<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, 2000
                          -----------------

  [   ]      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, 2000,
totaled $11,953,000.

                  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 9, 2001, was $10,426,882.

                       As of March 9, 2001, 997,989 of the
               issuer's common shares were issued and outstanding.



<PAGE>   2


                       DOCUMENTS INCORPORATED BY REFERENCE


         The following sections of the definitive Proxy Statement for the 2001
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;

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

5.   CERTAIN TRANSACTIONS


                                     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 a loan production office in Boardman, 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 is 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, and commercial and consumer loans. Substantially all
loans are secured by specific collateral. In addition to loans, funds are
invested in securities, a portfolio of which is maintained for liquidity
management purposes. Lending activities are primarily funded through deposits.
Primary deposit products include a variety of checking, savings and certificate
of deposit accounts. See "Lending Activities". At December 31, 2000, Potters
Bank employed a total of 59 individuals and had 46 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 in this Form 10-KSB 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, Potters Bank conducts business through
three branch offices located in and near East Liverpool and a loan production
office in Boardman, 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 Trumbull
Counties in northeastern Ohio and Beaver and Allegheny Counties in Pennsylvania.
During 2000, Potters Bank submitted application to the FDIC and the Division for
approval to establish a branch office in Beaver, Pennsylvania. Regulatory
approval was received during 2000 and ground was broken for the new full-service
office in January 2001.






                                       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:


<TABLE>
<CAPTION>
                                                                 At December 31,
                                         ---------------------------------------------------------------------
                                           2000          1999           1998            1997           1996
                                         --------       --------       --------       --------       --------
                                                                (Dollars in thousands)
<S>                                      <C>            <C>            <C>            <C>            <C>
SELECTED FINANCIAL CONDITION
DATA:

Total amount of:
   Assets                                $151,435       $143,736       $134,474       $122,637       $114,172
   Cash and cash equivalents                4,820          7,280         11,867          3,816          4,585
   Securities available for sale           21,177         22,751         23,714          5,474         10,878
   Securities held to maturity (1)          1,274          1,184            991         28,017         32,735
   Loans receivable, net                  119,903        108,360         94,911         82,093         62,450
   Deposits                               117,792        110,335        104,644        100,094         97,283
   Federal Home Loan Bank
    advances                               19,500         21,300         17,247          9,993          5,085
   Shareholders' equity,
    substantially restricted               12,333         11,020         11,157         11,006         10,576
</TABLE>


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

(1) Securities held to maturity include investment in stock in the FHLB.


<TABLE>
<CAPTION>
                                                       Years ended December 31,
                                    ----------------------------------------------------------------
                                      2000           1999          1998         1997         1996
                                    --------        -------       ------       ------       -------
                                                        (Dollars in thousands)
<S>                                 <C>             <C>           <C>          <C>          <C>
SUMMARY OF OPERATIONS:

Interest income                     $ 11,341        $10,147       $9,262       $8,558       $ 8,206
Interest expense                       6,340          5,241        5,032        4,671         4,529
                                    --------        -------       ------       ------       -------
Net interest income                    5,001          4,906        4,230        3,887         3,677
Provision for loan losses                 --            (75)          --         (485)          249
                                    --------        -------       ------       ------       -------
Net interest income after
 provision for loan losses             5,001          4,981        4,230        4,372         3,428
Noninterest income:
 Gain on sales of loans,
  securities and other assets             17             43          167           33            --
 Other noninterest income                595            502          409          348           267
                                    --------        -------       ------       ------       -------
Total noninterest income                 612            545          576          381           267
Total noninterest expense              3,581          3,460        3,098        2,927         3,688
                                    --------        -------       ------       ------       -------
Income before income tax               2,032          2,066        1,708        1,826             7
Income tax expense                       585            720          596          629            68
                                    --------        -------       ------       ------       -------

Net income (loss)                   $  1,447        $ 1,346       $1,112       $1,197       $   (61)
                                    ========        =======       ======       ======       =======

Earnings per share:
  Basic                             $   1.46        $  1.32       $ 1.03       $ 1.08       $  (.05)
                                    ========        =======       ======       ======       =======

  Diluted                           $   1.43        $  1.29       $  .99       $ 1.05       $  (.05)
                                    ========        =======       ======       ======       =======
</TABLE>




                                       4
<PAGE>   5


SELECTED FINANCIAL RATIOS
 AND OTHER DATA:

<TABLE>
<CAPTION>
                                                     At or for the year ended December 31,
                                          ----------------------------------------------------------------
                                           2000          1999          1998            1997          1996
                                          ------        ------        ------          ------        ------
<S>                                       <C>           <C>           <C>             <C>          <C>
Performance ratios:
 Return (loss) on assets
  (ratio of net income (loss)
   to average total assets)                 0.96%         0.97%         0.87%           1.00%        (0.05)%

Interest rate spread
 information:
 Average during period                      3.30          3.56          3.28            3.19          3.05
 End of period                              3.77          3.92          3.64            3.37          3.58

Net interest margin (ratio of
 net interest income to average
 interest-earning assets)                   3.50          3.73          3.49            3.43          3.30

Ratio of operating expense
 to average total assets                    2.39          2.49          2.43            2.45          3.15

Return (loss) on equity
 (ratio of net income (loss)
 to average equity)                        12.10         11.85          9.58           10.72         (0.57)

Dividend payout ratio (ratio of
 dividends declared per share to
 net income per share)                     26.90         23.56         20.14           14.23       (208.33)

Asset quality ratios:
 Nonperforming assets
  to total assets at end
  of period                                 0.72          0.22          0.17            0.17          1.51

Allowance for loan losses
 to nonperforming loans                   233.53        644.62        987.05        1,035.27        152.20

Allowance for loan losses
 to total loans                             1.61          1.85          2.28            2.54          4.04

Capital ratios:
 Shareholders' equity to total
  assets at end of period                   8.14          7.67          8.30            8.97          9.26

Average shareholders' equity
 to average assets                          7.97          8.17          9.10            9.34          9.27

Ratio of average interest-
 earning assets to average
 interest-bearing liabilities             104.04%       104.07%       105.13%         105.60%       105.96%

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




                                       5
<PAGE>   6


LENDING ACTIVITIES

GENERAL. Potters Bank concentrates on 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. In addition, Potters Bank makes loans secured by nonresidential real
estate, commercial loans, and a limited amount of acquisition and development
and commercial construction loans. During the past two years, originations of
higher yielding commercial real estate and consumer loans have been increased to
diversify the loan portfolio.

Special real estate loans are originated for homebuyers recommended by the
Community Action Agency of Columbiana County, Ohio. One such program provides
loans to first time homebuyers with 3% down, each of which is insured by private
mortgage insurance up 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 is in progress. 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, 2000,
the loan portfolio included approximately $20.6 million, or 16.9% of total
loans, of one-to-four family real estate loans purchased. Of such purchased
loans, $12.3 million were secured by properties located in northwestern Ohio,
$2.5 million were secured by properties in southwestern Ohio and $5.8 million
were secured by properties located in Hilton Head, South Carolina. As of
December 31, 2000, multifamily and nonresidential real estate loan purchases
totaling $2.0 million were secured by properties located in southwest Ohio, $1.1
million in northwest Ohio, $617,000 in the State of Colorado and $247,000
locally. The loan portfolio also contains a number of loans purchased from a
bank in Indiana, including $4.4 million in one-to-four family real estate loans,
$6.1 million of first mortgage home equity loans and $4.6 million of second
mortgage loans from various parts of the country.

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 business and residential
construction has increased, especially in the Calcutta area. 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,
                                              ---------------------------------------------
                                                     2000                       1999
                                                     ----                       ----
                                                          Percent                    Percent
                                                         of total                   of total
                                              Amount       loans         Amount       loans
                                              ------       -----         ------       -----
<S>                                          <C>          <C>           <C>          <C>
Type of loan and security:                                (Dollars in thousands)
Secured by real estate (1):
  One-to-four family residences              $ 78,463       63.17%      $ 70,732      63.38%
  Loans held for sale                              96         .08             55        .05
  Multifamily residential (over 4 units)        2,839        2.28          3,055       2.74
  Nonresidential property                      19,572       15.76         14,257      12.77
                                             --------      ------       --------     ------
Total real estate loans                       100,970       81.29         88,099      78.94
Consumer and other loans:
  Home equity loans                            13,282       10.69         13,301      11.92
  Purchased second mortgage loans               4,631        3.73          5,715       5.12
  Consumer loans and lines of credit            1,920        1.55          2,309       2.07
  Commercial business                           1,555        1.25            472        .42
  Other                                         1,854        1.49          1,716       1.53
                                             --------      ------       --------     ------
Total consumer and other loans                 23,242       18.71         23,513      21.06
                                             --------      ------       --------     ------
Total loans                                   124,212      100.00%       111,612     100.00%
                                                           ======                    ======
Less:
  Loans in process                             (2,909)                    (1,848)
  Premiums on purchased loans
    and net deferred loan (fees) costs            564                        633
  Allowance for loan losses                    (1,964)                    (2,037)
                                             --------                   --------
Total loans receivable, net                  $119,903                   $108,360
                                             ========                   ========
</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, 2000 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)
<S>                 <C>         <C>       <C>        <C>        <C>        <C>         <C>       <C>         <C>           <C>
Due during
years ending
December 31,

2001                $   734     8.86%     $ 1,901     10.53%     $  120      9.50%     $ 1,753      9.17%    $   4,508      9.36%
2002 through
  2005                1,428     8.24          154      9.66         122      9.38        2,893     11.02         4,597     11.30
2006 and
  following          76,397     8.16       17,517      9.22       2,597      8.06       18,596      9.99       115,107      8.44
                    -------               -------                ------                -------                --------
                    $78,559               $19,572                $2,839                $23,242                $124,212
                    =======               =======                ======                =======                ========
</TABLE>


-------
(1) Includes Construction Loans and Loans Held for Sale

The total amount of loans due after December 31, 2001 which have predetermined
interest rates is $53.4 million, while the total amount of loans due after such
date which have floating or adjustable rates is $66.3 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,
                                               --------------------------------------------------
                                                       2000                         1999
                                               ---------------------        ---------------------
                                                Amount       Percent         Amount       Percent
                                                ------       -------         ------       -------
<S>                                            <C>          <C>             <C>          <C>
Fixed-rate loans:                                            (Dollars in thousands)
  Real estate (1):
    One-to-four family                         $ 34,556       27.82%        $ 30,998       27.78%
    Multifamily (over 4 units)                    1,452        1.17            1,531        1.37
    Nonresidential                                3,486        2.81              472        0.42
                                               --------      ------         --------      ------
      Total real estate loans                    39,494       31.80           33,001       29.57
  Consumer and other loans                       14,168       11.40           16,287       14.59
                                               --------      ------         --------      ------

      Total fixed-rate loans                     53,662       43.20           49,288       44.16

Adjustable-rate loans:
  Real estate (1):
     One-to-four family                          44,003       35.42           39,789       35.65
     Multifamily (over 4 units)                   1,387        1.12            1,524        1.37
     Nonresidential                              16,086       12.95           13,785       12.35
                                               --------      ------         --------      ------
       Total real estate loans                   61,476       49.49           55,098       49.37
  Consumer and other loans                        9,074        7.31            7,226        6.47
                                               --------      ------         --------      ------

       Total adjustable-rate loans               70,550       56.80           62,324       55.84
                                               --------      ------         --------      ------
       Total loans receivable                   124,212      100.00%         111,612      100.00%
                                                             ======                       ======

Less:
  Loans in process                               (2,909)                      (1,848)
  Premiums on purchased loans
    and net deferred loan (fees) costs              564                          633
  Allowance for loan losses                      (1,964)                      (2,037)
                                               --------                     --------

       Total loans receivable, net             $119,903                     $108,360
                                               ========                     ========
</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. Potters Bank
concentrates on 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, 2000, the one-to-four family residential real estate
loan portfolio was approximately $78.5 million, or 63.2% of total gross loans.

During 2000, one-to-four family real estate loans were purchased to supplement
local loan originations. Such purchases totaled $8.1 million during 2000 and
included a package of $4.7 million of one-to-four family real estate loans
purchased from a bank in Indiana.

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, 2000, approximately 44.0% of loans secured by one-to-four
family residences had interest accruing 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 servicing released in the secondary mortgage market. Recently, Potters
Bank received 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 increased interest rate sensitivity. At December 31, 2000, $44.0 million, or
56.0%, of one-to-four family real estate loans had adjustable rates.

Potters Bank offers two nonconforming real estate loan programs, with a maximum
LTV of 89%. Potters Bank charges 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, by following stringent
loan collection procedures, and by adhering 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, 2000, such nonconforming real
estate loans totaled $7.2 million, of which one $186,000 loan was 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. 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 3% 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

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, 2000, loans secured by multifamily properties totaled
approximately $2.8 million, or 2.3% of total loans. Of such loans, none were
delinquent at December 31, 2000.

LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. At December 31, 2000, approximately
$19.6 million, or 15.8% 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 25 years. A portion of such loans has 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, personal
guarantees of the principals and appraisals supporting the property's valuation.
At December 31, 2000, 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 and
overdraft lines of credit, are made primarily at fixed rates of interest and for
varying terms based on the type of loan.

At December 31, 2000, Potters Bank had approximately $21.7 million, or 17.5% of
total loans, invested in consumer loans.

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 that 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 that 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
consumer loans increases during periods of recession, high unemployment and
other adverse economic conditions. Of such loans, $98,000 of locally originated
consumer loans and $179,000 of purchased consumer loans were 90 or more days
delinquent at December 31, 2000.




                                       11
<PAGE>   12

COMMERCIAL LOANS. At December 31, 2000, the loan portfolio included
approximately $1.6 million 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 $322,000 at December 31,
2000. The loans are secured by equipment, receivables or vehicles and are
indexed to the Prime Rate.

Commercial loans have a higher degree of risk because the primary source of
repayment is the collateral pledged to secure such loans, if any, and 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, 2000.

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. A
fee appraiser approved by the Board of Directors prepares an appraisal of the
fair market value of the collateral used to secure the loan. 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, a title guaranty, title insurance
or an attorney's opinion of title is obtained on the real estate that 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 $2.1 million to any one
borrower at December 31, 2000. No outstanding loans were in excess of such
limits at December 31, 2000.

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 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.



                                       12
<PAGE>   13

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 or telephone calls are made to
borrowers. 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, 2000. 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 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, 2000, gross interest income that would have been
recorded had the nonaccruing and restructured loans been current in accordance
with their original terms amounts to $77,000. The amount that was included in
interest income on such loans was $29,000 for the year ended December 31, 2000.
Other loans that are performing, but where known information causes management
to have serious doubts as to the ability of the borrower to comply with present
loan repayment terms totaled $153,000.

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.

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




                                       13
<PAGE>   14

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:

                                           2000           1999
                                           ----           ----
                                          (Dollars in thousands)

Balance at beginning of period           $ 2,037         $ 2,211
Loans charged-off:
  Residential real estate loans              (39)             (3)
  Nonresidential real estate loans
  Consumer and other loans                   (74)           (122)
                                         -------         -------
Total charge-offs                           (113)           (125)
Recoveries:
  Residential real estate loans                5              20
  Nonresidential real estate loans
  Consumer and other loans                    35               6
                                         -------         -------
Total recoveries                              40              26
                                         -------         -------
Net charge-offs                              (73)            (99)
Provision for loan losses                                    (75)
                                         -------         -------
Balance at end of period                 $ 1,964         $ 2,037
                                         =======         =======

Ratio of net charge-offs
  to average loans                          0.06%           0.10%


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

<TABLE>
<CAPTION>
                                                     2000                     1999
                                                     ----                     ----
                                                        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           $  474     63.24%          $  330      63.42%
Nonresidential real estate loans                  475     15.76              370      12.77
Consumer and other loans                          739     21.00              591      23.81
Unallocated                                       276                        746
                                               ------    ------           ------     ------

Total                                          $1,964    100.00%          $2,037     100.00%
                                               ======    ======           ======     ======
</TABLE>

The allowance for loan losses at December 31, 2000 represented 233.53% 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 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.



                                       14
<PAGE>   15

At December 31, 2000, mortgage-backed securities totaled approximately $9.1
million. All mortgage-backed securities at December 31, 2000 and 1999 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
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, 2000, $6.5 million, or 71.0%, 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,
                                                     ---------------
                                            2000                       1999
                                            ----                       ----
                                                 Estimated                  Estimated
                                    Amortized      Fair       Amortized       Fair
                                      Cost         Value        Cost          Value
                                      ----         -----        ----          -----
                                                 (Dollars in thousands)
<S>                                  <C>          <C>          <C>           <C>
Mortgage-backed securities           $9,176       $9,123       $12,551       $12,297
                                     ======       ======       =======       =======
</TABLE>

The combined estimated fair value of mortgage-backed securities designated as
available for sale at December 31, 2000, by contractual terms to maturity are
shown below. Actual maturities will differ from contractual maturities because
borrowers generally may prepay obligations without prepayment penalties.

                                                At December 31, 2000
                                             ---------------------------
                                             Estimated         Weighted
                                               Fair             Average
                                               Value             Yield
                                               -----             -----
                                               (Dollars in thousands)
Due after one year through three years         $   75             6.67%
Due after three years through five years          163             5.82
Due after five years through ten years          1,071             6.32
Due after ten years                             7,814             7.03
                                               ------             ----
Total                                          $9,123             6.92%
                                               ======             ====

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.



                                       15
<PAGE>   16

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, 2000.

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

<TABLE>
<CAPTION>
                                                        At December 31,
                                        --------------------------------------------------
                                                 2000                       1999
                                                 ----                       ----
                                                     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           $ 9,496       $ 9,395       $10,496       $ 9,918
         States and municipalities         2,282         2,377           158           172
         Other                               259           260           342           343
                                         -------       -------       -------       -------
         Total debt securities            12,037        12,032        10,996        10,433
         Equity securities                    22            22            22            21
                                         -------       -------       -------       -------
                                         $12,059       $12,054       $11,018       $10,454
                                         =======       =======       =======       =======
</TABLE>

The maturities of debt securities are indicated in the following table:

<TABLE>
<CAPTION>
                                                     At December 31, 2000
                                         -------------------------------------------------------
                                                                           Total debt securities
                                                                                  Estimated
                                         1 to 5       5 to 10        Over           Fair
                                          years        years       10 years         Value
                                          -----        -----       --------         -----
                                                     (Dollars in thousands)
<S>                                      <C>          <C>          <C>      <C>
Securities available for sale (1):
U.S. Treasury and U.S
  Government agencies                    $7,193                      $2,202         $9,395
States and municipalities                   153        $    3         2,221          2,377
Other                                                                   260            260
                                         ------        ------        ------        -------

                                         $7,346        $    3        $4,683        $12,032
                                         ======        ======        ======        =======

Weighted average yield (2)                 5.68%         8.13%         6.61%          6.04%
</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.

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




                                       16
<PAGE>   17


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, 2000. The amount of deposits from outside the primary market area is not
significant.

At December 31, 2000, certificates of deposit totaled $59.7 million, or 50.6% of
total deposits. Of such amount, approximately $33.7 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 average deposits in the various types of deposit
programs offered at the dates indicated:

<TABLE>
<CAPTION>
                                                       At December 31,
                                      ----------------------------------------------------
                                                 2000                    1999
                                                 ----                    -----
                                                     Percent                     Percent
                                      Average       of average    Average       of average
                                      Balance        deposits     Balance        deposits
                                      -------        --------     -------        --------
                                                    (Dollars in thousands)
<S>                                   <C>           <C>          <C>            <C>
Transaction accounts:
  Demand, NOW, and Super NOW
    accounts (1)                      $ 16,129         13.9%     $ 15,184          14.3%
  Savings and club accounts (2)         38,811         33.4        37,154          34.9
  Money market deposit
    accounts (3)                         1,291          1.1         1,830           1.7
                                      --------        -----      --------         -----

  Total transaction accounts            56,231         48.4        54,168          50.9
Certificates of deposit (4)             59,947         51.6        52,180          49.1
                                      --------        -----      --------         -----

Total deposits                        $116,178        100.0%     $106,348         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,
2000, the weighted average rate on such accounts was 1.52%.

(2) The weighted average rate on savings and club accounts, including Treasury
index savings accounts, was 3.82% at December 31, 2000.

(3) The weighted average interest paid on money market accounts fluctuates with
the general movement of interest rates. At December 31, 2000, the weighted
average rate on such accounts was 2.54%.

(4) The weighted average rate on certificates of deposit at December 31, 2000
was 5.91%.


                                       17
<PAGE>   18

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, 2000:

<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                $ 6,135       $6,364       $ 9,397       $22,120       $44,016
Certificates of deposit
  $100,000 or more                    1,969          871           908         3,299         7,047
Public funds (1)                      5,678          373         2,000           555         8,606
                                    -------       ------       -------       -------       -------

Total certificates of deposit       $13,782       $7,608       $12,305       $25,974       $59,669
                                    =======       ======       =======       =======       =======
</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, 2000, Potters Bank was in compliance
with the QTL Test. During 2000, a total of $4.1 million was received in FHLB
advances and $5.9 million was repaid. At December 31, 2000, FHLB advances
totaled $19.5 million. During 2000, FHLB advances were used primarily in
managing liquidity.

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

PFC has one wholly-owned subsidiary, Potters Bank. 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 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




                                       18
<PAGE>   19


rate levels and other factors that 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 that 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 that 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 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.




                                       19
<PAGE>   20


At December 31, 2000, 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 that 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 banks,
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 space and REO) authorized by state law are
not permitted for national banks. Certain exceptions are



                                       20
<PAGE>   21


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
2000, was approximately $1.7 million, or 12.65%. 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 that 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 2000, approximately $2.2 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, 2000 if the FDIC capital
requirements had applied to Potters Bank:

                                                 Amount          %
                                                 ------        ------

         Tier 1 capital (1)                    $12,048          8.0%
         Leverage capital requirement            7,554          5.0 (2)
                                               -------         ----
         Excess                                $ 4,494          3.0%
                                               =======         ====

         Total capital (1)                     $13,233         14.1%
         Risk-based capital requirement          7,527          8.0
                                               -------         ----
         Excess                                $ 5,706          6.1%
                                               =======         ====

         -----------------------------
         (Footnotes on next page)


                                       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, 2000, 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, 2000.




                                       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, up to
prescribed limits, by the FDIC. 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.

Under certain circumstances, interstate mergers and acquisitions involving
savings banks incorporated under Ohio law are permitted by Ohio law. 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 bank will not be
eligible for new FHLB advances. At December 31, 2000, 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 $42.8 million, subject to an exemption of up to $5.5 million, and to
maintain reserves of 10% of net transaction accounts in excess of $42.8 million.
These percentages are subject to revision by the FRB. At December 31, 2000,
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 $1.3 million at
December 31, 2000.

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, 2000, Potters
Bank's maximum limit on advances was approximately $25.5 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
that 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 do
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.

Certain thrift institutions are allowed deductions for bad debts under methods
more favorable than those granted to other taxpayers. Qualified thrift
institutions may compute deductions for bad debts using either the specific
charge off method of Section 166 of the Code or the experience method of Section
593 of the Code.

The "experience" method is also available to small banks. Under the experience
method, a thrift institution is 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.

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 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



                                       26
<PAGE>   27


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,
2000, 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 that includes
related member adjustments that could affect the taxable net worth of PFC's
subsidiary Potters Bank.

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 2000 is imposed at a rate of 1.3% of
apportioned book net worth determined in accordance with generally accepted
accounting principles, less statutory deductions. 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.




                                       27
<PAGE>   28


ITEM 2. PROPERTIES

         The following table sets forth certain information at December 31,
2000, regarding the properties on which the main office, each branch office and
the 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          $501,000

BRANCH OFFICES:
530 Broadway
East Liverpool, Ohio 43920            Owned             June 18, 1982          502,000

46635 Y&O Road
Glenmoor, Ohio 43920                  Owned             June 3, 1975           163,000

15575 State Rte. 170
Calcutta, Ohio 43920 (3)              Leased          February 1, 1983         256,000

LOAN PRODUCTION OFFICE:
7330 Southern Boulevard
Boardman, Ohio 44512 (4)              Leased            April 1, 1998           1,000
</TABLE>


-------
(1)  At December 31, 2000, office premises and equipment had a total net book
     value of $2.0 million.

(2)  Includes two parcels.

(3)  The lease agreement with a former director 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, 2001, subject to annual automatic
     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, 2000, 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 9, 2001, 997,989 common shares were outstanding and held by
approximately 304 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.

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>
                                  2000                               1999
                                  ----                               ----
                                           Dividends                          Dividends
Quarter Ended          High        Low     Per Share      High        Low     Per Share
                       ----        ---     ---------      ----        ---     ---------
<S>                   <C>         <C>      <C>          <C>         <C>       <C>
March 31              $11.310     $8.452     $0.095      $17.316    $10.930     $0.061
June 30                 9.584      8.050      0.095       14.286     10.000      0.076
September 30            9.875      8.750      0.100       12.500     11.071      0.086
December 31             9.188      8.250      0.100       12.143     10.952      0.086
</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, 2000


GENERAL

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.

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.

In the following pages, management presents an analysis of financial condition
as of December 31, 2000, and the results of operations for fiscal 2000, 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:

         Net Income - Management's statements regarding the strategic focus and
         long-term goals of Potters Bank.

         Net Interest Income - Statements regarding management's purchase of
         municipal securities as part of a plan to reduce income tax expense.

         Statements regarding management's plan for continued loan growth,
         future loan demand and the ability of internal loan generation to
         reduce Potters Bank's reliance on purchased loans to grow the
         portfolio.

         Management's statements regarding the effect of competition on
         acquiring funds and its intention to utilize deposit inflows, to the
         extent possible, to fund loan growth.

         Allowance and Provision for Loan Losses - Management's statements
         regarding the amount and adequacy of the allowance for loan losses and
         its belief that provisions for loan losses will resume in 2001.

         Noninterest Expense - Statements regarding management's intention to
         establish a full-service office in Beaver, Pennsylvania in order to
         expand its loan growth and deposit base, and the net expense which will
         be incurred during the construction and initial start-up of operations.

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

         Statements regarding loan diversification and growth and the intent to
         reduce reliance on purchased loans.

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




                                                                              30
<PAGE>   31

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


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. Provisions for losses, fee
and other noninterest income and noninterest expense also contribute to net
income.

Net income continued to grow during 2000, to $1.4 million, and represented a
$101,000, or 7.5%, increase over net income of $1.3 million during 1999, despite
a declining net interest rate margin through most of the year resulting from
rising funding costs. Net income for 1999 was $234,000, or 21.0%, higher than
net income of $1.1 million for 1998. Diluted earnings per share for 2000
increased $.14, or 10.9%, over diluted earnings per share of $1.29 for 1999, and
increased $.30, or 30.3%, in 1999 over diluted earnings per share of $.99 for
1998.

Concentrated focus on the basic tenets of Potters Bank's long-range strategic
plan and vision, profitable growth, diversification of the loan portfolio to
include higher-yielding commercial and consumer loans, cost containment and a
customer-focused sales and service culture with an emphasis on superior customer
service, all produced the continued growth in earnings during 2000. Returns on
average shareholders' equity grew from 9.58% during 1998, to 11.85% in 1999 and
to 12.10% during 2000. Returns on average assets were .87% in 1998, .97% in 1999
and .96% during 2000.

To compare net income on a core operations basis, unusual or nonrecurring events
causing one-time skews in net income must be excluded. The year 2000 contained
three such events, the combination of which had a net after-tax positive effect
of $28,000, or $.03 per diluted share. During the second quarter of 2000,
Potters Bank deposited bank cashier's checks issued by a regional financial
institution into a customer's account, and provided the customer immediate use
of those funds as is customary in the industry when dealing with cashier's
checks. The issuing bank thereafter placed stop payment orders on those official
checks. As a result, Potters Bank recorded a $448,000 nonrecurring expense,
$296,000 net of tax, during the second quarter of 2000. Potters Bank then
aggressively pursued all available options for the recovery of the funds and
filed suit against the financial institution and others. During the fourth
quarter, the Board of Directors elected to accept a settlement offer from the
financial institution upon mutually agreeable terms. The net after-tax cost
during 2000, excluding legal fees, of the lawsuit resolution was $74,000.

The second nonrecurring item during 2000 was the receipt of a one-time payment
of $29,000, $19,000 after tax, from a shareholder who was required by the Office
of Thrift Supervision ("OTS") to pay such amount to PFC as a consequence of
signing a consent order relating to the OTS's control regulations. The third
nonrecurring item during 2000 resulted from the recording of historical tax
credits of $83,000 on a low-income housing project in which Potters Bank
participates.

During 1999, nonrecurring events included a negative loan loss provision and the
receipt of a refund on previous years' franchise taxes, causing an after-tax
increase in net income of $74,000, or $.07 per diluted share. During 1998, a
nonrecurring gain was recorded on the sale of a parking lot, generating an
after-tax gain of $42,000, or $.04 per diluted share. On a core earnings basis,
net income increased $147,000, or 11.6%, and diluted earnings per share
increased $.18, or 14.8%, during 2000 over 1999. Core net income for 1999
increased $202,000, or 18.9%, and diluted earnings per share increased $.26, or
27.1%, during 1999 over 1998. On a core earnings basis, returns on average
shareholders' equity were 11.83% during 2000, 11.28% during 1999 and 9.25%
during 1998, while returns on average assets for the same years were .95%, .92%
and .84%.



                                                                              31
<PAGE>   32

The rising interest rate environment of 2000, especially in short-term rates
that govern market-driven deposit products, caused a relatively rapid increase
in the cost of funds, but, despite these unfavorable rate trends, net interest
income increased $95,000, or 1.9% during 2000 compared to 1999. Excluding
nonrecurring income during both years, fees from loans, deposits and other
customer services, plus increased rental income from corporate office leases,
were responsible for an increase of 21.7% in noninterest income during 2000 over
1999. Noninterest expense increased $121,000, or 3.5%, during 2000 compared to
1999, primarily from the check loss net of the settlement and increased legal
fees relating to the lawsuit. Excluding the net settlement, noninterest expense
increased only $9,000 during 2000 compared to 1999.

The improvement in net income during 1999 over 1998 resulted primarily from a
$676,000, or 16.0%, increase in net interest income and, excluding nonrecurring
items, a 13.7% increase in noninterest income, offset by fewer gains on sales of
assets and an 11.7% increase in noninterest expense.

YIELDS EARNED AND RATES PAID

Net interest income is the difference between interest income generated on loans
and securities and interest expense on deposits and borrowings. The composition,
volumes and interest rates of interest-earning assets and interest-bearing
liabilities are the primary determinants of net interest income.

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. Interest income is
presented on a taxable equivalent basis to reflect the impact of tax-exempt
interest income.





                                                                              32
<PAGE>   33

<TABLE>
<CAPTION>
(Dollars in thousands)                ---------------------------------Years ended December 31,-------------------------------------
                                                                       ------------------------
                                                    2000                          1999                            1998
                                                    ----                          ----                            ----
                                       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)                         $117,946    $ 9,772    8.29%   $103,699   $ 8,537    8.23%    $ 87,070    $ 7,243     8.32%
    Securities (2)                       22,566      1,447    6.28      25,078     1,460    5.82       29,405      1,756     5.98
    Other                                 2,024        122    6.04       2,633       150    5.70        4,742        263     5.55
                                       --------    -------    ----    --------   -------    ----     ---------   -------      ----
        Total interest-earning
           assets                       142,536     11,341    7.93     131,410    10,147    7.72      121,217      9,262     7.64
Noninterest-earning assets:
    Cash and cash equivalents             3,196                          3,076                          3,239
    Premises and equipment                2,070                          2,039                          1,750
    Other nonearning assets               2,274                          2,541                          1,458
                                       --------                       --------                      ---------
        Total assets                   $150,076                       $139,066                      $ 127,664
                                       ========                       ========                      =========
Interest-bearing liabilities:
    Certificates of deposit            $ 59,947      3,396    5.67    $ 52,180     2,784    5.34    $  49,668      2,818     5.67
    Savings and club accounts            38,811      1,434    3.70      37,154     1,124    3.03       36,100      1,134     3.14
    Demand, NOW and Super NOW
     accounts                            16,129        242    1.50      15,184       232    1.53       14,300        253     1.77
Money market accounts                     1,291         32    2.48       1,830        46    2.51        1,977         57     2.91
Borrowings                               20,818      1,236    5.93      19,480     1,055    5.42       13,260        770     5.81
                                       --------    -------    ----    --------   -------    ----    ---------   --------     ----
        Total interest-bearing
           liabilities                  136,996      6,340    4.63     125,828     5,241    4.16      115,305      5,032     4.36
                                                  --------                      --------                        --------
Noninterest-bearing liabilities:
    Other liabilities                     1,114                          1,883                            747
    Shareholders' equity                 11,966                         11,355                         11,612
                                       --------                       --------                      ---------
        Total liabilities and
           equity                      $150,076                       $139,066                      $ 127,664
                                       ========                       ========                      =========

    Net interest income                            $ 5,001                       $ 4,906                          $4,230
                                                   =======                       =======                        ========
    Interest rate spread                                      3.30%                         3.56%                            3.28%
                                                              ====                          ====                             ====
    Net interest-earning assets        $  5,540                       $  5,582                      $   5,912
                                       ========                       ========                      =========

    Net yield on average interest-
      earning assets                                          3.50%                         3.73%                            3.49%
                                                              ====                          ====                             ====
    Ratio of average interest-
      earning assets to average
      interest-bearing liabilities       104.04%                        104.44%                        105.13%
                                       ========                       ========                      =========
</TABLE>
-------------------------
(1) Net of deferred loan fees, loan premiums and discounts, loans in process and
    allowance for loan losses.
(2) Includes Federal Home Loan Bank stock.



                                                                              33

<PAGE>   34




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 that 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>
                                                         2000 vs. 1999                             1999 vs. 1998
                                                         -------------                             -------------
                                                           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                                      $ 1,180        $  55        $ 1,235        $ 1,370        $ (76)       $ 1,294
    Securities                                    (117)         104            (13)          (253)         (43)          (296)
    Other                                          (36)           8            (28)          (120)           7           (113)
                                               -------        -----        -------        -------        -----        -------

      Total interest-earning assets            $ 1,027        $ 167          1,194        $   997        $(112)           885
                                               =======        =====                       =======        =====

Interest-bearing liabilities:
    Certificates of deposit                    $   432        $ 180            612        $   139        $(173)           (34)
    Savings and club accounts                       52          258            310             32          (42)           (10)
    Demand, NOW and Super NOW
      accounts                                      14           (4)            10             15          (36)           (21)
    Money market accounts                          (13)          (1)           (14)            (4)          (7)           (11)
    Borrowed funds                                  76          105            181            340          (55)           285
                                               -------        -----        -------        -------        -----        -------

      Total interest-bearing liabilities       $   561        $ 538          1,099        $   522        $(313)           209
                                               =======        =====        -------        =======        =====        -------

Net interest income                                                        $    95                                    $   676
                                                                           =======                                    =======
</TABLE>

NET INTEREST INCOME

Net interest income increased $95,000, or 1.9%, during 2000 compared to 1999,
primarily from interest on loans, which increased $1.2 million, or 14.5%. The
year 2000 reflected a continued effort to diversify the loan portfolio to
include higher yielding commercial and consumer loans. A large package of
purchased loans was acquired early in 2000 and several individual loans were
purchased throughout the year, but the remaining loan growth resulted from
internal loan originations in market areas served by Potters Bank. One-to-four
family real estate loans increased $7.7 million, or 10.9%, while commercial real
estate loans increased $5.3 million, or 37.3%, during 2000. The increase in loan
interest income was primarily the result of a $14.2 million, or 13.7%, increase
in the average balance of loans and, to a lesser extent, an increase in yield
from 8.23% during 1999, to 8.29% during 2000. Securities and other interest
income declined marginally during 2000, primarily from lower balances, offset by
increases in the yields on these instruments. During the fourth quarter of 2000,
$2.1 million of municipal securities were purchased, part of an overall plan to
reduce income tax expense. Due to the rising interest rate environment
throughout much of 2000, the yields on all earning assets increased, from 7.72%
during 1999, to 7.93% during 2000.

The most negative aspect of rising rates during 2000 was an increase in the cost
of funds. Interest expense increased $1.1 million, or 21.0%, during 2000. Rates
on market-indexed deposit products increased rapidly and the local certificate
of deposit market became extremely competitive. Interest on deposits increased
$918,000 during 2000 compared to 1999, primarily from an increase of $9.8
million in the average balance of deposits and an increase in average yield on
deposits, from 3.94% during 1999, to 4.39% during 2000. Federal Home Loan Bank
("FHLB") advance interest increased $181,000 during 2000 from an increase of
$1.3 million in the average balance and an increase in cost from an average of
5.42% during 1999, to 5.93% during 2000. The overall cost of funds during 2000
increased to 4.63% during 2000, compared to 4.16% during 1999, and was the
primary cause of a narrowing of the interest rate spread. The interest rate
spread declined during 2000 to 3.30%, from 3.56% during 1999.






                                                                              34
<PAGE>   35



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. FHLB
advances were utilized to fund loan purchases and, during 1998, to purchase $5.1
million of mortgage-backed securities. The result of 1999 efforts produced an
interest rate spread of 3.56%, an increase from 3.28% during 1998.

Potters Bank was successful during 2000 in reducing its reliance on purchased
loans compared to prior years. Future plans call for continued internally
generated loan growth, although there can be no assurance that the demand for
loans will continue in surrounding local areas or that internal loan
originations will continue to fulfill growth goals. Loan demand is affected by,
among other things, regional and national economic conditions, current and
future interest rates and regulatory requirements.

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 "Really Free" checking product
and a Treasury Index savings account that earns competitive market yields based
on U.S. Treasury rates have been sources of funds for Potters Bank and have
enabled it to retain funds it could have otherwise lost. 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.

To the extent possible, management expects to utilize deposit inflows 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.

ALLOWANCE AND PROVISION FOR LOAN LOSSES

Management maintains an allowance for loan losses that, 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 2000 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. The negative provision was recorded to remove
excess allowances for loan losses.

The allowance for loan losses decreased $73,000 during 2000, to $2.0 million at
December 31, 2000. Charge-offs of $113,000 during 2000, primarily consumer and
real estate loans, were offset by $40,000 in recoveries. 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. Unallocated
general valuation allowances declined from $1.5 million at December 31, 1998, to
$746,000 at December 31, 1999, and further declined to $296,000 at December 31,
2000. The decline in unallocated general loan loss reserves is due primarily to
growth in the loan portfolio and increased reserve percentages allocated to
higher risk home equity loans, selected consumer loans, second




                                                                              35
<PAGE>   36


mortgage loans and a nonconforming real estate loan product available to persons
who are considered slightly higher credit risks, and to an increase in
nonperforming loans. Although no loan loss provisions have been made in the last
three years, it is anticipated that regular provisions will resume in 2001.

The following table sets forth the amounts and categories of nonperforming
assets. Nonperforming assets consist of nonaccrual loans, accruing loans that
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,---------------
                                          2000            1999            1998
                                          ----            ----            ----
                                               (Dollars in thousands)
<S>                                     <C>             <C>             <C>
Nonaccrual loans                        $    841        $    316        $    224
                                        --------        --------        --------
Total nonperforming loans                    841             316             224
Foreclosed and repossessed assets            243
                                        --------        --------        --------
Total nonperforming assets              $  1,084        $    316        $    224
                                        ========        ========        ========

Total assets                            $151,435        $143,736        $134,474

Total nonperforming assets as
  a percent of total assets                  .72%            .22%            .17%

Allowance for loan losses               $  1,964        $  2,037        $  2,211

Allowance as a percentage of
  nonperforming loans                     233.53%         644.62%         987.05%
</TABLE>

Nonperforming loans increased $525,000 during 2000 and $92,000 during 1999, but
remained less than 1% of total assets over the last three years. Nonperforming
loans at December 31, 2000 consisted primarily of one-to-four family real estate
loans, with approximately 22% resulting from the nonconforming loan programs and
approximately 34% from purchased real estate and consumer loan packages. The
make-up of nonperforming loans at December 31, 2000 was 67% residential loans to
33% consumer loans.

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,
2000, 1999 or 1998.

Restructured loans are those that have been renegotiated at concessionary terms
as a result of a borrowers' troubled financial condition. At year-ends 2000,
1999 and 1998, 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.




                                                                              36
<PAGE>   37


GAINS ON SALES OF LOANS, SECURITIES AND OTHER ASSETS

Gains on sales of assets have declined over the last three years, from $167,000
during 1998, to $43,000 during 1999 and to $17,000 during 2000. During 2000,
securities gains totaled $9,000, and an $8,000 gain was recorded on the sale of
real estate loans sold while retaining the servicing on the loans. The long-term
fixed-rate real estate loans sold on a servicing-released basis during the prior
two years were not as attractive to customers in the rising rate environment of
2000. During 1999, securities gains totaled $3,000, and $40,000 was recorded on
servicing-released loan sales. During 1998, securities gains totaled $57,000,
$46,000 was recorded on servicing-released loan sales and a $64,000 gain was
recorded on the sale of a parking lot owned by a subsidiary of Potters Bank.

NONINTEREST INCOME

Noninterest income increased $93,000, or 18.5%, during 2000 compared to 1999.
Excluding nonrecurring PFC miscellaneous income of $29,000 from 2000 and the
$37,000 franchise tax refund from 1999, noninterest income grew $101,000, or
21.7%, during 2000 over 1999. Noninterest income from core operations has
continued to grow over the last three years from a larger customer base
producing increasing numbers of accounts and increased usage of Potters Bank's
fee based products and services by those customers. Growth in such income during
2000 showed a $157,000, or 38.4%, increase over 1998.

Excluding the 1999 $37,000 refund mentioned above, service charges and other
noninterest income increased 13.7% during 1999 compared to 1998. Specific areas
of improvement over the last three years included service charges on deposits
from new checking accounts, increases in automated teller machine ("ATM") and
VISA Check Card fee income, other service fees, increased rental income from the
rental of branch office space for the financial investment service and corporate
office space to local businesses and other miscellaneous income.

NONINTEREST EXPENSE

Noninterest expense increased $121,000, or 3.5%, during 2000 compared to 1999.
Excluding the net loss of $112,000 on the settlement of the lawsuit involving
the $448,000 cashiers checks, noninterest expense increased only $9,000 during
2000 over the prior year. Salaries and employee benefits costs declined
$121,000, primarily from the closing of the Mentor loan production office during
the second quarter of 2000 and higher loan deferral costs, offset by increased
performance-based compensation. Occupancy and equipment costs increased $31,000
with technology purchases and the renovation of the Calcutta branch office and
expansion of its drive through facility. Professional service fees increased
$141,000, primarily as a result of the additional fees paid to resolve the
lawsuit and the utilization of a consultant during 2000 to aid in the
development of a three-year technology plan. Other noninterest expense increased
$100,000 during 2000 over 1999, but excluding the $112,000 cashiers checks
settlement, actually declined $9,000 during the year. Savings were realized from
lower deposit insurance premiums and regulatory supervisory fees, offset by
higher employee training and ATM/Check Card costs.

Noninterest expense increased $362,000, or 11.7%, during 1999 over 1998.
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. 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 compared to 1998. 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.
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.


                                                                              37
<PAGE>   38

During 2000, Potters Bank submitted application to the Federal Deposit Insurance
Corporation and the State of Ohio for approval to establish a branch office in
Beaver, Pennsylvania. Regulatory approval was received and ground was broken for
the new full-service office in January 2001. The strategic plan includes the
pursuit of expansion in geographic and service markets. The choice of Beaver, a
growing community twenty miles east of East Liverpool, as a location for a new
branch came after much research and analysis. Potters Bank has been originating
loans in that area and plans a full-service facility intended to increase the
deposit base needed to fund loan growth, although there can be no assurance that
the branch will be successful in attracting additional loans or deposits. During
construction and the initial start-up of operations, the branch will be
incurring net expense.

INCOME TAXES

Despite higher net income, income tax expense of $585,000 during 2000 was a
$135,000 decrease from the $720,000 recorded in 1999, and an $11,000 decline
from the $596,000 recorded in 1998. The decrease in income taxes during 2000 was
primarily the result of the recording of $83,000 in historical tax credits and
an additional credit of $17,000 relating to a low income housing project. Other
variances over the three years were primarily from the net increase 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 grew $7.7 million, or 5.4%, during 2000, from $143.7 million at December
31, 1999, to $151.4 million at December 31, 2000. Net loan growth of $11.5
million, or 10.7%, was funded primarily through deposit inflows and, to a lesser
extent, securities calls and repayments and the utilization of additional funds
on hand at year-end 1999 to maintain liquidity for customer demands relating to
the year 2000.

Securities activities during 2000 included the purchase of municipal securities
totaling $2.1 million, while repayments and calls on the available-for-sale
portfolio totaled $3.9 million. A $550,000 security was sold, generating a gain
of $9,000. Highly rated, insured municipal securities were purchased as part of
a strategy to reduce income tax expense. At year-end 2000, 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 decreased significantly during 2000, from $818,000 at year-end 1999 to
$58,000 at year-end 2000, primarily from rising prices on adjustable-rate
mortgage-backed securities and stepped-rate notes from the FHLB. The equity
component, representing the net after-tax unrealized losses on securities
available for sale, decreased from $540,000 at December 31, 1999, to $39,000 at
December 31, 2000.

Net loans grew to $119.9 million at December 31, 2000, compared to $108.4
million at December 31, 1999. Loan purchases of $8.1 million during 2000 and
$3.8 million in net loan originations caused the increase in loans. Loans
originated for sale during 2000 totaled $809,000, $776,000 of which was sold,
retaining the servicing, generating a gain of $8,000. Real estate loans
increased $12.9 million, or 14.6%, during 2000, with $7.7 million, or 10.9%, in
one-to-four family real estate loans, and $5.1 million, or 29.5% in multifamily
and commercial real estate loans. Commercial business loans also increased
during 2000, by $1.1 million. The rising rate environment during much of 2000
and customer preference during such times for adjustable-rate loans instead of
the long-term fixed rate loans usually sold by Potters Bank resulted in
significantly lower loans originated for sale compared to the prior year. The
Mentor loan production office was closed in April 2000 because its loan volume
was not sufficient to offset the expenses of continuing the loan production
office. The strategic plan calls for continued diversification of the loan
portfolio and growth in higher-yielding commercial real estate and other
consumer and commercial loans, along with an increasing reliance on internally
generated loans. Although loan purchases continued to contribute to loan growth
during 2000, the dollar volume of purchases declined over 50% during the year,
from $17.4 million during 1999, compared to $8.1 million during 2000.




                                                                              38
<PAGE>   39


However, there can be no assurance the demand for loans will continue in
surrounding local areas, or that the Boardman loan production office or the
proposed Beaver Office will successfully penetrate their respective markets.

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. A majority of commercial real estate loans were originated with
variable rates of interest. The ratio of loans to deposits increased to 103.5%
at December 31, 2000, from 100.1% at December 31, 1999.

Total deposits increased $7.5 million, or 6.8%, from $110.3 million at year-end
1999, to $117.8 million at December 31, 2000. Certificates of deposits grew $4.6
million, while savings accounts grew $3.3 million, primarily from net inflows of
$5.7 million into the Treasury Index savings account tied to the 90-day Treasury
bill. Numbers of checking accounts increased 32.2% during 2000, 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, 2000.
Potters Bank participates in the State of Ohio's Bid-Deposit Program, a monthly
on-line auction for State funds.

At December 31, 2000, FHLB advances totaled $19.5 million, compared to $21.3
million at year-end 1999. Advances totaling $4.2 million received during 2000
were used primarily for liquidity management. Advances totaling $6.0 million
were repaid during 2000, primarily replaced by deposit inflows.

Shareholders' equity increased $1.3 million during 2000, primarily from net
income of $1.4 million. Other changes were a $501,000 decrease in the unrealized
loss on securities available for sale, offset by the purchase of 28,850 PFC
common shares for $281,000 and the payment of $394,000, or $.39 per share, in
dividends to shareholders. A 5% stock dividend was paid in 2000 from treasury
shares, resulting in changes within the components of shareholders' equity, but
no impact on overall equity.

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 change of Potters Bank from a savings and loan institution to a savings bank
in early 2000 prompted a change in regulators. The primary regulator of all
Ohio-chartered savings banks, as with all Ohio-chartered savings and loan
institutions, is the State of Ohio. The federal regulator, however, changed from
the Office of Thrift Supervision (the "OTS"), which regulates savings and loan
institutions, to the Federal Deposit Insurance Corporation (the "FDIC"), which
regulates savings banks. The overall expectations of the OTS and the FDIC with
respect to interest rate risk, however, are largely the same - utilize an
appropriate system to measure interest rate risk and sensitivity, manage
interest rate risk, communicate that risk to the Board of Directors and
demonstrate quarterly compliance with board-approved limits. One difference
between the two regulators is in the nomenclature. The OTS defines risk in terms
of the net portfolio value ("NPV") approach, while the FDIC titles that same
concept the Economic Value of Equity ("EVE"). Another difference between the OTS
and the FDIC is in specific monitoring and reporting requirements. The OTS
requires the monitoring and reporting of NPV only. In addition to the EVE, the
FDIC also requires board approved limits, measurement and ongoing monitoring of
the change in net income from a 200 basis point increase or decrease in interest
rates.



                                                                              39
<PAGE>   40
The ALCO utilizes the NPV/EVE approach and simulation modeling to aid in making
decisions relating to pricing and the relative mix of interest rate sensitive
assets and liabilities. NPV/EVE 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 quantifies the largest
number of basis points lost in the NPV/EVE ratio when interest rates increase or
decrease 200 basis points.

During 1999, Potters Bank utilized a quarterly Interest Rate Risk Exposure
report provided by the OTS. As a result of the change to a savings bank, Potters
Bank no longer received the OTS Interest Rate Risk Exposure report in 2000.
Internally generated reports using commercial software were utilized to measure
interest rate risk during the first half of the year. During the third quarter
2000, interest rate risk software was purchased. The software utilizes call
report data to generate interest rate risk position reports and peer
comparisons, and is more comparable to the OTS reports previously provided.

Presented below, as of December 31, 2000 and December 31, 1999, is an analysis
of interest rate risk as measured by the projected NPV/EVE ratio for
instantaneous and sustained parallel shifts in the yield curve in 100 basis
point increments up and down 200 basis points, compared to current policy limits
of the Board of Directors. The NPV/EVE ratio is calculated by subtracting the
present value of liabilities from the present value of assets and dividing such
difference by the present value of assets. Generally, Potters Bank's NPV/EVE
ratio 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. Commercially generated assumptions similar to the OTS
assumptions were used in calculating the amounts in this table during 2000,
while actual OTS assumptions were used at December 31, 1999.

Change in          Minimum        December 31,         Minimum      December 31,
Interest Rate       Board              2000             Board           1999
(Basis Points)       EVE               EVE               NPV             NPV
 ------------        ---               ---               ---             ---

       +200          6.40%             6.77%             7.50%          6.98%
       +100          7.20              7.60              7.75           8.16
          -          8.00              8.35              8.00           9.10
       -100          7.20              8.86              7.75           9.69
       -200          6.40              9.00              7.50          10.31

  Change in         Minimum           December 31,
  Net Income        Board             2000
(Basis Points)      Change(1)         Change(1)
 ------------       ------            ------

       +200         (10.00)%          (6.15)%
       -200          10.00             7.33

-------------
(1) In addition to the EVE, required by the OTS as the NPV, the FDIC requires an
analysis and measurement of the increase or decrease in net income given a 2.0%
increase or decrease in interest rates. It also requires the Board to set limits
for such increases or decreases and be informed of compliance on a quarterly
basis.

At December 31, 2000, the EVE ratio assuming no change in current rates was
8.35%, lower than the 9.10% NPV at December 31, 1999. At year-end 2000, an
assumed 200 basis point increase in interest rates caused the EVE ratio to
decline from 8.35% to 6.77%. At year-end 1999, the NPV ratio declined from 9.10%
to 6.98% after the same 200 basis point increase in interest rates. During 2000,
exposure to interest rate risk was impacted primarily by the interest rate
environment. The U.S. Treasury Yield Curve, which tracks the rates offered by
the U.S. government on instruments of varying maturities, was significantly
lower for the medium and longer-term maturity periods at December 31, 2000, but
was


                                                                              40

<PAGE>   41

significantly higher for short-term time periods than at December 31, 1999,
causing a much flatter yield curve. With this yield curve, there was not much
difference at December 31, 2000 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 EVE at year-end
2000 compared to the NPV at year-end 1999, during a 200 basis point upward shift
in rates.

Interest rate sensitivity declined during 2000 compared to 1999. The sensitivity
measure, or change in the EVE ratio, decreased from a negative 212 basis points
at year-end 1999, to a negative 158 basis points at December 31, 2000. The
percentage change in EVE and NPV under all scenarios was within the
Board-imposed limits at both period ends, except for a 200 basis point increase
in interest rates at December 31, 1999, where the projected NPV was 52 basis
points lower than the 7.50% minimum. The Board was informed of the situation
and, early in 2000, the Board reviewed and revised the existing minimum levels
required and set minimum limits for the percentage change in net income. At
December 31, 2000, the projected changes in net income from a 200 basis point
increase or decrease in interest rates were within the minimum limits
established by the Board.

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/EVE calculations.

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, 2000 and 1999:

<TABLE>
<CAPTION>
                                                    Years ended December 31,
                                                       2000        1999
                                                     --------    --------
                                                    (Dollars in thousands)
<S>                                                 <C>         <C>
           Net income                                $  1,447    $  1,346
           Adjustments to reconcile net income
             to net cash from operating activities        808          47
                                                     --------    --------
           Net cash from operating activities           2,255       1,393
           Net cash from investing activities          (9,802)    (14,720)
           Net cash from financing activities           5,087       8,740
                                                     --------    --------
           Net change in cash and cash equivalents     (2,460)     (4,587)
           Cash and cash equivalents at the
             beginning of the year                      7,820      11,867
                                                     --------    --------
           Cash and cash equivalents at the end
             of the year                             $  4,820    $  7,280
                                                     ========    ========
</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.
Significant components of investing activities during 2000 were loan purchases
of $8.1 million, net loan originations of $3.8 million and securities repayments
and calls totaling $3.9 million, offset by purchases of $2.1 million of
municipal securities. 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


                                                                              41
<PAGE>   42

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.

Cash flows from financing activity during 2000 included net deposit inflows of
$7.5 million and net repayments of FHLB advances of $1.8 million. Financing
activity during 1999 included net deposit inflows of $5.7 million and a net
increase in FHLB advances of $4.1 million.

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 2000, the average regulatory liquidity ratio was
12.65%. At year-end 2000, commitments to originate loans and unused credit lines
totaled $7.8 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.

At December 31, 2000, 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 2000 and 1999 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 100.0% and 99.1% of the
carrying values at December 31, 2000 and 1999. At December 31, 2000 and 1999,
the estimated fair value of deposits was 100.02% and 99.9% of its carrying
value.

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.



                                                                              42
<PAGE>   43

ITEM 7.    FINANCIAL STATEMENTS.

                          POTTERS FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 2000 and 1999
                             (Dollars in thousands)
--------------------------------------------------------------------------------
                                                    2000         1999
                                                 ---------    ---------
ASSETS

      Cash and due from financial institutions   $   3,930    $   6,441
      Interest-bearing deposits                        401          801
      Federal funds sold                               489           38
                                                 ---------    ---------
         Cash and cash equivalents                   4,820        7,280
      Securities available for sale                 21,177       22,751
      Federal Home Loan Bank stock                   1,274        1,184
      Loans, net                                   119,903      108,360
      Accrued interest receivable                    1,349        1,343
      Premises and equipment, net                    2,016        1,960
      Other assets                                     896          858
                                                 ---------    ---------

                                                 $ 151,435    $ 143,736
                                                 =========    =========


LIABILITIES AND SHAREHOLDERS' EQUITY

      Liabilities

      Deposits                                   $ 117,792    $ 110,335
      Federal Home Loan Bank advances               19,500       21,300
      Accrued expenses and other liabilities         1,810        1,081
                                                 ---------    ---------

         Total liabilities                         139,102      132,716


      Shareholders' equity
      Common stock, no par value;
        2,000,000 shares authorized;
        1,116,528 shares issued
      Paid-in capital                                5,288        5,429
      Retained earnings                              8,567        7,945
      Accumulated other
        comprehensive income                           (39)        (540)
      Unearned compensation on
        recognition and retention plan shares          (46)         (60)
      Treasury stock, at cost:  118,539 shares
        in 2000 and 137,385 in 1999                 (1,437)      (1,754)
                                                 ---------    ---------

         Total shareholders' equity                 12,333       11,020
                                                 ---------    ---------

                                                 $ 151,435    $ 143,736
                                                 =========    =========
--------------------------------------------------------------------------------
                             See accompanying notes.

                                                                              43

<PAGE>   44


                          POTTERS FINANCIAL CORPORATION

                   For the three years ended December 31, 2000
                  (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
                                               2000             1999            1998
                                             --------         --------        --------
<S>                                        <C>               <C>             <C>
INTEREST AND DIVIDEND INCOME
      Loans, including fees                  $  9,772         $  8,537        $  7,243
      Securities                                1,447            1,460           1,756
      Federal funds sold and other                122              150             263
                                             --------         --------        --------
                                               11,341           10,147           9,262
INTEREST EXPENSE
      Deposits                                  5,104            4,186           4,262
      Federal Home Loan Bank advances           1,236            1,055             770
                                             --------         --------        --------
                                                6,340            5,241           5,032
                                             --------         --------        --------

NET INTEREST INCOME                             5,001            4,906           4,230

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

NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES                     5,001            4,981           4,230
Gains on sales of loans, securities
 and other assets                                  17               43             167
Noninterest income                                595              502             409
Noninterest expense                             3,581            3,460           3,098
                                             --------         --------        --------

INCOME BEFORE INCOME TAX                        2,032            2,066           1,708

Income tax expense                                585              720             596
                                             --------         --------        --------

NET INCOME                                   $  1,447         $  1,346        $  1,112
                                             ========         ========        ========
Earnings per common share
      Basic                                  $   1.46         $   1.32        $   1.03
                                             ========         ========        ========

      Diluted                                $   1.43         $   1.29        $   0.99
                                             ========         ========        ========
</TABLE>


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                    2000         1999         1998
                                                  --------     --------     --------
<S>                                              <C>          <C>          <C>
NET INCOME                                        $ 1,447      $ 1,346      $ 1,112
Other comprehensive income (net of tax):
      Change in unrealized loss on
       securities available for sale
       arising during the period                      507         (497)         (12)
      Transition adjustment from adoption
       of SFAS No. 133                                                           18
      Reclassification adjustment for
       accumulated (gains)/losses
       included in net income                          (6)          (2)         (30)
                                                  -------      -------      -------

      Total other comprehensive income (loss)         501         (499)         (24)
                                                  -------      -------      -------

COMPREHENSIVE INCOME                              $ 1,948      $   847      $ 1,088
                                                  =======      =======      =======
</TABLE>
--------------------------------------------------------------------------------
                             See accompanying notes.

                                                                             44


<PAGE>   45


                          POTTERS FINANCIAL CORPORATION
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                   For the three years ended December 31, 2000
                  (Dollars in thousands, except per share data)

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                 Accumulated
                                                                                    other       Recognition
                                                            Paid-in   Retained  comprehensive       and        Treasury
                                                            capital   earnings      income     Retention Plan   stock      Total
                                                            -------   --------  -------------  --------------  --------   -------
<S>                                                        <C>       <C>       <C>            <C>             <C>        <C>
BALANCE - JANUARY 1,1998                                     $5,159    $7,350       $ (17)          $(87)      $(1,399)   $11,006
Net income                                                              1,112                                               1,112
5,170 common shares issued for stock option exercises            36                                                            36
Purchase of 44,812 treasury shares                                                                                (780)      (780)
Cash dividends declared ($.209 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 ($.309 per common share)                         (318)                                               (318)
Stock dividend declared                                         176    (1,316)                                   1,140
Recognition and retention plan shares earned                                                          14                       14
Tax benefit arising from stock option
 and recognition and retention plan shares                       42                                                            42
Change in unrealized loss on securities available for sale                           (499)                                   (499)
                                                             ------    ------       -----           ----       -------    -------
BALANCE - DECEMBER 31, 1999                                   5,429     7,945        (540)           (60)       (1,754)    11,020
Net income                                                              1,447                                               1,447
Purchase of 28,850 treasury shares                                                                                (281)      (281)
Cash dividends declared ($.39 per common share)                          (394)                                               (394)
Stock dividend declared                                        (167)     (431)                                     598
Recognition and retention plan shares earned                                                          14                       14
Tax benefit arising from stock option
 and recognition and retention plan shares                       26                                                            26
Change in unrealized loss on securities available for sale                            501                                     501
                                                             ------    ------       -----           ----       -------    -------
BALANCE - DECEMBER 31, 2000                                  $5,288    $8,567       $ (39)          $(46)      $(1,437)   $12,333
                                                             ======    ======       =====           ====       =======    =======
</TABLE>
--------------------------------------------------------------------------------
                             See accompanying notes.


                                                                             45

<PAGE>   46



                          POTTERS FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   For the three years ended December 31, 2000
                             (Dollars in thousands)

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


<TABLE>
<CAPTION>
                                                                 2000              1999              1998
                                                                 ----              ----              ----
<S>                                                             <C>              <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES

      Net income                                                $ 1,447          $  1,346          $  1,112
      Adjustments to reconcile net income to net
        cash from operating activities
         Depreciation and amortization                              303               296               216
         Provision for losses                                                         (75)
         Net amortization of securities                              43                87                64
         Net realized (gain) loss on:
             Sales of securities                                     (9)               (3)              (57)
             Sales of loans                                          (8)              (40)              (46)
             Sales of foreclosed real estate and
               repossessed assets                                    (3)                                  1
             Sales of other assets                                                                      (64)
         Stock dividend on Federal Home Loan Bank stock             (90)              (77)              (67)
         Loans originated for sale                                 (809)           (5,577)           (6,877)
         Proceeds from sales of loans held for sale                 776             6,359             6,232
         Net change in:
             Deferred taxes                                          36                68                73
             Other assets and liabilities                           573              (991)               57
                                                                -------          --------          --------

                Net cash from operating activities                2,259             1,393               644
                                                                -------          --------          --------

CASH FLOWS FROM INVESTING ACTIVITIES

      Activity in available-for-sale securities:
           Sales                                                    550               577             3,422
           Maturities, repayments and calls                       3,884             8,101             7,088
           Purchases                                             (2,135)           (8,556)           (7,666)
      Activity in held-to-maturity securities:
         Maturities, repayments and calls                                                             6,031
      Purchase of Federal Home Loan Bank stock                                       (116)              (65)
      Loan originations and payments, net                        (3,784)            3,216             8,718
      Loan purchases                                             (8,061)          (17,407)          (20,868)
      Proceeds from sale of foreclosed real estate
        and repossessed assets                                       40                                   6
      Proceeds from sale of premises                                                                    100
      Additions to property and equipment                          (300)             (535)             (133)
                                                                -------          --------          --------

                Net cash from investing activities               (9,806)          (14,720)           (3,367)
                                                                -------          --------          --------
</TABLE>


-------------------------------------------------------------------------------
                                  (Continued)


                                                                              46
<PAGE>   47






                          POTTERS FINANCIAL CORPORATION
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                   For the three years ended December 31, 2000
                             (Dollars in thousands)

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

<TABLE>
<CAPTION>
                                                                   2000              1999              1998
                                                                   ----              ----              ----
<S>                                                             <C>               <C>               <C>
CASH FLOWS FROM FINANCING ACTIVITIES
      Net change in deposits                                       7,457             5,691             4,550
      Proceeds from Federal Home Loan Bank advances                4,150            15,300            17,300
      Repayments of Federal Home Loan Bank advances               (5,950)          (11,247)          (10,046)
      Repurchase of common stock                                    (281)             (726)             (780)
      Proceeds from exercise of stock options                                            4                36
      Cash dividends paid                                           (394)             (318)             (229)
      Other financing activities                                     105                36               (57)
                                                                --------          --------          --------

                Net cash from financing activities                 5,087             8,740            10,774
                                                                --------          --------          --------

Net change in cash and cash equivalents                           (2,460)           (4,587)            8,051

Cash and cash equivalents at beginning of year                     7,280            11,867             3,816
                                                                --------          --------          --------

CASH AND CASH EQUIVALENTS AT END OF YEAR                        $  4,820          $  7,280          $ 11,867
                                                                ========          ========          ========


Supplemental cash flow information:

      Interest paid                                             $  6,198          $  5,204          $  5,022
      Income taxes paid                                              483               887               431

Supplemental noncash disclosures:

      Transfer from loans to foreclosed real estate and
        repossessed assets                                      $    279                            $      6
      Transfer from held-to-maturity securities
        to available-for-sale securities                                                              22,112
      Recognition and retention plan shares earned                    14          $     14                13
</TABLE>




-------------------------------------------------------------------------------
                             See accompanying notes.



                                                                              47
<PAGE>   48


                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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



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 office in
Boardman, 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)



                                                                              48
<PAGE>   49
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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



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 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.

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 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.



--------------------------------------------------------------------------------
                                  (Continued)



                                                                              49
<PAGE>   50

                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock Dividends: A 5% stock dividend was distributed in July 2000 and a 10%
stock dividend was distributed in March 1999. Share data has been adjusted to
reflect the stock dividends. 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 and vesting of recognition
and retention plan shares. 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>
                                                              2000         1999           1998
                                                              ----         ----           ----
<S>                                                        <C>          <C>            <C>
         Weighted average common shares
          outstanding for basic EPS                          993,423     1,016,740      1,082,728
         Add:  Dilutive effects of assumed exercises
          of stock options and recognition and
          retention plan                                      18,635        28,738         36,160
                                                           ---------     ---------      ---------
         Average shares and dilutive potential
          common shares                                    1,012,058     1,045,478      1,118,888
                                                           =========     =========      =========
</TABLE>

As of December 31, 2000 and 1999, there were 31,078, and 32,655 antidilutive
stock options. Antidilutive stock options are those in which the exercise price
of the option exceeds the fair market value of the underlying stock. The
antidilutive stock options were excluded from the above calculation.

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.

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 1998 and 1999 financial
statements have been reclassified to correspond with the 2000 presentation.




--------------------------------------------------------------------------------
                                  (Continued)

                                                                              50
<PAGE>   51

                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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


NOTE 2 - SECURITIES

Securities available for sale at year-end were as follows:


<TABLE>
<CAPTION>
                                                      Gross           Gross
                                    Amortized       Unrealized      Unrealized          Fair
                                       Cost           Gains           Losses            Value
                                       ----           -----           ------            -----
                                                      (Dollars in thousands)
<S>                                 <C>             <C>             <C>                <C>
2000
       U.S. government and
         federal agencies             $ 9,496         $   9          $   (110)         $ 9,395
       States and municipalities        2,282            95                              2,377
       Other                              259             1                                260
       Mortgage-backed securities       9,176            22               (75)           9,123
                                      -------         -----          --------          -------
       Total debt securities           21,213           127              (185)          21,155

        Equity securities                  22                                               22
                                      -------         -----          --------          -------

                                      $21,235         $ 127          $   (185)         $21,177
                                      =======         =====          ========          =======

1999
       U.S. government and
         federal agencies             $10,496                        $   (578)         $ 9,918
       States and municipalities          158         $  14                                172
       Other                              342             1                                343
       Mortgage-backed securities      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
                                      =======         =====          ========          =======
</TABLE>


Contractual maturities of debt securities available for sale at year-end 2000,
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.

                                                  Amortized
                                                     Cost      Fair Value
                                                     ----      ----------
                                                  (Dollars in thousands)

     Due in one year or less                       $ 4,003      $ 4,003
     Due after one year through five years           3,345        3,343
     Due after five years through ten years              3            3
     Due after ten years                             4,686        4,683
     Mortgage-backed securities                      9,176        9,123
                                                   -------      -------
                                                   $21,213      $21,155
                                                   =======      =======


--------------------------------------------------------------------------------
                                  (Continued)

                                                                              51
<PAGE>   52
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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


NOTE 2 - SECURITIES (Continued)

Securities totaling $550,000 were sold during 2000, resulting in a gross gain of
$9,000, while calls totaled $1.0 million with no gain or loss. 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.

As of December 31, 2000 and 1999, securities totaling $14.0 million and $11.2
million, respectively, were pledged to collateralize public funds.

NOTE 3 - LOANS

Loans at year-end were as follows:

                                                  2000                1999
                                                  ----                ----
                                                   (Dollars in thousands)
Real estate mortgage loans
        One-to-four family residences          $  78,463          $  70,732
        Loans held for sale                           96                 55
        Nonresidential property                   19,572             14,257
        Multifamily and other                      2,839              3,055
                                               ---------          ---------
                                                 100,970             88,099
Consumer and other loans
        Home equity loans                         13,282             13,301
        Purchased second mortgages                 4,631              5,715
        Consumer loans and lines of credit         1,920              2,309
        Commercial business loans                  1,555                472
        Other                                      1,854              1,716
                                               ---------          ---------
                                                  23,242             23,513
                                               ---------          ---------

        Total loan principal balances            124,212            111,612
        Undisbursed loan funds                    (2,909)            (1,848)
        Premiums on purchased loans
        and net deferred loan (fees) costs           564                633
        Allowance for loan losses                 (1,964)            (2,037)
                                               ---------          ---------

                                               $ 119,903          $ 108,360
                                               =========          =========


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

                                        2000        1999       1998
                                        ----        ----       ----
                                          (Dollars in thousands)


        Beginning balance             $ 2,037     $ 2,211     $ 2,143
        Provision for loan losses                     (75)
        Recoveries                         40          26         127
        Charge-offs                      (113)       (125)        (59)
                                      -------     -------     -------
        Ending balance                $ 1,964     $ 2,037     $ 2,211
                                      =======     =======     =======



--------------------------------------------------------------------------------
                                  (Continued)

                                                                              52
<PAGE>   53

                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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


NOTE 3 - LOANS (Continued)

Nonaccrual and renegotiated loans totaled $841,000 and $316,000 at December 31,
2000 and 1999. Interest income that would have been recorded on such loans under
their original terms totaled approximately $77,000 and $30,000 for the years
ended December 31, 2000 and 1999. The amounts included in interest income for
such loans totaled approximately $29,000 during 2000 and $15,000 during 1999.
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 because nonperforming loans consisted of residential mortgages
and consumer loans that are not impaired.

NOTE 4 - ACCRUED INTEREST RECEIVABLE

Accrued interest receivable at year-end was as follows:

                                                2000         1999
                                                ----         ----
                                              (Dollars in thousands)

           Loans                               $1,082       $1,060
           Securities                             205          207
           Mortgage-backed securities              62           76
                                               ------       ------

                                               $1,349       $1,343
                                               ======       ======

NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment at year-end was as follows:

                                                2000         1999
                                                ----         ----
                                               (Dollars in thousands)

           Land                                $  177       $  142
           Buildings and improvements           2,748        2,593
           Furniture and equipment              1,399        1,289
                                               ------       ------
                                                4,324        4,024
           Less: Accumulated depreciation       2,308        2,064
                                               ------       ------

                                               $2,016       $1,960
                                               ======       ======

NOTE 6 - DEPOSITS

Deposits at year-end were as follows:

<TABLE>
<CAPTION>
                                                     2000                     1999
                                                     ----                     ----
                                              Amount      Percent      Amount       Percent
                                              ------      -------      ------       -------
                                                         (Dollars in thousands)
<S>                                          <C>          <C>        <C>            <C>
Demand, NOW, and Super NOW accounts
  (Noninterest bearing deposits: 2000 -
  $2,009,000; 1999 - $1,899,000)             $ 16,343       13.8%     $ 16,578       15.0%
Savings and club accounts                      40,508       34.3        37,221       33.7
Money market demand accounts                    1,272        1.3         1,438        1.3
Certificates of deposit                        59,669       50.6        55,098       50.0
                                             --------      -----      --------      -----
                                             $117,792      100.0%     $110,335      100.0%
                                             ========      =====      ========      =====
</TABLE>


--------------------------------------------------------------------------------
                                  (Continued)

                                                                              53
<PAGE>   54

                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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


NOTE 6 - DEPOSITS (Continued)

Certificates of deposit with a minimum denomination of $100,000 were $15,645,000
and $10,456,000 at year-end 2000 and 1999.

Scheduled maturities of certificates of deposit were as follows:

                                       Maturities
                                       ----------
                                 (Dollars in thousands)
                      2001               $33,695
                      2002                16,554
                      2003                 5,311
                      2004                 1,916
                      2005                 2,193
                                         -------

                                         $59,669
                                         =======

NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES

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

<TABLE>
<CAPTION>
                                                                         2000           1999
                                                                         ----           ----
                                                                       (Dollars in thousands)
<S>                                                                     <C>           <C>
Maturities March 2000 through December 2009, primarily
 convertible fixed-rate, from 4.75% to 6.50%, averaging 5.43%                         $21,300

Maturities March 2001 through May 2010, primarily
 convertible fixed-rate, from 5.54% to 6.50%, averaging 5.99%           $19,500
                                                                        -------       -------

                                                                        $19,500       $21,300
                                                                        =======       =======
</TABLE>

FHLB advances are payable at maturity, or prior to maturity with prepayment
penalties. At year-end 2000, advances totaling $12,000,000 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 of the
advances. 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 were as follows:

                                               Maturities
                                               ----------
                                         (Dollars in thousands)
                      2001                      $ 2,000
                      2002                        5,500
                      2003
                      2004
                      2005
                      2006 and thereafter        12,000
                                                -------
                                                $19,500



--------------------------------------------------------------------------------
                                  (Continued)

                                                                              54
<PAGE>   55
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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


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 $63,000 in 2000, $60,000 in 1999 and $56,000 in 1998.
PFC common shares are available as an investing option to all participants of
the plan. The 401(k) plan purchased 4,763 common shares for participants during
2000, 2,611 shares during 1999 and 7,219 shares during 1998.

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 36,659 shares available to be awarded under the plan,
47,163 shares have been awarded and 10,534 shares forfeited upon the termination
of employment by participants. During 2000, 3,117 shares were earned of the
16,747 shares awarded during 1998 and 1,000 shares were granted. At December 31,
2000, 30 shares were available to be awarded. Compensation expense totaled
$41,000, $56,000 and $6,000 for 2000, 1999 and 1998. Unearned compensation is
reported as a reduction of shareholders' equity until earned.

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 $34,000, $66,000 and $61,000 for 2000,
1999 and 1998. At year-end 2000, 21,397 shares of PFC common stock were owned by
the ESOP, of which 14,640 shares were allocated to employee accounts and 6,757
shares were purchased in 2000 and will be allocated to participants in future
periods based on plan criteria. At year-end 1999, the ESOP owned 14,640 shares
of PFC common stock, of which 12,944 shares were allocated to employee accounts
and 1,696 shares were allocated to plan participants in 2000. At year-end 2000,
the estimated fair value of shares subject to the cash distribution option,
based on the last sales price quoted in 2000 on the Nasdaq SmallCap Market,
totaled $177,000.

NOTE 10 - STOCK OPTION PLANS

Options to buy stock are granted to directors, officers and other key employees.
In addition to the outstanding stock options summarized below, 3,987 shares were
available to be granted as of December 31, 2000. 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)

                                                                              55
<PAGE>   56

                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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


NOTE 10 - STOCK OPTION PLANS (Continued)

A summary of activity in the plan was as follows:


<TABLE>
<CAPTION>
                                           2000                     1999                    1998
                                           ----                     ----                    ----
                                                 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                            85,078        $ 7.89     54,502        $ 5.20    59,930       $5.33
Granted                             26,351          8.57     31,500         12.44
Forfeited                           (5,360)        11.80
Exercised                                                      (924)         4.33    (5,428)       6.69
                                   -------                   ------                  ------

Outstanding - year-end             106,069          7.86     85,078          7.89    54,502        5.20
                                   =======                   ======                  ======
Weighted average fair value
 of options granted                               $ 2.02                   $3.68
</TABLE>



Options outstanding at year-end 2000 were as follows:

                                                     Weighted
                                                     Remaining
                                      Options       Contractual
Range of exercise price             Outstanding        Life
-----------------------             -----------        ----

$5-$10                                77,196          5.3 yrs
$11-$15                               28,873          8.3
                                     -------

Outstanding and exercisable
 at year-end                         106,069          6.1 yrs
                                     =======

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>
                                                  2000           1999         1998
                                                  ----           ----         ----
                                           (Dollars in thousands, except per share data)
<S>                                              <C>            <C>          <C>
Net income as reported                           $1,447         $1,346       $1,112
Pro forma net income                              1,394          1,273        1,112

Basic earnings per share as reported             $ 1.46         $ 1.32       $ 1.03
Pro forma basic earnings per share                 1.40           1.25         1.03

Diluted earnings per share as reported           $ 1.43         $ 1.29       $ 0.99
Pro forma diluted earnings per share               1.38           1.22         0.99
</TABLE>




--------------------------------------------------------------------------------
                                  (Continued)

                                                                              56
<PAGE>   57
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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


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.

                                        2000          1999
                                        ----          ----
Risk free interest rate                  6.30%         5.70%
Expected option life                     6 yrs         6 yrs
Expected stock price volatility         29.16%        28.04%
Dividend yield                           4.73%         1.24%

NOTE 11 - INCOME TAXES

Income tax expense was as follows:

                                        2000       1999      1998
                                        ----       ----      ----
                                          (Dollars in thousands)
        Current                         $549       $652      $523
        Deferred                          36         68        73
                                        ----       ----      ----

                                        $585       $720      $596
                                        ====       ====      ====

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

                                                         2000         1999
                                                         -----        -----
                                                       (Dollars in thousands)

Deferred tax assets:
  Allowance for loan losses                              $ 593        $ 588
  Depreciation                                              15           13
  Unrealized loss on securities available for sale          20          278
  Other                                                     16           11
                                                         -----        -----
                                                           644          890
                                                         -----        -----

Deferred tax liabilities:
  FHLB stock dividends                                    (247)        (216)
  Other                                                    (44)         (27)
                                                         -----        -----
                                                          (291)        (243)
                                                         -----        -----

Net deferred tax asset                                   $ 353        $ 647
                                                         =====        =====

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, 2000. 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)

                                                                              57
<PAGE>   58
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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

NOTE 11 - INCOME TAXES (Continued)

Effective tax rates differ from the federal statutory rate of 34% applied to
financial statement income due to the following:

                                       2000        1999      1998
                                       ----        ----      ----
                                         (Dollars in thousands)

        Federal statutory rate
         times financial income        $ 691       $703      $581
        Effect of:
           Tax exempt income              (7)        (4)       (4)
           Tax credits                  (103)
           Other                           4         21        19
                                       -----       ----      ----
           Total                       $ 585       $720      $596
                                       =====       ====      ====

NOTE 12 - RELATED PARTY TRANSACTIONS

Loans to principal officers, directors and their affiliates in 2000 were as
follows:

                                          (Dollars in thousands)

      Balance at beginning of year               $1,154
      New loans and advances                        105
      Repayments                                    (68)
                                                 ------
      Balance at end of year                     $1,191
                                                 ======


Deposits from principal officers, directors and their affiliates at year-end
2000 and 1999 were $451,000 and $379,000.

NOTE 13 - COMMITMENTS

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.

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

                                         2000                     1999
                                         ----                     ----
                                            (Dollars in thousands)
                                   Fixed     Variable       Fixed      Variable
                                    Rate       Rate          Rate        Rate
                                    ----       ----          ----        ----
Commitments to make loans
 (at market rates)                  $730      $  521         $49        $  874
Unused lines of credit and
 letters of credit                             6,535                     6,157


--------------------------------------------------------------------------------
                                  (Continued)

                                                                              58
<PAGE>   59
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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


NOTE 13 - COMMITMENTS (Continued)

Commitments to make loans are generally made for periods of 60 days or less.
Fixed-rate loan commitments at December 31, 2000 had interest rates ranging from
7.375% to 8.125%, with maturities up to 30 years.

Cash Reserve Requirements: The Company is required to keep $477,000 of cash on
hand or on deposit with the Federal Reserve Bank to meet regulatory reserve
requirements at December 31, 2000. Such balances do not earn interest.

NOTE 14 - NONINTEREST INCOME AND EXPENSE

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

                                               2000         1999         1998
                                               ----         ----         ----
                                                   (Dollars in thousands)
Noninterest income
         Service charges                      $  282       $  232       $  219
         Other                                   313          270          190
                                              ------       ------       ------
             Total                            $  595       $  502       $  409
                                              ======       ======       ======
Noninterest expense

         Salaries and employee benefits       $1,517       $1,638       $1,431
         Occupancy and equipment                 471          440          384
         Federal deposit insurance                23           61           61
         Data processing                         213          205          184
         Professional services                   329          188          155
         Check kiting loss                       112
         Other                                   916          928          883
                                              ------       ------       ------
             Total                            $3,581       $3,460       $3,098
                                              ======       ======       ======

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 Trumbull
Counties in northeastern Ohio and Beaver and Allegheny Counties in northwestern
Pennsylvania. At December 31, 2000, the loan portfolio included approximately
$12.3 million of purchased one-to-four family real estate loans on properties
located in northwestern Ohio, $2.5 million on properties in southwestern Ohio
and $5.8 million on properties in Hilton Head, South Carolina. As of December
31, 2000, multifamily and nonresidential real estate loan purchases totaling
$1.1 million were secured by properties located in northwest Ohio, $2.0 million
in southwest Ohio, $617,000 in the State of Colorado and $247,000 locally. The
loan portfolio also included $4.4 million in real estate loans, $6.1 million
first mortgage home equity loans and $4.6 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
$7.2 million at December 31, 2000, $540,000 of which were purchased loans from
southwestern Ohio also reported above.



--------------------------------------------------------------------------------
                                  (Continued)

                                                                              59
<PAGE>   60

                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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

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.

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)
<S>                              <C>           <C>          <C>           <C>          <C>         <C>
2000
Total capital to risk-
 weighted assets                 $13,233       14.1%        $7,527        8.0%         $9,409      10.0%
Core capital to risk-
 weighted assets                  12,048       12.8          3,763        4.0           5,645       6.0
Core capital to
 adjusted total assets            12,048        8.0          4,533        3.0           7,554       5.0
Tangible capital to
 adjusted total assets            12,048        8.0          2,266        1.5             N/A


1999
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
</TABLE>


Regulations limit capital distributions by savings banks 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 2000, approximately $2.2 million was available for Potters Bank to pay
dividends to the holding company. Potters Bank is considered well-capitalized.



--------------------------------------------------------------------------------
                                  (Continued)

                                                                              60
<PAGE>   61
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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

NOTE 16 - REGULATORY MATTERS (Continued)

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 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.

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, 2000                December 31, 1999
                                           -----------------                -----------------
                                       Carrying        Estimated        Carrying         Estimated
                                         Value         Fair Value         Value         Fair Value
                                         -----         ----------         -----         ----------
                                                       (Dollars in thousands)
<S>                                   <C>              <C>              <C>             <C>
Financial assets:
Cash and cash equivalents             $   4,820        $   4,820        $   7,280        $   7,280
Securities available for sale            21,177           21,177           22,751           22,751
Loans, net                              119,903          119,923          108,360          107,375
Federal Home Loan Bank stock              1,274            1,274            1,184            1,184
Accrued interest receivable               1,349            1,349            1,343            1,343


Financial liabilities:
Deposits                              $(117,792)       $(117,813)       $(110,335)       $(110,249)
Federal Home Loan Bank advances         (19,500)         (20,178)         (21,300)         (22,122)
Accrued interest payable                   (278)            (278)            (136)            (136)
</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 2000 or 1999.



--------------------------------------------------------------------------------
                                  (Continued)

                                                                              61
<PAGE>   62

                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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

NOTE 18 - CONDENSED PARENT-ONLY FINANCIAL STATEMENTS

Condensed financial information of Potters Financial Corporation follows:

CONDENSED BALANCE SHEETS

December 31:                                                2000          1999
                                                            ----          ----
                                                         (Dollars in thousands)
ASSETS

    Cash and cash equivalents                             $   280       $   625
    Interest-bearing deposits                                  29            27
    Equity securities available for sale                       22            21
    Investment in subsidiary                               12,009        10,314
    Other assets                                                             49
                                                          -------       -------

         Total assets                                     $12,340       $11,036
                                                          =======       =======

LIABILITIES AND EQUITY

    Other liabilities                                     $     7       $    16
    Shareholders' equity                                   12,333        11,020
                                                          -------       -------

         Total liabilities and shareholders' equity       $12,340       $11,036
                                                          =======       =======


CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Year ended December 31:                       2000            1999          1998
                                              ----            ----          ----
                                                      (Dollars in thousands)
<S>                                         <C>            <C>            <C>
    INCOME

    Dividends from subsidiary               $   375        $   708        $   833
    Interest income                               2              5              5
    Net gain on sales of securities                              4
    Other                                        29
                                            -------        -------        -------
                                                406            717            838
    EXPENSE                                     157             58            120
                                            -------        -------        -------

    INCOME BEFORE INCOME TAXES AND
      UNDISTRIBUTED SUBSIDIARY INCOME           249            659            718

    Income tax benefit                          (43)           (18)           (23)
    Equity in undistributed
     subsidiary income                        1,155            669            371
                                            -------        -------        -------

    NET INCOME                              $ 1,447        $ 1,346        $ 1,112
                                            =======        =======        =======
</TABLE>


--------------------------------------------------------------------------------
                                  (Continued)

                                                                              62

<PAGE>   63

                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

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


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


CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31:


<TABLE>
<CAPTION>
                                                             2000           1999           1998
                                                             ----           ----           ----
                                                                   (Dollars in thousands)
<S>                                                        <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                             $ 1,447        $ 1,346        $ 1,112
    Adjustments:
       Equity in undistributed subsidiary income            (1,155)          (669)          (371)
       Net realized gain on sales of securities                                (4)
       Change in other assets and other liabilities             40            (12)           (53)
                                                           -------        -------        -------
       Net cash from operating activities                      332            661            688

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
                                                           -------        -------        -------
      Net cash from investing activities                                       57          1,195

CASH FLOWS FROM FINANCING ACTIVITIES
    Purchase of common stock                                  (281)          (726)          (780)
    Proceeds from exercise of stock options                                     4             36
    Dividends paid                                            (394)          (318)          (229)
                                                           -------        -------        -------
      Net cash from financing activities                      (675)        (1,040)          (973)
                                                           -------        -------        -------

Net change in cash and cash equivalents                       (343)          (322)           910

Beginning cash and cash equivalents                            652            974             64
                                                           -------        -------        -------

ENDING CASH AND CASH EQUIVALENTS                           $   309        $   652        $   974
                                                           =======        =======        =======
</TABLE>


--------------------------------------------------------------------------------
                                  (Continued)

                                                                              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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with generally accepted accounting principles.


                                            Crowe, Chizek and Company LLP

Columbus, Ohio
February 1, 2001




                                       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.

The information contained in the Proxy Statement under the caption "CERTAIN
TRANSACTIONS" is incorporated herein by reference.

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

                  Item 10.4      Employment Contract with Edward L. Baumgardner

                  Item 10.5      Employment Contract with Albert E. Sampson

                  Item 10.6      Employment Contract with Anne S. Myers

                  Item 10.7      Employment Contract with Stephen A. Beadnell



                                       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 2001 Annual Meeting of
                                 Shareholders

                  Item 21.       Subsidiaries of Registrant

                  Item 23.       Consent of Independent Accountants

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

(b) Reports on Form 8-K

                  On November 13, 2000, Potters Financial Corporation filed a
                  Form 8-K to report on the issuance of a press release on
                  November 10, 2000 announcing that its subsidiary, Potters
                  Bank, settled all claims in its check fraud lawsuit against a
                  regional financial institution upon mutually agreeable terms.









                                       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 22, 2001                     Date: March 22, 2001


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 22, 2001                      Date: March 22, 2001


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

Date: March 22, 2001                     Date: March 22, 2001


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

Date: March 22, 2001



                                       67
<PAGE>   68


                                INDEX TO EXHIBITS

<TABLE>
<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 (SEC File No.
                                                                         0-27980).

     3.2   Code of Regulations of Potters Financial                      Incorporated by reference to the Form
           Corporation                                                   8-A filed with the SEC on March 4, 1996
                                                                         (SEC File No.0-27980).

    10.1   The Potters Savings and Loan Company Stock                    Incorporated by reference to the
           Option Plan                                                   Annual Report on Form 10-KSB for the
                                                                         fiscal year ended December 31, 1995,
                                                                         filed with the SEC on March 28, 1996
                                                                         (SEC File No. 0-27980), Exhibit 10.1.

    10.2   The Potters Savings and Loan Company                          Incorporated by reference to the
           Recognition and Retention Plan and                            Annual Report on Form 10-KSB for the
           Trust Agreement                                               fiscal year ended December 31, 1995,
                                                                         filed with the SEC on March 28, 1996
                                                                         (SEC File No. 0-27980), Exhibit 10.2.

    10.3   Lease dated February 1, 1983, by and                          Incorporated by reference to the
           between Billingsley, Incorporated and The                     Annual Report on Form 10-KSB for the
           Potters Savings and Loan Company                              fiscal year ended December 31, 1995,
                                                                         filed with the SEC on March 28, 1996
                                                                         (SEC File No. 0-27980), Exhibit 10.5.

    10.4   Employment Contract with Edward L. Baumgardner                Incorporated by reference to the
                                                                         Quarterly Report on Form 10-QSB
                                                                         for the fiscal quarter ended
                                                                         September 30, 2000, filed with the SEC
                                                                         on November 9, 2000 (SEC File No.
                                                                         0-27980), Exhibit 10.1.

    10.5   Employment Contract with Albert E. Sampson                    Incorporated by reference to the
                                                                         Quarterly Report on Form 10-QSB for
                                                                         the fiscal quarter ended September
                                                                         30, 2000, filed with the SEC
                                                                         on November 9, 2000 (SEC File No.
                                                                         0-27980), Exhibit 10.2.

    10.6   Employment Contract with Anne S. Myers                        Incorporated by reference to the
                                                                         Quarterly Report on Form 10-QSB
                                                                         for the fiscal quarter ended
                                                                         June 30, 2000, filed with the SEC
                                                                         on August 7, 2000 (SEC File No. 0-27980),
                                                                         Exhibit 10.2.

    10.7   Employment Contract with Stephen A. Beadnell                  Incorporated by reference to the
                                                                         Quarterly Report on Form 10-QSB
                                                                         for the fiscal quarter ended June 30,
                                                                         2000, filed with the SEC on August 7,
                                                                         2000 (SEC File No. 0-27980),
                                                                         Exhibit 10.3
</TABLE>



                                                    68
<PAGE>   69


<TABLE>
<CAPTION>
   EXHIBIT
   NUMBER     DESCRIPTION                                                           PAGE NUMBER
    ------    -----------                                                           -----------
<S>        <C>                                                           <C>
    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,
                                                                         filed on Form DEF 14A with the SEC
                                                                         on March 13, 1998 (SEC File No.
                                                                         0-27980).

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

     20    Proxy Statement for the 2001 Annual                           Incorporated by reference to the
           Meeting of Shareholders                                       definitive Proxy Statement for the
                                                                         2001 Annual Meeting of Shareholders
                                                                         to be filed.

     21    Subsidiaries of Registrant                                    Incorporated by reference to
                                                                         the Annual Report on Form 10-KSB for
                                                                         the fiscal year ended December 31,
                                                                         1995, filed with the SEC on March 28,
                                                                         1996 (SEC File No. 0-27980), Exhibit 21.

     23    Consent of Independent Accountants                            Included herewith.

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









                                                    69