<PAGE>   1
                                                                 EXHIBIT 13

                    BUSINESS OF POTTERS FINANCIAL CORPORATION

Potters Financial Corporation, a unitary savings and loan holding company
incorporated under the laws of the State of Ohio ("PFC"), owns all of the issued
and outstanding common shares of The Potters Savings and Loan Company ("Potters"
or the "Company"), a savings and loan association incorporated under the laws of
the State of Ohio. On March 11, 1996, PFC acquired all of the common shares of
Potters in a holding company reorganization. PFC's activities have been limited
primarily to holding the common shares of Potters.

Serving the East Liverpool, Ohio, area since 1889 and headquartered at 519
Broadway in East Liverpool, PFC, through Potters, conducts business from its
four full-service branch offices located in the City of East Liverpool and the
nearby neighborhoods of Glenmoor and Calcutta. Potters is principally engaged in
the business of originating real estate loans secured by first mortgages for the
purchase, construction or improvement of one-to-four family residences located
in Potters' primary market area. Potters also originates loans secured by
multifamily and nonresidential real estate, various types of consumer loans and,
to a lesser extent, commercial loans. In addition to originating loans, Potters
also purchases one-to-four family real estate loans within the State of Ohio and
invests in U.S. Government and agency obligations, interest-bearing deposits in
other financial institutions, mortgage-backed securities and other investments
permitted by applicable law. Funds for lending and other investment activities
are obtained primarily from savings deposits, loans and security repayments and
maturities and Federal Home Loan Bank advances.

As a 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
incorporated under the laws of the State of Ohio, Potters is 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. Deposits in Potters are insured
up to applicable limits by the FDIC. Potters is also a member of the Federal
Home Loan Bank of Cincinnati (the "FHLB").

                                  COMMON SHARES

As of March 10, 1997, there were 486,830 common shares of PFC outstanding and
held by approximately 335 shareholders. Prices for PFC's common shares are
quoted on The Nasdaq Small Cap Market ("Nasdaq") under the symbol PTRS. Five
brokerage firms currently serve as market makers for PFC's common shares: F.J.
Morrissey & Co., Inc., Howe Barnes Investments, Inc., Herzog, Heine, Geduld,
Inc., The Ohio Company and H.C. Wainwright & Co.

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 represent actual
transactions and do not include retail markups, markdowns or commissions.

<TABLE>
<CAPTION>
                                                 1996                              1995
                                                 ----    Dividends                 ----      Dividends
Quarter Ended                         High        Low    Per  Share      High        Low     Per Share
                                      ----        ---    ----------      ----        ---     ---------
<S>                                <C>         <C>       <C>           <C>        <C>        <C>


March 31                            $ 18.50    $ 17.00    $    --      $ 13.75    $ 12.25    $    --
June 30                               17.75      16.00       0.12        16.25      14.00       0.10
September 30                          16.25      15.50       0.06        16.75      16.00         --
December 31                           20.00      15.75       0.07        17.00      16.75       0.11
</TABLE>




                                                                               3
<PAGE>   2


                          POTTERS FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1996 and 1995
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                      1996              1995
                                                                   ---------         ---------
<S>                                                                <C>               <C>
ASSETS
      Cash and due from banks (Note 13)                            $   4,376         $   3,076
      Interest-bearing deposits with Federal Home Loan Bank               51             2,675
      Federal funds sold and cash management account                     158             5,479
                                                                   ---------         ---------
         Cash and cash equivalents                                     4,585            11,230
      Securities available for sale,
        at estimated fair value (Note 2)                              10,878            10,952
      Securities held to maturity (estimated
        fair value: December 31, 1996 - $31,576;
        December 31, 1995 - $37,940) (Note 2)                         31,913            38,112
      Federal Home Loan Bank stock (Note 7)                              822               709
      Loans receivable, net (Notes 3 and 7)                           62,450            49,889
      Accrued interest receivable (Note 4)                               778               784
      Premises and equipment, net (Note 5)                             1,738             1,585
      Other assets                                                     1,008               981
                                                                   ---------         ---------

         Total assets                                              $ 114,172         $ 114,242
                                                                   =========         =========

LIABILITIES

      Deposits (Note 6)                                            $  97,283         $  98,697
      Federal Home Loan Bank advances (Note 7)                         5,085             3,018
      Accrued expenses and other liabilities                           1,228             1,338
                                                                   ---------         ---------

         Total liabilities                                           103,596           103,053
                                                                   ---------         ---------

Commitments and contingencies (Note 13)

SHAREHOLDERS' EQUITY (Note 16)

      Common shares, no par value at December 31, 1996;
        $1.00 par value at December 31, 1995
        Authorized: 10,000,000 shares
         Issued:  538,470 shares in 1996 and
         532,809 shares in 1995                                                            533 
      Paid-in capital                                                  4,880             4,280
      Treasury shares, 26,640 at cost                                   (436)
      Unearned compensation on
        recognition and retention plan (Note 10)                        (100)             (118)
      Unrealized loss on securities
        available for sale, net of tax                                   (94)              (23)
      Retained earnings, substantially restricted                      6,326             6,517
                                                                   ---------         ---------
         Total shareholders' equity                                   10,576            11,189
                                                                   ---------         ---------

         Total liabilities and shareholders' equity                $ 114,172         $ 114,242
                                                                   =========         =========
</TABLE>

                See accompanying notes to financial statements.



                                                                               5
<PAGE>   3


                          POTTERS FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                   For the three years ended December 31, 1996
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                            1996           1995          1994
                                            ----           ----          ----
<S>                                      <C>            <C>             <C>
INTEREST INCOME

      Loans                               $ 4,534         $4,441        $4,318
      Securities                            3,491          3,436         3,199
      Other interest income                   181            188            69
                                          -------         ------        ------
         Total interest income              8,206          8,065         7,586
                                          -------         ------        ------

INTEREST EXPENSE

      Interest on deposits                  4,189          4,156         3,911
      Other interest expense                  340            115            32
                                          -------         ------        ------
         Total interest expense             4,529          4,271         3,943
                                          -------         ------        ------

NET INTEREST INCOME                         3,677          3,794         3,643

Provision for loan losses (Note 3)            249            245           377
                                          -------         ------        ------

NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES                 3,428          3,549         3,266

Noninterest income (Note 14)                  267            257           267

Noninterest expense (Note 14)               3,688          2,977         2,868
                                          -------         ------        ------

INCOME BEFORE INCOME TAX                        7            829           665

Income tax (Note 12)                           68
                                          -------         ------        ------

NET INCOME (LOSS)                         $   (61)        $  829        $  665
                                          =======         ======        ======

Earnings (loss) per common share
  (Note 1)                                $ (0.12)        $ 1.56        $ 1.26
                                          =======         ======        ======
</TABLE>




                 See accompanying notes to financial statements.


                                                                               6
<PAGE>   4


                          POTTERS FINANCIAL CORPORATION
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                   For the three years ended December 31, 1996
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                                     Recognition
                                                                        Common            Paid-in       Treasury         and
                                                                        Shares            Capital       shares     Retention Plan
                                                                        ------            -------       ------     --------------
<S>                                                                  <C>                  <C>           <C>        <C>
BALANCE - JANUARY 1, 1994                                            $      529           $4,295                        $ (127)
Net income for the year ended December 31, 1994
Issuance of 809 common shares for the
 exercise of stock options                                                    1                7
Conversion costs                                                                             (49)
Purchase of 3,135 common shares for the
 recognition and retention plan                                                                                            (35)
Cash dividends declared ($.20 per common share)
Recognition and retention plan shares earned                                                                                22
Change in unrealized loss on securities
 available for sale
                                                                      --------            ------        ---------      -------
BALANCE - DECEMBER 31, 1994                                                 530            4,253                          (140)
Net income for the year ended December 31, 1995
Issuance of 3,000 common shares for the
 exercise of stock options                                                    3               27
Cash dividends declared ($.21 per common share)
Recognition and retention plan shares earned                                                                                22
Change in unrealized loss on securities
 available for sale
                                                                      --------            ------        ---------      -------
BALANCE - DECEMBER 31, 1995                                                 533            4,280                          (118)
Net loss for the year ended December 31, 1996
Holding company formation                                                  (533)             533
Issuance of 5,661 common shares for the exercise
 of stock options                                                                             57
Purchase of 26,640 treasury shares                                                                      $    (436)
Cash dividends declared ($.25 per common share)
Recognition and retention plan shares earned                                                                                18
Tax benefit arising from stock option and
 recognition and retention plan shares                                                        10
Change in unrealized loss on securities
 available for sale
                                                                      --------            ------        ---------      -------
BALANCE - DECEMBER 31, 1996                                           $      0            $4,880        $    (436)     $  (100)
                                                                      ========            ======        =========      =======
</TABLE>

<TABLE>
<CAPTION>
                                                                    Unrealized gain
                                                                  (loss) on securities     Retained
                                                                   available for sale      earnings                  Total
                                                                   ------------------      --------                  -----
<S>                                                                  <C>                   <C>                     <C>

BALANCE - JANUARY 1, 1994                                            $     27               $ 5,240                $ 9,964
Net income for the year ended December 31, 1994                                                 665                   665
Issuance of 809 common shares for the
 exercise of stock options                                                                                              8
Conversion costs                                                                                                       (49)
Purchase of 3,135 common shares for the
 recognition and retention plan                                                                                        (35)
Cash dividends declared ($.20 per common share)                                                (106)                  (106)
Recognition and retention plan shares earned                                                                            22
Change in unrealized loss on securities
 available for sale                                                     (676)                                         (676)
                                                                    --------                 ------                -------
BALANCE - DECEMBER 31, 1994                                             (649)                 5,799                  9,793
Net income for the year ended December 31, 1995                                                 829                    829
Issuance of 3,000 common shares for the
 exercise of stock options                                                                                              30
Cash dividends declared ($.21 per common share)                                                (111)                  (111)
Recognition and retention plan shares earned                                                                            22
Change in unrealized loss on securities
 available for sale                                                      626                                           626
                                                                    --------                 ------                -------
BALANCE - DECEMBER 31, 1995                                              (23)                 6,517                 11,189
Net loss for the year ended December 31, 1996                                                   (61)                   (61)
Holding company formation
Issuance of 5,661 common shares for the exercise
 of stock options                                                                                                       57
Purchase of 26,640 treasury shares                                                                                    (436)
Cash dividends declared ($.25 per common share)                                                (130)                  (130)
Recognition and retention plan shares earned                                                                            18
Tax benefit arising from stock option and
 recognition and retention plan shares                                                                                  10
Change in unrealized loss on securities
 available for sale                                                     (71)                                           (71)
                                                                    --------                 ------               --------
BALANCE - DECEMBER 31, 1996                                         $    (94)                $6,326               $ 10,576
                                                                    ========                 ======               ========
</TABLE>

                See accompanying notes to financial statements.

                                                                               7
<PAGE>   5

                          POTTERS FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   For the three years ended December 31, 1996
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                   1996            1995            1994
                                                                --------         -------         --------
<S>                                                            <C>               <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES

      Net income (loss)                                         $    (61)        $   829         $    665
      Adjustments to reconcile net income to net
        cash from operating activities
         Depreciation and amortization                               154             130              177
         Provision for losses                                        249             245              379
         Net investment amortization                                  61              96              180
         Net (gain) loss on:
             Investment and mortgage-backed securities                 1              (3)              (1)
             Sale of loans                                            (1)             (9)             (12)
             Sale of foreclosed real estate and
               repossessed assets                                    (39)              2             (140)
             Sale of real estate held for investment                                                   (9)
             Sale of other assets                                     (2)
         Stock dividend on FHLB stock                                (51)            (48)             (36)
         Change in
             Deferred taxes                                                          (243)           (190)
             Other assets and liabilities                            230              19             (101)
                                                                --------         -------         --------

                Net cash from operating activities                   541           1,018              912
                                                                --------         -------         --------

CASH FLOWS FROM INVESTING ACTIVITIES

      Net change in interest-bearing balances with banks                              100             100
      Securities available for sale
           Proceeds from sales                                    13,225           3,385            7,666
         Proceeds from calls and maturities                       10,596           2,250
           Purchases                                             (23,856)         (4,328)          (3,228)
      Securities held to maturity
         Proceeds from repayments, calls and maturities            7,120           7,664            7,250
         Purchases                                                  (984)         (3,253)         (14,808)
      Purchase of FHLB stock                                         (62)            (16)
      Redemption of FHLB stock                                                        24
      Net (increase) decrease in loans                               329          (1,757)          (4,168)
      Loans purchased                                            (13,678)
      Proceeds from sale of loans held for sale                      513           1,618            1,038
      Proceeds from sale of foreclosed real estate
        and repossessed assets                                       155              40              951
      Proceeds from sale of real estate held
        for investment                                                                                 96
      Property and equipment expenditures                           (304)           (323)            (100)
                                                                --------         -------         --------

         Net cash from investing activities                       (6,946)          5,404           (5,203)
                                                                --------         -------         --------
</TABLE>


                                  (Continued)


                                                                               8
<PAGE>   6
                          POTTERS FINANCIAL CORPORATION
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                   For the three years ended December 31, 1996
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                               1996             1995             1994
                                                               ----             ----             ----
<S>                                                          <C>               <C>              <C>
CASH FLOWS FROM FINANCING ACTIVITIES

      Net decrease in deposits                                (1,414)          (1,271)          (1,332)
      Proceeds from FHLB advances                             15,580            4,100            6,750
      Repayments of FHLB advances                            (13,513)          (1,082)          (6,750)
      Net change in official checks                             (413)              88           (1,602)
      Net increase in advances from
        borrowers for taxes and insurance                         29               16               32
      Purchase of treasury shares                               (436)
      Issuance of common shares for
        exercise of stock options                                 57               30                8
      Conversion costs                                                                             (49)
      Contribution to recognition and retention plan                                               (35)
      Cash dividends paid                                       (130)            (111)            (106)
                                                                ----             ----             ----


         Net cash from financing activities                     (240)           1,770           (3,084)
                                                                ----            -----           ------


Net change in cash and cash equivalents                       (6,645)           8,192           (7,375)

Cash and cash equivalents at beginning of year                11,230            3,038           10,413
                                                              ------            -----           ------


CASH AND CASH EQUIVALENTS AT END OF YEAR                    $  4,585         $ 11,230         $  3,038
                                                            ========         ========         ========





Supplemental disclosures of cash flow information
    Cash paid during the year for:
         Interest                                           $  4,519         $  4,256         $  3,949
         Income taxes                                            116              258              272

      Noncash transactions
         Transfer from loans to foreclosed real estate and
           repossessed assets                                     23               97              448
         Transfer of investment and mortgage-backed
           securities to available for sale at adoption of
           new accounting pronouncement                                                          8,582
         Transfer from investment securities available for sale
           to investment securities held to maturity (Note 2)                  1,000
         Transfer from investment securities held to maturity
           to investment securities available for sale (Note 2)                1,501
         Recognition and retention plan shares earned             18              22                22
         Sale of land financed by the Company                                    130
</TABLE>

                 See accompanying notes to financial statements.

                                                                               9
<PAGE>   7


                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business: Potters Financial Corporation ("PFC" or the
"Corporation") is a unitary savings and loan holding company headquartered in
East Liverpool, Ohio. PFC is the sole shareholder of The Potters Savings and
Loan Company ("Potters" or the "Company"), also headquartered in East Liverpool,
Ohio. On March 11, 1996, PFC was formed through an internal reorganization in
which each shareholder of Potters received one common share of PFC for each
common share of Potters owned. In an internal reorganization, the historical
cost basis of assets and liabilities is carried forward.

Potters provides financial products and services through its four full-service
branch offices, two of which are located in East Liverpool, Ohio, one of which
is located in Glenmoor, Ohio and one of which is located in Calcutta, Ohio.
Potters' primary market area consists of the City of East Liverpool, Ohio, and
the contiguous areas of Columbiana and Jefferson Counties, Ohio and Hancock
County, West Virginia. Potters is principally engaged in the business of
originating real estate loans secured by first mortgages for the purchase,
construction or improvement of one-to-four family residences and accepting
demand, savings and time deposits. Potters also provides loans secured by
multifamily and nonresidential real estate, various types of consumer loans and,
to a lesser extent, commercial loans. In addition to originating loans, Potters
also purchases one-to-four family real estate loans within the State of Ohio and
invests in U.S. government and agency obligations, mortgage-backed securities,
interest-bearing deposits in other financial institutions and other investment
securities. The primary source of income for the Company is interest on loans
and securities.

Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of PFC and Potters. All significant intercompany
transactions and balances have been eliminated in consolidation.

Securities: Potters classifies debt and marketable equity securities as held to
maturity, trading or available for sale. Securities held to maturity are those
that management has the positive intent and ability to hold to maturity, and are
carried at amortized cost. Securities classified as available for sale are those
that may be sold before maturity, and are carried at fair value with unrealized
gains and losses included as a separate component of shareholders' equity, net
of tax. The Company held no trading securities during any period presented.
Realized gains or losses on dispositions are based on net proceeds and the
adjusted carrying amount of securities sold, using the specific identification
method. Income on securities consists of interest on such securities, adjusted
for amortization and accretion of purchased premiums and discounts using the
level yield method.

Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for losses on loans is maintained. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the risk
of the loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations including their financial position and collateral values, and other
factors and estimates which are subject to change over time. While management
may periodically allocate portions of the allowance 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 by management when deemed
uncollectible, although collection efforts continue and future recoveries may
occur.


                                  (Continued)
                                                                              10
<PAGE>   8


                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Statement of Financial Accounting Standards ("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," were adopted on
January 1, 1995, and require recognition of loan impairment. A loan is
considered impaired when it is anticipated that all principal and interest
amounts will not be collected according to the terms of the loan contract.
Impaired loans are carried 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 the loan is collateral dependent. A portion of the allowance for
loan losses is allocated to such loans. The adoption of SFAS Nos. 114 and 118
also eliminated the in-substance foreclosure designation. The impact to the
Company of adopting the accounting standards was the reclassification of two
loans totaling $363,000, previously designated as in-substance foreclosures, and
reported in foreclosed real estate, to loans. However, no allocation of existing
allowances or additional allowance was needed because such loans have been
reported at the fair value of the underlying collateral less estimated costs to
sell.

The carrying values of impaired loans are periodically adjusted to reflect cash
payments, revised estimates of future cash flows and increases in the present
value of expected cash flows due to the passage of time. Interest payments on
performing impaired loans are reported as interest income on a cash basis. All
other cash payments are recorded as reductions in the carrying value, while
increases or decreases due to changes in estimates of future payments and due to
the passage of time are reported as an increase or decrease in the provision for
loan losses.

Smaller-balance loans with similar characteristics are evaluated for impairment
in the aggregate. Such loans include residential real estate loans secured by
first mortgages on one-to-four family residences, residential construction
loans, and automobile, home equity and second mortgage loans. Commercial loans
and real estate loans secured by other properties are evaluated individually for
impairment. The Company's loan review system includes periodic analysis of
borrower operating results and financial condition. A loan is evaluated for
impairment when any delay or shortfall in payments occurs or when operating
results indicate cash flows inadequate to meet debt service requirements. Loans
are generally moved to nonaccrual status when 90 days or more past due. Such
delinquent loans are often also considered impaired. Impaired loans, or portions
thereof, are charged off when deemed uncollectible.

Loan Origination Fees and Costs: Loan origination fees and direct loan
origination costs are deferred and recognized over the contractual life of the
loans as a yield adjustment, using the level yield method. The net amount
deferred is reported as a reduction of loans.

Interest Income on Loans: Interest on loans is accrued over the term of the
loans based upon the principal outstanding. The accrual of interest is
discontinued when serious doubt exists as to the collectibility of the loan,
generally no later than when the loan becomes 90 days past due.

Mortgage Servicing Rights: Effective January 1, 1996, SFAS No. 122, "Accounting
for Mortgage Servicing Rights," was adopted. This statement requires companies
that engage in mortgage banking activities to recognize as separate assets
rights to service mortgage loans for others. Since no mortgage loans were sold
in 1996, the adoption of this statement did not impact 1996 financial
statements.

Foreclosed Real Estate: Real estate acquired through foreclosure or
deed-in-lieu-of-foreclosure is recorded at fair value less estimated costs to
sell. Upon foreclosure, the asset is transferred from loans to foreclosed real
estate at fair value, with any reduction in the carrying value reflected as a
loan loss. Estimated costs to sell are recorded through a valuation account with
a corresponding charge to income. Any subsequent reduction in the property's
value is recorded in the valuation account with a corresponding charge to
income.


                                  (Continued)
                                                                              11
<PAGE>   9

                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 respective properties and equipment. Premises and equipment are reviewed for
impairment when events indicate the carrying value may not be recoverable.
Maintenance and repairs are charged to expense as incurred and improvements are
capitalized.

Income Taxes: Deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The Corporation evaluates the collectibility of deferred
tax assets and provides a valuation allowance for the portion of such assets not
considered realizable.

Statement of Cash Flows: For purposes of this statement, cash and cash
equivalents include the Corporation's cash on hand, due from banks,
interest-bearing deposits with the Federal Home Loan Bank, federal funds sold
and cash management accounts. The Corporation reports net cash flows for
customer loan and deposit accounts, as well as deposits made with other
financial institutions.

Earnings per share: The weighted average number of shares outstanding for the
calculation of earnings per share was 518,922 in 1996, 529,924 in 1995 and
529,253 in 1994. The effect of exercising outstanding stock options discussed in
Note 9 would result in less than 3% dilution in earnings per common share, and
accordingly has not been included in the calculation.

Financial Statement Presentation: Certain items in the 1995 and 1994 financial
statements have been reclassified to correspond with the 1996 presentation.

Use of Estimates in Preparation of Financial Statements: Management must make
estimates and assumptions in preparing financial statements that affect the
amount reported therein and the disclosures provided. Such estimates and
assumptions may change in the future and future results could differ.

Areas involving the use of management's estimates and assumptions include, but
are not limited to, the allowance for loan losses, the realization of deferred
tax assets, fair values of certain securities, the determination and carrying
value of impaired loans, the carrying value of loans held for sale, the carrying
value of foreclosed real estate, the accrued liability for deferred
compensation, recognition and measurement of loss contingencies, depreciation of
premises and equipment, the actuarial present value of pension benefit
obligation, net periodic pension expense and prepaid pension costs recognized in
the Corporation's financial statements.

NOTE 2 - SECURITIES

At December 31, 1996, the amortized cost and estimated fair value of securities
are as follows:
<TABLE>
<CAPTION>
                                                                 Gross        Gross     Estimated
                                                 Amortized     Unrealized   Unrealized     Fair
                                                   Cost          Gains        Losses       Value
                                                   ----          -----        ------       -----
 Securities available for sale:                                (Dollars in thousands)

<S>                                            <C>           <C>             <C>         <C>
       U.S. Treasury and U.S.
        Government agencies                    $  9,988                      $ (135)     $  9,853
       Mutual funds                               1,034                          (9)        1,025
                                               --------                      -------     --------

                                               $ 11,022                      $ (144)     $ 10,878
                                               ========                      =======     ========
</TABLE>



                                  (Continued)
                                                                              12



<PAGE>   10


                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 2 - SECURITIES (Continued)


<TABLE>
<CAPTION>
                                                             Gross          Gross        Estimated
                                               Amortized   Unrealized     Unrealized       Fair
                                                  Cost        Gains         Losses         Value
                                                  ----        -----         ------         -----
                                                             (Dollars in thousands)
Securities held to maturity:
<S>                                            <C>          <C>           <C>          <C>
       U.S. Treasury and U.S.
         Government agencies                   $   6,854    $     7       $   (74)     $  6,787
       Obligations of states and
         political subdivisions                     175           7                         182
       Other securities                             866           6                         872
        Agency issued mortgage-
         backed securities                        24,018         82          (365)       23,735
                                               ---------    -------       -------      --------

                                               $  31,913    $   102       $  (439)     $ 31,576
                                               =========    =======       =======      ========
</TABLE>


The amortized cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.


<TABLE>
<CAPTION>
                                                   Available for Sale           Held to Maturity
                                                   ------------------           ----------------
                                                 Amortized      Estimated    Amortized  Estimated
                                                   Cost        Fair Value      Cost      Fair Value
                                                   ----        ----------      ----      ----------
                                                                (Dollars in thousands)


<S>                                              <C>          <C>           <C>          <C>
     Due in one year or less                                                $    22      $    22
     Due after one year through five years        $ 7,995      $7,906         4,133        4,103
     Due after five years through ten years         1,993       1,947         2,394        2,404
     Due after ten years                                                      1,346        1,312
     Agency issued mortgage-
      backed securities                                                      24,018       23,735
                                                  -------      ------       -------      -------

                                                  $ 9,988      $9,853       $31,913      $31,576
                                                  =======      ======       =======      =======
</TABLE>


Proceeds from sales of securities available for sale during 1996 totaled $13.2
million and resulted in gross gains of $8,000 and gross losses of $12,000. Under
the provisions of SFAS No. 115, mortgage-backed securities held to maturity sold
after the security has paid down to 15% of the purchased principal balance are
reported as maturities. Mortgage-backed securities held to maturity meeting such
criteria totaling $1.4 million were sold with gross gains of $15,000 and gross
losses of $12,000.

The carrying value of securities pledged as collateral for public funds amounted
to $2.0 million at December 31, 1996.


                                  (Continued)
                                                                              13
<PAGE>   11



                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 2 - SECURITIES (Continued)


The amortized cost and estimated fair value of securities are as follows at
December 31, 1995:


<TABLE>
<CAPTION>
                                                                 Gross            Gross         Estimated
                                                 Amortized     Unrealized       Unrealized         Fair
                                                   Cost          Gains            Losses           Value
                                                 -------        -------           -------        ---------
                                                                   (Dollars in thousands)
Securities available for sale:

<S>                                              <C>            <C>               <C>            <C>
       U. S. Government agencies                 $10,994        $     8           $   (50)       $  10,952
                                                 -------        -------           -------        ---------


Securities held to maturity:

       U.S. Treasury and U.S.
         Government agencies                     $ 7,666        $    18            $  (41)       $   7,643
       Obligations of states and
         political subdivisions                      178             37                                215
       Other securities                            1,028             13                              1,041
       Agency issued mortgage-
        backed securities                         29,240            120              (319)          29,041
                                                 -------        -------           -------        ---------


                                                 $38,112        $   188            $ (360)       $  37,940
                                                 -------        -------           -------        ---------
</TABLE>


Proceeds from sales of securities available for sale during 1995 totaled $3.4
million and resulted in $3,000 of gross gains. Proceeds from sales of securities
available for sale totaled $7.7 million during 1994, resulting in no gain or
loss, while $800,000 of securities were called during the year, resulting in
gross gains of $1,000.

Two agency securities totaling $1.0 million were transferred from the "available
for sale" category to "held to maturity" during 1995. The transfers into "held
to maturity" occurred at the fair value of the securities on the date of the
transfer. The gain or loss on the securities at the date of the transfer is
amortized to shareholders' equity over the remaining lives of the securities.
Such amortization produced a net increase of $5,000 in shareholders' equity
during 1995.

To provide additional flexibility to meet liquidity and asset/liability
management needs, certain securities were reclassified from held to maturity to
available for sale. The securities, with an amortized cost of $1.5 million, were
transferred on December 22, 1995, as allowed by the SFAS No. 115 Implementation
Guide issued by the Financial Accounting Standards Board in November 1995. The
related unrealized gain of $4,000 is reflected net of tax as an increase to
shareholders' equity.


                                  (Continued)
                                                                              14
<PAGE>   12
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 3 - LOANS RECEIVABLE


Loans receivable are summarized below at December 31:

<TABLE>
<CAPTION>
                                                            1996         1995
                                                          --------     --------
                                                          (Dollars in thousands)
<S>                                                       <C>          <C>
Real estate mortgage loans
        One-to-four family residences                     $ 49,086     $ 33,007
        Nonresidential property                              5,897        9,385
        Multifamily and other                                2,034        2,106
                                                          --------     --------

                                                            57,017       44,498
Consumer and other loans
        Home equity loans                                    3,859        3,314
        Commercial loans and unsecured lines of credit       1,316        1,563
        Mobile home loans                                      906        1,280
        Other                                                2,347        2,018
                                                          --------     --------

                                                             8,428        8,175
                                                          --------     --------

        Total loan principal balances                       65,445       52,673
        Loans in process                                      (466)        (477)
        Unearned interest                                      (23)         (49)
        Premiums on purchased loans                            147
        Net deferred loan fees                                 (23)         (18)
        Allowance for loan losses                           (2,630)      (2,240)
                                                          --------     --------

                                                          $ 62,450     $ 49,889
                                                          ========     ========
</TABLE>


Activity in the allowance for loan losses is as follows for the years ended
December 31:

<TABLE>
<CAPTION>
                                            1996         1995         1994
                                          -------      -------      -------
                                               (Dollars in thousands)
<S>                                       <C>          <C>          <C>
      Balance at beginning of year        $ 2,240      $ 1,963      $ 1,886
      Provision for loan losses               249          245          377
      Recoveries                              679           70           11
      Charge-offs                            (538)         (38)        (311)
                                          -------      -------      -------

      Balance at end of year              $ 2,630      $ 2,240      $ 1,963
                                          =======      =======      =======
</TABLE>


Nonaccrual and renegotiated loans totaled $1,728,000 and $2,438,000 at December
31, 1996 and 1995, respectively. Interest income that would have been recorded
on such loans under their original terms totaled approximately $204,000 and
$331,000 for the years ended December 31, 1996 and 1995, respectively. The
amounts included in interest income for such loans totaled approximately
$151,000 during 1996 and $225,000 during 1995. The Company is not committed to
lend additional funds to debtors whose loans have been modified.

                                  (Continued)

                                       15
<PAGE>   13
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996




NOTE 3 - LOANS RECEIVABLE (Continued)

Information regarding impaired loans is as follows for the years ended December
31:

<TABLE>
<CAPTION>
                                                           1996        1995
                                                           ----        ----
                                                        (Dollars in thousands)
<S>                                                        <C>         <C>
Average investment in impaired loans                       $403        $313
                                                           ====        ====

Interest income recognized on impaired loans
  including interest income recognized on a cash basis     $ 23        $  0
                                                           ====        ====

Interest income recognized on impaired loans
  on a cash basis                                          $ 23        $  0
                                                           ====        ====
</TABLE>

Information regarding impaired loans, which are included in nonaccrual and
renegotiated loans disclosed above, at December 31, is as follows:

<TABLE>
<CAPTION>
                                                          1996          1995
                                                         -----         -----
                                                        (Dollars in thousands)
<S>                                                      <C>           <C>
Balance of impaired loans                                $ 365         $ 193
Less portion for which no allowance for
  loan losses is allocated                                (365)         (193)
                                                         -----         -----

Portion of impaired loan balance for which an
  allowance for loan losses is allocated                 $   0         $   0
                                                         =====         =====

Portion of allowance for loan losses allocated
  to the impaired loan balance                           $   0         $   0
                                                         =====         =====
</TABLE>

The Company has granted loans to certain of its executive officers and directors
and their related business interests. A summary of activity during 1996 on
related party loans aggregating $60,000 or more to any one related party is as
follows:

<TABLE>
<CAPTION>
                                                                 1996
                                                                 ----
                                                        (Dollars in thousands)
<S>                                                            <C>
      Balance at beginning of year                             $     463
      New loans  and advances                                        388
      Repayments                                                    (428)
                                                               ---------

      Balance at end of year                                   $     423
                                                               =========
</TABLE>

NOTE 4 - ACCRUED INTEREST RECEIVABLE

Accrued interest receivable consists of the following at December 31:

<TABLE>
<CAPTION>
                                                 1996        1995
                                                 ----        ----
                                               (Dollars in thousands)
<S>                                              <C>         <C>
           Loans                                 $329        $232
           Investment securities                  308         348
           Mortgage-backed securities             141         204
                                                 ----        ----
                                                 $778        $784
                                                 ====        ====
</TABLE>

                                  (continued)

                                       16
<PAGE>   14
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996


NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment consists of the following at December 31:

<TABLE>
<CAPTION>
                                                     1996          1995
                                                    ------        ------
                                                   (Dollars in thousands)
<S>                                                 <C>           <C>
Land                                                $  190        $  190
Buildings and improvements                           2,440         2,499
Furniture and equipment                              1,403         1,036
                                                    ------        ------
     Total cost                                      4,033         3,725

Accumulated depreciation                             2,295         2,140
                                                    ------        ------

                                                    $1,738        $1,585
                                                    ======        ======
</TABLE>

NOTE 6 - DEPOSITS

Deposits are summarized as follows at December 31:

<TABLE>
<CAPTION>
                                                   1996                          1995
                                                   ----                          ----
                                          Amount          Percent      Amount            Percent
                                          ------          -------      ------            -------
                                                        (Dollars in thousands)
<S>                                      <C>             <C>           <C>             <C>
Demand, NOW, and Super NOW
  accounts, including noninterest
  bearing deposits: December 31,
  1996 - $556; December 31,
  1995 - $219                            $13,509            13.9%      $11,752            11.9%
Passbook savings, statement
  savings and club accounts               34,345            35.3        35,126            35.6
Money market demand accounts               1,978             2.0         2,439             2.5
Certificates of deposit                   47,451            48.8        49,380            50.0
                                         -------         -------       -------         -------

                                         $97,283           100.0%      $98,697           100.0%
                                         =======         =======       =======         =======
</TABLE>

The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $4,278,000 and $4,391,000 at December 31, 1996 and
1995, respectively.


At December 31, 1996, scheduled maturities of certificates of deposit are as
follows:

<TABLE>
<CAPTION>
                                              Maturities
                                              ----------
                                         (Dollars in thousands)
<S>                                          <C>
                   1997                      $    26,561
                   1998                            8,076
                   1999                            3,550
                   2000                            6,369
                   2001 and thereafter             2,895
                                             -----------

                                             $    47,451
                                             ===========
</TABLE>

                                  (continued)

                                       17
<PAGE>   15
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES

Federal Home Loan Bank advances as of December 31, are as follows:

<TABLE>
<CAPTION>
                                                                          1996             1995
                                                                          ----             ----
                                                                          (Dollars in thousands)
<S>                                                                     <C>            <C>
Fixed-rate advances with monthly interest payments:
    6.75% advance due March 8, 1996                                                    $    1,500
    5.80% advance due May 28, 1997                                      $    3,830
    5.67% advance due November 27, 1998                                        750            750
Fixed-rate advances with monthly principal and interest payments:
    6.05% advance due August 14, 1998                                          333            534
    5.85% advance due September 1, 1999                                        172            234
                                                                        ----------     ----------

                                                                        $    5,085     $    3,018
                                                                        ==========     ==========
</TABLE>

FHLB advances obtained through the Community Investment Program are amortizing
loans requiring monthly principal payments. As of December 31, 1996, the
aggregate future minimum annual principal payments on FHLB advances are
$4,092,000 in 1997, $945,000 in 1998 and $48,000 in 1999. As of December 31,
1996, the Company was approved to borrow a total of $5.5 million in cash
management advances. FHLB advances are collateralized by all shares of FHLB
stock owned by Potters and by 100% of the Company's qualified real estate loan
portfolio.

NOTE 8 - EMPLOYEE BENEFITS PLANS

In December 1996, the Company's Board of Directors approved a resolution
terminating the Company's defined benefit pension plan. In October 1995, the
Board of Directors approved ceasing the accumulation of future benefits to plan
participants. As a result of these actions, a termination loss of $67,000 was
included in 1996 noninterest expense and a curtailment loss of $74,000 was
included in 1995 noninterest expense. The settlement of vested plan benefits is
expected to be completed in 1997. Participants may choose a lump sum payment,
the purchase of a nontransferrable deferred annuity contract or a transfer to
the 401(k) plan discussed below.

The pension plan was a qualified, noncontributory defined benefit retirement
plan covering substantially all of its qualified employees. Benefits were based
on each employee's years of service up to a maximum of 44 years, and the average
of the highest five consecutive annual salaries of the ten years prior to
retirement. Benefits were reduced by a specified percentage of the employee's
social security benefit. An employee became fully vested upon completion of 5
years of qualifying service. It was the policy of the Company to fund the
maximum amount that could be deducted for Federal income tax purposes using a
different actuarial cost method and different assumptions from those used for
financial reporting. Net periodic pension expense was $(11,000) in 1996, $63,000
in 1995 and $78,000 in 1994.

The Company adopted a 401(k) plan during 1996 covering substantially all its
employees. Eligible employees may contribute up to 15% of their compensation
subject to a maximum statutory limitation. The Company may make a partial
matching of employee contributions up to 3% of compensation and a discretionary
contribution to all participating employees. During 1996, the Company
contributed up to 3% of a participant's compensation in a matching contribution
and a discretionary contribution to all qualified participants of 3% of employee
compensation. Employee contributions are vested at all times. The Company's
matching cash contribution and related expense included in compensation and
employee benefits was approximately $36,000 during 1996. PFC common shares are
available as an investing option within the 401(k) to all participants. During
1996, the 401(k) plan purchased 132 common shares for participants. The Company
has received a determination letter from the Commissioner of the Internal
Revenue Service (the "Commissioner") approving the tax-qualified status of the
401(k) plan and its purchase of common shares of PFC.

                                  (continued)

                                       18
<PAGE>   16
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 9 - STOCK OPTION PLAN

On April 28, 1994, shareholders approved the Company's Stock Option Plan, under
which options to purchase the Company's common shares are granted to certain
directors, officers and other key employees of Potters. The Stock Option Plan is
administered by a committee of directors of the Company who select recipients
and establish awards pursuant to the Plan. The option exercise price is
determined by the Stock Option Committee at the time of grant but the purchase
price must be at least equal to the market price of the stock at the date of
grant. All options have a term of 10 years from the date of the grant.

A summary of the Company's stock options activity and related information is as
follows:

<TABLE>
<CAPTION>
                                              1996                          1995
                                              ----                          ----
                                                     Average                        Average
                                                    Exercise                       Exercise
                                   Options            Price       Options           Price
                                   -------            -----       -------           -----
<S>                                <C>             <C>            <C>            <C>
Outstanding - beginning
 of year                            47,149         $    9.21      44,149         $   10.00
Granted                              1,400             15.50       6,000             16.75
Exercised                           (5,661)            10.00      (3,000)            10.00
                                   -------                        ------

Outstanding - end of year           42,888             11.12      47,149             10.86
                                   =======                        ======
Weighted average fair value
 of options granted during
 the year                          $  4.74                        $ 4.80
                                   =======                        ======
</TABLE>

All options outstanding at December 31, 1996 and 1995 are exercisable. Options
available for grants totaled 542 shares at December 31, 1996.

SFAS No. 123 "Accounting for Stock-Based Compensation," effective for the
Company in 1996, encourages the use of a fair value-based method to account for
stock-based compensation plans such as the Company's stock option plan. As
allowed by SFAS No. 123, however, the Company has elected to continue to follow
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 as if the Company had accounted for its stock options under the
fair value method of that Statement. The fair value for options granted in 1995
and 1996 and the related pro forma effect on net income and earnings per share
was not material.

                                  (Continued)

                                       19
<PAGE>   17
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 10 - RECOGNITION AND RETENTION PLAN

In connection with the conversion of Potters from the mutual to stock form of
ownership (the "Conversion"), the Board of Directors adopted a Recognition and
Retention Plan ("RRP") as a means of providing directors and certain key
employees with an ownership interest in Potters, and now in PFC, in a manner
designed to reward and retain these individuals. One-fifth of the shares awarded
to each individual are earned and vested on each of the first five anniversaries
of the effective date of the RRP, which was December 30, 1993.

The Company contributed $162,000 to the RRP for the purpose of purchasing common
shares. On December 30, 1993, the RRP purchased 12,735 shares of common stock at
$10.00 per share. An additional 3,135 shares were purchased on January 7, 1994
at $11.00 per common share. RRP expense totaled $7,000, $28,000 and $50,000 for
1996, 1995 and 1994, respectively.


NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN

At the time of the Conversion, Potters established an Employee Stock Ownership
Plan ("ESOP") for the benefit of substantially all of its employees. The Company
received a determination letter from the Commissioner approving the
tax-qualified status of the ESOP and its purchase of common shares of PFC.

Contributions to the ESOP are made at the Company's discretion and the Plan is
administered by a committee of directors of the Company. The Trustees vote all
shares owned by the ESOP, except in certain matters involving mergers and other
changes in corporate structure, when shares are voted by employees. ESOP expense
consists of the Company's contribution to the ESOP. ESOP shares are included in
weighted average shares outstanding for purposes of calculating earnings per
common share. Dividends on ESOP shares are recorded as a reduction of retained
earnings. Upon termination of employment, each participant may choose to receive
distributions in shares or cash. The ESOP contribution totaled $27,000, $40,000
and $20,000 for 1996, 1995 and 1994, respectively, and is reflected in
compensation and benefits expense. At year-end 1996 and 1995, the ESOP owned
3,400 and 2,000 shares of the Company's common stock, respectively, all of which
shares are to be allocated to employee accounts. At year-end 1996, the estimated
fair value of shares subject to the cash distribution option, based on the last
sales price quoted in 1996 on the Nasdaq Small Cap Market, totaled approximately
$68,000.


NOTE 12 - INCOME TAXES

An analysis of the provision for income tax is as follows for the years ended
December 31:

<TABLE>
<CAPTION>
                                           1996          1995         1994
                                          -----         -----         ----
                                               (Dollars in thousands)
<S>                                       <C>           <C>           <C>
Current                                   $ 137         $ 243         $190
Deferred                                    (69)          (16)          52
Change in valuation allowance                            (227)        (242)
                                          -----         -----         ----

                                          $  68         $   0         $  0
                                          =====         =====         ====
</TABLE>

                                  (Continued)

                                       20
<PAGE>   18
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996


NOTE 12 - INCOME TAXES (Continued)


The components of the deferred tax assets and liabilities consist of the
following at December 31:

<TABLE>
<CAPTION>
                                                              1996          1995
                                                             -----         -----
                                                            (Dollars in thousands)
<S>                                                          <C>           <C>
Items giving rise to deferred tax assets:

  Allowance for loan losses in excess of post-1987
     tax bad debt reserve                                    $ 785         $ 720
  Depreciation                                                  57            73
  Capital loss carryforward                                     55            55
  Nonaccrual loan interest                                       4             4
  Unrealized loss on securities available for sale              50            14
  Other                                                         34            45
                                                             -----         -----
                                                               985           911
                                                             -----         -----
Items giving rise to deferred tax liabilities:

  FHLB stock dividends                                        (152)         (134)
  Other                                                        (10)          (59)
                                                             -----         -----
                                                              (162)         (193)
                                                             -----         -----

Net deferred tax asset                                       $ 823         $ 718
                                                             =====         =====
</TABLE>


The valuation allowance against deferred tax assets was eliminated in 1995 based
on the existence of adequate taxable income in prior years, future reversals of
existing taxable temporary differences and anticipated future taxable income.

No deferred tax liability is recognized for tax bad debt reserves arising before
December 31, 1987 for qualified thrift lenders unless it is apparent that the
difference will reverse in the foreseeable future. The Company's tax bad debt
reserves that arose prior to December 31, 1987 were approximately $2,480,000.
Unrecognized deferred taxes on these reserves totaled $843,000 at December 31,
1996.

The provision for income tax differs from amounts computed by using the
statutory federal income tax rate. The reconciled difference between the
financial statement provision and amounts computed by using the statutory rate
of 34% is as follows for the years ended December 31:

<TABLE>
<CAPTION>
                                              1996          1995          1994
                                             -----         -----         -----
                                                  (Dollars in thousands)
<S>                                          <C>           <C>           <C>
Income tax computed at the statutory rate    $   2         $ 282         $ 226
Tax effect of
   Tax exempt income                            (5)           (5)           (5)
   Change in valuation allowance                            (227)         (242)
   Other                                        71           (50)           21
                                             -----         -----         -----

                                             $  68         $   0         $   0
                                             =====         =====         =====
</TABLE>


                                  (Continued)

                                       21
<PAGE>   19
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 13 - COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. These include the Company being
a defendant in certain claims and legal actions arising in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated financial position of the Company.

Lease Commitments: As of December 31, 1996, the Company is obligated to a
corporation owned by a director of the Company under an operating lease for
land. Net rent expense under this lease, included in occupancy and equipment
expense, was approximately $34,000 for each of the years ended December 31,
1996, 1995 and 1994. The lease term ends on January 31, 2008, and the Company
has the option of renewing the lease for up to five successive five-year periods
beyond that date.

The projected minimum rental payments under the terms of the lease at December
31, 1996, are as follows:

<TABLE>
<CAPTION>
                      Years ending
                      December 31,                          Amount
                      ------------                          ------
                                                    (Dollars in thousands)
<S>                                                       <C>
                         1997                             $     34
                         1998                                   34
                         1999                                   34
                         2000                                   34
                         2001                                   34
                         2002 and thereafter                   202
                                                          --------

                                                          $    372
                                                          ========
</TABLE>

Loan Commitments: As of December 31, 1996, the Company had commitments to make
loans (at market rates) and unused lines of credit approximating $4,201,000, of
which $155,000 carry fixed rates, ranging from 7.75% to 9.50%, and $4,046,000
carry adjustable rates. At December 31, 1995, the Company's loan commitments and
unused lines of credit totaled approximately $3,439,000, of which $90,000
carried fixed rates and $3,349,000 carried adjustable rates. Since loan
commitments may expire without being used, the amounts do not necessarily
represent future cash commitments.

The exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to make loans and lines and letters of
credit is represented by the contractual amount of those instruments. The
Company follows the same credit policy to make such commitments as is followed
for those loans recorded in the financial statements. In management's opinion,
these commitments represent normal banking transactions and no material losses
are expected to result therefrom. Collateral obtained upon exercise of the
commitments is determined using management's credit evaluations of the borrower
and is primarily real estate.

Cash Reserve Requirements: The Company is required to have approximately
$447,000 of cash on hand or on deposit with the Federal Reserve Bank to meet
regulatory reserve requirements at December 31, 1996. These balances do not earn
interest.

                                  (Continued)

                                       22
<PAGE>   20
                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)

Liquidation Account: In conjunction with the Conversion, the Company established
a liquidation account of $4,748,000, which was equal to its total net worth as
of the date of the latest balance sheet appearing in the final prospectus for
its stock offering. The liquidation account will be maintained for the benefit
of eligible depositors who continue to maintain their accounts at the Company
after the conversion. The liquidation account will be reduced annually to the
extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balance
for accounts then held.

NOTE 14 - NONINTEREST INCOME AND EXPENSE

Noninterest income and expense amounts include the following major categories
for the years ended December 31:

<TABLE>
<CAPTION>
                                                1996            1995            1994
                                             -------         -------         -------
                                                      (Dollars in thousands)
<S>                                          <C>             <C>             <C>
Noninterest income
         Security gains (losses), net        $    (1)        $     3         $     1
         Gain on sale of loans                     1               9              12
         Gain on sale of other assets              2
         Service charges on deposits             152             137             134
         Income (expense) on real
           estate operations, net                (22)             (3)            (60)
         Other                                   135             111             180
                                             -------         -------         -------

             Total                           $   267         $   257         $   267
                                             =======         =======         =======


                                                1996            1995            1994
                                             -------         -------         -------
Noninterest expense
         Compensation and benefits           $ 1,360         $ 1,388         $ 1,213
         Occupancy and equipment                 360             334             341
         Deposit insurance premiums              874             257             280
         Data processing expense                 164             151             136
         Goodwill amortization                                                    57
         Legal, professional and
           consulting fees                       146             145             253
         Loss (gain) on foreclosed
           and repossessed property              (39)              2            (140)
         Other                                   823             700             728
                                             -------         -------         -------

             Total                           $ 3,688         $ 2,977         $ 2,868
                                             =======         =======         =======
</TABLE>

On September 30, 1996, legislation was passed to recapitalize the Savings
Association Insurance Fund ("SAIF"). As a result, all savings and loan
institutions paid a one-time assessment of $.657 per $100 in deposits held as of
March 31, 1995. Consequently, the Company recognized a $643,000 expense included
in "Deposit insurance premiums" above.

                                  (Continued)

                                       23
<PAGE>   21

                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 15 - CONCENTRATIONS OF CREDIT RISK

Most of the Company's 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. At December 31, 1996, Potters' loan portfolio included approximately
$10.7 million of purchased one-to-four family real estate loans, $8.0 million on
properties located in northwestern Ohio and $2.7 million on properties in
southwestern Ohio. As of December 31, 1996, the Company's loan portfolio also
included approximately $4.5 million in nonresidential real estate loans secured
by property located primarily in the State of Colorado.

NOTE 16 - REGULATORY MATTERS

Potters 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 about components, risk weightings and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.

The prompt corrective action regulations provide five classifications, including
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 plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
                                                                 Capital to risk-
                                                                 weighted assets        Core capital to
                                                                Total        Core    adjusted total assets
                                                                -----        ----    ---------------------
<S>                                                              <C>           <C>            <C>
Well-capitalized                                                 10%           6%             5%
Adequately capitalized                                            8%           4%             4%
Undercapitalized                                                  6%           3%             3%
</TABLE>

At year-end 1996, actual capital levels and minimum required levels were:

<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>
Total capital to risk-
 weighted assets               $  10,220       19.5%      $ 4,187        8.0%       $ 5,234        10.0%
Core capital to risk-
 weighted assets                   9,541       17.6         2,171        4.0          3,257         6.0
Core capital to
 adjusted total assets             9,541        8.3         3,457        3.0          5,762         5.0
Tangible capital to
 adjusted total assets             9,541        8.3         1,729        1.5            N/A
</TABLE>

Potters was categorized as well-capitalized at year-end 1996.


                                  (Continued)                                24
<PAGE>   22


                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 16 - REGULATORY MATTERS (Continued)

Dividends paid by the Company are the primary source of funds available to PFC
for payment of dividends to shareholders and for other working capital needs.
Under Office of Thrift Supervision ("OTS") regulations, limitations have been
imposed on all "capital distributions", including cash dividends, by savings
institutions. The regulation established a three-tiered system of restrictions,
with the greatest flexibility afforded to thrifts which are both
well-capitalized and given favorable qualitative examination ratings by the OTS.
A Tier 1 association may make capital distributions up to 100% of its earnings
to date during the calendar year in which the distribution is made, plus the
amount that would reduce by one-half its "surplus capital ratio" at the
beginning of the calendar year. The Company is currently a Tier 1 institution.
Other thrifts would be subject to more stringent procedural and substantive
requirements, the most restrictive being prior OTS approval of any capital
distributions.


NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS

The following table shows carrying values and the related estimated fair values
of financial instruments at December 31. Items which are not financial
instruments are not included.

<TABLE>
<CAPTION>
                                                      December 31, 1996            December 31, 1995
                                                      -----------------            -----------------
                                                   Carrying      Estimated      Carrying      Estimated
                                                     Value      Fair Value       Value        Fair Value
                                                     -----      ----------       -----       ----------
                                                                  (Dollars in thousands)
<S>                                              <C>           <C>            <C>            <C>
Financial assets:
Cash and cash equivalents                        $    4,585    $    4,585     $   11,230     $   11,230
Securities available for sale                        10,878        10,878         10,952         10,952
Securities held to maturity                          31,913        31,576         38,112         37,940
Loans receivable, net                                62,450        61,755         49,889         50,085
Accrued interest receivable                             778           778            784            784
                                                 ----------    ----------     ----------     ----------

    Total financial assets                       $  110,604    $  109,572     $  110,967     $  110,991
                                                 ==========    ==========     ==========     ==========

Financial liabilities:
Deposits                                         $  (97,283)   $  (97,398)    $  (98,697)    $  (98,919)
FHLB advances                                        (5,085)       (5,085)        (3,018)        (3,065)
Accrued interest payable                                (52)          (52)           (42)           (42)
                                                 ----------    ----------     -----------    ----------

    Total financial liabilities                  $  (102,420)  $  (102,535)   $ (101,757)    $ (102,026)
                                                 ===========   ===========    ==========     ==========
</TABLE>


The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate such
value:

Cash and cash equivalents and interest-bearing deposits: For such short-term
instruments, the carrying amount approximates fair value.

Securities: The fair values of securities available for sale and held to
maturity are based on quoted market prices or dealer quotes. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar instruments.




                                  (Continued)                                25
<PAGE>   23


                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

Loans, net: For certain similar categories of variable rate loans, the
outstanding balance at the reporting date approximates fair value. The fair
value of other types of loans is estimated by discounting future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities at December 31,
1996 and 1995. The fair value of unrecorded commitments was not material at
December 31, 1996 or 1995.

Accrued interest receivable and payable: For such short-term receivables and
payables, the carrying amount approximates fair value.

Deposits and FHLB advances: The fair value of demand deposits, savings accounts
and certain money market deposits is the amount payable on demand at December
31, 1996 and 1995. The fair value of fixed maturity certificates of deposits and
FHLB advances is estimated using the rates offered at December 31, 1996 and 1995
for deposits of similar remaining maturities.

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

NOTE 18 - CONDENSED PARENT-ONLY FINANCIAL STATEMENTS

Balance Sheet for PFC as of December 31:
<TABLE>
<CAPTION>
                                                          1996
ASSETS                                             (Dollars in thousands)
<S>                                                      <C>
    Cash and cash equivalents                            $     66
    Investment in subsidiary                                9,446
    Loan receivable from subsidiary                         1,000
    Other assets                                               66
                                                         --------
         Total assets                                    $ 10,578
                                                         ========
LIABILITIES
    Other liabilities                                    $      2
                                                         --------
         Total liabilities                                      2
                                                         --------
SHAREHOLDERS' EQUITY
    Common shares, no par value
     Authorized: 10,000,000 shares
     Issued:  538,470 shares
    Paid-in capital                                         4,880
    Treasury shares, 26,640 at cost                          (436)
    Unearned compensation on
      recognition and retention plan                         (100)
    Unrealized loss on securities
      available for sale, net of tax                          (94)
    Retained earnings                                       6,326
                                                         --------
         Total shareholders' equity                        10,576
                                                         --------
         Total liabilities and shareholders' equity      $ 10,578
                                                         ========
</TABLE>


                                  (Continued)                                26

<PAGE>   24


                          POTTERS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996



NOTE 18 - CONDENSED PARENT ONLY FINANCIAL STATEMENTS (Continued)

Income Statement for PFC for the year ended December 31:
<TABLE>
<CAPTION>
                                                             1996
                                                             ----
                                                      (Dollars in thousands)
INCOME
<S>                                                        <C>
Dividends from subsidiary                                  $ 1,650
Interest income                                                  8
                                                           -------
                                                             1,658
EXPENSE
Other operating expense                                         22
                                                           -------
INCOME BEFORE INCOME TAXES AND DISTRIBUTIONS
  IN EXCESS OF SUBSIDIARY EARNINGS                           1,636
Income tax benefit                                              (3)
                                                           -------
INCOME BEFORE DISTRIBUTIONS IN EXCESS
  OF SUBSIDIARY EARNINGS                                     1,639
Distributions in excess of
 subsidiary earnings                                        (1,700)
                                                           -------
NET LOSS                                                   $   (61)
                                                           =======
</TABLE>

Statement of Cash Flows for PFC for the year ended December 31:

<TABLE>
<CAPTION>
                                                                1996
                                                                ----
                                                       (Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                        <C>
    Net income                                             $   (61)
    Adjustments to reconcile net income to
     net cash from operating activities
       Distributions in excess of subsidiary earnings        1,700
       Change in other assets and other liabilities            (64)
                                                           -------
      Net cash from operating activities                     1,575

CASH FLOWS FROM INVESTING ACTIVITIES
    Loans to subsidiary                                     (1,000)
                                                           -------
      Net cash from investing activities                    (1,000)
                                                           -------

CASH FLOWS FROM FINANCING ACTIVITIES
    Purchase of treasury shares                               (436)
    Proceeds from exercise of stock options                     57
    Cash dividends paid                                       (130)
                                                           -------

      Net cash from financing activities                      (509)
                                                           -------
Net change in cash and cash equivalents                         66

Cash and cash equivalents at beginning of year             
                                                           -------
     
CASH AND CASH EQUIVALENTS AT END OF YEAR                   $    66
                                                           =======
</TABLE>



                                                                             27
<PAGE>   25






                         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, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

As discussed in Note 1, the Corporation changed its method of accounting for
impaired loans in 1995 to conform with new accounting guidance.




                                                  Crowe, Chizek and Company LLP

Columbus, Ohio
February 6, 1997






                                                                             28


<PAGE>   26









                          POTTERS FINANCIAL CORPORATION

                                Financial Review
                                December 31, 1996

GENERAL

On March 11, 1996, shareholders of The Potters Savings and Loan Company
("Potters" or the "Company") approved the reorganization of Potters into the
holding company structure of ownership. As a result, Potters Financial
Corporation ("PFC"), a unitary savings and loan holding company, became the
holder of all of the outstanding common shares of Potters, and the former
shareholders of Potters received common shares of PFC.

A net loss of $61,000, or $.12 per common share, was recorded for the twelve
months ended December 31, 1996, compared to net income of $829,000, or $1.56 per
share, for the comparable period in 1995. The loss during 1996 was primarily due
to a one-time special assessment by the Federal Deposit Insurance Corporation
("FDIC") on all financial institutions whose deposits are insured by the Savings
Association Insurance Fund ("SAIF"). Also contributing to the decline in net
income during 1996 compared to 1995 was a decline in net interest income and an
additional provision for loan losses of $188,500 during the first quarter of
1996 relating to the Bennett Funding Group, Inc. (the "Bennett Group") equipment
lease credits upon learning of its bankruptcy filing and investigation by the
Securities and Exchange Commission. Potters also began recording income tax
expense during the year due to the elimination of the valuation allowance
against deferred tax assets in 1995, which reduced 1996 net income by $68,000.

Consistent with Potters' long-term goals to increase interest income and the
interest rate spread, significant progress was made during 1996 in restructuring
its asset mix. Funds invested in short-term instruments at December 31, 1995,
along with repayments, maturities and calls on securities held to maturity, were
channeled into local loan originations and purchases of one-to-four family real
estate loans in northwestern and southwestern Ohio. As a result, one-to-four
family real estate loans increased $16.1 million, or 48.7%, during 1996 and net
loans receivable increased $12.6 million, or 25.2%. Asset quality improved
despite the addition of the Bennett Group equipment lease credits to
nonperforming loans during 1996, with a 29.1% decline in nonperforming loans and
a net increase of $390,000, or 17.4%, in the allowance for loan losses. At
December 31, 1996, the allowance for loan losses totaled $2.6 million,
representing 152.2% of nonperforming loans.

Dividends of $130,000, or $.25 per common share, were paid during 1996, compared
to $111,000, or $.21 per share, during 1995, representing an increase of 19.0%.
PFC successfully completed the repurchase of 5% of its 532,809 outstanding
common shares on June 12, 1996. The stock repurchase program, announced on June
7, 1996, resulted in the repurchase of 26,640 shares at an average price of
$16.375 per common share. PFC began a second stock repurchase plan on October
10, 1996, in which up to 10% of its outstanding common shares may be purchased
during the subsequent twelve months. In January 1997, 10,000 shares were
purchased at $19.25 per share and in February 1997, 15,000 shares were purchased
at a price of $19.625. The second stock repurchase represents a continuation of
PFC's commitment to enhance shareholder value.

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

In the following pages, management presents an analysis of Potters Financial's
financial condition as of December 31, 1996, and the results of operations for
fiscal 1996, 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, Potters Financial's
operations and Potters Financial's actual results could differ significantly
from those discussed in the forward-looking statements. Some of



                                                                             29


<PAGE>   27





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 Potters Financial's general market area.

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

           1. Federal Deposit Insurance Corporation Assessment - Management's
              belief that charter unification legislative changes, which may
              change the regulatory requirements of Potters Financial and
              Potters, will not have a material effect on either entity's
              financial condition or operations.

           2. Allowance and Provision for Loan Losses - Management's belief that
              the Court in the Bennett Group bankruptcy matter will decide in
              favor of Potters' motion for relief from bankruptcy stay by
              mid-1997, that the final settlement documents will be approved and
              that no additional losses will be incurred.

              Management's statements regarding the amount and adequacy of the
              allowance for loan losses.

           3. Noninterest Expense - Management's belief that Potters can more
              effectively service its East End customers through its Downtown
              Branch Office.

              Management's belief that the Employee Stock Ownership Plan and the
              401(k) plan can more adequately serve the retirement needs of
              Potters' employees at less cost than the defined benefit plan.

           4. Financial Condition - Statements regarding the strategic focus and
              long-term goals of Potters.

           5. Asset/Liability Management - Management's expectation that its
              asset/liability management efforts will reduce Potters' overall
              vulnerability to interest rate risk, and that Potters' results of
              operations are sensitive to general changes in interest rates,
              because its interest-rate-sensitive liabilities exceed its
              interest-rate-sensitive assets.

           6. Asset Quality - Allowance for Loan Losses - Statements regarding
              the amount and adequacy of the provision for loan losses.

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

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

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

           9. Effect of Recent Accounting Pronouncements - Management's
              expectation that SFAS No. 125, "Accounting for Transfers and
              Servicing of Financial Assets and Extinguishment of Liabilities"
              will not have a material impact on Potters' financial statements


FEDERAL DEPOSIT INSURANCE CORPORATION ASSESSMENT

The deposit accounts of Potters and other savings associations are insured by
the FDIC through the SAIF. Because a significant portion of the assessments paid
into the fund by savings associations are used to pay the cost of prior thrift
failures, the reserves of the SAIF were below the level required by law. The
deposit accounts of commercial banks are insured by the FDIC through the Bank
Insurance Fund ("BIF"), except to the extent such banks have acquired SAIF
deposits. The reserves of the BIF met the level required by law in May 1995.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy commercial banks were reduced in mid-1995
significantly below





                                                                             30
<PAGE>   28





the level paid by healthy savings associations. In 1996, no BIF assessments were
required for healthy commercial banks, except a $2,000 minimum fee, while SAIF
assessments continued at $.23 per $100 of deposits.

In 1996, Congress passed legislation to recapitalize the SAIF and to eliminate
the significant premium disparity. The recapitalization plan, enacted on
September 30, 1996, provided for, among other things, a special assessment of
$.657 per $100 of SAIF deposits held at March 31, 1995, in order to increase
SAIF reserves to the level required by law. Potters had a deposit base of $97.9
million at March 31, 1995. Potters' special assessment totaled $643,000 and had
a $424,000, or $.82 per common share, after tax negative impact on 1996 net
income. Pro rata sharing of the Financing Corporation obligation between BIF and
SAIF members will begin by January 1, 2000. Until that time, partial sharing
will occur, with SAIF deposits assessed at $.0644 per $100 in deposits and BIF
deposits at $.0129 per $100 in deposits. Through December 31, 1998, SAIF
assessments for healthy institutions can never be reduced below the level set
for healthy BIF institutions.

The recapitalization plan also provides for the merger of the SAIF and BIF
insurance funds on January 1, 1999, if there are no savings associations under
federal law. Pending legislation introduced in early 1997 proposes the
elimination of the federal thrift charter and of the separate federal regulation
of thrifts prior to the merger of the deposit insurance funds. The Treasury
Department has been directed to report to Congress by March 31, 1997 with its
recommendation regarding a common charter for banks and federal savings
institutions. If this pending legislation is enacted as proposed, Potters would
be regulated as a bank under federal law. As a result, Potters would become
subject to the more restrictive activity limits imposed on national banks. In
addition, if required to become a bank holding company, PFC would be subject to
more restrictive activity limits and to capital requirements similar to those
imposed on Potters. It is not expected that such new activity limits will have a
material effect on the financial condition or operations of PFC and Potters. No
assurances may be given whether such legislation will be enacted or if so
whether it might contain different provisions than as currently proposed.

RESULTS OF OPERATIONS

PFC recorded a net loss of $61,000, or $.12 per common share, for the year ended
December 31, 1996, compared to net income of $829,000, or $1.56 per share, and
$665,000, or $1.26 per share, for 1995 and 1994, respectively. The principal
source of earnings is net interest income which represents the amount by which
income generated on interest-earning assets, including loans and securities,
exceeds expense incurred on interest-bearing liabilities such as deposits and
borrowings. Net income is also impacted by provisions for losses, fee and other
noninterest income and noninterest expense.

The decline in net income during 1996 compared to the prior year was primarily
the result of the one-time FDIC assessment included in noninterest expense and a
decline in net interest income. Also contributing to the decline in net income
during 1996 was a write-down of the Bennett Group equipment lease credits by
$377,000 upon learning of its bankruptcy filing and the related investigation by
the Securities and Exchange Commission.

Potters began recording income tax expense during 1996 due to the elimination of
the valuation allowance against deferred tax assets in 1995. Income tax expense
during 1996 was $68,000, primarily the result of the early termination of a life
insurance policy during the year. The primary components of the $164,000, or
24.7%, increase in net income during 1995 compared to 1994 were lower provisions
for loan losses and improving net interest income despite rising deposit costs,
somewhat offset by higher noninterest expenses.

The decrease in PFC's net income resulted in returns on average assets and
average shareholders' equity of (.05)% and (.57)%, respectively for the year
ended December 31, 1996, compared to .74% and 7.88% , respectively, in 1995. Net
income for 1994 represented a return on average assets of .59%, and a return on
average shareholders' equity of 6.74%.



                                                                             31


<PAGE>   29



YIELDS EARNED AND RATES PAID

PFC's net interest income consists of the difference between income generated on
loans and securities and interest expense on deposits and borrowings. Net
interest income is primarily affected by volumes, interest rates and the
composition of interest-earning assets and interest-bearing liabilities. The
interest rate spread decreased to 3.05% for the twelve months ended December 31,
1996 from 3.28% for the twelve months ended December 31, 1995. The yield on
interest-earning assets declined to 7.36% during 1996 from 7.52% in 1995. The
cost of funds increased from 4.24% for the year ended December 31, 1995 to 4.31%
during 1996 due primarily to the increased use of Federal Home Loan Bank
("FHLB") advances to finance loan purchases and a short-term growth strategy
employed primarily during the third quarter of 1996.

The following table sets forth the weighted average yields on Potters'
interest-earning assets, the weighted average interest rates on interest-bearing
liabilities and the interest rate spread between the weighted average yields and
rates at the dates indicated. Nonaccruing loans have been included in the table
as having a yield of zero.

<TABLE>
<CAPTION>
                                                                     ...............At December 31,...........
                                                                     1996               1995              1994
                                                                     ----               ----              ----

<S>                                                                  <C>                <C>               <C>
Weighted average yield on:
    Loans receivable                                                  8.91%              9.15%             9.05%
    Securities (1)                                                    6.39               5.84              6.08
    Other interest-earning assets                                     6.70               5.50              6.36
        Combined weighted average yield
          on interest-earning assets                                  7.87               7.36              7.49

Weighted average rate paid on:
    Certificates of deposits                                          5.67               5.81              5.22
    Savings deposits                                                  3.02               3.05              3.05
    NOW accounts                                                      2.07               2.25              2.22
    Money market accounts                                             2.99               2.86              2.75
    FHLB advances                                                     6.51               6.29
        Combined weighted average
          rate paid on interest-
          bearing liabilities                                         4.29               4.39              3.99
    Interest rate spread                                              3.58               2.97              3.50
</TABLE>


(1) Includes FHLB Stock

The following table sets forth certain information relating to PFC's average
balance sheet 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.





                                                                             32
<PAGE>   30





<TABLE>
<CAPTION>
(Dollars in thousands)                             ..........................Years ended December 31,....................
                                                                             -----------------------
                                                                   1996                                 1995
                                                                   ----                                 ----
                                                     Average     Interest                Average     Interest
                                                   Outstanding    Earned/    Yield/    Outstanding    Earned/      Yield/
                                                     Balance       Paid       Rate       Balance       Paid         Rate
                                                   --------     --------    -------    ---------     --------      ------
<S>                                                <C>          <C>           <C>      <C>           <C>            <C>
Interest-earnings assets:
    Loans receivable                               $ 52,880     $  4,534      8.57%    $  49,945     $  4,441       8.89%
    Securities (1)                                   55,055        3,491      6.32        53,530        3,436       6.36
    Other                                             3,409          181      5.32         3,341          188       5.63
                                                   --------     --------               ---------     --------
        Total interest-earning assets (2)           111,344        8,206      7.36       106,816        8,065       7.52
Noninterest earning assets:
    Cash and cash equivalents                         2,350                                2,319
    Premises and equipment                            1,700                                1,404
    Other nonearning assets                           1,790                                1,772
                                                   --------                            ---------
        Total assets                               $117,184                            $ 112,311
                                                   ========                            =========

Interest-bearing liabilities:
    Certificates of deposit                        $ 48,665        2,769      5.69     $  48,995        2,743       5.60
    Passbook, statement savings
     and club accounts                               35,389        1,075      3.04        35,450        1,077       3.04
    Demand, NOW and Super NOW
     accounts                                        12,671          267      2.10        11,844          260       2.20
    Money market accounts                             2,512           78      3.09         2,743           76       2.77
    Borrowings                                        5,843          340      5.83         1,765          115       6.52
                                                   --------     --------               ---------     --------
        Total interest-bearing liabilities          105,080        4,529      4.31       100,797        4,271       4.24
                                                                --------                             --------
Noninterest-bearing liabilities:
    Other liabilities                                 1,239                                  998
    Shareholders' equity                             10,865                               10,516
                                                   --------                            ---------
        Total liabilities and equity               $117,184                            $ 112,311
                                                   ========                            =========

    Net interest income                                          $ 3,677                              $ 3,794
                                                                ========                             ========
    Interest rate spread                                                      3.05%                                 3.28%
                                                                              ====                                  ====
    Net interest-earning assets                    $  6,264                            $   6,019
                                                   ========                            =========
    Net yield on average interest-
      earning assets                                                          3.30%                                 3.55%
                                                                              ====                                  ====
    Ratio of average interest-earning
      assets to average interest-
      bearing liabilities                                         105.96%                              105.97%
                                                                ========                             ========
</TABLE>

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




<TABLE>
<CAPTION>

                                                                    1994
                                                                    ----
                                                     Average      Interest
                                                  Outstanding     Earned/       Yield/
                                                    Balance        Paid          Rate
                                                   --------     --------        ------
<S>                                                <C>            <C>           <C>
Interest-earnings assets:
    Loans receivable                               $  49,279      $ 4,318        8.76%
    Securities (1)                                    55,693        3,199        5.69
    Other                                              1,811           69        3.81
                                                   ---------      -------
        Total interest-earning assets (2)            106,783        7,586        7.07
Noninterest earning assets:
    Cash and cash equivalents                          2,516
    Premises and equipment                             1,431
    Other nonearning assets                            1,534
                                                   ---------
        Total assets                               $ 112,264
                                                   =========

Interest-bearing liabilities:
    Certificates of deposit                        $  45,840        2,344        5.11
    Passbook, statement savings
     and club accounts                                39,425        1,204        3.05
    Demand, NOW and Super NOW
     accounts                                         11,742          259        2.21
    Money market accounts                              3,697          104        2.81
    Borrowings                                           695           32        4.60
                                                   ---------      -------
        Total interest-bearing liabilities           101,399        3,943        3.89
                                                                  -------
Noninterest-bearing liabilities:
    Other liabilities                                  1,011
    Shareholders' equity                               9,854
                                                   ---------
        Total liabilities and equity               $ 112,264
                                                   =========

    Net interest income                                           $ 3,643
                                                                  =======
    Interest rate spread                                                         3.18%
                                                                                 ====
    Net interest-earning assets                    $   5,834
                                                   =========
    Net yield on average interest-
      earning assets                                                             3.41%
                                                                                 ====
    Ratio of average interest-earning
      assets to average interest-
      bearing liabilities                                          105.31%
                                                                 ========
</TABLE>

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

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



                                                                             33
<PAGE>   31





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


<TABLE>
<CAPTION>
                                                      1996 vs. 1995                      1995 vs. 1994
                                                      -------------                      -------------

                                                        Increase                           Increase
                                                       (decrease)                         (decrease)
                                                         due to                             due to
                                                       ----------                         ----------
(Dollars in thousands)
                                              Volume      Rate       Total      Volume       Rate       Total
                                              ------      ----       -----      ------       ----       -----
Interest-earning assets:
<S>                                           <C>        <C>        <C>        <C>         <C>        <C>
    Loans receivable                          $  255     $ (162)    $   93     $    59     $   64     $   123
    Securities                                    79        (24)        55        (131)       368         237
    Other                                          4        (11)        (7)         76         43         119
                                              ------     ------     ------     -------     ------     -------

      Total interest-earning assets           $  338     $ (197)       141     $     4     $  475         479
                                              ------     ------     ------     -------     ------     -------

Interest-bearing liabilities:
    Certificates of deposits                     (18)        44         26         168        231         399
    Savings deposits                              (2)                   (2)       (121)        (6)       (127)
    Demand, NOW and Super NOW
      accounts                                    18        (11)         7           2         (1)          1
    Money market accounts                         (7)         9          2         (26)        (2)        (28)
    Borrowed funds                               238        (13)       225          66         17          83
                                              ------     ------     ------     -------     ------     -------

      Total interest-bearing liabilities      $  229     $   29        258     $    89     $  239         328
                                              ======     ======     ======     =======     ======     =======

Net interest income                                                $  (117)                           $   151
                                                                   =======                            =======
</TABLE>

NET INTEREST INCOME

Net interest income is the largest component of Potters' net income and is
affected by the interest rate environment and the volume and composition of
interest sensitive assets and liabilities. Net interest income decreased
$117,000, or 3.1%, during 1996 compared to 1995, due primarily to the increased
use of FHLB advances in 1996, which generally bear higher interest rates than
deposits, to finance loan purchases and a short-term growth strategy discussed
in "Financial Condition". Also contributing to the decline in 1996 net interest
income was a decline in the average yield of interest-earning assets somewhat
offset by increasing average balances of loans and securities. Net interest
income increased $151,000, or 4.1%, during 1995 compared to 1994. Increases in
the average yields on loans, securities and short-term investments exceeded the
increase in the cost of funds during 1995 and were largely responsible for the
increase in net interest income.

Interest on loans receivable totaled $4.5 million for the twelve months ended
December 31, 1996, compared to $4.4 million and $4.3 million for the comparable
periods in 1995 and 1994, respectively. The $93,000 increase in loan interest
income during 1996 resulted primarily from increased loan volume through
originations and purchases, somewhat offset by a decline in the average yield.
Payoffs of $3.4 million on nonresidential real estate loans located in Colorado,
with a weighted average yield of 8.32%, negatively affected the yield on loans,
but were consistent with management's strategy of reducing credit risk from
out-of-state properties. The average balance of loans increased $2.9 million, to
$52.9 million, during 1996, while the average yield decreased from 8.89% during
1995 to 8.57% during 1996. The $123,000 increase in loan interest income during
1995 compared to 1994 was attributable to increases in both the average balance
of and average yield on loans.


                                                                              34
<PAGE>   32

Interest and dividends on securities and FHLB stock totaled $3.5 million for the
twelve months ended December 31, 1996 compared to $3.4 million and $3.2 million
for the comparable periods in 1995 and 1994, respectively. The $55,000 increase
during 1996 compared to 1995 resulted primarily from significant purchases of
agency securities available for sale during 1996 which increased the average
balance by $1.5 million. The purchase of $10.0 million of such securities was
part of the Company's short-term growth strategy employed during 1996. The yield
on securities decreased to 6.32% during 1996 from 6.36% during 1995. The
increase in securities income during 1995 compared to 1994 was due primarily to
an increase in the average yield, from 5.69% during 1994 to 6.36% in 1995.
Security yields increased during 1995 due to the maturity or sale of lower
yielding securities and the subsequent purchase of higher yielding securities
combined with the upward repricing of adjustable-rate mortgage-backed
securities.

Interest on short-term investments declined $7,000 during 1996 compared to 1995,
but increased $119,000 during 1995 compared to 1994. The average balance of
short-term investments increased marginally during 1996 while the average yield
decreased from 5.63% during 1995 to 5.32% during 1996. The average balance of
other investments increased to $3.3 million during 1995, and average yields
increased from 3.81% during 1994. The increase in the yield during 1995 was the
result of the flattening of the yield curve which narrowed the spreads between
short- and long-term investment instruments and increased short-term rates.

Interest paid on deposits for the years ended December 31, 1996 and 1995 totaled
$4.2 million in each year, compared to $3.9 million in 1994. The marginal
increase in deposit costs during 1996 compared to 1995 was primarily
attributable to increased rates on certificates of deposit and an $827,000
increase in the average balance of demand and NOW accounts. The increase in 1995
compared to 1994 was a reflection of the interest rate environment and strong
local competition for time deposits. The Company introduced a tiered interest
rate pricing structure on certificates and selected checking and statement
savings products during 1995 in order to reduce the impact of paying higher
deposit rates and continued the pricing strategy during 1996. The average rate
on deposits was 4.22% during 1996, compared to 4.20% during 1995 and 3.89% in
1994.

Interest on borrowings increased $225,000, to $340,000 for the year ended
December 31, 1996, compared to $115,000 and $32,000 during 1995 and 1994,
respectively. The increase during 1996 compared to 1995 was due primarily to a
$4.1 million increase in the average balance of FHLB advances which were used to
fund loan purchases and a short-term growth strategy employed during the year.
Somewhat offsetting the increased expense due to volume was a decline in the
average rate on FHLB advances to 5.83% during 1996 from 6.52% during 1995. The
increase in interest expense on borrowed funds during 1995 compared to 1994 was
due to the Company's use of certain borrowings to purchase investments, locking
in positive spreads, and its participation in Community Investment and
Affordable Housing Programs with the FHLB. Interest expense during 1995 was also
impacted, to a lesser extent, by an increase in the average yield paid on FHLB
advances, from 4.60% during 1994 to 6.52% in 1995.

ALLOWANCE AND PROVISION FOR LOAN LOSSES

The provision for loan losses was $249,000 during 1996, compared to $245,000 and
$377,000 during 1995 and 1994, respectively. The marginally higher provision
during 1996 compared to 1995 related to the extension of credit by Potters for
an investment in equipment leases with the Bennett Group, a Syracuse, New York
leasing corporation, and Bennett Leasing Corporation, a related entity. Potters
learned late in the first quarter of 1996 that the Securities and Exchange
Commission had commenced proceedings against Bennett Funding, charging fraud in
connection with the sale of equipment leases. On March 29, 1996, the Bennett
Group filed for protection from creditors under Chapter 11 of the federal
bankruptcy laws.

Consistent with Potters' historically proactive approach to dealing with problem
assets, $377,000 of the $754,000 equipment lease credits were charged off in the
first quarter of 1996. An additional provision for loan losses of $188,500 was
recorded in the first quarter of 1996. Potters ceased the accrual of interest on
the remaining investment in March 1996. At December 31, 1996, the Bennett Group
equipment lease credits totaled $365,000 and were included in nonperforming and
impaired loans. A trustee appointed by the bankruptcy court continues the
investigation into the activities of the Bennett


                                                                              35
<PAGE>   33

Group, and Potters' legal counsel has worked actively with the trustee. No
payments have been received since the announcement of the bankruptcy.

The Court has ruled that the manner in which the Bennett Group equipment lease
credits were documented and recorded was sufficient to perfect Potters' position
in the loans as a secured creditor. It is anticipated that the Court will decide
the Company's motion for relief from bankruptcy stay by mid- 1997, which if
resolved in Potters' favor, would result in the resumption of lease payments. In
January 1997, the trustee extended various settlement options to all financial
institutions involved in the case. Because of the legal expenses involved in
continuing with litigation and the expected length of the case, Potters' Board
of Directors decided to accept one of the settlement options. The motions for
settlement were heard and approved by the Court on February 27, 1997 subject to
the approval of final settlement documents. At this time, no additional losses
are anticipated on the Bennett Group equipment lease credits. However, no
assurances can be given that additional losses will not be incurred or that
additional provisions will not be required. 

Potters has experienced continued improvement in asset quality over the last
two years despite the addition of the Bennett Group equipment lease credits to
nonperforming loans in 1996, with declining balances of nonperforming loans and
net increases in the allowance for loan losses. The allowance for loan losses
increased $390,000, or 17.4%, during 1996 due to provisions of $249,000 and net
recoveries of $141,000. Charge-offs of $538,000 related primarily to the Bennett
Group equipment leases and payoff discounts offered to two Colorado
nonresidential borrowers. Recoveries of $679,000 were recorded during 1996,
$647,000 of which involved the payoff of Colorado property loans which had
previously been written down. The allowance increased $277,000, or 14.1%, during
1995 due to provisions of $245,000 and net recoveries of $32,000. During 1994,
the allowance for loan losses increased $77,000, with provisions of $377,000 and
net loan charge-offs of $300,000. Charge-offs during 1995 and 1994 related
primarily to nonresidential real estate loans located in Colorado and mobile
home loans.

As discussed in Note 1 to the consolidated financial statements, Potters adopted
the provisions of 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," which require recognition of loan impairment. At
December 31, 1996, impaired loans totaled $365,000 and consisted solely of the
Bennett Group lease credits. The $193,000 impaired loan reported at December 31,
1995 was paid off during 1996. Management has incorporated the provisions of
SFAS Nos. 114 and 118 into its analysis of the Company's allowance for loan
losses. See "Asset Quality - Nonperforming Assets and Loan Loss Allowances".

NONINTEREST INCOME

Noninterest income increased $10,000, to $267,000 during 1996. As a result of an
analysis of the existing fee structure on deposit and loan products and the
implementation of several changes, deposit account fee income and other income
have increased 11.0% and 22.7%, respectively, during 1996 compared to 1995.
Somewhat offsetting the increase in 1996 was a net loss of $22,000 on foreclosed
real estate operations due primarily to the payment of real estate taxes on
foreclosed real estate which was sold during the year at a gain of $55,000. Also
included in 1996 noninterest income were gains and losses on sales of loans and
securities netting to zero during the year compared to $12,000 of gains on such
sales during 1995. Noninterest income decreased $10,000, to $257,000, during
1995 compared to 1994 due primarily to an initial cash payment received by the
Company during 1994 from the settlement of a lawsuit against a mobile home loan
broker and servicing company somewhat offset by a net loss on foreclosed real
estate operations of $3,000 during 1995 compared to a net loss of $60,000 during
1994.

NONINTEREST EXPENSE

Noninterest expense increased $711,000, to $3.7 million during 1996 compared to
$3.0 million during 1995. The primary reason for the increase during 1996
compared to 1995 was the one-time $643,000 special assessment required by the
FDIC to recapitalize the SAIF fund. As discussed above, this charge in 1996 will
result in the reduction of future deposit insurance premiums. Exclusive of the
special SAIF assessment, noninterest expense increased $68,000, or 2.3%, in 1996
compared to 1995.




                                                                              36
<PAGE>   34

Office occupancy expense increased $26,000 during 1996 due to increased
depreciation expense from the new loan and deposit operations equipment and
software installed in late 1995 and mid-1996, respectively, and increased
expenses for maintenance of and improvements to Potters' offices. Other
noninterest expense increased $123,000 as Potters worked toward its strategic
commitments to invest in employee training and development, plus new product
development. Included in other noninterest expense during 1996 were increased
employee education expenses, higher automated teller machine ("ATM") expenses
due to the installation of Potters' second ATM machine in late 1995 and set up
costs relating to Potters' VISA Check Card program which will be initiated
during 1997. Also increasing during 1996 compared to 1995 were advertising
expense, franchise tax and data processing costs. Compensation and benefits
expense decreased $28,000 during 1996 due primarily to larger deferrals of
compensation costs related to increased loan originations during 1996, somewhat
offset by normal salary adjustments. Included in 1996 noninterest expense was a
net gain on the sale of foreclosed and repossessed property of $39,000 versus a
net loss of $2,000 on such sales during 1995.

As part of management's ongoing process to contain costs, Potters recently
announced that, effective March 31, 1997, branch operations at its East End
Branch Office will be terminated. The East End Office has not been profitable
for several years, and despite the addition of new loan and deposit products,
and several attempts to increase lending operations at the branch, the activity
level and deposit base has continued to decline. Due to the physical limitations
of the building and the decline in activity, the Board of Directors and
management believe that Potters can better serve all of its customers by
consolidating its East End operations into its newly renovated Downtown Office.
Management has also selected a location for the installation of an ATM in the
East End.

In December 1996, the Company's Board of Directors approved a resolution
terminating the Company's defined benefit pension plan. In October 1995, the
Board of Directors approved ceasing the accumulation of future benefits to
participants in the Company's defined benefit pension plan and pursuing the
implementation of a 401(k) profit sharing plan in 1996. The termination decision
required Potters to expense $67,000 in 1996, which represented the remaining
prepaid pension costs which had been included in other assets. Ceasing the
accumulation of future benefits during 1995 was considered a curtailment of the
plan, resulting in a net loss of $74,000 in noninterest expense. Management and
the Board of Directors of Potters believe that the combination of the Employee
Stock Ownership Plan initiated in 1994, and a 401(k) plan implemented during
1996 will provide more competitive retirement benefits to its employees at a
lower cost than the defined benefit plan. Nonrecurring professional fees are
expected to be incurred upon terminating the pension plan in 1997.

Excluding $140,000 of gains on sales of foreclosed and repossessed assets during
1994 and $2,000 of losses on such sales for 1995, noninterest expenses declined
$33,000 during 1995 compared to 1994. The reduction occurred despite increased
expenses to support Potters' strategic priorities, which include upgraded
technology, employee development and training, expanded product offerings and
emphasis on the development of a stronger sales culture with improved customer
service levels. Potters acquired an automated loan documentation and tracking
system during 1995 and consolidated its downtown East Liverpool branch offices
into one newly remodeled, full-service facility that is more efficient and
convenient for the Company's customers. As a result of the Company's priorities,
compensation and benefits, advertising and data processing expense increased,
but were more than offset by a $108,000, or 42.7%, reduction in legal,
professional and consulting fees and lower FDIC deposit insurance premiums
during 1995 compared to 1994. Also contributing to the decrease in noninterest
expense during 1995 was the absence of goodwill amortization, which arose from
the 1982 acquisition of a thrift institution and which was completely amortized
in mid-1994.

INCOME TAXES

The absence of a tax provision in 1995 and 1994 on income before tax of $829,000
and $665,000 in 1995 and 1994, respectively, resulted primarily from the
reduction during such years, of the valuation allowance against deferred tax
assets. The valuation allowance was reduced as it became more likely to be
realized as the Company paid taxes and established a history of generating
taxable income. As a result of the elimination of the valuation allowance as of
December 31, 1995, Potters began to recognize



                                                                              37
<PAGE>   35

income tax expense in 1996. Income tax expense during 1996 was $68,000,
resulting primarily from the early termination of a life insurance policy during
the year.

Legislation enacted in 1996 requires the recapture, over time, of a portion of
the bad debt reserve previously deducted by Potters 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

Potters' total assets remained constant at $114.2 million at December 31, 1996
and 1995. The Company began to restructure its balance sheet during 1996 in
accordance with its strategic focus and long-term goals of increasing interest
income and the interest rate spread. Funds from loan repayments, the reduction
in the held to maturity security portfolio, sales of securities available for
sale and FHLB advances were used to originate loans, purchase one-to-four family
real estate loans and fund deposit outflows.

Cash and cash equivalents decreased $6.6 million, from $11.2 million at December
31, 1995 to $4.6 million at December 31, 1996. Funds invested in short-term
investment instruments at December 31, 1995, along with other sources, were used
to purchase $13.7 million one-to-four family real estate loans located in
northwestern and southwestern Ohio and increase local loan originations.

Securities available for sale remained virtually the same, totaling $10.9
million at December 31, 1996 compared to $11.0 million at December 31, 1995.
Securities designated as available for sale are carried at their fair values,
with resulting unrealized gains or losses added to or deducted from
shareholders' equity, net of tax. The unrealized loss on securities available
for sale increased from $42,000 at year-end 1995 to $144,000 at year-end 1996
due to a general rise in interest rates during 1996. The equity component,
representing unrealized losses, net of tax, on securities available for sale
increased from $23,000 at December 31, 1995, to $94,000 at December 31, 1996.

During 1996, purchases of $23.9 million in securities available for sale were
offset by $13.2 million in sales and $10.6 million in calls and maturities.
Purchases of fixed-rate securities totaling $10.0 million were part of a
short-term leveraged growth strategy employed during 1996 financed by
variable-rate FHLB advances. The growth strategy generated an average spread of
169 basis points over the period held, and was monitored at each quarterly
interest rate reset of the FHLB advances when the transaction could be
terminated. Due to an increase in interest rates during the fourth quarter, all
of the transactions were terminated. The strategy added approximately $33,000 to
net interest income during 1996.

At December 31, 1996, the Company's held-to-maturity securities portfolio
totaled $31.9 million, a decrease of $6.2 million from $38.1 million at December
31, 1995. Held-to-maturity securities at December 31, 1996 consisted of $24.0
million of mortgage-backed securities and $7.9 million of other securities,
primarily U.S. Government agencies. Purchases of $984,000 were offset by
repayments, calls and maturities of $5.7 million. The provisions of SFAS No. 115
allow the sale of securities held to maturity if the security has paid down to
15% of the purchased principal balance. Mortgage-backed securities held to
maturity meeting this criteria totaling $1.4 million were sold at a net gain of
$2,000. These transactions are reported as maturities and facilitated the
purchase of real estate loans.

Net loans receivable increased $12.6 million, from $49.9 million at December 31,
1995, to $62.5 million at December 31, 1996. Local loan originations and loan
purchases during 1996 resulted in a net increase of $16.1 million, or 48.7%, in
one-to-four family real estate loans. Loan purchases totaled $13.7 million and
consisted of $12.3 million of adjustable-rate real estate loans and $1.4 million
of fixed-rate real estate loans. A total of $2.9 million of such loan purchases
were comprised of nonconforming real estate loans. The adjustable rate features
of the majority of the loan purchases continued management's asset/liability
strategy of controlling the Company's exposure to interest rate risk. Real
estate loans secured by nonresidential property decreased $3.5 million, or
37.2%, during 1996 due primarily to payoffs of $3.4 million of nonresidential
real estate loans located in Colorado. Consumer and other loans increased
$253,000 during 1996 due primarily to increased home equity lines of credit and
other consumer loans somewhat offset by the write-down of the Bennett Group
lease credits and the continued



                                                                              38
<PAGE>   36


paydown of the mobile home loan portfolio. Increased loan originations and
purchases were part of the Company's focus on its strategic goals, and resulted
in an increase in the ratio of loans-to-deposits from 50.5% at December 31,
1995, to 64.2% at December 31, 1996.

Total deposits decreased $1.4 million, or 1.4%, from $98.7 million at December
31, 1995, to $97.3 million at December 31, 1996. Net outflows of $1.2 million
occurred in passbook and money market deposit products, and $1.9 million in
certificates of deposit. Potters developed a full line of commercial checking
account products in mid-1996 and a packaged checking account product for
customers over 50 years of age in September 1996 which resulted in a net inflow
of $1.8 million in demand, NOW and super NOW accounts. Strong competition for
certificates of deposit in the local area continued to affect the cost of funds.
The Asset and Liability Management Committee ("ALCO") continues to focus on
strategies for reduced interest rate risk and responsible deposit management.
The Company introduced tiered pricing during 1995, on the basis of amount of
deposit, on its certificates and other selected products in order to mitigate
somewhat the effect of rising deposit costs.

In accordance with its asset/liability policy, Potters does not match the
highest rates offered on deposits by competitors. The Company continues to
emphasize deposits from retail sources and, as a matter of policy, has no
brokered deposit accounts.

Potters funded the change in its asset mix and deposit outflows during 1996 with
loan and security maturities, calls and repayments, sales of securities
available for sale, and with FHLB advances. At December 31, 1996, FHLB advances
totaled $5.1 million compared to $3.0 million at December 31, 1995. During 1996,
advances were used to finance loan purchases, the short-term growth strategy and
cash management needs. A total of $15.6 million in FHLB advances was received
during 1996, while repayments totaled $13.5 million.

Shareholders' equity decreased $613,000 during 1996 due primarily to a net loss
of $61,000 for 1996, the purchase of 26,640 outstanding shares for $436,000, an
increase of $71,000 in the unrealized loss, net of income tax, on securities
available for sale and dividends paid of $130,000, or $.25 per share. A total of
5,661 common shares were issued during 1996 relating to the exercise of stock
options, resulting in a $57,000 increase in shareholders' equity.

ASSET/LIABILITY MANAGEMENT

Asset/liability management is the process by which a company manages its
exposure to changes in interest rates. The Company's 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 process is carried out through weekly meetings of
the ALCO. The ALCO utilizes gap analysis, the net portfolio value ("NPV")
approach and simulation modeling to aid in making decisions relating to pricing
and the relative mix of interest rate sensitive assets and liabilities.

The measure of the difference between interest rate sensitive assets and
liabilities that mature or reprice within a certain period of time is the
Company's gap. Potters' one year interest rate sensitivity gap at December 31,
1996 was a negative 49.7% of interest-earning assets. A negative gap indicates
that the Company's interest-bearing liabilities which reprice or mature within a
given time period exceed the amount of interest-earning assets maturing or
repricing within the same period. In a rising interest rate environment, an
institution with a negative interest rate sensitivity gap, such as Potters, will
experience greater increases in the cost of its liabilities than in the yield on
its assets. Conversely, in an environment of falling rates, the Company's cost
of funds will generally decrease more rapidly than the yield on its assets.
Changes in interest rates generally will have the opposite effect on an
institution with a positive interest rate sensitivity gap.

The Company's negative one year gap increased to a negative 49.7% at December
31, 1996 from a negative 33.3% of interest-earning assets at December 31, 1995.
The change in the Company's gap position during 1996 was due primarily to the
decline in short-term investments and the deployment of those funds into loans.
Significant increases occurred in both fixed- and adjustable-rate loans. The



                                                                              39
<PAGE>   37

increase in transaction accounts and FHLB advances due within one year also
contributed to the increase in the negative gap position.

The following table summarizes the Company's interest rate sensitive assets and
liabilities at December 31, 1996. Except as stated below, the amount of assets
and liabilities shown which reprice or mature in a period were determined in
accordance with the contractual terms of the asset or liability. No estimate was
made of fixed-rate loan or mortgage-backed security amortization or prepayments.
This table does not necessarily indicate the impact of general interest rate
movements on Potters' net interest income because the repricing of certain
categories of assets and liabilities is subject to the interest rate
environment, competition and other factors beyond Potters' control. As a result,
certain assets and liabilities may in fact mature or reprice at different times
and in different volumes than indicated.

<TABLE>
<CAPTION>
                                              Within          Over            Over           Over
                                             One Year       1-3 Years      3-5 Years       5 Years            Total
                                            ---------       --------       --------        --------          --------
                                                                   (Dollars in thousands)
Interest-earning assets:

<S>                                         <C>             <C>            <C>             <C>               <C>
Fixed-rate real estate loans                $     520       $    361       $    500        $ 26,434          $ 27,815
Variable-rate real estate loans                13,775          8,800          2,981           3,646            29,202
                                            ---------       --------       --------        --------          --------
Total real estate loans                        14,295          9,161          3,481          30,080            57,017
                                            ---------       --------       --------        --------          --------

Commercial loans and
  unsecured lines of credit                       943            288             85                             1,316
Consumer and other loans                        3,637            701          1,671           1,103             7,112
Securities available for sale                   1,524          1,288          6,118           1,948            10,878
Securities held to maturity                     8,707          5,381          1,045          16,780            31,913
Other (1)                                         209                                                             209
                                            ---------       --------       --------        --------          --------
Total interest-earning assets                  29,316         16,819         12,400          49,910           108,445
                                            ---------       --------       --------        --------          --------

Interest-bearing liabilities:
Savings deposits and
  Christmas clubs (2)                          34,345                                                          34,345
Demand, NOW and Super NOW                      13,509                                                          13,509
Money market demand accounts                    1,978                                                           1,978
Certificates                                   26,561         11,626          9,264                            47,451
FHLB advances                                   3,830          1,255                                            5,085
                                            ---------       --------       --------        --------          --------
Total interest-bearing liabilities             80,223         12,881          9,264                           102,368
                                            ---------       --------       --------        --------          --------

Interest-earning assets less


  interest-bearing liabilities              $ (50,907)      $  3,938       $  3,136        $ 49,910          $  6,077
                                            =========       ========       ========        ========          ========

Cumulative interest-rate
  sensitivity gap                         $   (50,907)      $(46,969)      $(43,833)       $  6,077

Cumulative interest-rate gap
  as a percentage of interest-
  earning assets                               (49.73)%       (45.88)%       (42.82)%         5.94%

</TABLE>

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

(1) Includes interest-bearing deposits, federal funds sold and cash management
    accounts.
(2) While management may reprice savings accounts at its discretion and such
    accounts are therefore included in the amount to be repriced within one
    year, these accounts generally reprice in lesser increments than do other
    interest-earning assets and interest-bearing liabilities.



                                                                             40

<PAGE>   38



Interest rate risk is also monitored through the NPV approach, which is the
difference between the present value of expected cash flows from assets, and the
present value of expected cash flows from liabilities and off-balance sheet
contracts under various interest rate scenarios. Office of Thrift Supervision
("OTS") regulations define a normal level of interest rate risk, based on a 200
basis point change (100 basis points equals 1%) in interest rates, as a decrease
in the NPV of no more than two percent of the present value of its assets.

Presented below, as of December 31, 1996 and 1995, is an analysis of Potters'
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts in yield curve in 100 basis point increments up and down 400
basis points and compared to current policy limits of the Board of Directors. As
illustrated in the table, NPV is more sensitive to rising rates than declining
rates. In a rising rate environment, fixed-rate loans decline in market value
because of the rise in rate and slowing prepayments. The Company does not
experience a rise in market value for such loans in a declining rate environment
because borrowers will prepay at relatively faster rates. OTS assumptions are
used in calculating the amounts in this table.

<TABLE>
<CAPTION>
                                              At December 31, 1996          At December 31, 1995
Change in                                     --------------------          --------------------
Interest Rate            Board Limit         $ change       % change       $ change       % change
(Basis Points)           % Change             in NPV          in NPV        in NPV         in NPV
--------------           --------             ------           ------        ------          ------
                                          (Dollars in thousands)

<S>                         <C>             <C>                <C>           <C>                <C>
       +400                 (40)%           $  (3,979)         (30)%         $  (1,901)         (14)%
       +300                 (30)               (2,787)         (21)             (1,237)          (9)
       +200                 (20)               (1,667)         (13)               (657)          (5)
       +100                 (10)                 (702)          (5)               (221)          (2)
          0                   0                     0            0                   0            0
       -100                 (10)                  381            3                 436            3
       -200                 (20)                  695            5                 937            7
       -300                 (30)                1,132            9               1,534           12
       -400                 (40)                1,898           14               2,413           18
</TABLE>

At December 31, 1996, Potters' base case NPV ratio was 11.17% compared to 11.36%
at December 31, 1995. After an assumed 200 basis point increase in interest
rates, the December 31, 1996 NPV ratio declined to 10.01% compared to 10.99% at
December 31, 1995. The Company's change in NPV as a percentage of the present
value of its assets increased from (.56)% at December 31, 1995 to (1.41)% at
December 31, 1996. The increase which has occurred in the Company's exposure to
interest rate risk was caused primarily from shifting short-term investment
instruments to loans during 1996.

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

OTS regulations specifying an interest rate risk component to the calculation of
risk-based capital required financial institutions exceeding the normal interest
rate exposure as defined by the OTS to take a deduction from the total capital
available to meet the risk-based capital requirement. The effective date of this
regulation has been indefinitely delayed. If and when the regulation is enacted,
Potters' asset and risk-based capital levels make the OTS regulation not
applicable to the Company.

Net interest income is analyzed under various interest rate scenarios using
simulation modeling and limits set for maximum allowable percentage changes in
net interest income under each scenario. The Board of Directors approves and
monitors the Company's compliance with its interest rate risk management policy
on a quarterly basis.




                                                                              41

<PAGE>   39



ASSET QUALITY

Nonperforming Assets and Loan Loss Allowances: Nonperforming assets are loans
and other assets on which the recognition or receipt of income has been
restricted or suspended. Nonperforming assets consist of nonaccrual loans,
accruing loans which are delinquent 90 days or more, restructured loans, real
estate acquired by foreclosure or deed-in-lieu thereof and repossessed assets.

The following table sets forth the amounts and categories of Potters'
nonperforming 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 and in-substance foreclosures.

<TABLE>
<CAPTION>
                                          ..............December 31,............
                                             1996           1995           1994
                                                  (Dollars in thousands)
Nonaccrual loans:
<S>                                       <C>            <C>            <C>
      One-to-four family real estate      $    127       $    126       $     35
      Nonresidential real estate                              193            363
      Consumer and other                       500             53             80
                                          --------       --------       --------
         Total                                 627            372            478

Restructured loans:
      Nonresidential real estate             1,101          2,066          2,116
                                          --------       --------       --------
         Total nonperforming loans           1,728          2,438          2,594

Foreclosed and repossessed assets:
      Nonresidential real estate                               85
      Consumer and other                                                      31
                                          --------       --------       --------
         Total                                                 85             31
                                          --------       --------       --------

Total nonperforming assets                $  1,728       $  2,523       $  2,625
                                          ========       ========       ========

Total assets                              $114,172       $114,242       $110,910

Total nonperforming assets as
  a percent of total assets                   1.51%          2.21%          2.37%

Allowance for loan losses                 $  2,630       $  2,240       $  1,963

Allowance as a percentage of
  nonperforming loans                       152.20%         91.88%         75.67%
</TABLE>


Nonaccrual Loans: A loan is generally placed on nonaccrual status when it is 90
days past due. At that time, previously accrued but unpaid interest is deducted
from interest income. Nonaccrual loans increased $255,000 during 1996, primarily
from the inclusion of the Bennett Group equipment lease credits, but declined
$106,000 during 1995. At December 31, 1996, 1995 and 1994, nonaccrual loans as a
percentage of gross loans totaled .96%, .71% and .91%, respectively. 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. Included in consumer and other nonaccrual loans at December
31, 1996 were impaired loans totaling $365,000 which consisted of the Bennett
Group equipment lease credits.

Restructured Loans: Restructured loans are those which have been renegotiated at
concessionary terms as a result of the borrowers' financial condition. At
year-end 1995 and 1994, restructured loans were comprised of four nonresidential
real estate loans located in the State of Colorado. During 1996, one of the
loans was repaid and another was removed from the restructured category due to
the collateral value, interest rate and the history of repayment on the loan. As
a result, restructured loans declined $965,000 during 1996 and totaled $1.1
million at December 31, 1996. As of December 31, 1996, both of



                                                                              42

<PAGE>   40


the remaining restructured loans had reverted back to the terms and conditions
of the original loan contract.

Foreclosed and Repossessed Assets: Foreclosed and repossessed assets totaled
$85,000 at December 31, 1995. The $85,000 asset was sold during 1996 at a gain
of $55,000, while mobile home loan repossessions and sales during 1996 resulted
in losses of $16,000. As of December 31, 1996, Potters had no foreclosed or
repossessed assets.

Allowance for Loan Losses: Potters maintains an allowance for loan losses in an
amount which, in management's judgment, is adequate to absorb reasonably
foreseeable future losses inherent in the loan portfolio. The allowance is
available to absorb credit losses from any loans, including nonperforming loans,
and a portion of the allowance is allocated to each major loan type. Management
determines the adequacy of the allowance for credit losses by reviewing the
changes in the financial condition or operating results of borrowers, economic
conditions and business trends. While management utilizes its best judgment and
information available, the ultimate adequacy of the allowance is dependent upon
a variety of factors, including future economic, regulatory and other conditions
beyond Potters' control. 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.

Potential Problem Assets: Potters has identified $237,000 of real estate loans
at December 31, 1996, which do not meet the criteria of nonperforming loans but
where information about credit or other problems creates doubts as to the
ultimate collectibility of the loan. The loans included in the above figure are
generally current as to contractually required payments but information exists
regarding possible credit or other problems of borrowers which causes management
concerns as to the ability of such borrowers to comply with the present loan
repayment terms.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity refers to the ability of Potters 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. Potters' 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, 1996 and 1995:

<TABLE>
<CAPTION>
                                             Years ended December 31,
                                             ------------------------
                                               1996           1995
                                               ----           ----
                                                 (In thousands)

<S>                                          <C>           <C>
Net income                                   $    (61)     $   829
Adjustments to reconcile net income
  to net cash from operating activities           602          189
                                             --------      -------
Net cash from operating activities                541        1,018

Net cash from investing activities             (6,946)       5,404
Net cash from financing activities               (240)       1,770
                                             --------      -------
Net change in cash and cash equivalents        (6,645)       8,192

Cash and cash equivalents at the
  beginning of the year                        11,230        3,038
                                             --------      -------

Cash and cash equivalents at the end of
  the year                                   $  4,585      $11,230
                                             ========      =======
</TABLE>


                                                                              43
<PAGE>   41

The adjustments to reconcile net income to net cash from operating activities
consists mainly of the provisions for losses, depreciation and amortization and
changes in accrued income and expense. Significant components of cash flows from
investment activities during 1996 were $23.9 million of purchases, $13.2 million
in sales of securities available for sale and calls and maturities totaling
$10.6 million. In addition, during 1996, there were $13.7 million in real estate
loan purchases and sales, repayments and calls of securities held to maturity of
$7.1 million. During 1995, investment activities included purchases of $4.3
million of securities available for sale and $3.3 million of securities held to
maturity which were offset by $3.4 million in sales and $9.9 million in calls
and maturities of such securities.

Financing activity included net outflows in deposits of $1.4 million during 1996
compared to $1.3 million during 1995. During 1996, proceeds from FHLB advances
totaled $15.6 million while repayments of such advances totaled $13.5 million.
During 1995, $4.1 million of FHLB advances were received, $1.1 million of which
were repaid.

Potters' normal, recurring sources of funds are primarily customer deposits,
investment securities available for sale, maturities, calls and repayments of
securities held to maturity, loan repayments and other funds provided by
operations. Potters has the ability to borrow from the FHLB when needed as a
secondary source of liquidity. Potters maintains investments in liquid assets
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
Potters' asset/liability management program. Potters is required under federal
regulation to maintain 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 5% of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. During December 1996, Potters' average regulatory liquidity ratio was
15.58%. At that date, Potters had commitments to originate loans and unused
credit lines totaling $4.2 million. Management considers Potters' liquidity and
capital reserves sufficient to fund its outstanding short- and long-term needs
on a timely basis. Potters has sufficient cash flow and borrowing capacity to
fund all outstanding commitments and to maintain desired levels of liquidity.

At December 31, 1996, Potters 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
Potters' regulatory capital and the corresponding regulatory capital
requirements applicable to thrift institutions.

FAIR VALUES OF FINANCIAL INSTRUMENTS

The Company disclosed the estimated fair values and related carrying values of
its financial instruments at December 31, 1996 and 1995 in Note 17 of the
consolidated financial statements. The difference between the carrying values
and the estimated fair values of the Company's 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 98.9% and 100.4% of the
carrying values at December 31, 1996 and 1995, respectively, while the fair
value of securities represented 98.9% and 99.5% of the carrying values at the
same date. At December 31, 1996 and 1995, the estimated fair value of deposits
was 100.1% and 100.2%, respectively, of its carrying value.

BAD DEBT RESERVE RECAPTURE

On August 20, 1996, President Clinton signed into law the Small Business Jobs
Protection Act of 1996. The new law eliminates the percent-of-taxable-income
method for computing additions to the tax bad debt reserves for all thrifts for
tax years beginning after December 31, 1995. The new rules also require that
thrift institutions recapture all or a portion of their tax bad debt reserves
added since their base year (the last taxable year beginning before January 1,
1998). Because Potters has average total assets of less than $500 million, it is
considered a small bank and is permitted to maintain the greater of the reserves
for bad debts as of the base year or the 1995 reserve balance for bad debts
allowable under the experience method. Any excess of the 1995 reserve balances
over the greater of the reserve balances



                                                                              44

<PAGE>   42





must be recaptured into income ratably over six years, although a two-year delay
may be permitted for institutions meeting a residential mortgage loan
origination test. Prospectively, small institutions such as Potters will use the
experience method for deducting bad debts for tax purposes. The unrecaptured
base year reserves will not be subject to recapture as long as the institution
continues to carry on the business of banking. Likewise, if an institution is
acquired via a merger by another financial institution, no recapture of base
year reserves will result as long as the acquiring institution continues with
the business of banking. However, if an institution ceases to qualify as a bank
or converts to a credit union, the base year reserves must be recaptured in
accordance with previous law. This recapture would not be material for Potters,
because it has used the experience method of calculating its bad debt deductions
in recent years, which is the same method used by banks. In 1995 and 1996,
Potters' bad debt deduction was based on a percentage of taxable income, for
which a deferred tax liability has been recognized. As a result, the recapture
of the bad debt reserve will not impact future net income.

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 of the assets and liabilities of
Potters are monetary in nature. As a result, interest rates have a more
significant impact on Potters' 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.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, was issued by the Financial Accounting Standards
Board in 1996. It revises the accounting for transfers of financial assets, such
as loans and securities, and for distinguishing between sales and secured
borrowings. It is effective for some transactions in 1997 and others in 1998.
Management does not anticipate that it will have a material impact on Potters'
financial statements.




                                                                              45