loans, except that an appraiser evaluates the building plans,
construction specifications and estimates of construction costs. The feasibility
of the proposed construction project and the experience and record of the
builder are evaluated.

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

LOANS TO ONE BORROWER. Under current regulations, the aggregate amount of loans
that can be made to any one borrower (including related entities), with certain
exceptions, is limited in general to 15% of unimpaired capital and unimpaired
surplus. Based on such limits, Potters Bank could lend $1.9 million to any one
borrower at December 31, 1999. No outstanding loans were in excess of such
limits at December 31, 1999.

LOAN ORIGINATION AND OTHER FEES. Potters Bank realizes loan origination fee and
other fee income from lending activities, such as late payment charges,
application fees and fees for other miscellaneous services. Loan origination 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

                                       12
<PAGE>   13
certain direct loan origination costs are deferred and recognized in accordance
with Statement of Financial Accounting Standards (SFAS) No. 91 as an adjustment
to yield over the life of the related loan.

DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. A loan is
considered delinquent when a borrower fails to make a contractual payment on the
loan within 15 days of the payment due date and does not cure the delinquency
promptly. Normal collection procedures involve contact with the borrower in an
effort to bring the loan to a current status. When loan payments have not been
made by the fifteenth day, late notices are sent. If payment is not received by
the thirtieth day, second notices are sent and, thereafter, telephone calls are
made to the borrower. Each loan bears a late payment penalty which is assessed
as soon as such loan is more than ten or fifteen days delinquent. The late
penalty is generally 5% of the principal and interest payment.

Although collection procedures usually cure delinquencies in a timely manner,
additional measures are instituted to remedy the default if the delinquency
exceeds the 30- and 60-day categories. When any loan is delinquent 90 days,
interest is no longer accrued. At that time, previously accrued but unpaid
interest is deducted from interest income.

When a loan secured by real estate becomes delinquent more than 90 days,
foreclosure action or the acceptance from the mortgagor of a voluntary deed to
the property in lieu of foreclosure is instituted. If a foreclosure action is
instituted and the loan is not reinstated, paid in full or refinanced, the
property is sold at a judicial sale and usually purchased. An appraisal of the
collateral is conducted when foreclosed real estate is acquired. If the
appraisal indicates that the value of the collateral is less than the carrying
value of the loan, a valuation allowance is established for such loan.

When a consumer loan secured by an automobile or other collateral becomes more
than 90 days past due, an estimate is made of the value of the collateral. If
the estimate of value indicates that the value of the collateral is less than
the carrying value of the loan, a specific allowance for loss is established.

SFAS Nos. 114, "Accounting by Creditors for Impairment of a Loan" and 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," require recognition of loan impairment. No loans were impaired at
December 31, 1999. See Notes 1 and 3 to the Consolidated Financial Statements in
Item 7. Financial Statements for information on impaired loans.

Nonperforming assets include nonaccrual loans, accruing loans which are
delinquent 90 days or more, restructured loans, real estate acquired by
foreclosure or by deed-in-lieu thereof and repossessed assets. For a discussion
of nonperforming loans, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Allowance and Provision for Loan Losses"
in Item 6. Management's Discussion and Analysis or Plan of Operation.

For the year ended December 31, 1999, gross interest income which would have
been recorded had the nonaccruing and restructured loans been current in
accordance with their original terms amounts to $30,000. The amount that was
included in interest income on such loans was $15,000 for the year ended
December 31, 1999.

Real estate acquired as a result of foreclosure proceedings is classified as
foreclosed real estate until it is sold. When property is so acquired, it is
recorded at the estimated fair value of the real estate at the date of
acquisition and any write-down resulting therefrom is charged to the allowance
for loan losses. Interest accrual, if any, ceases no later than the date of
acquisition of the real estate, and all costs incurred from such date in
maintaining the property are expensed. Costs relating to the development and
improvement of the property are capitalized to the extent they are realizable.
Subsequent to acquisition, the property is carried at the lower of the initial
balance or estimated fair value less selling costs.

                                       13
<PAGE>   14
ALLOWANCE FOR LOAN LOSSES. Senior management, with oversight by the Board,
reviews, on a monthly basis, the allowance for loan losses as it relates to a
number of relevant factors, including but not limited to, trends in the level of
nonperforming and classified loans, current economic conditions in the primary
lending area, past loss experience and probable losses arising from specific
problem assets. To a lesser extent, management also considers loan
concentrations to single borrowers and changes in the composition of the loan
portfolio. While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments, and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the final
determination.

The following table sets forth an analysis of the allowance for losses on loans
for the periods indicated:

<TABLE>
<CAPTION>
                                                           1999          1998
                                                           ----          ----
                                                         (Dollars in thousands)
<S>                                                       <C>           <C>
Balance at beginning of period                            $2,211        $2,143
Loans charged-off:
  Residential real estate loans                               (3)           (3)
  Nonresidential real estate loans
  Consumer and other loans                                  (122)          (56)
                                                          ------        ------
Total charge-offs                                           (125)          (59)
Recoveries:
  Residential real estate loans                               20            26
  Nonresidential real estate loans
  Consumer and other loans                                     6           101
                                                          ------        ------
Total recoveries                                              26           127
                                                          ------        ------
Net (charge-offs) recoveries                                 (99)           68
Provision for loan losses                                    (75)
                                                          ------        ------
Balance at end of period                                  $2,037        $2,211
                                                          ======        ======

Ratio of net (charge-offs) recoveries
  to average loans                                         (0.10)%        0.08%
</TABLE>

The following table sets forth the allocation of the allowance for loan losses
at the dates indicated:

<TABLE>
<CAPTION>
                                                      1999                              1998
                                                      ----                              ----
                                                           Percent of                          Percent of
                                                          loans in each                      loans in each
                                                           category to                        category to
                                              Amount       total loans           Amount       total loans
                                              ------       -----------           ------       -----------
                                                                (Dollars in thousands)
<S>                                           <C>          <C>                   <C>          <C>
One-to-four family real estate loans          $  330           63.42%            $  168           78.97%
Nonresidential real estate loans                 370           12.77                272            8.53
Consumer and other loans                         591           21.07                273           12.50
Unallocated                                      746                              1,498
                                                              ------             ------          ------

Total                                         $2,037          100.00%            $2,211          100.00%
                                              ======          ======             ======          ======
</TABLE>

The allowance for loan losses at December 31, 1999 represented 644.62% of
nonperforming loans. Because the loan loss allowance is based on estimates, it
is monitored monthly and adjusted as necessary to provide an adequate allowance.

MORTGAGE-BACKED SECURITIES. Potters Bank invests some funds in mortgage-backed
securities, including Government National Mortgage Association (GNMA), FHLMC and
Federal National Mortgage Association (FNMA) pass-through certificates. The
purchase of such certificates entitles the holder to receive a

                                       14
<PAGE>   15
portion of the cash flows from an identified pool of mortgages. GNMA, FHLMC and
FNMA securities are each guaranteed by their respective agencies as to principal
and interest.

At December 31, 1999, mortgage-backed securities totaled approximately $12.3
million. All mortgage-backed securities at December 31, 1999 and 1998, were
designated as available for sale. In accordance with SFAS No. 115,
available-for-sale mortgage-backed securities are carried on the balance sheet
at fair market value.

Because mortgage-backed securities have a lower yield relative to current loan
market rates, retention of such investments could adversely affect earnings,
particularly in a rising interest rate environment. Adjustable-rate
mortgage-backed securities were purchased as part of an effort to reduce its
interest rate risk. In a period of declining interest rates, there is prepayment
risk on such adjustable-rate mortgage-backed securities. Attempts to mitigate
this prepayment risk include purchasing mortgage-backed securities at or near
par. If interest rates rise in general, the interest rates on the loans backing
the mortgage-backed securities will also adjust upward, subject to the interest
rate caps in the underlying adjustable-rate mortgage loans. However, interest
rate risk exists on such securities if interest rates rise faster than the 1% to
2% maximum annual interest rate adjustments on the underlying loans.

At December 31, 1999, $8.2 million, or 65.7%, of Potters Bank's mortgage-backed
securities had adjustable rates. Although adjustable-rate securities generally
have a lower yield at the time of origination than fixed-rate securities, the
interest rate risk associated with adjustable-rate securities is lower. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset/Liability Management" in Item 6. Management's Discussion and
Analysis or Plan of Operation. The following table sets forth certain
information regarding mortgage-backed securities at the dates indicated:

<TABLE>
<CAPTION>
                                                          At December 31,
                                                          ---------------
                                              1999                             1998
                                              ----                             ----
                                                    Estimated                         Estimated
                                   Amortized          Fair           Amortized          Fair
                                      Cost            Value            Cost             Value
                                      ----            -----            ----             -----
                                                     (Dollars in thousands)

<S>                                 <C>              <C>              <C>              <C>
Mortgage-backed securities          $12,551          $12,297          $17,072          $16,989
                                    =======          =======          =======          =======
</TABLE>

The combined estimated fair value of mortgage-backed securities designated as
available for sale at December 31, 1999, by contractual terms to maturity are
shown below. Actual maturities will differ from contractual maturities because
borrowers generally may prepay obligations without prepayment penalties.

<TABLE>
<CAPTION>
                                                          At December 31, 1999
                                                          --------------------
                                                        Estimated        Weighted
                                                          Fair            Average
                                                          Value            Yield
                                                          -----            -----
                                                         (Dollars in thousands)
<S>                                                      <C>               <C>
Due within one year                                      $   464           6.48%
Due after three years through five years                     309           5.84
Due after five years through ten years                     1,246           6.59
Due after ten years                                       10,278           6.51
                                                         -------           ----
Total                                                    $12,297           6.50%
                                                         =======           ====
</TABLE>

                                       15
<PAGE>   16
INVESTMENT ACTIVITIES

Federal and state regulations require that a prudent amount of liquid assets be
maintained in order to protect the safety and soundness of Potters Bank. Ohio
law specifies the types of investments Potters Bank may make, which include, but
are not limited to, obligations of specified federal and state governmental
entities and agencies, deposits in insured financial institutions and certain
amounts of specified real estate and equity investments. Such investment
authority may be limited by the FDIC. Liquid assets include U.S. governmental
agency obligations, certificates of deposit, bankers acceptances and federal
funds.

No security or group of securities, with the exception of securities issued by
the U.S. government or its agencies, exceeded 10% of Potters Bank's equity at
December 31, 1999.

The following table sets forth the composition of the investment portfolio at
the dates indicated:

<TABLE>
<CAPTION>
                                                                 At December 31,
                                            ----------------------------------------------------------
                                                      1999                            1998
                                                      ----                            ----
                                                            Estimated                        Estimated
                                            Amortized         Fair          Amortized          Fair
                                              Cost            Value            Cost            Value
                                              ----            -----            ----            -----
                                                              (Dollars in thousands)
<S>                                         <C>              <C>              <C>             <C>
Securities available for sale:
         U.S. Treasury and U.S.
           Government agencies              $10,496          $ 9,918          $5,999          $5,997
         States and municipalities              158              172             166             187
         Other                                  342              343             463             467
                                            -------          -------          ------          ------
         Total debt securities               10,996           10,433           6,628           6,651
         Equity securities                       22               21              75              74
                                            -------          -------          ------          ------
                                            $11,018          $10,454          $6,703          $6,725
                                            =======          =======          ======          ======
</TABLE>

The maturities of debt securities are indicated in the following table:
<TABLE>
<CAPTION>

                                                                    At December 31, 1999
                                          ----------------------------------------------------------------------------
                                                                                                 Total debt securities
                                                                                                            Estimated
                                          Less than      1 to 5        5 to 10          Over                   Fair
                                            1 year        years         years         10 years                 Value
                                            ------        -----         -----         --------                 -----
                                                            (Dollars in thousands)

<S>                                         <C>           <C>           <C>            <C>                    <C>
Securities available for sale (1):
U.S. Treasury and U.S
  Government agencies                                     $2,846        $2,395          $4,677                $ 9,918
States and municipalities                   $    3           163             6                                    172
Other                                                                                      343                    343
                                            ------        ------        ------          ------                -------

                                            $    3        $3,009        $2,401          $5,020                $10,433
                                            ======        ======        ======          ======                =======

Weighted average yield (2)                    8.09%         5.97%         5.51%           5.64%                  5.71%
</TABLE>

----------
(1) Amounts reflected for maturities of securities available for sale are based
on the estimated fair value while the yield is based on amortized cost.
(2) Since investments in nontaxable obligations are minimal, yields are not
stated on a taxable equivalent basis.

                                       16
<PAGE>   17
DEPOSITS AND BORROWINGS

GENERAL. Deposits have traditionally been the primary source of funds for use in
lending and other investment activities. In addition to deposits, funds are
derived from interest payments and principal repayments on loans and securities
and income on earning assets. Loan payments are a relatively stable source of
funds, while deposit inflows and outflows fluctuate more in response to general
interest rates and money market conditions. Funds are also borrowed from the
FHLB.

DEPOSITS. Deposits are attracted principally from within the primary market area
through the offering of a broad selection of deposit instruments, including NOW
and demand accounts, money market deposit accounts, regular passbook savings
accounts, statement savings accounts, a statement savings account indexed to the
90-day U.S. Treasury bill, holiday club accounts, term certificate accounts and
Individual Retirement Accounts. Interest rates paid, maturity terms, service
fees and withdrawal penalties for the various types of accounts are established
periodically by management and are based on liquidity requirements, growth goals
and local and national interest rates. No brokered deposits existed at December
31, 1999. The amount of deposits from outside the primary market area is not
significant.

At December 31, 1999, certificates of deposit totaled $55.1 million, or 50.0% of
total deposits. Of such amount, approximately $34.5 million in certificates of
deposit mature within one year. Based on past experience and pricing strategies
used, management believes that a substantial percentage of such certificates
will renew at maturity. If there is a significant deviation from historical
experience, borrowings from the FHLB can be used as an alternative to this
source of funds.

The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered at the dates indicated:

<TABLE>
<CAPTION>
                                                               At December 31,
                                         ----------------------------------------------------------
                                                   1999                            1998
                                                   ----                            ----
                                                          Percent                          Percent
                                                         of total                          of total
                                          Amount         deposits           Amount         deposits
                                         --------        --------           ------         --------
                                                          (Dollars in thousands)
<S>                                      <C>              <C>              <C>              <C>
Transaction accounts:
  Demand, NOW, and Super NOW
    accounts (1)                         $ 16,578           15.0%          $ 15,843           15.1%
  Savings and club accounts (2)            37,221           33.7             37,674           36.0
  Money market deposit
    accounts (3)                            1,438            1.3              1,835            1.8
                                         --------          -----           --------          -----

  Total transaction accounts               55,237           50.0             55,352           52.9
Certificates of deposit (4)                55,098           50.0             49,292           47.1
                                         --------          -----           --------          -----

Total deposits                           $110,335          100.0%          $104,644          100.0%
                                         ========          =====           ========          =====
</TABLE>

----------
(1) The weighted average interest rate paid on demand, NOW and Super NOW
accounts fluctuates with the general movement of interest rates. At December 31,
1999, the weighted average rate on such accounts was 1.54%.

(2) The weighted average rate on savings and club accounts was 3.34% at December
31, 1999.

(3) The weighted average interest paid on money market accounts fluctuates with
the general movement of interest rates. At December 31, 1999, the weighted
average rate on such accounts was 2.54%.

                                       17
<PAGE>   18
(4) The weighted average rate on certificates of deposit at December 31, 1999
was 5.44%.

See Item 6. Management's Discussion and Analysis or Plan of Operation for
information relating to the average balance and the average rates paid on
various deposit products for the past three years.

The following table presents the amount of certificates of deposit of $100,000
or more and other certificates of deposit by the time remaining until maturity
as of December 31, 1999:

<TABLE>
<CAPTION>
                                                        Maturity
                                  ------------------------------------------------------
                                  3 months   Over 3 to   Over 6 to    Over 12
                                  or less    6 months    12 months    months       Total
                                  --------   ---------   --------     -------      -----
                                                   (Dollars in thousands)
<S>                               <C>         <C>         <C>         <C>         <C>
Certificates of deposit
  less than $100,000              $ 8,588     $ 7,040     $10,173     $18,841     $44,642
Certificates of deposit
  $100,000 or more                    326       1,144       1,846       1,747       5,063
Public funds (1)                    1,650       3,335         408                   5,393
                                  -------     -------     -------     -------     -------

Total certificates of deposit     $10,564     $11,519     $12,427     $20,588     $55,098
                                  =======     =======     =======     =======     =======
</TABLE>

----------
(1)  Includes deposits from governmental and other public entities.

BORROWINGS. The FHLB System functions as a central reserve bank providing credit
for its member institutions and certain other financial institutions. See
"REGULATION - Federal Home Loan System." As a member in good standing of the
FHLB of Cincinnati, Potters Bank is authorized to apply for advances from the
FHLB of Cincinnati, provided certain standards of creditworthiness have been
met. Under current regulations, an association must meet certain qualifications
to be eligible for FHLB advances. The extent to which an association is eligible
for such advances will depend upon whether it meets the Qualified Thrift Lender
Test (the QTL Test). See "REGULATION - Holding Company Regulation". If an
association meets the QTL Test, it will be eligible for 100% of the advances it
would otherwise be eligible to receive. If an association does not meet the QTL
Test, it will be eligible for such advances only to the extent it holds
specified QTL Test assets. At December 31, 1999, Potters Bank was in compliance
with the QTL Test. During 1999, a total of $15.3 million was received in FHLB
advances, $11.2 million of which were repaid. At December 31, 1999, FHLB
advances totaled $21.3 million. During 1999, FHLB advances were used to finance
loan originations and loan and mortgage-backed security purchases.

The average amounts of FHLB advances outstanding during the last three years and
the weighted average interest rate thereon are detailed in Item 6. Management's
Discussion and Analysis or Plan of Operation.

SUBSIDIARY ACTIVITIES

Potters Bank has one wholly-owned subsidiary, Potters Financial Services
Corporation, which is inactive.

COMPETITION

Competition for deposits includes other savings associations, commercial banks
and credit unions and with the issuers of commercial paper and other securities,
such as shares in money market mutual funds. The primary factors in competing
for deposits are interest rates and convenience of office location. In making
loans, the competition is with other savings associations, savings banks,
commercial banks, consumer finance companies, credit unions, leasing companies
and other lenders. Competition for loan

                                       18
<PAGE>   19
originations occurs primarily through the interest rates and loan fees charged
and through the efficiency and quality of services provided to borrowers.
Competition is intense and is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels and other factors which are not readily predictable.
Proposed expansion in the permissible activities of bank holding companies and
decreases in the deposit insurance assessment rates for banks compared to those
for savings associations may increase this competition.

The number and size of financial institutions viewed as competition is likely to
increase as a result of changes in federal statutes and regulations eliminating
various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect.

                                   REGULATION

GENERAL

As of January 3, 2000, Potters Bank converted from an Ohio-chartered savings and
loan association to an Ohio-chartered state savings bank. As a state chartered
savings bank which is not a member of the Federal Reserve System, Potters Bank
is subject to regulation by the Division and the FDIC. In connection within that
conversion, PFC elected to continue to be regulated as a savings and loan
holding company within the meaning of the Home Owners' Loan Act, as amended. PFC
is, therefore, subject to regulation, examination and supervision by the OTS.

PFC and Potters Bank must file periodic reports with these governmental
agencies, as applicable, concerning their activities and financial condition.
Examinations are conducted periodically by the applicable regulators to
determine whether PFC and Potters Bank are in compliance with various regulatory
requirements and are operating in a safe and sound manner. Potters Bank is a
member of the FHLB of Cincinnati and is also subject to certain regulations of
the Board of Governors of the Federal Reserve Bank (the FRB).

On November 12, 1999, the Gramm-Leach-Bliley Act (the GLB Act) was enacted into
law. The GLB Act repealed prior laws which had generally prevented banks from
affiliating with securities and insurance firms and made other significant
changes in the financial services in which various types of financial
institutions may engage.

Prior to the GLB Act, unitary savings and loan holding companies which met
certain requirements were the only financial institution holding companies
permitted to engage in any type of business activity, whether or not the
activity was a financial service. The GLB Act continues those broad powers for
unitary thrift holding companies in existence on May 4, 1999, including PFC. Any
thrift holding company formed after May 4, 1999, however, will be subject to the
same restrictions as multiple thrift holding companies, which generally are
limited to activities considered incidental to banking.

The GLB Act authorizes a new "financial holding company," which can own banks
and thrifts and is also permitted to engage in a variety of financial
activities. Such activities include insurance and securities underwriting and
agency activities, as long as the depository institutions it owns are well
capitalized, well managed and meet certain other tests.

The GLB Act is not expected to have a material effect on the activities in which
PFC and Potters Bank currently engage, except to the extent competition from
other types of financial institutions may increase as they engage in activities
not permitted prior to enactment of the GLB Act.

OHIO REGULATION OF POTTERS BANK

Both as a savings and loan association incorporated under Ohio law and as an
Ohio savings bank, Potters Bank has been and continues to be subject to
regulation, examination and oversight by the Division. Such

                                       19
<PAGE>   20
regulation affects Potters Bank's savings, lending and investment activities.
Ohio law requires that Potters Bank maintain at least 60% of its assets in
housing-related and other specified investments. At December 31, 1999, Potters
Bank had more than 60% of its assets in such investments. The ability of Ohio
savings banks to engage in certain state-authorized investments is subject to
oversight and approval by the FDIC.

Ohio law generally limits the aggregate amount that a savings bank can lend to
one borrower to an amount equal to 15% of the institution's unimpaired capital
and surplus. A savings bank may lend to one borrower an additional amount not to
exceed 10% of the institution's unimpaired capital and surplus, if the
additional amount is fully secured by certain forms of "readily marketable
collateral". Real estate is not considered "readily marketable collateral".

The Division is responsible for the regulation and supervision of Ohio savings
banks in accordance with the laws of the State of Ohio. Periodic examinations by
the Division are usually conducted on a joint basis with the FDIC. Ohio law
requires that Potters Bank maintain federal deposit insurance as a condition of
doing business. The Division may initiate certain supervisory measures or formal
enforcement actions against Ohio savings banks. Ultimately, if the grounds
provided by law exist, the Division may place an Ohio savings bank in
conservatorship or receivership. Any mergers or acquisitions of control of Ohio
savings banks must be approved by the Division.

In addition to being governed by the laws of Ohio specifically related to
savings banks, Potters Bank is also governed by Ohio corporate law, to the
extent such law does not conflict with the laws specifically governing savings
banks.

FEDERAL REGULATION OF POTTERS BANK

SUPERVISION AND EXAMINATION. The FDIC is responsible for the regulation and
supervision of all commercial banks and state savings banks that are not members
of the Federal Reserve System (Non-member Banks). The FDIC issues regulations
governing the operations of Non-member Banks, examines such institutions and may
also initiate enforcement actions against such institutions and certain persons
affiliated with them for violations of laws and regulations or for engaging in
unsafe or unsound practices. If the grounds provided by law exist, the FDIC may
appoint a conservator or a receiver for a Non-member Bank.

Non-member Banks 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 institution to
open a new branch or engage in a merger transaction.

STANDARDS FOR SAFETY AND SOUNDNESS. FDIC regulations and guidelines for
Non-member Banks establish standards for (a) internal controls, information
systems and internal audit systems; (b) loan documentation; (c) credit
underwriting; (d) interest rate exposure; (e) asset growth; and (f)
compensation, fees and benefits. These standards provide general guidance on
what operational systems and procedures the FDIC believes Non-member Banks
should have in place in each of these areas. A Non-member Bank which fails to
meet these standards may be required by the FDIC to submit an acceptable plan to
achieve compliance.

STATE-CHARTERED BANK ACTIVITIES. The ability of state-chartered savings bank,
including Potters Bank, to engage in any state-authorized activities or make any
state-authorized investments, as principal, is limited to the extent that such
activity is conducted or investment is made in a manner different than that
permitted for, or subject to different terms and conditions than those imposed
on, national banks. Any such activity or investment, as principal, not
permissible for a national bank is subject to approval by the FDIC. Such
approval will not be granted unless certain capital requirements are met and
there is not a significant risk to the FDIC insurance fund. Most equity and real
estate investments (excluding office

                                       20
<PAGE>   21
space and REO) authorized by state law are not permitted for national banks.
Certain exceptions are granted, including one for any activity deemed to be
closely related to banking by the FRB and, therefore, permissible for bank
holding companies and another for FDIC-approved subsidiary activities.

LIQUIDITY. Prior to its conversion to an Ohio-chartered savings bank, Potters
Bank was subject to OTS regulations which require that savings associations
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances and specified U.S. government, state and federal agency
obligations) equal to a monthly average of not less than 4% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Monetary penalties may be imposed upon member institutions failing to meet
liquidity requirements. The eligible liquidity of Potters Bank for December
1999, was approximately $11.8 million, or 13.2%. The FDIC requires that Potters
Bank maintain an amount of liquid assets that will insure the safety and
soundness of Potters Bank.

REGULATORY CAPITAL REQUIREMENTS. Prior to its conversion to an Ohio-chartered
state savings bank, Potters Bank was subject to OTS regulations which limit
capital distributions. Generally, capital distributions are limited to the
current year to date undistributed net income and prior two years' undistributed
net income, as long as the institution remains well-capitalized after the
proposed distribution. At year-end 1999, approximately $1.1 million was
available for Potters Bank to pay dividends to the holding company. Potters Bank
is considered well-capitalized. See Note 16 to the financial statements included
in this Form 10-KSB at Item 7. Financial Statements.

Under FDIC regulation, Potters Bank is required by applicable law and
regulations to meet certain minimum capital requirements, which include a
leverage, or core, capital requirement and a risk-based capital requirement.

If Potters Bank has the highest regulatory examination rating, well-diversified
risk and minimal anticipated growth or expansion, the leverage capital
requirement is a minimum level of 3% Tier 1 capital to average total
consolidated assets. However, the leverage capital requirement rises to between
4% and 5% of average total consolidated assets if it does not meet those
criteria. "Tier 1" capital includes, generally, common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in the accounts
of consolidated subsidiaries, less all intangibles, other than includable
purchased mortgage servicing rights and credit card relationships, and other
deductions not applicable to Potters Bank.

Pursuant to the risk-based capital requirement, Potters Bank must maintain total
capital, which consists of Tier 1 capital and certain general valuation
reserves, of 8% of risk-weighted assets. The FDIC may, however, set higher
capital requirements when particular circumstances warrant higher capital
levels, including the presence of excessive interest rate risk. For purposes of
computing risk-based capital, assets and certain off-balance sheet items are
weighted at percentage levels ranging from 0% to 100%, depending on the relative
risk.

The following table presents the minimum capital requirements for Non-member
Banks and Potters Bank's capital levels at December 31, 1999 if the FDIC capital
requirements had applied to Potters Bank:

<TABLE>
<CAPTION>
                                                        Amount             %
                                                        ------            ---

<S>                                                     <C>              <C>
Tier 1 capital (1)                                      $10,854           7.6%
Leverage capital requirement                              7,178           5.0(2)
                                                        -------          ----
Excess                                                  $ 3,676           2.6%
                                                        =======          ====

Total capital (1)                                       $11,965          13.6%
Risk-based capital requirement                            5,548           8.0
                                                        -------          ----
Excess                                                  $ 6,417           5.6%
                                                        =======          ====
</TABLE>
----------

                                       21
<PAGE>   22
         (1) Tier 1 capital and risk-based capital reflect capital computed in
accordance with generally accepted accounting principles. Risk-based capital
includes a $1.1 million general loan loss allowance.
         (2) Non-member Banks that meet certain requirements may be permitted to
maintain a leverage ratio of less than 5%.

The FDIC also has a market risk component to the capital requirements of
Non-member Banks. Such component would require additional capital for general or
specific market risk or trading portfolios of debt and equity securities and
other investments or assets. The policy applies to an institution with less than
$5 billion in assets only if its trading portfolio constitutes at least 10% of
the institution's assets. PFC has no trading portfolio and, therefore, does not
expect to have to meet this new requirement. The FDIC may also require
additional capital to address interest-rate risk, concentrations of credit and
non-traditional activities on a case-by-case basis.

The FDIC has adopted regulations governing prompt corrective action to resolve
the problems of capital deficient and otherwise troubled Non-member Banks. At
each successively lower defined capital category, an institution is subject to
more restrictive and numerous mandatory or discretionary regulatory actions or
limits, and the applicable agency has less flexibility in determining how to
resolve the problems of the institution. The FDIC has defined these capital
levels as follows: (1) well-capitalized institutions must have total risk-based
capital of at least 10%, Tier 1 risk-based capital of at least 6% and a leverage
ratio of at least 5%; (2) adequately capitalized institutions are those that
meet the regulatory minimum of total risk-based capital of at least 8%, Tier 1
risk-based capital of at least 4% and a leverage ratio of at least 4% (except
for institutions receiving the highest examination rating that is not
experiencing or anticipating significant growth, in which case the leverage
ratio must be at least 3%); (3) undercapitalized institutions are those that do
not meet regulatory limits, but that are not significantly undercapitalized; (4)
significantly undercapitalized institutions have total risk-based capital of
less than 6%, or a leverage ratio of less than 3%; and (5) critically
undercapitalized institutions are those with tangible equity to total assets of
less than 2%. In addition, the FDIC generally can downgrade an institution's
capital category, notwithstanding its capital level, if, after notice and
opportunity for hearing, the institution is deemed to be in an unsafe and
unsound condition or because it has not corrected deficiencies noted in the most
recent examination. An undercapitalized institution must submit a capital
restoration plan to the FDIC within 45 days after it becomes undercapitalized.
Such institution 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. A critically undercapitalized
institution must be placed in conservatorship or receivership within 90 days of
reaching that capitalization level, except under limited circumstances. Potters
Bank's capital levels at December 31, 1999, meet the standards for a
well-capitalized institution.

TRANSACTIONS WITH INSIDERS AND AFFILIATES. All transactions between Potters Bank
and PFC or any other affiliate must comply with Sections 23A and 23B of the
Federal Reserve Act (the FRA). An affiliate is any company or entity that
controls, is controlled by or is under common control with the financial
institution. In a holding company context, the parent holding company of an
insured institution and any companies that are controlled by such parent holding
company are affiliates of the institution. Generally, Section 23A and 23B of the
FRA (i) limit the extent to which a financial institution or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such institution's capital stock and surplus for any one affiliate and
20% of such capital stock and surplus for the aggregate of such transactions
with all affiliates, and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable to the institution or the
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition, because it is a subsidiary of
a savings and loan holding company, Potters Bank 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. Exemptions from
Section 23A or 23B of the FRA may be granted only by the FRB. Potters Bank was
in compliance with these requirements and restrictions at December 31, 1999.

                                       22
<PAGE>   23
Loans to all insiders of Potters Bank and PFC may not exceed in the aggregate
the institution's total regulatory capital plus additional loan reserves (or 20%
of such capital amount for qualifying institutions with less than $100 million
in deposits). Most loans to directors, executive officers and greater than 10%
shareholders of an institution, and their respective affiliates, must be
approved in advance by a majority of the board of directors of the institution
with any "interested" director not participating in the voting. All loans to
directors, executive officers and principal shareholders must be made on terms
substantially the same as offered in comparable transactions to the general
public or as offered to all employees in a company-wide benefit plan. In
addition, loans generally may not be made to an executive officer, except loans
for specific authorized purposes, such as financing the education of the
officer's children or the purchase of the officer's primary residence.

DEPOSIT INSURANCE. The FDIC is an independent federal agency that insures the
deposits, up to prescribed statutory limits, of federally insured banks and
savings and loan associations and safeguards the safety and soundness of the
banking and savings and loan industries. The FDIC administers two separate
insurance funds, the Bank Insurance Fund (BIF) for commercial banks and state
savings banks and the Savings Association Insurance Fund (SAIF) for savings
associations.

Potters Bank 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 Potters Bank, 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 is required to maintain designated levels of reserves in the SAIF and
the BIF. 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.

CHANGES IN CONTROL

FEDERAL LAW. The Federal Deposit Insurance Act (the FDIA) provides that no
person, acting directly or indirectly or in concert with one or more persons,
shall acquire control of any insured depository institution or holding company
unless 60 days prior written notice has been given to the primary federal
regulator for that institution and such regulator has not issued a notice
disapproving the proposed acquisition. Control, for purposes of the FDIA, means
the power, directly or indirectly, alone or acting in concert, to direct the
management or policies of an insured institution or to vote 25% or more of any
class of securities of such institution. Control exists in situations in which
the acquiring party has direct or indirect voting control of at least 25% of the
institution's voting shares, controls in any manner the election of a majority
of the directors of such institution or is determined to exercise a controlling
influence over the management or policies of such institution. In addition,
control is presumed to exist, under certain circumstances where the acquiring
party (which includes a group "acting in concert") has voting control of at
least 10% of the institution's voting stock.

Under OTS regulations, no person, directly or indirectly, or acting in concert
with others, may acquire control of Potters Bank or PFC without sixty days'
prior notice to the OTS. For purposes of OTS regulations, 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 in
place. If the acquisition of control is by a company, the acquiror must obtain
approval, rather than give notice, of the acquisition.

                                       23
<PAGE>   24
OHIO LAW. A statutory limitation on the acquisition of control of an Ohio
savings bank requires the written approval of the Division prior to the
acquisition by any person or entity of a controlling interest in an Ohio
association. Control exists, for purposes of Ohio law, when any person or entity
which, either directly or indirectly, or acting in concert with one or more
other persons or entities, owns, controls, holds with power to vote, or holds
proxies representing, 15% or more of the voting shares or rights of an
association, or controls in any manner the election or appointment of a majority
of the directors. A director will not be deemed to be in control by virtue of an
annual solicitation of proxies voted as directed by a majority of the board of
directors. Ohio law also requires that certain acquisitions of voting securities
that would result in the acquiring shareholder owning 20%, 33-1/3% or 50% of the
outstanding voting securities of PFC 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 represented at such a meeting, excluding the voting shares by the
acquiring shareholder. This statute was intended, in part, to protect
shareholders of Ohio corporations from coercive tender offers.

Interstate mergers and acquisitions involving savings banks incorporated under
Ohio law are permitted by Ohio law, under certain circumstances. A financial
institution or financial institution holding company with its principal place of
business in another state may acquire a savings and loan association or savings
and loan holding company incorporated under Ohio law if, in the discretion of
the Division, the laws of such other state give an Ohio institution or an Ohio
holding company reciprocal rights.

HOLDING COMPANY REGULATION. PFC is a unitary savings and loan holding company
subject to the regulatory oversight, examination and enforcement authority of
the OTS. Although Potters Bank is not a savings association, it has elected to
be treated as such for holding company purposes, so that PFC does not become a
bank holding company. As a savings and loan holding company, PFC is required to
register and file periodic reports with the OTS. If the OTS determines that the
continuation of a particular activity by a savings and loan holding company
constitutes a serious threat to the financial condition of its subsidiary
institutions, the OTS may impose restrictions on the holding company. Such
restrictions may include limiting the payment of dividends, transactions with
affiliates or any other activities deemed to pose a serious threat to the
savings associations.

In order for PFC to retain its status as a savings and loan holding company,
Potters Bank must meet one of two tests in order to be a qualified thrift lender
(QTL). The first test requires Potters Bank to maintain a specified level of
investments in assets that are designated as qualifying thrift investments
(QTIs). Generally, QTI's are assets related to domestic residential real estate
and manufactured housing, although they also include credit card, student and
small business loans and stock issued by an FHLB, the FHLMC or the FNMA. Under
the QTL test, 65% of an institution's "portfolio assets" (total assets less
goodwill and other intangibles, property used to conduct business and 20% of
liquid assets) must consist of QTI on a monthly average basis in nine out of
every 12 months. The second test permits a savings association to qualify as a
QTL by meeting the definition of "domestic building and loan association" under
the Internal Revenue Code of 1986, as amended (the Code). In order for an
institution to meet the definition of a "domestic building and loan association"
under the Code, at least 60% of its assets must consist of specified types of
property, including cash loans secured by residential real estate or deposits,
educational loans and certain governmental obligations. The OTS may grant
exceptions to the QTL tests under certain circumstances. If Potters Bank fails
to meet either one of the QTL tests, Potters Bank and PFC become subject to
certain operating and regulatory restrictions and the savings association will
not be eligible for new FHLB advances. At December 31, 1999, Potters Bank
qualified as a QTL.

Generally, no savings and loan holding company may (i) acquire or retain control
of a savings association or another savings and loan holding company or control
the assets thereof or (ii) acquire or retain more than 5% of the voting shares
of a savings association or holding company thereof which is not a subsidiary
without the prior written approval of the Director of the OTS. Additionally,
under certain circumstances a savings and loan holding company is permitted to
acquire, with the approval of the Director 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

                                       24
<PAGE>   25
company. Except with the prior approval of the Director 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.

Federal law provides that an insured institution shall be liable for any loss
incurred by the FDIC in connection with the default or potential default of, or
federal assistance provided to, an insured institution which is controlled by
the same holding company. Such loss would be apportioned among all of the
insured institutions controlled by the holding company.

FRB RESERVE REQUIREMENTS. FRB regulations currently require savings associations
to maintain reserves of 3% of net transaction accounts (primarily NOW accounts)
up to $44.3 million, subject to an exemption of up to $5.0 million, and to
maintain reserves of 10% of net transaction accounts in excess of $44.3 million.
These percentages are subject to revision by the FRB. At December 31, 1999,
Potters Bank was in compliance with the FRB's reserve requirement.

FEDERAL HOME LOAN BANKS

As a member of the FHLB, Potters Bank is required to maintain an investment in
the capital stock of the FHLB in an amount equal to the greater of 1.0% of the
aggregate outstanding principal amount of its loans or 5% of its advances from
the FHLB. Potters Bank is in compliance with this reserve requirement with an
investment in FHLB of Cincinnati stock having a book value of $1.2 million at
December 31, 1999.

FHLB advances to member institutions who meet the QTL test are generally limited
to 20 times the member's investment in FHLB stock. At December 31, 1999, Potters
Bank's maximum limit on advances was approximately $23.7 million. The granting
of advances is also subject to the FHLB's collateral and credit underwriting
guidelines.

Upon the origination or renewal of a loan or advance, the FHLB 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 not more than 90 days delinquent or certain
securities representing an interest in such loans; securities issued, insured or
guaranteed by the United State Government or an agency thereof; deposits in any
FHLB; or other real estate related collateral (up to 30% of the member
association's capital) acceptable to the FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.

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

                                    TAXATION

FEDERAL TAXATION

PFC and Potters Bank are each subject to the federal tax laws and regulations
which apply to corporations in general. In addition to the regular income tax,
an alternative minimum tax may also apply. 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

                                       25
<PAGE>   26
income. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. However, The
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average gross
receipts of $5 million or less for the three tax years ending with its first tax
year beginning after December 31, 1997. Once a corporation is recognized as a
small corporation, it will continue to be exempt from the alternative minimum
tax for as long as its average gross receipts for the prior three-year period
does not exceed $7.5 million. In determining if a corporation meets this
requirement, the first year that it achieved small corporation status is not
taken into consideration.

Potters Bank's average gross receipts for the three tax years ending on December
31, 1998, were $9,080,000. As a result, neither Potters Bank nor PFC qualifies
as a small corporation exempt from the alternative minimum tax.

Prior to the enactment of the Small Business Jobs Protection Act (the "Small
Business Act"), which was signed into law on August 21, 1996, certain thrift
institutions were allowed deductions for bad debts under methods more favorable
than those granted to other taxpayers. Qualified thrift institutions could
compute deductions for bad debts using either the specific charge off method of
Section 166 of the Code or one of the two reserve methods 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 tax year 1995, the
percentage of taxable income method was used because such method provided a
higher bad debt deduction than the experience method. For tax years 1990 through
1994, the experience method was used.

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

A thrift institution required to change its method of computing reserves for bad
debt will treat such change as a change in the method of accounting, initiated
by the taxpayer and having been made with the consent of the Secretary of the
Treasury. Section 481(a) of the Code requires certain amounts to be recaptured
with respect to such change. Generally, the amounts to be recaptured will be
determined solely with respect to the "applicable excess reserves" of the
taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that is treated as a large bank, the
amount of the institution's applicable excess reserves generally is the excess
of (i) the balances

                                       26
<PAGE>   27
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 Potters 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 and its reserve for losses on nonqualifying
loans as of the close of its last taxable year beginning before January 1, 1996,
over (ii) the greater of the balance of (a) its pre-1988 reserves or (b) what
the thrift's reserves would have been at the close of its last year beginning
before January 1, 1996, had the thrift always used the experience method.

For taxable years that begin after December 31, 1995, and before January 1,
1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken into
account as a Code Section 481(a) adjustment for the year will be suspended. A
thrift meets the residential loan requirement if, for the tax year, the
principal amount of residential loans made by the thrift during the year is not
less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential real 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 Small Business Act, which require recapture in the
case of certain excessive distributions to shareholders. The pre-1988 reserves
may not be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by Potters Bank to the Company is deemed paid out
of its pre-1988 reserves under these rules, the pre-1988 reserves would be
reduced and Potters Bank'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 December 31, 1998, pre-1988 reserves for tax
purposes totaled approximately $2.5 million. Approximately $843,000 of
accumulated earnings and profits for tax purposes remained as of December 31,
1999, 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 Potters Bank will have current or accumulated earnings
and profits in subsequent years.

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

OHIO TAXATION

PFC is subject to the Ohio corporation franchise tax, which, as applied to PFC,
is a tax measured by both net earnings and net worth. For tax years beginning
after December 31, 1998, the rate of tax is the greater of (i) 5.1% on the first
$50,000 of computed Ohio taxable income and 8.5% of computed Ohio taxable income
in excess of $50,000, or (ii) 0.4% of taxable net worth.

A special litter tax is also applicable to all corporations, including PFC,
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 0.014% of taxable net
worth.

Due to legislative changes enacted July 1, 1997, PFC may elect to be a
"qualifying holding company" and as such be exempt from the net worth tax. To be
exempt it must satisfy all the requirements of the enacted law which includes
related member adjustments that could affect the taxable net worth of PFC's
subsidiary Potters Bank.

                                       27
<PAGE>   28
Potters Bank 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 for tax year 1999 is imposed at a rate of 1.4% of
apportioned book net worth determined in accordance with generally accepted
accounting principles, less statutory deductions. This rate decreases in tax
year 2000 and thereafter 1.3%. As a "financial institution," Potters Bank is not
subject to any tax based upon net income or net profits imposed by the State of
Ohio.

ITEM 2.             PROPERTIES

         The following table sets forth certain information at December 31,
1999, regarding the properties on which the main office, each branch office and
each loan production office of Potters Bank is located:

<TABLE>
<CAPTION>
                                      Owned             Date acquired            Net
       Location                     or leased             or leased         book value(1)
       --------                     ---------             ---------         ----------
<S>                                 <C>                <C>                  <C>
CORPORATE OFFICE:
519 Broadway (2)                                       January 8, 1903
East Liverpool, Ohio 43920            Owned              May 2, 1978          $434,000

BRANCH OFFICES:
530 Broadway
East Liverpool, Ohio 43920            Owned             June 18, 1982          554,000

46635 Y&O Road
Glenmoor, Ohio 43920                  Owned             June 3, 1975           133,000

15575 State Rte. 170
Calcutta, Ohio 43920 (3)             Leased            February 1, 1983        187,000

LOAN PRODUCTION OFFICES:
7330 Southern Boulevard
Boardman, Ohio 44512 (4)             Leased              April 1, 1998           2,000

9179 Mentor Avenue
Cleveland, Ohio 44060 (5)            Leased               May 1, 1999            3,000
</TABLE>

----------
(1) At December 31, 1999, office premises and equipment had a total net book
    value of $2.0 million.
(2) Includes two parcels.
(3) The lease agreement with one of the directors of Potters Bank expires on
    January 31, 2008, subject to five five-year renewal periods at Potters
    Bank's option.
(4) The lease agreement expires on March 31, 2000, subject to annual automatic
    one-year renewal periods at Potters Bank's option.
(5) The lease agreement expires on December 31, 2000, subject to two additional
    one-year renewal periods at Potters Bank's option.

ITEM 3.    LEGAL PROCEEDINGS.

There is presently no involvement in any legal proceedings of a material nature.
Legal proceedings to enforce a security interest in collateral pledged to secure
loans occur from time to time.

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

During the quarter ended December 31, 1999, there were no submissions of matters
to the shareholders of PFC.

                                       28
<PAGE>   29
                                     PART II

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

                                  COMMON SHARES

As of March 10, 2000, 961,793 common shares were outstanding and held by
approximately 318 shareholders of record. Prices for common shares are quoted on
The Nasdaq SmallCap Market (Nasdaq) under the symbol "PTRS". Five brokerage
firms currently serve as market makers: Tucker Anthony Incorporated, F.J.
Morrissey & Co., Inc., Knight Securities L.P., Spear, Leeds & Kellogg and Keefe,
Bruyette & Woods, Inc. All share and per share data disclosures have been
restated to reflect the 10% stock dividend that was paid on March 29, 1999.

PRICE RANGE OF COMMON SHARES

The table below shows the range of high and low sales prices for the common
shares of PFC as quoted by Nasdaq. Such prices do not include retail markups,
markdowns or commissions. Also shown are dividends per share declared during
each quarter presented. See Note 16 of the consolidated financial statements for
a discussion of dividend restrictions.

<TABLE>
<CAPTION>
                                  1999                               1998
                                  ----                               ----
                                           Dividends                          Dividends
Quarter Ended          High        Low    Per  Share      High        Low     Per Share
                       ----        ---    ----------      ----        ---     ---------
<S>                  <C>        <C>         <C>         <C>        <C>         <C>
March 31             $18.182    $11.477     $0.064      $20.682    $16.364     $0.045
June 30               15.000     10.500      0.080       18.636     15.682      0.055
September 30          13.125     11.625      0.090       16.023     12.500      0.055
December 31           12.750     11.500      0.090       18.182     11.818      0.064
</TABLE>

                                       29
<PAGE>   30
ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

                          POTTERS FINANCIAL CORPORATION
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations
                                December 31, 1999

GENERAL

As of January 3, 2000, Potters Bank, the subsidiary of Potters Financial
Corporation (PFC) converted from an Ohio-chartered savings and loan association
to an Ohio-chartered savings bank.

The following discussion and financial information are presented to provide
shareholders with a more comprehensive review of the financial position and
operating results than could be obtained from an examination of the financial
statements alone. The review should be read in conjunction with the consolidated
financial statements and accompanying notes.

In the following pages, management presents an analysis of financial condition
as of December 31, 1999, and the results of operations for fiscal 1999, as
compared to prior years. In addition to this historical information, the
following discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, operations and actual results could
differ significantly from those discussed in the forward-looking statements.
Some of the factors that could cause or contribute to such differences are
discussed herein but also include changes in the economy and interest rates in
the nation and in local market areas.

Without limiting the foregoing, some of the forward-looking statements included
herein are the statements under the following headings and regarding the
following matters:

         1.       Net Interest Income - Management's plan for continued loan
                  growth and its belief that regional loan demand and the
                  ability to purchase loans will continue.

                  Management's intention to utilize deposit inflows and FHLB
                  advances as sources to fund loan growth.

                  Statements regarding rising interest rates and increasing
                  deposit and borrowing costs, possibly negatively affecting the
                  interest rate spread.

         2.       Allowance and Provision for Loan Losses - Management's
                  statements regarding the amount and adequacy of the allowance
                  for loan losses and its belief that no additional provisions
                  will be required during 2000.

         3.       Financial Condition - Statements regarding strategic focus and
                  long-term goals.

                  Statements regarding the ability of the Boardman and Mentor
                  loan production offices to reduce reliance on purchased loans.

         4.       Liquidity and Capital Resources - Management's belief that
                  liquidity and capital positions are adequate to fund
                  outstanding short- and long-term needs.

                  Management's expectation that cash flow and borrowing capacity
                  are sufficient to fund all outstanding commitments and
                  maintain desired levels of liquidity.

         5.       Year 2000 - Management's expectation that any subsequent year
                  2000 issues will be resolved in a satisfactory manner and will
                  not pose significant operational problems.

         6.       Bad Debt Reserve Recapture - Management's expectation that the
                  bad debt reserve recapture legislation will not impact future
                  income.

                                       30
<PAGE>   31
RESULTS OF OPERATIONS

NET INCOME
The composition of assets and liabilities, the interest rate environment,
fiscal, monetary and regulatory policies of government agencies and the general
state of the economy all affect operating results. Income is generated on
interest-earning assets, primarily loans and securities, while expense is
incurred on interest-bearing liabilities, including deposits and borrowings. Net
interest income is the difference between the two. Net income is also impacted
by provisions for losses, fee and other noninterest income and noninterest
expense. Net income for 1999 of $1.3 million, or $1.35 per diluted share,
represented a $234,000, or 21.0%, improvement over net income of $1.1 million
for 1998 and a $149,000, or 12.4%, increase over 1997 net income of $1.2
million. Diluted earnings per share for 1999 increased $.31, or 29.8%, over
diluted earnings per share of $1.04 for the same time during 1998 and increased
$.25, or 22.7%, over diluted earnings per share of $1.10 during 1997.

Earnings increased during 1999 compared to 1998 and 1997 from a concentrated
focus on core strategies for growth, diversification and superior customer
service, core strategies which are part of Potters Bank's long-range strategic
plan and vision. With this adherence to the plan came increased profitability,
resulting in a return on average shareholders' equity of 11.85% during 1999
compared to returns of 9.58% during 1998 and 10.72% during 1997. A return on
average assets of .97% during 1999 compared favorably to .87% during 1998, and
 .73% during 1997, excluding a negative loan loss provision which had an
after-tax positive impact of $320,000 on 1997 earnings.

The improvement in net income during 1999 over 1998 resulted primarily from a
$676,000, or 16.0%, increase in net interest income. Gains on sales of loans,
securities and other assets declined $124,000 during 1999, primarily from fewer
securities sales and a gain on the sale of a parking lot during 1998. Excluding
a refund of $37,000, received in 1999 on prior years' franchise taxes for
Potters Bank, noninterest income increased 13.7% during 1999 compared to 1998,
primarily from increases in deposit account and other customer service fees.
Noninterest expense, which increased 11.7% during 1999 over 1998, rose primarily
from costs associated with planned growth in checking products and electronic
services, operating expenses associated with a new loan production office in
Mentor, Ohio, a full year of operations in the Boardman, Ohio loan production
office and growth in performance-based compensation. Occupancy and equipment
costs also increased during 1999 from corporate office renovations, new
technology purchases and maintenance costs. During 1998, net interest income
increased 8.8% and noninterest income increased 17.5%, while noninterest expense
increased 5.8% over 1997.

YIELDS EARNED AND RATES PAID
Net interest income is the difference between income generated on loans and
securities and interest expense on deposits and borrowings. It is primarily
affected by the composition, volumes and interest rates of interest-earning
assets and interest-bearing liabilities.

The following table sets forth certain average balance sheet information and
reflects the average yield on interest-earning assets and the average cost of
interest-bearing liabilities for the periods presented. Average balances are
derived from average daily balances for all periods presented, and include
nonaccruing loans in the loan portfolio, net of the allowance for loan losses.
Average balances of securities available for sale are based on the carrying
value while the yield is based on the amortized cost. The Corporation has
minimal tax-exempt interest income; as a result, interest income is presented
without taxable equivalent adjustment.

                                       31
<PAGE>   32

<TABLE>
<CAPTION>
(Dollars in thousands)                    ---------------------------------Years ended December 31,---------------------------------
                                                                           ------------------------
                                                        1999                            1998                          1997
                                                        ----                            ----                          ----
                                            Average   Interest             Average    Interest            Average   Interest
                                         Outstanding  Earned/     Yield/  Outstanding  Earned/  Yield/  Outstanding  Earned/  Yield/
                                            Balance     Paid       Rate    Balance      Paid     Rate     Balance     Paid     Rate
                                            -------     ----       ----    -------      ----     ----     -------     ----     ----
<S>                                        <C>         <C>         <C>    <C>          <C>       <C>     <C>         <C>       <C>
Interest-earnings assets:
    Loans  (1)                             $103,699    $ 8,537     8.23%  $ 87,070     $7,243    8.32%   $ 72,495    $6,027    8.31%
    Securities (2)                           25,078      1,460     5.82     29,405      1,756    5.98      39,549     2,465    6.21
    Other                                     2,633        150     5.70      4,742        263    5.55       1,195        66    5.49
                                           --------    -------            --------     ------            --------    ------
        Total interest-earning assets       131,410     10,147     7.72    121,217      9,262    7.64     113,239     8,558    7.55
Noninterest-earning assets:
    Cash and cash equivalents                 3,076                          3,239                          2,789
    Premises and equipment                    2,039                          1,750                          1,739
    Other nonearning assets                   2,541                          1,458                          1,758
                                           --------                       --------                       --------
        Total assets                       $139,066                       $127,664                       $119,525
                                           ========                       ========                       ========

Interest-bearing liabilities:
    Certificates of deposit                $ 52,180      2,784     5.34   $ 49,668      2,818    5.67    $ 49,723     2,816    5.66
    Savings and club accounts                37,154      1,124     3.03     36,100      1,134    3.14      34,452     1,031    2.99
    Demand, NOW and Super NOW
      accounts                               15,184        232     1.53     14,300        253    1.77      12,891       263    2.04
Money market accounts                         1,830         46     2.51      1,977         57    2.91       2,064        62    3.02
Borrowings                                   19,480      1,055     5.42     13,260        770    5.81       8,102       499    6.16
                                           --------    -------            --------     ------            --------    ------
        Total interest-bearing liabilities  125,828      5,241     4.16    115,305      5,032    4.36     107,232     4,671    4.36
                                                       -------                         ------                        ------
Noninterest-bearing liabilities:
    Other liabilities                         1,883                            747                          1,133
    Shareholders' equity                     11,355                         11,612                         11,160
                                           --------                       --------                       --------
        Total liabilities and equity       $139,066                       $127,664                       $119,525
                                           ========                       ========                       ========

    Net interest income                                $4,906                          $4,230                        $3,887
                                                       ======                          ======                        ======
    Interest rate spread                                           3.56%                         3.28%                         3.19%
                                                                   ====                          ====                          ====
    Net interest-earning assets            $  5,582                       $  5,912                       $  6,007
                                           ========                       ========                       ========
    Net yield on average interest-
      earning assets                                               3.73%                         3.49%                         3.43%
                                                                   ====                          ====                          ====
    Ratio of average interest-earning
      assets to average interest-
      bearing liabilities                    104.44%                        105.13%                       105.60%
                                           ========                       ========                       =======
</TABLE>

----------
(1) Net of deferred loan fees, loan premiums and discounts, loans in process and
allowance for loan losses.
(2) Includes FHLB Stock.


                                       32
<PAGE>   33
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category, information is provided on
changes attributable to changes in volume and changes in rate. For purposes of
this table, changes attributable to both rate and volume which cannot be
segregated have been allocated proportionately based on the absolute value of
the change due to volume and the change due to rate.

<TABLE>
<CAPTION>
                                                      1999 vs. 1998                        1998 vs. 1997
                                                      -------------                        -------------
                                                        Increase                             Increase
                                                       (decrease)                           (decrease)
                                                         due to                               due to
                                                         ------                               ------
(Dollars in thousands)
                                             Volume       Rate        Total       Volume       Rate       Total
                                             ------       ----        -----       ------       ----       -----
<S>                                          <C>          <C>        <C>          <C>          <C>       <C>
Interest-earning assets:
    Loans                                    $1,370       $ (76)     $1,294       $1,213       $  3      $1,216
    Securities                                 (253)        (43)       (296)        (620)       (89)       (709)
    Other                                      (120)          7        (113)         196          1         197
                                             ------       -----      ------       ------       ----      ------

      Total interest-earning assets          $  997       $(112)        885       $  789       $(85)        704
                                             ======       =====                   ======       ====

Interest-bearing liabilities:
    Certificates of deposit                  $  139       $(173)        (34)      $   (3)      $  5           2
    Savings and club accounts                    32         (42)        (10)          51         52         103
    Demand, NOW and Super NOW
      accounts                                   15         (36)        (21)          27        (37)        (10)
    Money market accounts                        (4)         (7)        (11)          (3)        (2)         (5)
    Borrowed funds                              340         (55)        285          301        (30)        271
                                             ------       -----      ------       ------       ----      ------

      Total interest-bearing liabilities     $  522       $(313)        209       $  373       $(12)        361
                                             ======       =====      ------       ======       ====      ------

Net interest income                                                  $  676                              $  343
                                                                     ======                              ======
</TABLE>

NET INTEREST INCOME

Net interest income increased $676,000, or 16.0%, during 1999 compared to 1998,
due primarily to growth in and diversification of the loan portfolio along with
a decrease in deposit costs despite an increase in deposits. Purchases of
higher-yielding home equity and second mortgage loans and a net increase of $5.9
million in commercial real estate loans contributed to increased interest
income. Loan growth was funded primarily through an increase of $5.7 million, or
5.4%, in deposits and $4.1 million in FHLB advances. Although the yield on loans
actually decreased to 8.23% during 1999, from 8.32% during 1998, a larger
portion of earning assets consisted of loans during 1999, resulting in an
increase in the yield on earning assets to 7.72%, from 7.64% during 1998.
Securities yields decreased to 5.82% during 1999 from 5.98% during 1998, while
the yield on short-term investments increased to 5.70% during 1999, from 5.55%
during 1998.

Despite an increase of $4.3 million in the average balance of deposits and $6.2
million in the average balance of borrowings during 1999, the cost of funds
declined to 4.16% during 1999, from 4.36% during 1998. The cost of deposits
decreased to 3.94% during 1999, compared to 4.18% during 1998, while FHLB
borrowing costs declined to 5.42%, from 5.81% during the same periods. During
the last three years, the average balance of lower cost checking deposits has
increased $2.3 million, or 17.8%, and the yield has declined to 1.53% during
1999, from 2.04% during 1997. The result of 1999 efforts produced an interest
rate spread of 3.56%, an increase from 3.28% during 1998. However, because
interest rates increased during 1999, deposit and borrowing costs are on the
rise and could negatively affect the interest rate spread in the future. In a
rising rate environment, the cost of funds usually rises faster than the yield
on assets.

                                       33
<PAGE>   34
Net interest income increased $343,000, or 8.8%, during 1998 compared to 1997,
due primarily to loan growth and a shift of assets from securities to loans. The
yield on loans increased only one basis point during 1998, to 8.32%, but more
assets were comprised of loans receivable as opposed to securities yielding
5.98% and 6.21% during 1998 and 1997. This shift in assets caused an increase in
the overall earning asset yield from 7.55% during 1997 to 7.64% during 1998. The
cost of funds remained level during 1998 and 1997, at 4.36%. The average balance
of total deposits increased $2.9 million in 1998, while the yield decreased from
4.21% during 1997, to 4.18% during 1998. Increases in the use of FHLB advances
during 1998 resulted in an increase of $5.2 million in the average balance,
offset by a decrease in the yield, from 6.16% during 1997, to 5.81% during 1998.
The increase in the asset yield during 1998 and the consistency of deposit costs
resulted in an increase in the interest spread, from 3.19% during 1997, to 3.28%
during 1998.

Over the last three years, interest on loans has increased from $6.0 million in
1997, to $8.5 million during 1999, an increase of $2.5 million, or 41.6%. From
1997 to 1998, loan interest income increased $1.2 million, or 20.2%, while the
increase during 1999 was $1.3 million, or 17.9%. Average balances of loans
increased $14.6 million, or 20.1%, during 1998 and $16.6 million, or 19.1%,
during 1999. Loans grew $13.3 million, or 13.7%, during 1999, primarily through
purchases of $7.4 million in home equity loans and $6.0 million in second
mortgage loans, and a net increase of $5.9 million in commercial real estate
loans. Additions of these types of loans added diversity and higher-yielding
products to the loan portfolio.

Future plans call for continued loan growth, although there can be no assurance
that the demand for loans will continue in surrounding local areas or that the
supply of purchased loans will continue. Loan demand is affected by, among other
things, regional and national economic conditions, the prevailing interest rate
environment and regulatory requirements.

Interest and dividends on securities and FHLB stock has decreased over the last
three years as maturities, sales and calls of securities have been used to fund
loan growth. Yields have also declined due to repayments, calls and maturities
of higher-yielding securities. Interest and dividends of $1.5 million in 1999
represented declines of $296,000 during 1999 and $709,000 in 1998. Average
balances declined $4.3 million during 1999 and $15.5 million during 1998, while
the yield decreased to 5.82% during 1999, from 5.98% during 1998, and from 6.21%
during 1997.

Interest expense on deposits remained relatively stable in each of the last
three years, increasing $90,000 during 1998 and decreasing $76,000 during 1999.
Despite higher average balances in certificates of deposit during 1999,
certificate yields declined by 33 basis points, while savings yields declined by
11 basis points and checking by 24 basis points, resulting in lower actual
deposit expense during 1999 compared to 1998. A "Really Free" checking product
and a Treasury Index savings account that earns competitive money market yields
based on U.S. Treasury rates have attracted deposits during 1999. Total interest
and rates paid on certificates of deposit were relatively constant during 1998
and 1997. The average balance of savings and club accounts increased $1.6
million during 1998 and the rate paid increased from 2.99% during 1997, to 3.14%
during 1998, primarily from inflows into the treasury index savings account. The
balance in the treasury index accounts increased from $949,000 at year-end 1997,
to $7.5 million at December 31, 1998 and to $10.8 million at the end of 1999.
The competition for deposits from financial institutions and a wide array of
alternative deposit investments continues to impact the availability and cost of
funds and will continue to do so in the future. A tiered interest rate pricing
structure is utilized for certificates and most checking and statement savings
products in order to encourage higher balance accounts and reduce the impact of
paying higher deposit rates.

Interest on FHLB advances totaled $1.1 million during 1999, higher than $770,000
during 1998 and $499,000 during 1997. FHLB advances were utilized to fund loan
purchases and, during 1998, to purchase $5.1 million of mortgage-backed
securities. Management expects to continue to utilize a combination of deposit
inflows and FHLB advances to fund loan growth. There can be no assurance,
however, that deposit inflows will continue, and to the extent higher rate FHLB
advances are utilized, the cost of funds could be negatively affected.

                                       34
<PAGE>   35
ALLOWANCE AND PROVISION FOR LOAN LOSSES

Management maintains an allowance for loan losses which, in its judgment, is
adequate to absorb credit losses from loans. As part of management's ongoing
review of all loans with respect to the adequacy of the allowance for loan
losses, a portion of the allowance is allocated to each major loan type. A
periodic analysis of the percentages allocated to various types of real estate,
consumer and commercial loans is conducted, at least annually, and percentages
changed to reflect the risk and delinquency status of various loan types. No
provisions were recorded during 1999 or 1998 because the allowance was deemed
adequate. During 1999, a negative provision of $75,000 was recorded relating to
a Colorado loan payoff and recovery, which increased net income and decreased
the allowance for loan losses. During 1997, one nonperforming loan located in
Colorado was repaid and another loan was sold at a loss of $60,000, resulting in
a negative provision for loan losses of $485,000. Both negative provisions were
recorded to remove excess allowances for loan losses. The negative provision and
the loss on the loan sale during 1997 had a $281,000, or $.26 per diluted share,
after-tax positive effect on 1997 earnings.

The allowance for loan losses decreased $174,000, to $2.0 million, during 1999,
from charge-offs of $125,000, primarily consumer loans, and the $75,000 negative
loan loss provision, offset by recoveries totaling $26,000. Charge-offs of
$59,000, primarily from consumer loans, and recoveries of $127,000 during 1998
resulted in an allowance for loan losses of $2.2 million at year-end 1998. The
allowance for loan losses at year-end 1997 was $2.1 million, representing a
decline of $487,000 from $2.6 million at year-end 1996, due primarily to the
negative provisions of $485,000 during 1997. Loan charge-offs during 1997
totaled $76,000, with recoveries of $74,000. Unallocated general valuation
allowances have declined from $1.5 million at December 31, 1998, to $746,000 at
December 31, 1999, primarily from growth in the loan portfolio and increased
reserve percentages allocated to home equity loans, selected consumer loans, and
to a nonconforming real estate loan product available to persons who are
considered slightly higher credit risks. No loan loss provision is planned for
2000, although no assurances can be given that provisions will not be made
during that time if circumstances change, such as significant growth in the loan
portfolio, changes in the economy or increases in delinquent and nonperforming
loans.

The following table sets forth the amounts and categories of nonperforming
assets. Nonperforming assets consist of nonaccrual loans, accruing loans which
are delinquent 90 days or more, restructured loans, real estate acquired by or
instead of foreclosure and repossessed assets. Loans are placed on nonaccrual
status when the collection of principal and/or interest becomes doubtful.
Foreclosed assets include assets acquired in settlement of loans.

<TABLE>
<CAPTION>
                                           --------------December 31,-----------
                                                         ------------
                                             1999          1998          1997
                                             ----          ----          ----
                                                   (Dollars in thousands)
<S>                                        <C>           <C>           <C>
Nonaccrual loans                           $    316      $    224      $    207
                                           --------      --------      --------
Total nonperforming loans                       316           224           207
Foreclosed and repossessed assets
                                           --------      --------      --------
Total nonperforming assets                 $    316      $    224      $    207
                                           ========      ========      ========

Total assets                               $143,736      $134,474      $122,637

Total nonperforming assets as
  a percent of total assets                     .22%          .17%          .17%

Allowance for loan losses                  $  2,037      $  2,211      $  2,143

Allowance as a percentage of
  nonperforming loans                        644.62%       987.05%     1,035.27%
</TABLE>

Nonperforming loans increased $92,000 during 1999 and $17,000 during 1998, but
have remained significantly less than 1% of total assets over the last three
years.

Nonaccrual loans include impaired loans. A loan is considered impaired when it
is probable that all principal and interest will not be collected according to
the terms of the loan contract. There were no impaired loans at December 31,
1999, 1998 or 1997.

                                       35
<PAGE>   36
Restructured loans are those which have been renegotiated at concessionary terms
as a result of a borrowers' troubled financial condition. At year-ends 1999,
1998 and 1997, there were no restructured loans.

Management uses its best judgment and information available in reviewing changes
in the financial condition or operating results of borrowers, economic
conditions and business trends to determine the adequacy of the allowance for
credit losses. The ultimate adequacy of the allowance depends on many factors,
including the performance of the loan portfolio, generally prevailing economic
conditions, changes in real estate values, interest rates and regulatory
requirements. There can be no assurance that the allowance for loan losses will
be adequate to cover future losses. The provision for loan losses is the amount
periodically charged to earnings and added to the allowance for loan losses. The
amount of the provision is based on management's regular review of the loan
portfolio considering such factors as historical loss experience, the amount of
nonperforming and delinquent loans, changes in the size and composition of the
loan portfolio, and specific borrower considerations such as the ability of the
borrower to repay the loan and the estimated value of the underlying collateral.
See Note 3 to Consolidated Financial Statements for activity with respect to the
allowance for loan losses.

NONINTEREST INCOME

Noninterest income comes from two primary sources, gains on sales of assets and
fees for products and services. Gains on sales of loans, securities and other
assets declined $124,000 during 1999 compared to 1998, primarily from fewer
securities sales and a $64,000 gain on the sale of a parking lot during 1998.
Gains on sales of real estate loans sold on a servicing-released basis remained
relatively consistent, totaling $40,000 during 1999 and $46,000 during 1998,
while gains on sales of securities totaled $3,000 during 1999 compared to
$57,000 during 1998. During 1997, gains of $111,000 were recorded on the sale of
Potters Bank's East End Office property and two other company-owned properties,
losses of $22,000 were recorded on sales of securities available for sale and
losses of $56,000 were recognized on loan sales, $60,000 of which related to a
nonperforming loan in Colorado.

Excluding a refund of $37,000, received in 1999 on prior years' franchise taxes
for Potters Bank, service charges and other noninterest income increased 13.7%
during 1999 and 17.5% during 1998, primarily from increases in deposit account
and other customer service fees. Specific areas of improvement included service
charges on deposits from new checking accounts, increases in automated teller
machine (ATM) and VISA Check Card fee income, other service fees and increased
rental income from the rental of branch office space for the financial
investment service and corporate office space to local businesses.

NONINTEREST EXPENSE

Noninterest expense increased $362,000, or 11.7%, during 1999. Salaries and
benefits increased $207,000 during 1999, primarily from staffing a new loan
production office in Mentor, Ohio and experiencing a full year of operations in
the Boardman, Ohio loan production office. Also affecting 1999 salaries and
benefits was an increased use of performance-based compensation and grants of
shares from the recognition and retention plan. Occupancy and equipment expenses
increased $56,000 during 1999, caused primarily by rent expense from the
Boardman and Mentor loan production offices and off-site ATM locations,
increased office building depreciation from corporate office renovation and
improvements, depreciation of new technology and maintenance of equipment and
systems.

Other noninterest expense increased $45,000 during 1999. During late 1999, an
ATM was installed in a grocery store in Midland, Pennsylvania, approximately ten
miles from East Liverpool. Data processing and communication costs increased
during 1999 from the telephone banking system and loan production offices, while
costs associated with checking accounts and ATM/check card services increased
consistent with planned growth. Training costs have increased, as management
continued to develop the skills of its employees with "Customer-Focused Banking"
sales system training and technical and leadership development training through
seminars and classes. Increases also occurred in expenses related to advertising
products and services, accounting and legal fees, postage from customer
newsletters and expense incurred in making operations Y2K compliant.

                                       36
<PAGE>   37
Included in noninterest expense during 1997 was a $50,000 gain on the sale of
foreclosed real estate located in Colorado. Excluding the gain, noninterest
expense increased $121,000, or 4.1%, during 1998. Salaries and benefits
increased during 1998 over the prior year primarily from the addition of
employees skilled in commercial lending, loan processing and the secondary
mortgage market. Compensation and other expenses relating to the Boardman loan
production office also contributed to the increase in noninterest expense, as
did the implementation of the telephone banking system, the addition of two ATMs
and the purchase of a financial selling system training program. Expenses
relating to ATMs, ATM cards and VISA Check Cards increased during 1998, as did
data processing and training costs, but legal and professional fees, insurance,
check processing and other miscellaneous expenses declined.

INCOME TAXES

Income tax expense of $720,000 during 1999 was a $124,000 increase from the
$596,000 recorded in 1998, but decreased $33,000 during 1998 from $629,000 in
1997, primarily from the net increase or decrease in net income for each year.

Legislation requires the recapture, over time, of a portion of the bad debt
reserve previously deducted for income tax reporting purposes. Since deferred
taxes have been recorded on those bad debt reserves, this recapture will not
affect net income.

FINANCIAL CONDITION

Assets totaled $143.8 million at December 31, 1999, an increase of $9.3 million
over assets of $134.5 million at December 31, 1998. Funds from calls and sales
of securities and loan repayments, received late in 1998 and included in
year-end cash and cash equivalents, were deployed into loans and securities
during 1999. Therefore, cash and cash equivalents decreased significantly, by
$4.6 million from year-end 1998. These cash inflows, plus deposit inflows and
increased FHLB borrowing during 1999, funded internal loan originations and loan
purchases to continue planned loan growth. Actual cash at December 31, 1999
included approximately $1.5 million of additional funds on hand to maintain
liquidity for customer demands relating to the year 2000.

Activities in securities during 1999 included maturities and calls of $8.1
million, sales of $577,000 and $8.6 million in purchases, resulting in an
overall decline of $963,000 in December 31, 1999 securities balances. At
year-end 1999, the portfolio consisted primarily of mortgage-backed and U.S.
government agency securities. All securities are designated available for sale
and are carried at their fair values, with resulting unrealized gains or losses
added to or deducted from shareholders' equity, net of tax. The unrealized loss
on securities available for sale increased significantly during 1999, from
$61,000 at year-end 1998 to $818,000 at year-end 1999, primarily from increasing
interest rates, especially in the latter part of the year. The equity component,
representing the net after-tax unrealized losses on securities available for
sale, increased from $41,000 at December 31, 1998, to $540,000 at December 31,
1999.

Net loans increased $13.4 million, or 14.2%, during 1999, from $94.9 million at
year-end 1998, to $108.4 million at December 31, 1999. During 1999, the loan
portfolio grew and diversified, with purchases of $7.4 million of first mortgage
home equity loans and $6.0 million of second mortgage loans, and a net increase
of $7.0 million in multi-family and commercial real estate loans. Originations
of $5.6 million in loans held for sale during 1999 were offset by sales of $6.4
million, which generated gains of $40,000. The increase in fixed-rate loans,
from 43.2% of total loans at the end of 1998, to 44.2% at year-end 1999, was
primarily attributable to the consumer loan purchases, which carried higher
interest rates than most one-to-four family real estate loans. A majority of
commercial real estate loans were originated with variable rates of interest.
Loan originations and purchases during 1999 were part of the focus on strategic
goals, and resulted in an increase in the ratio of loans to deposits from 92.8%
at December 31, 1998, to 100.1% at December 31, 1999. The Asset/Liability
Management Committee (ALCO) monitors the pricing of loan products, loan purchase
decisions and the overall interest rate risk of the loan portfolio.

The Boardman loan production office continues to contribute to local loan
originations and, in May 1999, another loan production office was opened in
Mentor, Ohio, a suburb of Cleveland. The strategic plan calls for utilization of
loan production offices to become less reliant on loan purchases to grow the
portfolio,

                                       37
<PAGE>   38
although there can be no assurance the demand for loans will continue in
surrounding local areas or the loan production offices will successfully
penetrate the Boardman or Mentor markets.

Total deposits increased $5.7 million, or 5.4%, from $104.6 million at year-end
1998, to $110.3 million at December 31, 1999. Net inflows of $5.8 million
occurred in certificates of deposit and $3.3 million in the treasury index
savings account. Numbers of checking accounts increased 7.7% during 1999,
including Really Free Checking, the Advantage checking program, which includes
other benefits for customers 50 or older, and business checking products. The
ALCO continues to focus on strategies for reduced interest rate risk and
responsible deposit management, such as the competitive pricing of selected
certificates of deposit with maturities exceeding one year and the use of a
tiered pricing system on the basis of amount of deposit.

In accordance with its asset/liability policy, management does not match the
highest rates offered on deposits by competitors. Deposits from retail sources
are emphasized and no brokered deposit accounts existed at December 31, 1999.
Potters Bank participates in the State of Ohio's Bid-Deposit Program, a monthly
on-line auction for State funds.

At December 31, 1999, FHLB advances totaled $21.3 million, compared to $17.2
million at year-end 1998. Advances totaling $15.3 million received during 1999
contributed to financing loan growth and were used in liquidity management.

Shareholders' equity decreased $137,000 during 1999 due primarily to an increase
of $499,000 in the unrealized loss on securities available for sale, the
purchase of 44,077 PFC common shares for $726,000 and the payment of $318,000,
or $.324 per share, in dividends to shareholders. Somewhat offsetting these
declines was the addition of $1.3 million in net income.

ASSET/LIABILITY MANAGEMENT

Asset/liability management is the process by which a company manages its
vulnerability to movements in interest rates. This process is carried out
through weekly meetings of the ALCO. Although interest rate risk is a normal
part of operations, excessive interest rate risk can significantly affect income
and expense on interest-sensitive assets and interest-sensitive liabilities, and
can also affect the underlying value of an institution's assets. The goal in
managing interest rate sensitivity is to maintain an appropriate balance between
interest-sensitive assets and liabilities in order to minimize the impact of
volatility in market interest rates. The ALCO utilizes the net portfolio value
(NPV) approach and simulation modeling to aid in making decisions relating to
pricing and the relative mix of interest rate sensitive assets and liabilities.
NPV is the difference between the present value of expected cash flows from
assets and expected cash flows from liabilities as well as off-balance sheet
contracts, such as loan commitments, under various interest rate scenarios. The
interest rate sensitivity measure is the largest number of basis points lost in
the NPV ratio when interest rates increase or decrease 200 basis points.

The Office of Thrift Supervision (OTS) issued guidance regarding the management
of interest rate risk in which it established minimum expected guidelines for
OTS regulated institutions. All institutions are required to establish and
demonstrate quarterly compliance with board-approved limits on interest rate
risk, defined in terms of NPV. In addition, some measurement system is required
to be used to determine NPV estimates. Potters Bank utilizes a quarterly
Interest Rate Risk Exposure report from the OTS.

The OTS established the following guidelines regarding its assessment of an
institution's interest rate risk:

<TABLE>
<CAPTION>
                                           Interest Rate Sensitivity Measure
Post Shock            -------------------------------------------------------------------------
NPV Ratio             0-100 b.p.          100-200 b.p.        200-400 b.p.        Over 400 b.p.
-----------------------------------------------------------------------------------------------
<S>                   <C>                 <C>                 <C>                 <C>
Over 10%              Minimal Risk        Minimal Risk        Minimal Risk        Moderate Risk
6% to 10%             Minimal Risk        Minimal Risk        Moderate Risk       Significant Risk
4% to 6%              Minimal Risk        Moderate Risk       Significant Risk    High Risk
Below 4%              Moderate Risk       Significant Risk    High Risk           High Risk
</TABLE>

                                       38
<PAGE>   39
Presented below, as of December 31, 1999 and December 31, 1998, is an analysis
of interest rate risk as measured by the projected NPV for instantaneous and
sustained parallel shifts in the yield curve in 100 basis point increments up
and down 300 basis points, compared to current policy limits of the Board of
Directors. Generally, NPV is more sensitive to rising rates than declining
rates. In a rising rate environment, fixed-rate loans decline in market value
because of the rise in rate and slowing prepayments. A rise in market value for
fixed-rate loans is not experienced in a declining rate environment because
borrowers will prepay at relatively faster rates. OTS assumptions are used in
calculating the amounts in this table.

<TABLE>
<CAPTION>
                                           December 31, 1999         At December 31, 1998(1)
Change in             Minimum              -----------------         -----------------------
Interest Rate          Board
(Basis Points)          NPV                       NPV                        NPV
-------------           ---                       ---                        ---

<S>                     <C>                      <C>                        <C>
     +300               7.00%                     5.67%                      7.52%
     +200               7.50                      6.98                       8.52
     +100               7.75                      8.16                       9.21
        0               8.00                      9.10                       9.63
     -100               7.75                      9.69                      10.06
     -200               7.50                     10.31                      10.56
     -300               7.00                     11.02                      11.35
</TABLE>

----------
(1)      NPV percentages from December 31, 1998 were adjusted to reflect a
         reclassification of convertible FHLB advances from their long-term
         maturity dates to their shorter-term convertible dates, making them
         comparable with the classification of the advances at December 31,
         1999. The reclassification was made because of the increasing
         likelihood that the advances will be converted to variable rates in the
         current rising interest rate environment.

At December 31, 1999, the NPV ratio assuming no change in current rates was
9.10%, lower than the 9.63% at December 31, 1998. At year-end 1999, an assumed
200 basis point increase in interest rates caused the NPV ratio to decline from
9.10% to 6.98%. At year-end 1998, the NPV ratio declined from 9.63% to 8.52%
after the same 200 basis point increase in interest rates. Interest rate risk
exposure during 1999 was impacted primarily by the interest rate environment.
The U.S. Treasury Yield Curve, which details the rates offered by the U.S.
government on instruments of varying maturities, was significantly higher during
1999 than in 1998 and much steeper, as there was a greater difference during
1999 between the rates offered on short-term instruments versus those with
longer-term maturities. This movement in interest rates was the primary cause of
the reduction in the projected NPV at year-end 1999 compared to year-end 1998,
during a 200 basis point upward shift in rates, and the increase in the
sensitivity measure. The sensitivity measure, or change in the NPV ratio,
increased from a negative 112 basis points at year-end 1998, to a negative 212
basis points at December 31, 1999. The increase in the sensitivity measure
during 1999 caused movement from a minimal risk category of interest rate risk
at year-end 1998, to just over the 200 basis point maximum on that category into
the moderate risk category at year-end 1999. The percentage change in NPV under
all scenarios was within the Board-imposed limits at both period ends, except
for a 200 or 300 basis point increase in interest rates at December 31, 1999,
where the projected NPV was lower than the 7.00% and 7.50% Board minimums. The
Board was informed of the situation and is currently evaluating potential
action, including possible revision of the current limits.

As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. Certain assets and liabilities with similar
characteristics may react in different degrees to changes in market interest
rates. In addition, the interest rates on certain assets and liabilities may
fluctuate in advance, or lag behind, changes in market interest rates. A change
in interest rates can also invalidate the prepayment and other assumptions used
in NPV calculations.

OTS regulations specifying an interest rate risk component to the calculation of
risk-based capital requires financial institutions exceeding the normal interest
rate exposure as defined by the OTS to take a deduction from the total capital
available to meet the risk-based capital requirement. Potters Bank was not

                                       39
<PAGE>   40
at December 31, 1999, subject to the NPV regulations because the regulation does
not apply to institutions with less than $300 million in assets and risk-based
capital in excess of 12%.

The Board of Directors approves and monitors compliance with its interest rate
risk management policy on a quarterly basis.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity refers to the ability to generate sufficient cash to fund current loan
demand, meet deposit withdrawals and pay operating expenses. Liquidity is
influenced by financial market conditions, fluctuations in interest rates,
general economic conditions and regulatory requirements. Liquid assets,
primarily represented by cash equivalents and interest-bearing deposits in other
financial institutions, are a result of operating, investing and financing
activities. These activities are summarized below for the years ended December
31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                        Years ended December 31,
                                                        ------------------------
                                                         1999            1998
                                                         ----            ----
                                                       (Dollars in thousands)
<S>                                                    <C>             <C>
Net income                                             $  1,346        $ 1,112
Adjustments to reconcile net income
  to net cash from operating activities                      47           (468)
                                                       --------        -------
Net cash from operating activities                        1,393            644
Net cash from investing activities                      (14,720)        (3,367)
Net cash from financing activities                        8,740         10,774
                                                       --------        -------
Net change in cash and cash equivalents                  (4,587)         8,051
Cash and cash equivalents at the
  beginning of the year                                  11,867          3,816
                                                       --------        -------
Cash and cash equivalents at the end of
  the year                                             $  7,280        $11,867
                                                       ========        =======
</TABLE>

The adjustments to reconcile net income to net cash from operating activities
consists mainly of the origination and sale of mortgage loans, provisions for
losses, depreciation and amortization and changes in accrued income and expense.
The most significant components of cash flows from operating activities during
1999 included sales of loans held for sale totaling $6.4 million, offset by the
origination of $5.6 million in loans held for sale. Significant components of
cash flows from investing activities during 1999 were loan purchases of $17.4
million and securities purchases of $8.6 million, offset by securities
repayments, calls and maturities of $8.1 million, securities sales of $577,000
and, excluding loan purchases, a $3.2 million net decrease in loans. During
1998, investment activities included $20.9 million in loan purchases and $7.1
million in securities purchases, sales of securities available for sale of $3.4
million and repayments and calls on securities of $13.1 million.

Financing activity during 1999 included net deposit inflows of $5.7 million and
a net increase in FHLB advances of $4.1 million. During 1998, cash flows from
financing activities included net deposit inflows of $4.6 million and a net
increase of $7.3 million in FHLB advances

Normal, recurring sources of funds are primarily customer deposits, sale,
maturities, calls and repayments of securities, loan repayments and other funds
provided by operations. Potters Bank has the ability to borrow from the FHLB
when needed as a secondary source of liquidity. Investments in liquid assets are
maintained based upon management's assessment of the need for funds, expected
deposit flows, the yields available on short-term liquid assets and the
objectives of the asset/liability management program. Federal regulation
requires the maintenance of an average daily balance of liquid assets (generally
including cash, deposits in other financial institutions, and qualifying U.S.
government securities) at a minimum of 4% of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. During December 1999, the average regulatory liquidity ratio was
13.23%. At year-end 1999, commitments to originate loans and unused credit lines
totaled $7.1 million. Management considers liquidity and capital reserves to be
sufficient to fund its outstanding short- and long-term needs on a timely basis.
Sufficient cash flow and borrowing capacity exists to fund all outstanding
commitments and to maintain desired levels of liquidity.

                                       40
<PAGE>   41
At December 31, 1999, capital was in excess of all capital requirements set
forth by regulation for all federally insured savings institutions. Note 16 of
the consolidated financial statements sets forth information with respect to
regulatory capital and the corresponding regulatory capital requirements
applicable to thrift institutions.

FAIR VALUES OF FINANCIAL INSTRUMENTS

Estimated fair values and related carrying values of its financial instruments
at year-end 1999 and 1998 are disclosed in Note 17 of the consolidated financial
statements. The difference between the carrying values and the estimated fair
values of financial instruments is primarily a function of the interest rate
environment and the characteristics of the financial instruments.

The estimated fair value of loans receivable represented 99.1% and 100.8% of the
carrying values at December 31, 1999 and 1998. At December 31, 1999 and 1998,
the estimated fair value of deposits was 99.9% and 100.4% of its carrying value.

YEAR 2000 READINESS DISCLOSURE

Significant time was spent over the last several years on Y2K and all
contingency plans were in place prior to the arrival of January 1, 2000. Extra
cash was on hand for any customer demand, but no extraordinary cash outflows
occurred. Most customers who did withdraw additional sums redeposited the funds
within the first few weeks of January. Selected employees reported to work on
January 1, 2000 to ensure that all computer and other systems were functioning
correctly. The Y2K Customer Information telephone line was updated to reflect
that all systems had successfully made the transition to 2000. All systems had
previously been upgraded or replaced to bring them into Y2K compliance and they
functioned without interruption during and after the change-over. Contingency
plans are in place for all subsequent Y2K dates throughout the year 2000 and
will be used if problems occur. At the present time, there is no reason to
believe that all systems will not continue to operate correctly in relationship
to Y2K.

BAD DEBT RESERVE RECAPTURE

On August 20, 1996, President Clinton signed into law the Small Business Jobs
Protection Act of 1996. The law eliminated the percent-of-taxable-income method
for computing additions to the tax bad debt reserves for all thrifts for tax
years beginning after December 31, 1995. The new rules also require that thrift
institutions recapture over six years all or a portion of their tax bad debt
reserves added since their base year (the last taxable year beginning before
January 1, 1988). This recapture is not material for Potters Bank. A deferred
tax liability has been recognized. As a result, the recapture of the bad debt
reserve will not impact future net income. Prospectively, small institutions
will use the experience method for deducting bad debts for tax purposes.

IMPACT OF INFLATION AND CHANGING PRICES

The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles (GAAP), which require
the measurement of financial position and results of operations primarily in
terms of historical dollars without considering changes in the relative
purchasing power of money over time because of inflation.

Unlike most industrial companies, virtually all assets and liabilities are
monetary in nature. As a result, interest rates have a more significant impact
on performance than the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or in the same magnitude as the
prices of goods and services.

                                       41
<PAGE>   42
ITEM 7.    FINANCIAL STATEMENTS.

<TABLE>
                          POTTERS FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1999 and 1998
                             (Dollars in thousands)

================================================================================

<CAPTION>
                                                         1999           1998
                                                         ----           ----
<S>                                                    <C>            <C>
ASSETS

      Cash and due from financial institutions         $  6,441       $  5,612
      Interest-bearing deposits                             801            792
      Federal funds sold                                     38          5,463
                                                       --------       --------
         Cash and cash equivalents                        7,280         11,867
      Securities available for sale                      22,751         23,714
      Federal Home Loan Bank stock                        1,184            991
      Loans, net                                        108,360         94,911
      Accrued interest receivable                         1,343            769
      Premises and equipment, net                         1,960          1,646
      Other assets                                          858            576
                                                       --------       --------

                                                       $143,736       $134,474
                                                       ========       ========


LIABILITIES AND SHAREHOLDERS' EQUITY

      Deposits                                         $110,335       $104,644
      Federal Home Loan Bank advances                    21,300         17,247
      Accrued expenses and other liabilities              1,081          1,426
                                                       --------       --------

         Total liabilities                              132,716        123,317


      Shareholders' equity
      Common stock, no par value;
        2,000,000 shares authorized;
        1,116,528 shares issued in 1999 and 1998
      Paid-in capital                                     5,429          5,218
      Retained earnings                                   7,945          8,233
      Accumulated other
        comprehensive income                               (540)           (41)
      Unearned compensation on
        recognition and retention plan shares               (60)           (74)
      Treasury stock, at cost:  137,385 shares
        in 1999 and 94,168 in 1998                       (1,754)        (2,179)
                                                       --------       --------

         Total shareholders' equity                      11,020         11,157
                                                       --------       --------

                                                       $143,736       $134,474
                                                       ========       ========
</TABLE>

================================================================================
                            See accompanying notes.

                                       42
<PAGE>   43

<TABLE>
                            POTTERS FINANCIAL CORPORATION
                     For the three years ended December 31, 1999
                    (Dollars in thousands, except per share data)

===================================================================================
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
                                                     1999         1998        1997
                                                     ----         ----        ----
<S>                                                 <C>          <C>         <C>
INTEREST AND DIVIDEND INCOME
      Loans, including fees                         $ 8,537      $7,243      $6,027
      Securities                                      1,460       1,756       2,465
      Federal funds sold and other                      150         263          66
                                                    -------      ------      ------
                                                     10,147       9,262       8,558
INTEREST EXPENSE
      Deposits                                        4,186       4,262       4,172
      Federal Home Loan Bank advances                 1,055         770         499
                                                    -------      ------      ------
                                                      5,241       5,032       4,671
                                                    -------      ------      ------

NET INTEREST INCOME                                   4,906       4,230       3,887

Provision for loan losses                               (75)                   (485)
                                                    -------      ------      ------

NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES                           4,981       4,230       4,372
Gains on sales of loans, securities
 and other assets                                        43         167          33
Noninterest income                                      502         409         348
Noninterest expense                                   3,460       3,098       2,927
                                                    -------      ------      ------

INCOME BEFORE INCOME TAX                              2,066       1,708       1,826

Income tax expense                                      720         596         629
                                                    -------      ------      ------

NET INCOME                                          $ 1,346      $1,112      $1,197
                                                    =======      ======      ======
Earnings per common share
      Basic                                         $  1.39      $ 1.08      $ 1.13
                                                    =======      ======      ======

      Diluted                                       $  1.35      $ 1.04      $ 1.10
                                                    =======      ======      ======

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
                                                      1999        1998        1997
                                                      ----        ----        ----
<S>                                                 <C>          <C>         <C>
NET INCOME                                          $ 1,346      $1,112      $1,197

Other comprehensive income (net of tax):
      Change in unrealized loss on
       securities available for sale
       arising during the period                       (497)        (12)         62
      Transition adjustment from adoption
       of SFAS No. 133                                               18
      Reclassification adjustment for
       accumulated (gains)/losses
       included in net income                            (2)        (30)         15
                                                    -------      ------      ------

      Total other comprehensive income (loss)          (499)        (24)         77
                                                    -------      ------      ------

COMPREHENSIVE INCOME                                $   847      $1,088      $1,274
                                                    =======      ======      ======
===================================================================================
</TABLE>
                               See accompanying notes.


                                       43
<PAGE>   44
<TABLE>
                                           POTTERS FINANCIAL CORPORATION
                            CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                    For the three years ended December 31, 1999
                                   (Dollars in thousands, except per share data)

====================================================================================================================================
<CAPTION>
                                                                                 Accumulated
                                                                                     other       Recognition
                                                            Paid-in    Retained  comprehensive       and         Treasury
                                                            capital    earnings      income     Retention Plan    shares      Total
                                                            -------    --------      ------     --------------    ------      -----
<S>                                                         <C>        <C>          <C>         <C>            <C>          <C>
BALANCE - JANUARY 1, 1997                                    $4,880     $6,326       $ (94)         $(100)     $  (436)     $10,576
Net income                                                               1,197                                                1,197
38,377 common shares issued for stock option exercises          174                                                             174
Purchase of 85,312 treasury shares                                                                                (963)        (963)
Cash dividends declared ($.159 per common share)                          (173)                                                (173)
Recognition and retention plan shares earned                                                           13                        13
Tax benefit arising from stock option
 and recognition and retention plan shares                      105                                                             105
Change in unrealized loss on securities available for sale                                77                                     77
                                                             ------     ------         -----        -----      -------      -------
BALANCE - DECEMBER 31, 1997                                   5,159      7,350           (17)         (87)      (1,399)      11,006
Net income                                                               1,112                                                1,112
5,170 common shares issued for stock option exercises            36                                                              36
Purchase of 44,812 treasury shares                                                                                (780)        (780)
Cash dividends declared ($.219 per common share)                          (229)                                                (229)
Recognition and retention plan shares earned                                                           13                        13
Tax benefit arising from stock option
 and recognition and retention plan shares                       23                                                              23
Change in unrealized loss on securities available for sale                               (24)                                   (24)
                                                             ------     ------         -----        -----      -------      -------
BALANCE - DECEMBER 31, 1998                                   5,218      8,233           (41)         (74)      (2,179)      11,157
Net income                                                               1,346                                                1,346
860 common shares issued from treasury
 for stock option exercises                                      (7)                                                11            4
Purchase of 44,077 treasury shares                                                                                (726)        (726)
Cash dividends declared ($.324 per common share)                          (318)                                                (318)
Stock dividend declared                                         176     (1,316)                                  1,140
Recognition and retention plan shares earned                                                           14                        14
Tax benefit arising from stock option
 and recognition and retention plan shares                       42                                                              42
Change in unrealized loss on securities available for sale                              (499)                                  (499)
                                                             ------     ------         -----        -----      -------      -------
BALANCE - DECEMBER 31, 1999                                  $5,429     $7,945         $(540)       $ (60)     $(1,754)     $11,020
                                                             ======     ======         =====        =====      =======      =======
====================================================================================================================================
</TABLE>

                            See accompanying notes.

                                       44
<PAGE>   45

<TABLE>
                              POTTERS FINANCIAL CORPORATION
                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                        For the three years ended December 31, 1999
                                 (Dollars in thousands)

============================================================================================
<CAPTION>
                                                          1999          1998          1997
                                                          ----          ----          ----
<S>                                                     <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Net income                                        $  1,346      $  1,112      $  1,197
      Adjustments to reconcile net income to net
        cash from operating activities
         Depreciation and amortization                       296           216           211
         Provision for losses                                (75)                       (485)
      Net amortization of securities                          87            64            44
         Net realized (gain) loss on:
             Sales of securities                              (3)          (57)           22
             Sales of loans                                  (40)          (46)           56
             Sales of foreclosed real estate and
               repossessed assets                                            1           (50)
             Sales of other assets                                         (64)         (111)
         Stock dividend on FHLB stock                        (77)          (67)          (60)
         Loans originated for sale                        (5,577)       (6,877)
         Proceeds from sales of loans held for sale        6,359         6,232           560
         Net change in:
             Deferred taxes                                   68            73           263
             Other assets and liabilities                   (991)           57           598
                                                        --------      --------      --------

                Net cash from operating activities         1,393           644         2,245
                                                        --------      --------      --------

CASH FLOWS FROM INVESTING ACTIVITIES

      Activity in available-for-sale securities:
           Sales                                             577         3,422         5,515
           Maturities, repayments and calls                8,101         7,088
           Purchases                                      (8,556)       (7,666)
      Activity in held-to-maturity securities:
         Maturities, repayments and calls                                6,031         4,707
      Purchase of Federal Home Loan Bank stock              (116)          (65)
      Redemption of Federal Home Loan Bank stock                                          23
      Loan originations and payments, net                  3,216         8,718           570
      Loan purchases                                     (17,407)      (20,868)      (20,497)
      Proceeds from sale of foreclosed real estate
        and repossessed assets                                               6            50
      Proceeds from sale of premises                                       100           192
      Additions to property and equipment                   (535)         (133)         (201)
                                                        --------      --------      --------

         Net cash from investing activities              (14,720)       (3,367)       (9,641)
                                                        --------      --------      --------
============================================================================================
</TABLE>

                                  (Continued)

                                       45
<PAGE>   46
<TABLE>
                                        POTTERS FINANCIAL CORPORATION
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                    For the three years ended December 31, 1999
                                          (Dollars in thousands)

================================================================================================
<CAPTION>
                                                               1999          1998          1997
                                                               ----          ----          ----
<S>                                                         <C>           <C>           <C>
CASH FLOWS FROM FINANCING ACTIVITIES

      Net change in deposits                                   5,691         4,550         2,811
      Proceeds from Federal Home Loan Bank advances           15,300        17,300        16,050
      Repayments of Federal Home Loan Bank advances          (11,247)      (10,046)      (11,142)
      Repurchase of common stock                                (726)         (780)         (963)
      Proceeds from exercise of stock options                      4            36           174
      Cash dividends paid                                       (318)         (229)         (173)
      Other financing activities                                  36           (57)         (130)
                                                            --------      --------      --------

         Net cash from financing activities                    8,740        10,774         6,627
                                                            --------      --------      --------

Net change in cash and cash equivalents                       (4,587)        8,051          (769)

Cash and cash equivalents at beginning of year                11,867         3,816         4,585
                                                            --------      --------      --------

CASH AND CASH EQUIVALENTS AT END OF YEAR                    $  7,280      $ 11,867      $  3,816
                                                            ========      ========      ========


Supplemental cash flow information:

      Interest paid                                         $  5,204      $  5,022      $  4,633
      Income taxes paid                                          887           431           125

Supplemental noncash disclosures:

      Transfer from loans to foreclosed real estate and
        repossessed assets                                                $      6
      Transfer from held-to-maturity securities
        to available-for-sale securities                                    22,112
      Recognition and retention plan shares earned          $     14            13      $     13

================================================================================================
</TABLE>
                             See accompanying notes.

                                       46
<PAGE>   47
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

================================================================================

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation: The consolidated financial
statements include Potters Financial Corporation and its wholly-owned
subsidiary, Potters Bank, together referred to as "the Corporation".
Intercompany transactions and balances have been eliminated in consolidation.

The Corporation provides financial products and services through its three
offices in and near East Liverpool, Ohio and its loan production offices in
Boardman and Mentor, Ohio. Primary lending products are residential and
commercial real estate loans, home equity lines of credit, commercial and
consumer loans. Substantially all loans are secured by specific collateral. Real
estate loans are secured by both residential and commercial real estate.
Commercial loans are expected to be repaid from cash flows of the business.
Lending activities are primarily funded by attracting deposits. Primary deposit
products include a variety of checking, savings and certificate of deposit
accounts. The primary source of income is interest on loans and securities.

Business Segments: While the Corporation's chief decision makers monitor the
revenue streams of the various Corporation products and services, operations are
managed and financial performance is evaluated on a company-wide basis.
Accordingly, all banking operations are considered by management to be
aggregated in one reportable operating segment.

Use of Estimates in Preparation of Financial Statements: Management makes
estimates and assumptions in preparing financial statements in conformity with
generally accepted accounting principles. These estimates and assumptions affect
the amount reported in the financial statements and disclosures required, and
future results could differ. The allowance for loan losses, fair values of
certain securities, the determination and carrying value of impaired loans and
the carrying value of loans held for sale are all particularly subject to
change.

Cash Flows: Cash and cash equivalents include cash on hand, interest-bearing
deposits and federal funds sold. Net cash flows are reported for loan and
deposit transactions.

Securities: Securities are classified as held to maturity, trading or available
for sale. Held-to-maturity securities are those that management has the positive
intent and ability to hold to maturity, and are carried at amortized cost.
Available-for-sale securities are those that may be sold before maturity, and
are carried at fair value, with unrealized gains and losses reported in other
comprehensive income. Trading securities are those which are held for short
periods of time and are carried at fair value with unrealized gains and losses
reflected in earnings. No trading securities were held during any period
presented. Federal Home Loan Bank stock is carried at cost. Realized gains or
losses on dispositions are based on net proceeds and the adjusted carrying
amount of securities sold, using the specific identification method. Interest
income on securities includes the amortization and accretion of purchased
premiums and discounts using the level yield method. Securities are written down
to fair value when a decline in value is not temporary.

Loans: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, unearned interest and an allowance for loan losses. Loans
held for sale are carried at the lower of cost or market in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.

Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the life of the loan. Interest is no
longer reported when serious doubt exists as to the repayment of the loan,
typically when a loan is impaired or when the loan becomes 90 days past due.
Payments received on these loans are reported as principal reductions.

================================================================================
                                  (Continued)

                                       47
<PAGE>   48
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

================================================================================

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Loan Losses: An allowance for loan losses is maintained for
probable credit losses. Provisions and recoveries increase the allowance, while
it is decreased by charge-offs. Management maintains the allowance at a level
considered adequate to cover losses that are currently anticipated based on past
loss experience, general economic conditions, risk in the portfolio, information
about specific borrower situations, collateral values, and other factors and
estimates which are subject to change over time. While portions of the allowance
are allocated for specific problem loan situations, the whole allowance is
available for any loan charge-offs that occur. A loan is charged-off against the
allowance when deemed uncollectible, although collection efforts continue and
future recoveries may occur.

A loan is considered impaired when full payment under the loan terms is not
expected. Smaller-balance loans with similar characteristics, such as
residential real estate and consumer loans, are evaluated for impairment in
total. Commercial loans and nonresidential real estate loans are evaluated
individually for impairment. A portion of the allowance for loan losses is
allocated to impaired loans so they are reported at the present value of
expected future cash flows, discounted using the loan's effective interest rate,
or at the fair value of collateral if repayment is expected from the collateral.

Foreclosed Assets: Assets acquired through or instead of foreclosure are
recorded at fair value when acquired, with any reduction in the carrying value
reflected as a charge-off. Any subsequent decline in value is recorded through
expense. Costs after acquisition are expensed.

Premises and Equipment: Land is stated at cost. Buildings, furniture, fixtures
and equipment are stated at cost less accumulated depreciation. Depreciation is
computed based on the straight-line method over the estimated useful lives of
the assets.

Servicing Rights: Mortgage servicing rights are recognized as assets for
purchased rights and for the allocated value of retained servicing rights on
loans sold. Servicing rights are expensed in proportion to, and over the period
of, estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates and then, secondarily, as to geographic and prepayment characteristics.
Any impairment of a grouping is reported as a valuation allowance. No servicing
rights have been retained on any loans sold during the periods presented.

Income Taxes: Income tax expense includes the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax
assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.

Financial Instruments: Financial instruments include credit instruments, such as
commitments to make loans and standby letters of credit, issued to meet customer
financing needs. The face amount for these items represents the exposure to
loss, before considering customer collateral or ability to repay.

An accounting standard, adopted in 1998, requires all derivatives to be recorded
at fair value. Unless designated as hedges, changes in these fair values will be
recorded in the income statement. Fair value changes involving hedges will
generally be recorded by offsetting gains and losses on the hedge and on the
hedged item, even if the fair value of the hedged item is not otherwise
recorded. No derivative financial instruments are currently owned or
contemplated, but the standard was adopted to provide maximum flexibility for
possible future hedging strategies. As part of adoption of this standard, the
Corporation's held-to-maturity securities were transferred to available for sale
so they may be available for

================================================================================
                                  (Continued)

                                       48
<PAGE>   49
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

================================================================================

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

hedging in the future. The amortized cost of held-to-maturity securities as of
July 1, 1998 was $22.1 million, and resulted in an after-tax transition
adjustment to comprehensive income of $18,000 in 1998.

Stock Dividend: A 10% stock dividend was distributed in March 1999. Share data
in the 1998 Annual Report financial statements was adjusted to reflect the stock
dividend, but the actual transaction took place in 1999. Stock dividends are
recorded at the fair market value of the shares issued.

Earnings per Common Share: Basic earnings per share (EPS) is computed by
dividing net income by the weighted average number of common shares outstanding
during the year. Diluted EPS includes the potential dilution resulting from the
issuance of common shares upon stock option exercises. All references to common
shares, earnings and dividends per share reflect all stock dividends and stock
splits. Following is a summary of shares used in computing EPS:

<TABLE>
<CAPTION>
                                                 1999          1998          1997
                                                 ----          ----          ----
                                                     (Dollars in thousands)
<S>                                             <C>         <C>           <C>
Weighted average common shares
 outstanding for basic EPS                      968,324     1,031,170     1,058,860
Add:  Dilutive effects of assumed exercises
 of stock options and recognition and
 retention plan                                  27,369        34,438        27,960
                                                -------     ---------     ---------
Average shares and dilutive potential
 common shares                                  995,693     1,065,608     1,086,820
                                                =======     =========     =========
</TABLE>

Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as a separate
component of equity.

New Accounting Pronouncements: A new accounting standard for 1999 allows
mortgage loans originated and converted into securities to be classified as
available for sale, trading or held to maturity, instead of the previous
requirement to classify as trading. This did not have a material effect because
no such transactions have taken place nor are any currently contemplated.

Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.

Dividend Restrictions: Financial institution regulations require the maintenance
of certain capital levels and may limit the dividends paid by the financial
institution or by the holding company to shareholders.

Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions significantly
affect the estimates.

Financial Statement Presentation: Certain items in the 1997 and 1998 financial
statements have been reclassified to correspond with the 1999 presentation.

================================================================================
                                  (Continued)


                                       49
<PAGE>   50
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

================================================================================

NOTE 2 - SECURITIES

Securities available for sale at year-end were as follows:
<TABLE>
<CAPTION>
                                                Gross      Gross       Estimated
                                   Amortized  Unrealized  Unrealized      Fair
                                      Cost      Gains      Losses         Value
                                      ----      -----      ------         -----
                                               (Dollars in thousands)
<S>                                 <C>             <C>                  <C>
1999
----
       U.S. government and
         federal agencies           $10,496     $          $(578)        $ 9,918
       States and municipalities        158        14                        172
       Other                            342         1                        343
       Agency issued mortgage-
         backed                      12,551        48       (302)         12,297
                                    -------     -----      -----         -------
       Total debt securities         23,547        63       (880)         22,730

        Equity securities                22                   (1)             21
                                    -------     -----      -----         -------

                                    $23,569     $  63      $(881)        $22,751
                                    =======     =====      =====         =======

1998
----
       U.S. government and
         federal agencies           $ 5,999     $   6      $  (8)        $ 5,997
       States and municipalities        166        22         (1)            187
       Other                            463         4                        467
       Agency issued mortgage-
        backed                       17,072        51       (134)         16,989
                                    -------     -----      -----         -------
        Total debt securities        23,700        83       (143)         23,640

        Equity securities                75                   (1)             74
                                    -------     -----      -----         -------

                                    $23,775     $  83      $(144)        $23,714
                                    =======     =====      =====         =======
</TABLE>

Contractual maturities of debt securities available for sale at year-end 1999,
were as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>

                                                        Amortized         Estimated
                                                          Cost           Fair Value
                                                          ----           ----------
                                                         (Dollars in thousands)
<S>                                                      <C>             <C>
Due in one year or less                                  $     3         $     3
Due after one year through five years                      3,149           3,009
Due after five years through ten years                     2,506           2,401
Due after ten years                                        5,338           5,020
Agency issued mortgage-
 backed securities                                        12,551          12,297
                                                         -------         -------

                                                         $23,547         $22,730
                                                         =======         =======
</TABLE>

================================================================================
                                  (Continued)

                                       50
<PAGE>   51
NOTE 2 - SECURITIES (Continued)

Securities totaling $577,000 were sold during 1999, resulting in gross gains of
$4,000 and gross losses of $2,000. Securities totaling $3.0 million were called
during 1999, resulting in a gain of $1,000. Available-for-sale securities
totaling $3.4 million were sold during 1998, resulting in gross gains of
$57,000. Proceeds from sales of securities available for sale during 1997
totaled $5.5 million and resulted in gross gains of $1,000 and gross losses of
$23,000.

As of December 31, 1999 and 1998, securities totaling $11.2 million and $5.1
million, respectively, were pledged to collateralize public funds.

NOTE 3 - LOANS

<TABLE>
<CAPTION>
Loans at year-end were as follows:                      1999             1998
                                                        ----             ----
                                                       (Dollars in thousands)
<S>                                                   <C>              <C>
Real estate mortgage loans
        One-to-four family residences                 $ 70,732         $76,543
        Loans held for sale                                 55             797
        Nonresidential property                         14,257           8,350
        Multifamily and other                            3,055           2,010
                                                      --------         -------
                                                        88,099          87,700
Consumer and other loans
        Home equity loans (1)                           13,301           5,746
        Purchased second mortgages                       5,715
        Secured, unsecured consumer
         loans and lines of credit                       2,309           2,102
        Commercial business loans                          472             654
        Other                                            1,716           1,726
                                                      --------         -------
                                                        23,513          10,228
                                                      --------         -------

        Total loan principal balances                  111,612          97,928
        Undisbursed loan funds                          (1,848)         (1,167)
        Premiums on purchased loans,
        unearned interest and net
        deferred loan (fees) costs                         633             361
        Allowance for loan losses                       (2,037)         (2,211)
                                                      --------         -------

                                                      $108,360         $94,911
                                                      ========         =======
</TABLE>

----------
(1) December 31, 1999 total includes $6.8 million of first mortgage home equity
loans from various parts of the country purchased from a bank in Indiana.

Activity in the allowance for loan losses for the year was as follows:

<TABLE>
<CAPTION>
                                         1999            1998            1997
                                         ----            ----            ----
                                                (Dollars in thousands)
<S>                                     <C>             <C>             <C>
Beginning balance                       $2,211          $2,143          $2,630
Provision for loan losses                  (75)                           (485)
Recoveries                                  26             127              74
Charge-offs                               (125)            (59)            (76)
                                        ------          ------          ------

Ending balance                          $2,037          $2,211          $2,143
                                        ======          ======          ======
</TABLE>

================================================================================
                                  (Continued)


                                       51
<PAGE>   52
NOTE 3 - LOANS (Continued)

Nonaccrual and renegotiated loans totaled $316,000 and $224,000 at December 31,
1999 and 1998. Interest income that would have been recorded on such loans under
their original terms totaled approximately $30,000 and $17,000 for the years
ended December 31, 1999 and 1998. The amounts included in interest income for
such loans totaled approximately $15,000 during 1999 and $10,000 during 1998.
Potters Bank is not committed to lend additional funds to debtors whose loans
have been modified. Impaired loans were not material at any date or during any
period presented.

NOTE 4 - ACCRUED INTEREST RECEIVABLE

Accrued interest receivable at year-end was as follows:

<TABLE>
<CAPTION>
                                                           1999             1998
                                                           ----             ----
                                                          (Dollars in thousands)
<S>                                                       <C>               <C>
Loans                                                     $1,060            $559
Securities                                                   207             104
Mortgage-backed securities                                    76             106
                                                          ------            ----

                                                          $1,343            $769
                                                          ======            ====
</TABLE>

NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment at year-end was as follows:

<TABLE>
<CAPTION>
                                                          1999             1998
                                                          ----             ----
                                                         (Dollars in thousands)
<S>                                                      <C>              <C>
Land                                                     $  142           $  142
Buildings and improvements                                2,593            2,267
Furniture and equipment                                   1,289            1,094
                                                         ------           ------
                                                          4,024            3,503
Less: Accumulated depreciation                            2,064            1,857
                                                         ------           ------

                                                         $1,960           $1,646
                                                         ======           ======
</TABLE>

NOTE 6 - DEPOSITS

Deposits at year-end were as follows:

<TABLE>
<CAPTION>
                                                         1999                   1998
                                                         ----                   ----
                                                  Amount     Percent     Amount     Percent
                                                  ------     -------     ------     -------
                                                           (Dollars in thousands)
<S>                                              <C>         <C>       <C>         <C>
Demand, NOW, and Super NOW accounts
  (Noninterest bearing deposits:  1999 -
  $1,899,000;  1998 - $1,974,000)                $ 16,578      15.0%   $ 15,843      15.1%
Savings and club accounts                          37,221      33.7      37,674      36.0
Money market demand accounts                        1,438       1.3       1,835       1.8
Certificates of deposit                            55,098      50.0      49,292      47.1
                                                 --------     -----    --------     -----

                                                 $110,335     100.0%   $104,644     100.0%
                                                 ========     =====    ========     =====
</TABLE>

================================================================================
                                  (Continued)

                                       52
<PAGE>   53
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

================================================================================

NOTE 6 - DEPOSITS (Continued)

Certificates of deposit with a minimum denomination of $100,000 were
approximately $10,456,000 and $8,588,000 at year-end 1999 and 1998.

Scheduled maturities of certificates of deposit for the next five years were as
follows:

<TABLE>
<CAPTION>
                                            Maturities
                                            ----------
                                       (Dollars in thousands)
<S>                                           <C>
                    2000                      $34,510
                    2001                       12,662
                    2002                        4,447
                    2003                          958
                    2004 and thereafter         2,521
                                              -------

                                              $55,098
                                              =======
</TABLE>

NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES

Federal Home Loan Bank (FHLB) advances at year-end were as follows:

<TABLE>
<CAPTION>
                                                             1999         1998
                                                             ----         ----
                                                           (Dollars in thousands)
<S>                                                         <C>         <C>
Maturities February 1999 through September 2008,
 fixed rate, from 4.66% to 6.50%, averaging 5.44%                       $17,247

Maturities March 2000 through December 2009, primarily
 fixed rate, from 4.75% to 6.50%, averaging 5.43%           $21,300
                                                            -------     -------

                                                            $21,300     $17,247
                                                            =======     =======
</TABLE>

FHLB advances are payable at maturity, or prior to maturity with prepayment
penalties. At year-end 1999, advances totaling $11,500,000 were convertible
fixed-rate advances which, at the FHLB's option, can be converted to the London
Interbank Offering Rate, on a quarterly basis after the first year for
$7,500,000 of the advances, and after the first six months for a $4,000,000
advance. If the FHLB exercises its option, the advances may be repaid in whole
or in part on any of the quarterly repricing dates without prepayment penalty.
Advances are collateralized by all shares of FHLB stock and by 100% of the
qualified real estate loan portfolio.

Scheduled maturities of advances for the next five years were as follows:

<TABLE>
<CAPTION>
                                                Maturities
                                                ----------
                                           (Dollars in thousands)
<S>                                             <C>
                       2000                      $ 3,800
                       2001                        2,000
                       2002                        4,000
                       2003
                       2004
                       2005 and thereafter        11,500
                                                 -------

                                                 $21,300
                                                 =======
</TABLE>

================================================================================
                                  (Continued)

                                       53
<PAGE>   54
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

================================================================================

NOTE 8 - EMPLOYEE BENEFITS PLANS

A 401(k) plan allows employee contributions up to 15% of each participant's
compensation, with a match equal to 50% of the first 6% of the compensation
contributed. Participants may also receive discretionary and profit sharing
contributions. Expense was $60,000 in 1999, $56,000 in 1998 and $62,000 in 1997.
PFC common shares are available as an investing option to all participants of
the plan. The 401(k) plan purchased 2,487 common shares for participants during
1999, 6,875 shares during 1998 and 1,410 shares during 1997.

A Recognition and Retention Plan provides for the award of shares to directors
and certain key employees. Compensation expense is recognized over a five-year
vesting period. Of the 34,914 shares available to be awarded under the plan,
43,965 shares have been awarded and 10,032 shares forfeited upon the termination
of employment by participants. During 1999, 2,970 shares were earned of the
15,950 shares awarded during 1998. At December 31, 1999, 981 shares were
available to be awarded. Compensation expense totaled $56,000, $6,000 and $2,000
for 1999, 1998 and 1997. Unearned compensation is reported as a reduction of
shareholders' equity until earned.

Vested plan benefits of a defined benefit plan, which was terminated in 1996,
were settled during 1998. Participants were given a choice to receive a lump sum
payment, purchase a nontransferable deferred annuity contract, transfer to the
401(k) plan discussed above or transfer to other individual retirement account
options. No gain or loss was recorded on the settlement of the pension plan.

NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN

Employees participate in an Employee Stock Ownership Plan (ESOP). ESOP expense
consists of discretionary and profit sharing contributions made to the ESOP
during the year. ESOP shares are included in weighted average shares outstanding
for purposes of calculating earnings per common share. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings and increase
participant accounts. Upon termination of employment, each participant may
choose to receive distributions in shares or cash.

ESOP contribution and expense totaled $66,000, $61,000 and $45,000 for 1999,
1998 and 1997. At year-end 1999, 13,943 shares of PFC common stock were owned by
the ESOP, of which 12,328 shares were allocated to employee accounts and 1,615
shares were purchased in 1999 and will be allocated to participants in future
periods based on plan criteria. At year-end 1998, the ESOP owned 12,328 shares
of PFC common stock, of which 10,245 shares were allocated to employee accounts
and 2,083 shares were allocated to plan participants in 1999. At year-end 1999,
the estimated fair value of shares subject to the cash distribution option,
based on the last sales price quoted in 1999 on the Nasdaq SmallCap Market,
totaled $166,000.

NOTE 10 - STOCK OPTION PLANS

Options to buy stock are granted to directors, officers and other key employees
under the Stock Option Plans. In addition to the outstanding stock options
summarized below, 23,794 shares were available to be granted as of December 31,
1999. The exercise price is the market price at the date of grant. All options
have a term of 10 years and are immediately exercisable.

================================================================================
                                  (Continued)


                                       54
<PAGE>   55
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

================================================================================

NOTE 10 - STOCK OPTION PLANS (Continued)

A summary of activity in the plan was as follows:

<TABLE>
<CAPTION>
                                       1999                    1998                    1997
                                       ----                    ----                    ----
                                           Weighted                 Weighted               Weighted
                                            Average                  Average                Average
                                           Exercise                 Exercise               Exercise
                                 Shares      Price       Shares       Price      Shares      Price
                                 ------      -----       ------       -----      ------      -----
<S>                              <C>         <C>         <C>         <C>         <C>        <C>
Outstanding - beginning
 of year                         51,907      $ 5.46      57,077      $ 5.60      94,354     $ 5.05
Granted                          30,000       13.06                               2,200      15.45
Forfeited                                                                        (1,100)      9.09
Exercised                          (880)       4.55      (5,170)       7.02     (38,377)      4.55
                                 ------                  ------                  ------

Outstanding - year-end           81,027        8.28      51,907        5.46      57,077       5.60
                                 ======                  ======                  ======
Weighted average fair value
 of options granted during
 the year                                     $3.68                                         $ 4.78
</TABLE>

Options outstanding at year-end 1999 were as follows:

<TABLE>
<CAPTION>
                                                     Weighted
                                                     Remaining
                                                    Contractual
Range of exercise price               Number           Life
<S>                                   <C>            <C>
$5-$10                                49,927         4.4 yrs
$11-$20                               31,100         9.4
                                      ------

Outstanding and exercisable
 at year-end                          81,027         6.3 yrs
                                      ======
</TABLE>

Financial Accounting Standards Board (FASB) Statement No. 123 allows adhering to
prior accounting guidance, under which no compensation expense is recognized
because the exercise price of employee stock options equals the market price on
the date of grant.

Had compensation cost for stock options been measured using FASB Statement No.
123, net income and earnings per share would have been the pro forma amounts
indicated below. The pro forma effect may increase in the future if more options
are granted.

<TABLE>
<CAPTION>
                                            1999          1998          1997
                                            ----          ----          ----
                                      (Dollars in thousands, except per share data)
<S>                                        <C>           <C>           <C>
Net income as reported                     $1,346        $1,112        $1,197
Pro forma net income                        1,273         1,112         1,190

Basic earnings per share as reported       $ 1.39        $ 1.08        $ 1.13
Pro forma basic earnings per share           1.31        $ 1.08        $ 1.13

Diluted earnings per share as reported     $ 1.35        $ 1.04        $ 1.10
Pro forma diluted earnings per share         1.28          1.04          1.10
</TABLE>

================================================================================
                                  (Continued)


                                       55
<PAGE>   56
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

================================================================================

NOTE 10 - STOCK OPTION PLANS (Continued)

The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date. No options were granted
during 1998.

<TABLE>
<CAPTION>
                                            1999                       1997
                                            ----                       ----
<S>                                         <C>                        <C>
Risk free interest rate                     5.70%                      5.70%
Expected option life                        6 yrs                      6 yrs
Expected stock price volatility            28.04%                     22.85%
Dividend yield                              1.24%                      1.24%
</TABLE>

NOTE 11 - INCOME TAXES

Income tax expense was as follows:

<TABLE>
<CAPTION>
                                          1999             1998             1997
                                          ----             ----             ----
                                                  (Dollars in thousands)
<S>                                       <C>              <C>              <C>
Current                                   $652             $523             $366
Deferred                                    68               73              263
                                          ----             ----             ----

                                          $720             $596             $629
                                          ====             ====             ====
</TABLE>

Deferred tax assets and liabilities at year-end were due to the following:

<TABLE>
<CAPTION>
                                                               1999        1998
                                                               ----        ----
                                                             (Dollars in thousands)
<S>                                                           <C>         <C>
Deferred tax assets:
  Allowance for loan losses                                   $ 588       $ 608
  Depreciation                                                   13          11
  Capital loss carryforward                                                  20
  Unrealized loss on securities available for sale              278          21
  Other                                                          11           8
                                                              -----       -----
                                                                890         668
                                                              -----       -----

Deferred tax liabilities:
  FHLB stock dividends                                         (216)       (190)
  Other                                                         (27)        (20)
                                                              -----       -----
                                                               (243)       (210)
                                                              -----       -----

Net deferred tax asset                                        $ 647       $ 458
                                                              =====       =====
</TABLE>

Taxes paid in the current and prior years were adequate to warrant recording the
full deferred tax asset without a valuation allowance.

Federal income tax laws permitted additional bad debt deductions through 1987,
totaling $2,480,000. Accounting standards do not require a deferred tax
liability to be recorded on this amount, which would otherwise be $843,000 at
December 31, 1999. If Potters Bank were liquidated or otherwise ceased to exist,
or if tax laws changed, this amount would be expensed. Under 1996 tax law
changes, bad debts are based on actual loss experience and tax bad debt reserves
accumulated since 1987 are to be reduced. This requires payment of approximately
$32,000 over six years beginning in 1998.

================================================================================
                                  (Continued)


                                       56
<PAGE>   57
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

================================================================================

NOTE 11 - INCOME TAXES (Continued)

Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:

<TABLE>
<CAPTION>
                                            1999           1998           1997
                                            ----           ----           ----
                                                  (Dollars in thousands)
<S>                                         <C>            <C>            <C>
Federal statutory rate
 times financial income                     $703           $581           $621
Effect of:
   Tax exempt income                          (4)            (4)            (4)
   Other                                      21             19             12
                                            ----           ----           ----

   Total                                    $720           $596           $629
                                            ====           ====           ====
</TABLE>

NOTE 12 - RELATED PARTY TRANSACTIONS

Loans to principal officers, directors and their affiliates in 1999 were as
follows:

<TABLE>
<CAPTION>
                                                                 (Dollars in thousands)
<S>                                                                     <C>
Balance at beginning of year                                            $1,299
New loans and advances                                                      30
Repayments                                                                (175)
                                                                        ------
Balance at end of year                                                  $1,154
                                                                        ======
</TABLE>

Deposits from principal officers, directors and their affiliates at year-end
1999 and 1998 were $379,000 and $305,000.

NOTE 13 - COMMITMENTS

Lease Commitments: At year-end 1999, an obligation to a corporation owned by a
former director under an operating lease for land resulted in annual net rent
expense of $34,000 in 1999, 1998 and 1997. The lease term ends on January 31,
2008, with options for renewal for up to five successive five-year periods
beyond that date.

Loan Commitments: Some financial instruments, such as loan commitments, credit
lines, letters of credit and overdraft protection are issued to meet customer
financing needs. These are agreements to provide credit or to support the credit
of others, as long as conditions established in the contract are met, and
usually have expiration dates. Commitments may expire without being used.
Off-balance sheet risk of credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies used to make commitments are also used for loans, including obtaining
collateral at exercise of the commitment.

================================================================================
                                  (Continued)


                                       57
<PAGE>   58
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

================================================================================

NOTE 13 - COMMITMENTS (Continued)

Financial instruments with off-balance sheet risk at year-end were as follows:

<TABLE>
<CAPTION>
                                                 1999                1998
                                                 ----                ----
                                                  (Dollars in thousands)
                                          Fixed      Variable    Fixed   Variable
                                           Rate        Rate       Rate    Rate
                                           ----        ----       ----    ----
<S>                                       <C>         <C>         <C>    <C>
Commitments to make loans
 (at market rates)                        $   49      $  874      $844   $   695
Unused lines of credit and
 letters of credit                                     6,157              5,745
</TABLE>

Commitments to make loans are generally made for periods of 60 days or less. The
fixed-rate loan commitment at December 31, 1999 had an interest rate of 8.0%,
with a maturity of 30 years. Variable-rate commitments to make loans had a range
of interest rates from 7.375% to 9.875%.

Cash Reserve Requirements: The Company is required to keep approximately
$472,000 of cash on hand or on deposit with the Federal Reserve Bank to meet
regulatory reserve requirements at December 31, 1999. Such balances do not earn
interest.

NOTE 14 - NONINTEREST INCOME AND EXPENSE

Noninterest income and expense amounts at year-end included the following:

<TABLE>
<CAPTION>
                                                   1999        1998        1997
                                                   ----        ----        ----
                                                      (Dollars in thousands)
<S>                                               <C>         <C>         <C>
Noninterest income
         Service charges                          $  232      $  219      $  188
         Other                                       270         190         160
                                                  ------      ------      ------
             Total                                $  502      $  409      $  348
                                                  ======      ======      ======

Noninterest expense
         Salaries and employee benefits           $1,638      $1,431      $1,342
         Occupancy and equipment                     440         384         378
         Federal deposit insurance                    61          61          63
         Data processing                             205         184         159
         Professional services                       188         155         251
         Other                                       928         883         734
                                                  ------      ------      ------
             Total                                $3,460      $3,098      $2,927
                                                  ======      ======      ======
</TABLE>

================================================================================
                                  (Continued)


                                       58
<PAGE>   59
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

================================================================================

NOTE 15 - CONCENTRATIONS OF CREDIT RISK

Most current business activities are with customers located within the immediate
lending area which includes portions of Columbiana and Jefferson Counties in
northeastern Ohio and northern Hancock County in West Virginia. The Boardman
loan production office focuses on originating loans in Mahoning and Trumball
Counties in northeastern Ohio and Beaver and Allegheny Counties in northwestern
Pennsylvania, while the Mentor loan production office focuses its originations
in Geauga and Lake Counties in northeastern Ohio. At December 31, 1999, the loan
portfolio included approximately $24.3 million of purchased one-to-four family
real estate loans, $13.4 million on properties located in northwestern Ohio,
$3.3 million on properties in southwestern Ohio, $7.4 million on properties in
Hilton Head, South Carolina and $200,000 locally. As of December 31, 1999,
multifamily and nonresidential real estate loan purchases totaling $1.1 million
were secured by properties located in northwest Ohio, $1.9 million in southwest
Ohio and $872,000 in the State of Colorado. The loan portfolio also included
$6.8 million of first mortgage home equity loans and $5.7 million of second
mortgage loans from various parts of the country, purchased from a bank in
Indiana.

Two nonconforming real estate loan programs, which charge a slightly higher
interest rate on single family residential mortgage loans, are available to
borrowers who are considered slightly higher credit risks. Such loans totaled
$6.8 million at December 31, 1999, $681,000 of which were purchased loans from
southwestern Ohio also reported above.

NOTE 16 - REGULATORY MATTERS

Potters Bank is subject to regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators. Failure to meet various capital requirements can
initiate regulatory action.

Prompt corrective action regulations provide five classifications:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.

================================================================================
                                  (Continued)

                                       59
<PAGE>   60
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

================================================================================

NOTE 16 - REGULATORY MATTERS (Continued)

Actual and required capital amounts and ratios are presented below at year-end.

<TABLE>
<CAPTION>
                                                                             Minimum Required
                                                     Minimum Required     to be Well-Capitalized
                                                        For Capital      Under Prompt Corrective
                                   Actual            Adequacy Purposes     Action Regulations
                                   ------            -----------------     ------------------
                            Amount         Ratio   Amount         Ratio   Amount         Ratio
                            ------         -----   ------         -----   ------         -----
                                                   (Dollars in thousands)
1999
------
<S>                        <C>             <C>     <C>             <C>    <C>            <C>
Total capital to risk-
 weighted assets           $11,965         13.6%   $7,029          8.0%   $8,786         10.0%
Core capital to risk-
 weighted assets            10,854         12.3     3,517          4.0     5,276          6.0
Core capital to
 adjusted total assets      10,854          7.6     4,307          3.0     7,178          5.0
Tangible capital to
 adjusted total assets      10,854          7.6     2,153          1.5       N/A

1998
------
Total capital to risk-
 weighted assets           $11,013         15.9%   $5,548          8.0%   $6,936         10.0%
Core capital to risk-
 weighted assets            10,129         14.6     2,774          4.0     4,162          6.0
Core capital to
 adjusted total assets      10,129          7.6     4,004          3.0     6,674          5.0
Tangible capital to
 adjusted total assets      10,129          7.6     2,002          1.5       N/A
</TABLE>

OTS regulations limit capital distributions by savings associations such as
Potters Bank. Generally, capital distributions are limited to the current year
to date undistributed net income and prior two years' undistributed net income,
as long as the institution remains well-capitalized after the proposed
distribution. At year-end 1999, approximately $1.1 million was available for
Potters Bank to pay dividends to the holding company. Potters Bank is considered
well-capitalized.

The Qualified Thrift Lender test requires at least 65% of assets be maintained
in housing-related finance and other specified areas. If this test is not met,
limits are placed on growth, branching, new investments, FHLB advances and
dividends, or Potters Bank must convert to a commercial bank charter. Management
believes that this test is met.

Upon Potters Bank's conversion from a mutual thrift to a stock thrift, a
liquidation account of $4,748,000 was established, which was equal to the net
worth of Potters Bank reported in the conversion prospectus. Eligible depositors
who have maintained their accounts, less annual reductions to the extent they
have reduced their deposits, would receive a distribution from this account in
the event of a liquidation of Potters Bank. Dividends may not reduce
shareholders' equity below the required liquidation account balance.

================================================================================
                                  (Continued)

                                       60
<PAGE>   61
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

================================================================================

NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS

Year-end carrying values and estimated fair values of financial instruments were
as follows:

<TABLE>
<CAPTION>
                                         December 31, 1999           December 31, 1998
                                         -----------------           -----------------
                                     Carrying       Estimated     Carrying       Estimated
                                      Value        Fair Value       Value        Fair Value
                                      -----        ----------       -----        ----------
Financial assets:                                  (Dollars in thousands)
----------------
<S>                                 <C>            <C>            <C>            <C>
Cash and cash equivalents           $   7,280      $   7,280      $  11,867      $  11,867
Securities available for sale          22,751         22,751         23,714         23,714
Loans, net                            108,360        107,375         94,911         95,695
Federal Home Loan Bank stock            1,184          1,184            991            991
Accrued interest receivable             1,343          1,343            769            769
                                    ---------      ---------      ---------      ---------

    Total financial assets          $ 140,918      $ 139,933      $ 132,252      $ 133,036
                                    =========      =========      =========      =========

Financial liabilities:
---------------------
Deposits                            $(110,335)     $(110,249)     $(104,644)     $(105,113)
Federal Home Loan Bank advances       (21,300)       (22,122)       (17,247)       (17,956)
Accrued interest payable                 (136)          (136)           (99)           (99)
                                    ---------      ---------      ---------      ---------

    Total financial liabilities     $(131,771)     $(132,507)     $(121,990)     $(123,168)
                                    =========      =========      =========      =========
</TABLE>

The methods and assumptions used to estimate fair value are described as
follows:

Carrying values are the estimated fair value for cash and cash equivalents,
Federal Home Loan Bank stock, accrued interest receivable and payable, demand
deposits and variable-rate loans or deposits that reprice frequently and fully.

Security fair values are based on market prices or dealer quotes, and if no such
information is available, on the rate and term of the security and information
about the issuer.

For fixed-rate loans or deposits and for variable-rate loans or deposits with
infrequent repricing or repricing limits, fair value is based on discounted cash
flows using current market rates applied to the estimated life and credit risk.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values. Fair value of loans held for sale is based on
market quotes. Fair value of debt is based on current rates for similar
financing. The fair value of unrecorded commitments was not material at year-end
1999 or 1998.

While the estimates used in determining the fair value of financial assets and
liabilities are based on management's judgment of the appropriate valuation
factors, there is no assurance that, were liquidation to occur, the estimated
fair values would necessarily be realized. The estimated fair values should not
be considered to apply at subsequent dates. Other assets and liabilities that
are not defined as financial instruments are not included in the above
disclosures. Such assets and liabilities would include, among others, property
and equipment, financing leases and the intangible value of the customer base
and profit potential.

================================================================================
                                  (Continued)


                                       61
<PAGE>   62
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

================================================================================

NOTE 18 - CONDENSED PARENT-ONLY FINANCIAL STATEMENTS

Condensed financial information of Potters Financial Corporation follows:

<TABLE>

CONDENSED BALANCE SHEETS

<CAPTION>
December 31:                                                  1999         1998
                                                              ----         ----
                                                            (Dollars in thousands)
<S>                                                          <C>         <C>
ASSETS

    Cash and cash equivalents                                $   625     $   896
    Interest-bearing deposits                                     27          78
    Equity securities available for sale                          21          74
    Investment in subsidiary                                  10,314      10,088
    Other assets                                                  49          21
                                                             -------     -------

         Total assets                                        $11,036     $11,157
                                                             =======     =======

LIABILITIES AND EQUITY

    Other liabilities                                        $    16
    Shareholders' equity                                      11,020     $11,157
                                                             -------     -------

         Total liabilities and shareholders' equity          $11,036     $11,157
                                                             =======     =======
</TABLE>

<TABLE>
CONDENSED STATEMENTS OF INCOME

<CAPTION>
Year ended December 31:                      1999          1998          1997
                                             ----          ----          ----
                                                 (Dollars in thousands)
<S>                                         <C>           <C>           <C>
INCOME
Dividends from subsidiary                   $  708        $  833        $1,168
Interest income                                  5             5            32
Net gain on sales of securities                  4
Expense                                         58           120            82
                                            ------        ------        ------

INCOME BEFORE INCOME TAXES AND
  UNDISTRIBUTED SUBSIDIARY INCOME              659           718         1,118

Income tax benefit                             (18)          (23)          (15)
Equity in undistributed
 subsidiary income                             669           371            64
                                            ------        ------        ------

NET INCOME                                  $1,346        $1,112        $1,197
                                            ======        ======        ======
</TABLE>

================================================================================
                                  (Continued)

                                       62
<PAGE>   63
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

================================================================================

NOTE 18 - CONDENSED PARENT-ONLY FINANCIAL STATEMENTS (Continued)

<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
Year ended December 31:
                                                           1999        1998         1997
                                                           ----        ----         ----
                                                              (Dollars in thousands)
<S>                                                      <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                           $ 1,346      $1,112       $1,197
    Adjustments:
       Equity in undistributed subsidiary income            (669)       (371)         (64)
       Net realized gain on sales of securities               (4)
       Change in other assets and other liabilities          (12)        (53)          97
                                                         -------      ------       ------
       Net cash from operating activities                    661         688        1,230
CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of securities available for sale                            (75)
    Sale of equity securities available for sale              57
    Loans to subsidiary, net of principal repayments                   1,270         (270)
                                                         -------      ------       ------
      Net cash from investing activities                      57       1,195         (270)

CASH FLOWS FROM FINANCING ACTIVITIES
    Purchase of common stock                                (726)       (780)        (963)
    Proceeds from exercise of stock options                    4          36          174
    Dividends paid                                          (318)       (229)        (173)
                                                         -------      ------       ------
      Net cash from financing activities                  (1,040)       (973)        (962)
                                                         -------      ------       ------

Net change in cash and cash equivalents                     (322)        910           (2)

Beginning cash and cash equivalents                          974          64           66
                                                         -------      ------       ------

ENDING CASH AND CASH EQUIVALENTS                         $   652      $  974       $   64
                                                         =======      ======       ======
</TABLE>

================================================================================

                                       63
<PAGE>   64
                         REPORT OF INDEPENDENT AUDITORS



Shareholders and Board of Directors
Potters Financial Corporation
East Liverpool, Ohio


We have audited the accompanying consolidated balance sheets of Potters
Financial Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Potters
Financial Corporation as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.




                                                   Crowe, Chizek and Company LLP

Columbus, Ohio
February 3, 2000


                                       64
<PAGE>   65

ITEM 8.    CHANGE IN ACCOUNTANTS.

No changes or disagreements with the independent accountants have occurred.

                                    PART III

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

The information contained in the Proxy Statement under the captions "PROPOSAL
ONE - ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS" is incorporated herein by
reference.

ITEM 10.   EXECUTIVE COMPENSATION.

The information contained in the Proxy Statement under the caption "COMPENSATION
OF DIRECTORS AND EXECUTIVE OFFICERS" is incorporated herein by reference.

ITEM 11.   OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information contained in the Proxy Statement under the caption "VOTING
SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is
incorporated herein by reference.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Not Applicable.

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

           (a)    Exhibits

                  Item 3.        Amended Articles of Incorporation and Code of
                                 Regulations

                  Item 10.1      The Potters Savings and Loan Company Stock
                                 Option Plan

                  Item 10.2      The Potters Savings and Loan Company
                                 Recognition and Retention Plan and Trust
                                 Agreement

                  Item 10.3      Deferred Compensation Agreement with Alwyn C.
                                 Purinton, Jr.

                  Item 10.4      Lease dated February 1, 1983, by and between
                                 Billingsley, Incorporated and The Potters
                                 Savings and Loan Company

                  Item 10.5      Employment Contract with Edward L. Baumgardner

                  Item 10.6      Employment Contract with Albert E. Sampson

                  Item 10.7      Employment Contract with Anne S. Myers

                                       65
<PAGE>   66
                  Item 10.8      Potters Financial Corporation 1998 Stock Option
                                 and Incentive Plan

                  Item 11.       Statement re: computation of per share earnings

                  Item 20.       Proxy Statement for the 2000 Annual Meeting of
                                 Shareholders

                  Item 21.       Subsidiaries of Registrant

                  Item 23.       Consent of Independent Accountants

                  Item 27.       Financial Data Schedule

                  Item 99.       Safe Harbor Under the Private Securities
                                 Litigation Reform Act of 1995

           (b)    No current report on Form 8-K was filed by PFC during the
                  fourth quarter of 1999.

                                       66
<PAGE>   67
                                   SIGNATURES


         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                          Potters Financial Corporation



                                          By /s/  Edward L. Baumgardner
                                             -----------------------------------
                                              Edward L. Baumgardner
                                              President, Chief Executive Officer
                                              and Director

         In accordance with the Exchange Act, 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/  Arthur T. Doak                By /s/  Suzanne B. Fitzgerald
     ----------------------------          -------------------------------------
     Arthur T. Doak                         Suzanne B. Fitzgerald
     Director                               Director

Date:  March 10, 2000                   Date:  March 10, 2000


By   /s/  William L. Miller             By /s/  Timothy M. O'Hara
     ----------------------------          -------------------------------------
     William L. Miller                      Timothy M. O'Hara
     Chairman of the Board                  Director

Date:  March 10, 2000                   Date:  March 10, 2000


By   /s/  James R. Platte               By /s/  Peter D. Visnic
     ---------------------------           -------------------------------------
     James R. Platte                        Peter D. Visnic
     Director                               Director

Date:  March 10, 2000                   Date:  March 10, 2000


By /s/  Anne S. Myers
   -----------------------------
     Anne S. Myers
     Senior Vice President, Secretary,
     Chief Operating/Financial  Officer

Date:  March 10, 2000


                                       67
<PAGE>   68
<TABLE>
                                INDEX TO EXHIBITS
<CAPTION>
   EXHIBIT
   NUMBER  DESCRIPTION                                                          PAGE NUMBER
   ------  -----------                                                          -----------

<S>        <C>                                                           <C>
     3.1   Articles of Incorporation of Potters Financial                Incorporated by reference to the
           Corporation                                                   Form 8-A filed with the Securities
                                                                         and Exchange Commission (the
                                                                         SEC) on March 4, 1996 (the 8-A).

     3.2   Code of Regulations of Potters Financial Corporation          Incorporated by reference to the 8-A.

    10.1   The Potters Savings and Loan Company                          Incorporated by reference to the
           Stock Option Plan                                             Annual Report on Form 10-KSB for
                                                                         the fiscal year ended December 31, 1995
                                                                         (the 1995 10-KSB), Exhibit 10.1.


    10.2   The Potters Savings and Loan Company                          Incorporated by reference to the
           Recognition and Retention Plan and                            1995 10-KSB, Exhibit 10.2.
           Trust Agreement

    10.3   Deferred Compensation Agreement dated                         Incorporated by reference to the
           November 1, 1972, by and between The                          1995 10-KSB, Exhibit 10.3.
           Potters Savings and Loan Company and
           Alwyn C. Purinton, Jr.

    10.4   Lease dated February 1, 1983, by and                          Incorporated by reference to the
           between Billingsley, Incorporated and The                     1995 10-KSB, Exhibit 10.5.
           Potters Savings and Loan Company

    10.5   Employment Contract with Edward L. Baumgardner                Incorporated by reference to the
                                                                         Annual Report on Form 10-KSB
                                                                         for the fiscal year ended December
                                                                         31, 1996 (the 1996 10-KSB),
                                                                         Exhibit 10.5.

    10.6   Employment Contract with Albert E. Sampson                    Incorporated by reference to the
                                                                         1996 10-KSB, Exhibit 10.6.

    10.7   Employment Contract with Anne S. Myers                        Incorporated by reference to the
                                                                         Quarterly Report on Form 10-QSB
                                                                         for the quarter ended June 30, 1997,
                                                                         Exhibit 10.

    10.8   Potters Financial Corporation 1998 Stock                      Incorporated by reference to the
           Option and Incentive Plan                                     definitive Proxy Statement for the
                                                                         1998 Annual Meeting of
                                                                         Shareholders.

    11     Statement re:  computation of earnings per share              See Note 1 to the consolidated
                                                                         financial statements included
                                                                         herewith.
</TABLE>

                                       68
<PAGE>   69
<TABLE>
<S>        <C>                                                           <C>
    20     Proxy Statement for the 2000 Annual                           Incorporated by reference to the
           Meeting of Shareholders                                       definitive Proxy Statement for the
                                                                         2000 Annual Meeting of Shareholders
                                                                         to be filed.

    21     Subsidiaries of Registrant                                    Incorporated by reference to
                                                                         the 1995 10-KSB, Exhibit 21.

    23     Consent of Independent Accountants                            Included herewith.

    27     Financial Data Schedule                                       Included herewith.

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

                                       69