<PAGE> 1
Page 1 of 21 pages
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT FOR THE TRANSITION PERIOD FROM TO
------------ -----------
Commission file number: 0-27980
Potters Financial Corporation
-----------------------------
(Exact name of small business issuer
as specified in its charter)
Ohio 34-1817924
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
519 Broadway, East Liverpool, Ohio 43920
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (330) 385-0770
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Common Shares, no par value Outstanding at October 31, 1997
482,326 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
------- -------
<PAGE> 2
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1997
Part I - Financial Information
Item 1. Financial Statements
Interim financial information required by Regulation 210.10-01 of
Regulation S-X is included in this Form 10-QSB as referenced below:
<TABLE>
<CAPTION>
Page
Number (s)
----------
<S> <C>
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-19
Part II - Other Information
Item 1. Legal Proceedings 20
Item 2. Change in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2.
<PAGE> 3
POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,243 $ 4,376
Interest-bearing deposits with Federal Home Loan Bank 204 51
Federal funds sold and cash management account 6 158
-------- --------
Cash and cash equivalents 4,453 4,585
Securities available for sale,
at estimated fair value (Note 2) 7,931 10,878
Securities held to maturity (estimated
fair value: September 30, 1997 - $28,543;
December 31, 1996 - $31,576) (Note 2) 28,649 31,913
Federal Home Loan Bank stock 844 822
Loans receivable, net (Note 3) 77,468 62,450
Premises and equipment, net 1,712 1,738
Other assets 1,659 1,786
-------- --------
Total assets $122,716 $114,172
======== ========
LIABILITIES
Deposits $100,857 $ 97,283
Federal Home Loan Bank advances (Note 4) 9,858 5,085
Accrued expenses and other liabilities 1,189 1,228
-------- --------
Total liabilities 111,904 103,596
-------- --------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
Common shares, no par value
Authorized: 10,000,000 shares;
Issued: 546,922 shares in 1997 and
538,470 shares in 1996
Paid-in capital 4,964 4,880
Treasury shares (64,596 shares in 1997
and 26,640 shares in 1996, at cost) (1,227) (436)
Unearned compensation on
recognition and retention plan (100) (100)
Unrealized loss on investment
securities available for sale, net of tax (40) (94)
Retained earnings, substantially restricted 7,215 6,326
-------- --------
Total shareholders' equity 10,812 10,576
-------- --------
Total liabilities and shareholders' equity $122,716 $114,172
======== ========
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3.
<PAGE> 4
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $1,574 $1,096 $4,367 $3,295
Securities 600 975 1,921 2,676
Other interest income 19 15 53 132
------ ------ ------ ------
Total interest income 2,193 2,086 6,341 6,103
------ ------ ------ ------
INTEREST EXPENSE
Interest on deposits 1,057 1,050 3,092 3,168
Other interest expense 137 130 334 192
------ ------ ------ ------
Total interest expense 1,194 1,180 3,426 3,360
------ ------ ------ ------
NET INTEREST INCOME 999 906 2,915 2,743
Provision for loan losses (Note 3) (485) 249
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 999 906 3,400 2,494
NONINTEREST INCOME
Loan and security losses (7) (4) (81) (3)
Other noninterest income 143 75 363 193
------ ------ ------ ------
Total noninterest income 136 71 282 190
------ ------ ------ ------
NONINTEREST EXPENSE
Compensation and benefits 344 368 979 1,036
Occupancy and equipment 94 99 282 263
FDIC deposit insurance premiums 15 701 47 829
Other noninterest expense 270 284 842 840
------ ------ ------ ------
Total noninterest expense 723 1,452 2,150 2,968
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAX 412 (475) 1,532 (284)
Income tax expense 138 (157) 519 (79)
------ ------ ------ ------
NET INCOME (LOSS) $ 274 $ (318) $1,013 $ (205)
====== ====== ====== ======
Earnings (loss) per share $ 0.56 $(0.63) $ 2.06 $(0.39)
====== ====== ====== ======
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4.
<PAGE> 5
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
BALANCE - JANUARY 1 $10,576 $11,189
Net income for the nine months ended September 30 1,013 (205)
Issuance of 8,452 common shares for the exercise
of stock options in 1997 84
Purchase of treasury shares (37,956 in 1997
and 26,640 in 1996) (791) (436)
Cash dividends declared ($.25 per share in 1997
and $.18 per share in 1996) (124) (94)
Change in net unrealized loss on
securities available for sale 54 (153)
------- -------
BALANCE - SEPTEMBER 30 $10,812 $10,301
======= =======
- ---------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5.
<PAGE> 6
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Nine months ended
September 30,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,013 $ (205)
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 153 108
Provision for loan losses (485) 249
Net investment amortization 36 51
Net (gain) loss on sale of:
Securities 21 4
Loans 60 (1)
Foreclosed real estate and
repossessed assets (50) 14
Other assets (111)
Stock dividend on FHLB stock (45) (37)
Change in other assets and liabilities 404 330
-------- --------
Net cash from operating activities 996 513
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Proceeds from sales 3,012 3,494
Proceeds from calls and maturities 3,296
Purchases (23,856)
Securities held to maturity
Proceeds from repayments, calls and maturities 3,224 4,903
Purchases (984)
Redemption of FHLB stock 23
Purchase of FHLB stock (62)
Net increase in loans (184) (153)
Loan purchases (14,833) (6,822)
Proceeds from sale of loans 281 513
Proceeds from sale of foreclosed real estate
and repossessed assets 50 88
Proceeds from sale of other assets 192
Property and equipment expenditures (123) (297)
-------- --------
Net cash from investing activities (8,358) (19,880)
-------- --------
- -----------------------------------------------------------------------------------------
</TABLE>
(Continued)
6.
<PAGE> 7
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Nine months ended
September 30,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 3,574 (743)
Proceeds from FHLB advances 14,550 15,580
Repayments of FHLB advances (9,777) (2,697)
Net change in official checks (215) (320)
Net decrease in advances from
borrowers for taxes and insurance (71) (80)
Purchase of treasury shares (791) (436)
Issuance of common shares for
exercise of stock options 84
Cash dividends paid (124) (94)
------ -------
Net cash from financing activities 7,230 11,210
------ -------
Net change in cash and cash equivalents (132) (8,157)
Cash and cash equivalents at beginning of year 4,585 11,230
------ -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $4,453 $ 3,073
====== =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $3,454 $ 3,302
Income taxes 106 116
Noncash transactions
Transfer from loans to foreclosed real estate and
repossessed assets 23
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
7.
<PAGE> 8
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Potters Financial Corporation ("PFC") 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"), also headquartered in East
Liverpool, Ohio.
The accompanying consolidated financial statements include the accounts of PFC
and Potters. All significant intercompany transactions and balances have been
eliminated in consolidation. These interim financial statements are prepared
without audit and reflect all adjustments which, in the opinion of management,
are necessary to present fairly the consolidated financial position of PFC at
September 30, 1997, and its results of operations and statements of cash flows
for the periods presented. All such adjustments are normal and recurring in
nature. The accompanying consolidated financial statements do not purport to
contain all the necessary financial disclosures required by generally accepted
accounting principles that might otherwise be necessary in the circumstances and
should be read in conjunction with the consolidated financial statements of PFC
and notes thereto included in the 1996 Annual Report.
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
was adopted in 1997. It revised 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. While the potential future impact will depend on the extent any assets are
sold with servicing retained, management does not expect such impact to be
material.
Earnings per share was calculated on the basis of the weighted average number of
shares outstanding during the period. Such weighted average shares were 487,071
for the third quarter of 1997 and 490,934 for the nine months ended September
30, 1997. Weighted average shares were 506,169 for the third quarter of 1996 and
522,114 for the nine months ended September 30, 1996.
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year.
NOTE 2 - SECURITIES
At September 30, 1997, 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
---- ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and U.S.
Government agencies $ 7,992 $ 1 $ (62) $ 7,931
------- ---- ----- -------
$ 7,992 $ 1 $ (62) $ 7,931
======= ==== ===== =======
Securities held to maturity:
U.S. Treasury and U.S.
Government agencies $ 6,363 $ 7 $ (25) $ 6,345
Obligations of states and
political subdivisions 176 23 199
Other securities 734 19 753
Agency issued mortgage-
backed securities 21,376 117 (247) 21,246
------- ---- ----- -------
$28,649 $166 $(272) $28,543
======= ==== ===== =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 9
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated fair value of debt securities at September
30,1997, 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 $ 2,503 $ 2,496
Due after one year through five years $7,492 $7,438 1,641 1,636
Due after five years through ten years 500 493 2,445 2,458
Due after ten years 684 707
Agency issued mortgage-
backed securities 21,376 21,246
------ ------ ------- -------
$7,992 $7,931 $28,649 $28,543
====== ====== ======= =======
</TABLE>
Available-for-sale securities totaling $3.0 million were sold during the first
nine months of 1997, resulting in losses of $21,000, while $3.5 million of such
securities were sold during the comparable period in 1996, resulting in a $4,000
loss. The net unrealized holding loss on securities available for sale decreased
by $54,000 during 1997.
The carrying value of investment securities pledged as collateral for public
funds amounted to $6.0 million at September 30, 1997.
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
---- ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
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
======= ==== ===== =======
Securities held to maturity:
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>
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized below:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Real estate loans
One-to-four family residences $61,962 $49,086
Nonresidential property 5,883 5,897
Multifamily and other 1,922 2,034
------- -------
69,767 57,017
------- -------
Commercial loans 1,280 894
------- -------
1,280 894
------- -------
Consumer loans
Home equity loans 4,951 3,859
Unsecured loans and lines of credit 2,064 1,815
Other 1,635 1,860
------- -------
8,650 7,534
------- -------
Total loan principal balances 79,697 65,445
Loans in process (354) (466)
Unearned interest and deferred fees, net 230 101
Allowance for loan losses (2,105) (2,630)
------- -------
$77,468 $62,450
======= =======
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of year $ 2,630 $ 2,240
Provision for loan losses (485) 249
Recoveries 19 28
Charge-offs (59) (416)
------- -------
Balance at end of year $ 2,105 $ 2,101
======= =======
</TABLE>
Nonaccrual and renegotiated loans totaled $541,000 and $1.7 million at September
30, 1997 and December 31, 1996, respectively. Potters is not committed to lend
additional funds to debtors whose loans have been modified.
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Average investment in impaired loans $ 365 $ 403
======= =======
Interest income recognized on impaired loans
including interest income recognized on a cash basis $ 0 $ 23
======= =======
Interest income recognized on impaired loans
on a cash basis $ 0 $ 23
======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 11
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
Information regarding impaired loans, which are included in nonaccrual and
renegotiated loans disclosed above, is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance of impaired loans $ 365 $ 547
Less portion for which no allowance for
loan losses is allocated (365) (547)
----- -----
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>
NOTE 4 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank ("FHLB") advances are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Variable-rate Cash Management Advance with
monthly interest payments:
6.90% advance due December 29, 1997 $1,300
Variable-rate advances with monthly interest payments:
5.90% advance due April 29, 1998 1,300
Fixed-rate advances with monthly interest payments:
5.80% advance due May 28, 1997 $3,830
6.30% advance due June 24, 1998 2,000
5.67% advance due November 27, 1998 750 750
6.50% advance due June 26, 1999 2,700
6.50% advance due June 27, 2000 1,500
Fixed-rate advances with monthly principal and
interest payments:
6.05% advance due August 14, 1998 183 333
5.85% advance due September 1, 1999 125 172
------ ------
$9,858 $5,085
====== ======
</TABLE>
FHLB advances obtained through the Community Investment Program are amortizing
loans requiring monthly principal payments. As of September 30, 1997, the
aggregate future minimum annual principal payments on FHLB advances were $1.4
million in 1997, $4.2 million in 1998, $2.7 million in 1999 and $1.5 million in
2000. As of September 30, 1997, the Company was approved to borrow an additional
$4.2 million in cash management advances. FHLB advances are collateralized by
all shares of FHLB stock owned by Potters and by 100% of its qualified real
estate loan portfolio.
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 12
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, various outstanding commitments and
contingent liabilities are not reflected in the accompanying consolidated
financial statements. These include 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 PFC.
Loan Commitments
- ----------------
As of September 30, 1997, Potters had commitments to make loans (at market
rates) and unused lines of credit approximating $4.7 million, of which $40,000
carry a fixed rate of 7.50%, and $4.7 million carry adjustable rates. Since loan
commitments may expire without being used, the amounts do not necessarily
represent future cash commitments.
NOTE 6 - CONCENTRATIONS OF CREDIT RISK
Most of Potters' 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
September 30, 1997, the loan portfolio included approximately $22.1 million of
purchased residential real estate loans, $18.4 million on properties located in
northwestern Ohio and $3.7 million on properties in southwestern Ohio. As of
September 30, 1997, the loan portfolio also included approximately $2.4 million
in nonresidential real estate loans secured by property located in the State of
Colorado.
- --------------------------------------------------------------------------------
12.
<PAGE> 13
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
Potters Financial Corporation, a unitary thrift holding company ("PFC"), owns
all of the outstanding shares of The Potters Savings and Loan Company
("Potters"), a savings and loan institution. In the following pages, management
presents an analysis of PFC's financial condition as of September 30, 1997 and
December 31, 1996, and the results of operations for the three and nine months
ended September 30, 1997, as compared to the same periods in the prior year. In
addition to the historical information, the following discussion contains
forward-looking statements that involve risks and uncertainties, including
regulatory policy changes, interest rate fluctuations, loan demand and other
risks. Economic circumstances, operations and actual strategies and results in
future time periods may differ materially from those currently expected. Such
forward-looking statements represent PFC's judgment as of the current date. PFC
disclaims, however, any intent or obligation to update such forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and in Potters' general market area. See Exhibit
99, attached hereto, which is incorporated herein by reference.
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) Results of Operations - Management's belief that a portion of the amount
charged-off in connection with the Bennett Funding Group Inc. ("Bennett")
bankruptcy matter will be recovered.
Management's statements regarding the amount and adequacy of the allowance
for loan losses and future loan loss provisions.
Statements regarding management's intent to continue the shifting of funds
from securities and other investments into loans.
Management's statement that the outsourcing of part of the internal audit
and compliance functions should contain future audit and compliance costs.
2) Recent Accounting Pronouncements - Management's expectation that the new
accounting requirements for calculating earnings per share will not
significantly affect future basic earnings per share and diluted earnings
per share.
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. Because the activities of PFC have
been limited primarily to holding the shares of Potters, the following
discussion essentially concerns the operations of Potters.
13.
<PAGE> 14
RESULTS OF OPERATIONS
PFC recorded net income of $274,000, or $.56 per common share, for the three
months ended September 30, 1997, compared to a loss of $318,000, or $.63 per
share, for the comparable period during 1996. The increase in net income
resulted in annualized returns on average assets and average shareholders'
equity of .91% and 10.07%, respectively, for the three months ended September
30, 1997, compared to negative 1.06% and negative 12.06%, respectively, for the
comparable period during 1996.
Net income for the nine months ended September 30, 1997 was $1.0 million, or
$2.06 per common share, compared to a net loss of $205,000, or $.39 per share,
for the nine months ended September 30, 1996. Annualized returns on average
assets and average shareholders' equity of 1.14% and 12.28%, respectively, for
the nine months ended September 30, 1997, compared favorably to negative .23%
and negative 2.52%, respectively, for the comparable period during 1996.
The increase in net income during the third quarter of 1997 over the comparable
period during 1996 was primarily attributable to a $643,000 Federal Deposit
Insurance Corporation ("FDIC") special assessment during the third quarter of
1996, which had a $424,000, or $.84 per common share, net negative after tax
impact on third quarter 1996 earnings. Third quarter 1997 earnings included a
10.3% increase in net interest income over the third quarter of 1996 as Potters
continued to channel loan and security repayments and deposit growth into the
origination and purchase of residential real estate loans on properties located
in Ohio. The increase in noninterest income during the same time period was due
primarily to growing fee income on Potters' products and services, and the
recognition of a $56,000 deferred gain on the sale of a parcel of local real
estate upon the payoff of the land contract connected with the sale.
Several nonrecurring items affected net income during 1997, some of which
enhanced earnings. Contributing to the increase in net income for the nine
months ended September 30, 1997, excluding the FDIC special assessment, were
negative provisions for loan losses to remove excess allowances for loan losses.
In January 1997, a $756,000 nonperforming loan located in Colorado was repaid
and in June 1997, a $341,000 nonperforming Colorado loan was sold at a loss of
$60,000. Through the removal of the allowances specifically allocated to the
loans, the portion of the allowance for loan losses not allocated to any
specific loan or group of loans increased by over $485,000. In addition to
management's ongoing review of all loans with respect to the adequacy of the
allowance for loan losses, a periodic analysis of the percentages allocated to
various types of real estate, consumer and commercial loans is conducted.
Because of the decline in nonperforming loans and the change in the risk profile
of Potters' loan portfolio, and primarily because of the payoff and sale of two
nonperforming Colorado nonresidential real estate loans, a negative provision
for loan losses of $485,000 was recorded during 1997 to remove excess allowances
for loan losses. The provision and the loss on the loan sale had a $281,000, or
$.57 per share, after tax positive impact on 1997 earnings. At September 30,
1997, nonperforming loans totaled $541,000, or .45% of total assets, compared to
$2.7 million, or 2.20% of assets, at September 30, 1996, a decrease of 80.3%.
The unallocated allowance for loan losses has increased from $1.0 million at
September 30, 1996 to more than $1.4 million at September 30, 1997. In addition,
the allowance for loan losses totaled $2.1 million at both September 30, 1997
and 1996, but such allowance represented 389.1% of nonperforming loans at
September 30, 1997, compared to 76.4% at September 30, 1996.
The property housing Potters' East End Office, which ceased operations on March
31, 1997, and a residential property adjacent to another of Potters' offices
were sold during the second quarter of 1997, generating total gains of $53,000.
Including the recognition of the $56,000 deferred profit on the land sale during
the third quarter, such nonrecurring items had an after tax positive impact of
$72,000, or $.15 per share, on 1997 year-to-date earnings.
14.
<PAGE> 15
The $172,000, or 6.3%, increase in net interest income during the first nine
months of 1997 compared to the same period in 1996 has resulted from continued
efforts to restructure the balance sheet. Funds from loan and security
repayments, sales of securities available for sale, deposit inflows and Federal
Home Loan Bank ("FHLB") advances were used to originate and purchase residential
real estate loans. Loans receivable increased from $56.1 million at September
30, 1996, to $62.5 million at December 31, 1996 and to $77.5 million at
September 30, 1997, representing increases of 38.1% from September 30, 1996 and
24.0% from year-end 1996.
Noninterest income during 1997 was affected by the $60,000 loss on the sale of a
nonperforming loan and $21,000 of losses on sales of securities available for
sale. Excluding $109,000 in nonrecurring gains on property sales, noninterest
income from fees on products and services has increased 31.6% during the first
nine months of 1997 compared to 1996. The addition of a third automated teller
machine ("ATM") in an East End grocery store for the convenience of East End
customers and the introduction of fee-based products, including a VISA Check
Card program, have contributed to the increase. Lower FDIC deposit insurance
premiums, compensation, advertising and data processing costs, somewhat offset
by increased occupancy and equipment costs and professional fees due to the
utilization of upgraded technology and the outsourcing of portions of the
internal audit and compliance functions, were primarily responsible for the
reduction in noninterest expense during 1997. Excluding the one-time FDIC
assessment in 1996, noninterest expense decreased 7.5% during 1997 compared to
1996. Income taxes increased $598,000 in 1997 due primarily to the $1.2 million
increase in net income before income taxes.
Earnings for the first nine months of 1996 were negatively affected by an
additional provision for loan losses of $188,500 relating to the writedown of
the Bennett Funding Group, Inc. equipment lease credits by 50% upon learning of
its bankruptcy filing and an investigation by the Securities and Exchange
Commission for alleged securities fraud. The Court has since ruled that the
manner in which the lease credits were structured and recorded was sufficient to
perfect Potters' position in the lease credits as a secured creditor. Further,
in January 1997, the bankruptcy Trustee extended various settlement options to
all financial institutions involved in the case. After careful consideration,
Potters' Board of Directors agreed to accept one of the settlement options.
Under the terms of the settlement agreement approved by the Court and Potters'
Board of Directors, Potters can receive up to 72.5% of all payments collected by
the court appointed Trustee on total lease outstandings of $741,796 on the date
of the bankruptcy petition, less applicable servicing fees. While the total
amount of repayment that Potters will receive under terms of the settlement
agreement is uncertain, a partial recovery of the amount previously charged-off
on the Bennett lease credits is anticipated.
The allowance for loan losses at September 30, 1997 was $2.1 million,
representing a decline of $525,000 from $2.6 million at December 31, 1996,
primarily due to negative provisions of $485,000 during 1997. During the first
nine months of 1997, net loan charge-offs totaled $40,000, compared to $388,000
for the first nine months of 1996. Due to the current level of unallocated
allowances, no provision for loan losses is planned for the remainder of 1997,
although no assurances can be given that provisions will not be made during that
time if circumstances change, such as increases in the loan portfolio, changes
in the economy or increases in nonperforming loans. The provision for loan
losses during the first nine months of 1996 totaled $249,000, relating primarily
to the Bennett credits.
Nonperforming loans of $541,000 at September 30, 1997 represented decreases of
$1.2 million from the $1.7 million level at December 31, 1996, and $2.2 million
from a level of $2.7 million at September 30, 1996. The decrease, despite the
inclusion of the Bennett credits, resulted primarily from payoffs and the loan
sale in the Colorado portfolio. The allowance for loan losses increased from
76.4% of nonperforming loans at September 30, 1996, to 152.5% at December 31,
1996 and to 389.9% at September 30, 1997. Impaired loans totaled $365,000 at
December 31, 1996 and September 30, 1997, and consisted solely of the Bennett
credits.
15.
<PAGE> 16
Interest income increased $107,000 and $238,000 for the three and nine months
ended September 30, 1997, compared to the same periods for 1996. The overall
increase in interest income was primarily attributable to the change in the
composition of interest-earning assets. Interest income on loans increased
$478,000, or 43.6%, from the third quarter of 1996 to the third quarter of 1997,
while interest on securities and other investments declined $371,000, or 37.5%,
during the same period. Loan interest income increased $1.1 million during the
first nine months of 1997 compared to 1996 while interest on securities and
other investments declined by $834,000 during the same period. The shifting of
funds from securities and other investments into loans occurred throughout 1996,
continued during the first nine months of 1997 and should continue during the
coming year as Potters' strategic initiatives are executed, although no
assurances can be provided that loan demand will continue. Loan originations are
affected by many circumstances and events, including interest rates nationally
and locally, competition and other changes in the national and local economy.
Yields on interest-earning assets increased by 21 basis points, from 7.34% for
the first nine months of 1996 to 7.55% for the same period during 1997. Although
the yield on loans actually decreased between the two years, more of Potters'
assets were placed into loans which yield significantly higher than securities
and other investments.
Interest expense increased $14,000 for the three months ended September 30, 1997
and $66,000 for the nine months ended September 30, 1997 compared to the same
periods during 1996. The increases were primarily attributable to higher average
balances and certificate of deposit yields during the third quarter and the
first nine months of 1997 compared to the same periods in 1996. The increased
use of FHLB advances during 1997 compared to 1996 had somewhat of a negative
impact on interest expense because such instruments generally bear higher
interest rates than deposits. The cost of funds increased marginally, from 4.31%
for the nine months ended September 30, 1996 to 4.32% for the comparable period
in 1997.
The yield on interest-earning assets increased twenty-one basis points, while
the cost of funds increased one basis point, resulting in a widening of the
interest rate spread from 3.03% during the first nine months of 1996, to 3.23%
for the same period in 1997. Net interest income increased $93,000, or 10.3%,
and $172,000, or 6.3%, during the three and nine months ended September 30,
1997, respectively, compared to net interest income during the same period in
1996.
Noninterest income increased $65,000 and $92,000 for the three and nine months
ended September 30, 1997, respectively, compared to the respective periods in
1996. The increase during 1997 compared to 1996 resulted primarily from
increased service charges on deposit accounts, ATM and other customer fees from
the development and implementation of new products and services. Depressing
noninterest income during 1997 were losses of $21,000 on the sale of
available-for-sale securities and a $60,000 loss on the sale of a nonperforming
loan. Also included in 1997 noninterest income were $53,000 in gains on the sale
of Potters' East End Office property and a residential property owned by
Potters, and the recognition of a $56,000 deferred gain on the sale of land upon
repayment of the land contract. Excluding such gains and losses, noninterest
income increased 33.7% during 1997 compared to 1996.
Excluding the one-time FDIC assessment, noninterest expense decreased $86,000
and $175,000 for the three and nine months ended September 30, 1997,
respectively, compared to the same periods in 1996. Due to the recapitalization
of the Savings Association Insurance Fund, deposit insurance premiums during the
first half of 1997 declined $139,000 from the first nine months of 1996.
Included in 1997 noninterest expense was a $50,000 gain on the sale of
foreclosed real estate in Colorado. Compensation and benefits expense decreased
$57,000, or 5.5%, between 1996 and 1997, while occupancy and equipment expense
increased due to the utilization of upgraded technology. Professional fees
increased significantly during 1997 from legal fees associated with the
settlement of the Bennett lease credits and from Potters' decision to outsource
part of its internal audit and compliance functions.
16.
<PAGE> 17
As part of management's ongoing process to contain costs, branch operations at
Potters' East End Office were terminated on March 31, 1997. An ATM has been
installed in an East End grocery store in order to utilize technology to
accommodate more customers in the East End. Potters has continued its commitment
to provide its employees with the training and technology they need to help
Potters achieve its strategic initiatives. Throughout 1997 training efforts will
continue to reflect this philosophy.
FINANCIAL CONDITION
PFC's assets at September 30, 1997 increased $8.5 million, or 7.5%, to $122.7
million compared to $114.2 million at December 31, 1996. Potters continued to
restructure its balance sheet during 1997 in accordance with its strategic focus
and long-term goals of increasing interest income and the interest rate spread.
During 1997, funds from loan and security repayments, deposit inflows and FHLB
advances were utilized to originate loans and purchase one-to-four family real
estate loans.
Securities available for sale decreased $2.9 million, to $7.9 million at
September 30, 1997, compared to $10.9 million at December 31, 1996. Sales of
$3.0 million in securities available for sale resulted in losses of $21,000
during 1997. Proceeds from the sales were used to fund loan originations and
purchases during 1997. 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 decreased from $144,000 at year-end 1996 to
$61,000 at September 30, 1997 due to a general rise in interest rates during the
first quarter of 1997, which reversed during the second and third quarters. The
effect on equity, representing unrealized losses, net of tax, on securities
available for sale, increased from $94,000 at December 31, 1996 to $174,000 at
March 31, 1997 and then declined to $98,000 at June 30, 1997 and subsequently to
$40,000 at September 30, 1997.
At September 30, 1997, the held-to-maturity securities portfolio totaled $28.6
million and consisted of agency issued mortgage-backed securities totaling $21.4
million and $7.2 million of other securities, primarily U.S. Government agency
securities. Repayments on such securities of $2.7 million and a call on a
$500,000 agency security during 1997 were used to fund loan growth.
Net loans receivable increased $15.0 million, from $62.5 million at December 31,
1996, to $77.5 million at September 30, 1997. Loan purchases and local loan
originations during 1997 resulted in a net increase of $12.9 million, or 26.2%,
in one-to-four family real estate loans. Commercial and consumer loans also
increased $1.5 million, or 17.8%, during 1997, primarily from increased home
equity lines of credit. Loan purchases totaled $14.8 million of primarily
adjustable-rate real estate loans during 1997 on properties located in
northwestern and southwestern Ohio. The adjustable-rate features of the loan
purchases continued management's asset/liability strategy of controlling
exposure to interest rate risk. The Asset/Liability Management Committee has
decided to assume a limited amount of increased interest rate risk by purchasing
fixed-rate residential real estate loans for Potters' portfolio in order to
enhance the yield on interest-earning assets. Potters has also developed a
30-year fixed-rate real estate product for origination, most of which will be
sold in the secondary market.
Total deposits increased $3.6 million, or 3.7%, during the first nine months of
1997, from $97.3 million at December 31, 1996 to $100.9 million at September 30,
1997. Inflows occurred primarily in certificates of deposit. Potters has
aggressively priced selected certificates of deposit with maturities exceeding
one year in an attempt to maintain deposit levels despite strong competition for
certificates of deposit in the local area. The Asset and Liability Management
Committee continues to focus on strategies for reduced interest rate risk and
responsible deposit management.
17.
<PAGE> 18
FHLB advances totaled $9.9 million at September 30, 1997, compared to $5.1
million at December 31, 1996. Advances totaling $14.6 million received during
the first nine months of 1997 were used to fund loan purchases and for cash
management purposes. The maturity of several advances used to fund loan
purchases were matched to selected securities maturing within the next three
years. Advance repayments totaled $9.8 million during 1997.
Despite net income of $1.0 million for the nine months ended September 30, 1997,
shareholders' equity increased only $236,000 during 1997 due primarily to the
repurchase of 37,956 PFC shares for $791,000 relating to a repurchase program
announced in October 1996 and dividends paid of $124,000, or $.25 per share. The
issuance of 8,452 common shares upon the exercise of stock options contributed
$84,000 and a decrease in the unrealized loss, net of income tax, on securities
available for sale contributed $54,000 to the increase in shareholders' equity
during 1997.
LIQUIDITY AND CAPITAL RESOURCES
Potters' normal, recurring sources of funds are primarily customer deposits,
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.
The most significant components of cash flows from investing activities during
the first nine months of 1997 were loan purchases of $14.8 million, somewhat
offset by sales of $3.0 million available-for-sale securities and $2.7 million
in repayments and a call of $500,000 on held-to-maturity securities. Investing
activities during the first nine months of 1996 included the purchase of $23.9
million in securities available for sale, offset by $3.5 million in sales of
such securities and $8.2 million in calls and maturities of both
available-for-sale and held-to-maturity securities. Loan purchases during 1996
totaled $6.8 million.
Financing activities during the nine months ended September 30, 1997 included
net deposit inflows of $3.6 million and proceeds from FHLB advances of $14.6
million offset by advance repayments totaling $9.8 million. In addition, PFC
purchased 37,956 PFC shares for a total of $791,000, of which 9,000 shares were
purchased for a total of $218,000 during the third quarter of 1997. Deposit
outflows of $743,000 occurred during the first nine months of 1996, while FHLB
advance activity included proceeds of $15.6 million and repayments totaling $2.7
million.
Potters' average regulatory liquidity ratio for September 1997 was 13.27%. At
September 30, 1997, Potters had commitments to originate loans of $231,000 and
unused lines of credit totaling $4.5 million.
18.
<PAGE> 19
The following table details the minimum capital requirements set forth by
regulation for all federally insured savings institutions and Potters' capital
levels as of September 30, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
--------------- ---------------- ------------------
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital -
computed $9,708 7.98% $9,708 7.98% $10,467 17.63%
Minimum capital
requirement 1,824 1.50 3,648 3.00 4,750 8.00
------ ---- ------ ---- ------- -----
Regulatory capital -
excess $7,884 6.48% $6,060 4.98% $ 5,717 9.63%
====== ==== ====== ==== ======= =====
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the accounting requirements for calculating earnings per share
were revised. Basic earnings per share for 1997 and later will be calculated
solely on average common shares outstanding. Diluted earnings per share will
reflect the potential dilution of stock options and other common stock
equivalents. All prior calculations will be restated to be comparable to the new
methods. As PFC has not had significant dilution from stock options, the new
calculation methods will not significantly affect future basic earnings per
share and diluted earnings per share.
19.
<PAGE> 20
PART II - OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On November 4, 1997, Potters Financial Corporation
("PFC") announced that its Board of Directors
declared a stock dividend in the nature of a two-
for-one stock split. Each shareholder of record on
November 17, 1997 will receive one share of PFC
for each share of PFC held on such date. The
dividend will be paid on December 1, 1997.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 3.1 Articles of Incorporation of Potters Incorporated by reference to the
Financial Corporation Form 8-A filed with the SEC on
March 4, 1996 (the "8-A").
Exhibit 3.2 Code of Regulations of Potters Incorporated by reference to the 8-A.
Financial Corporation
Exhibit 11 Statement re: computation of Incorporated by reference to Note 1
per share earnings to the Consolidated Financial
Statements.
Exhibit 27 Financial Data Schedule Included herewith.
Exhibit 99 Safe Harbor Under the Private Included herewith.
Securities Litigation Reform Act of 1995
B. Reports on Form 8-K - none.
</TABLE>
20.
<PAGE> 21
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
POTTERS FINANCIAL CORPORATION
Date: November 6, 1997 By: /s/ Edward L. Baumgardner
--------------------------------------
Edward L. Baumgardner
Duly Authorized Representative,
President and Chief Executive Officer
By: /s/ Anne S. Myers
--------------------------------------
Anne S. Myers
Principal Financial Officer and
Principal Accounting Officer
21.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
<RESTATED>
<CIK> 0001010476
<NAME> Potters Financial Corporation
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jul-1-1997
<PERIOD-END> Sep-30-1997
<CASH> 4,243
<INT-BEARING-DEPOSITS> 204
<FED-FUNDS-SOLD> 6
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,931
<INVESTMENTS-CARRYING> 28,649
<INVESTMENTS-MARKET> 28,543
<LOANS> 79,573
<ALLOWANCE> 2,105
<TOTAL-ASSETS> 122,716
<DEPOSITS> 100,857
<SHORT-TERM> 4,783
<LIABILITIES-OTHER> 1,189
<LONG-TERM> 5,075
0
0
<COMMON> 4,964
<OTHER-SE> 5,848
<TOTAL-LIABILITIES-AND-EQUITY> 122,716
<INTEREST-LOAN> 1,574
<INTEREST-INVEST> 600
<INTEREST-OTHER> 19
<INTEREST-TOTAL> 2,193
<INTEREST-DEPOSIT> 1,057
<INTEREST-EXPENSE> 137
<INTEREST-INCOME-NET> 999
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 723
<INCOME-PRETAX> 412
<INCOME-PRE-EXTRAORDINARY> 412
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 274
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
<YIELD-ACTUAL> 7.54
<LOANS-NON> 541
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 234
<ALLOWANCE-OPEN> 2,111
<CHARGE-OFFS> 16
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 2,105
<ALLOWANCE-DOMESTIC> 2,105
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,413
</TABLE>
<PAGE> 1
Exhibit 99
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. Potters Financial
Corporation desires to take advantage of the "safe harbor" provisions of the
Act. Certain information, particularly information regarding future economic
performance and finances and plans and objectives of management, contained or
incorporated by reference in Potters Financial Corporation's Report on Form
10-QSB for the fiscal quarter ended September 30, 1997 is forward-looking. In
some cases, information regarding certain important factors that could cause
actual results of operations or outcomes of other events to differ materially
from any such forward-looking statement appear together with such statement. In
addition, forward-looking statements are subject to other risks and
uncertainties affecting the financial institutions industry, including, but not
limited to, the following:
Interest Rate Risk
Potters Financial Corporation's operating results are dependent to a
significant degree on its net interest income, which is the difference between
interest income from loans and investments and interest expense on deposits and
borrowings. The interest income and interest expense of Potters Financial
Corporation change as the interest rates on mortgages, securities and other
assets and on deposits and other liabilities change. Interest rates may change
because of general economic conditions, the policies of various regulatory
authorities and other factors beyond Potters Financial Corporation's control.
The interest rates on specific assets and liabilities of Potters Financial
Corporation will change or "reprice" in accordance with the contractual terms
of the asset or liability instrument and in accordance with customer reaction
to general economic trends. In a rising interest rate environment, loans tend
to prepay slowly and new loans at higher rates increase slowly, while interest
paid on deposits increases rapidly because the terms to maturity of deposits
tend to be shorter than the terms to maturity or prepayment of loans. Such
differences in the adjustment of interest rates on assets and liabilities may
negatively affect Potters Financial Corporation income. Moreover, rising
interest rates tend to decrease loan demand in general, negatively affecting
Potters Financial Corporation income.
Possible Inadequacy of the Allowance for Loan Losses
The Potters Savings and Loan Company maintains an allowance for loan losses
based upon a number of relevant factors, including, but not limited to, trends
in the level of nonperforming assets and classified loans, current and
anticipated economic conditions in the primary lending area, past loss
experience, possible losses arising from specific problem assets and changes in
the composition of the loan portfolio. While the Board of Directors of The
Potters Savings and Loan Company believes that it uses the best information
available to determine the allowance for loan losses, unforeseen market
conditions could result in material adjustments, and net earnings could be
significantly adversely affected if circumstances differ substantially from the
assumptions used in making the final determination.
Loans not secured by one-to-four family residential real estate are generally
considered to involve greater risk of loss than loans secured by one-to-four
family residential real estate due, in part, to the effects of general economic
conditions. The repayment of multifamily residential and nonresidential real
estate loans generally depends upon the cash flow from the operation of the
property, which may be negatively affected by national and local economic
conditions that cause leases not to be renewed or that negatively affect the
operations of a commercial borrower.
<PAGE> 2
Construction loans may also be negatively affected by such economic conditions,
particularly loans made to developers who do not have a buyer for a property
before the loan is made. The risk of default on consumer loans increases during
periods of recession, high unemployment and other adverse economic conditions.
When consumers have trouble paying their bills, they are more likely to pay
mortgage loans than consumer loans, and the collateral securing such loans, if
any, may decrease in value more rapidly than the outstanding balance of the
loan.
Competition
The Potters Savings and Loan Company competes for deposits with other savings
associations, commercial banks and credit unions and issuers of commercial
paper and other securities, such as shares in money market mutual funds. The
primary factors in competing for deposits are interest rates and convenience of
office location. In making loans, The Potters Savings and Loan Company competes
with other savings associations, commercial banks, consumer finance companies,
credit unions, leasing companies, mortgage companies and other lenders.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels and other factors which are not readily predictable. The size of
financial institutions competing with The Potters Savings and Loan Company is
likely to increase as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon
Potters Financial Corporation.
Legislation and Regulation that may Adversely Affect The Potters Savings and
Loan Company's Earnings
The Potters Savings and Loan Company is subject to extensive regulation by the
Office of Thrift Supervision (the "OTS") and the Federal Deposit Insurance
Corporation (the "FDIC") and is periodically examined by such regulatory
agencies to test compliance with various regulatory requirements. As a savings
and loan holding company, Potters Financial Corporation is also subject to
regulation and examination by the OTS. Such supervision and regulation of The
Potters Savings and Loan Company and Potters Financial Corporation are intended
primarily for the protection of depositors and not for the maximization of
shareholder value and may affect the ability of the company to engage in
various business activities. The assessments, filing fees and other costs
associated with reports, examinations and other regulatory matters are
significant and may have an adverse effect on Potters Financial Corporation's
net earnings.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC may increase
assessment rates for either fund if necessary to restore the fund's ratio of
reserves to insured deposits to the target level within a reasonable time and
may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
such system, assessments may vary depending on the risk the institution poses
to its deposit insurance fund. Such risk level is determined by reference to
the institution's capital level and the FDIC's level of supervisory concern
about the institution.
Congress recently enacted a plan to recapitalize the SAIF. The recapitalization
plan also provides for the merger of the SAIF and BIF effective January 1,
1999, assuming there are no savings associations under federal law. Congress is
considering legislation to eliminate the federal thrift charter and the
separate federal regulation of savings and loan associations, and the
Department of the Treasury is preparing a report for Congress on the
development of a common charter for all financial institutions. As a result,
The Potters Savings and Loan Company may have to convert to a different
financial institution charter or might be regulated under federal law as a
bank. If The Potters Savings and Loan Company becomes a bank or is regulated as
a bank, it would become subject to the more restrictive activity limitations
imposed on national banks. Moreover, Potters Financial Corporation might become
subject to more
<PAGE> 3
restrictive holding company requirements, including activity limits and capital
requirements similar to those imposed on The Potters Savings and Loan Company.
Potters Financial Corporation cannot predict the impact of the conversion of
The Potters Savings and Loan Company to, or regulation of The Potters Savings
and Loan Company as, a bank until any legislation requiring such change is
enacted.
