<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 JUNE 30, 1998
[ ] 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 July 31, 1998
951,236 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
------- -------
<PAGE> 2
FORM 10-QSB
QUARTER ENDED JUNE 30, 1998
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:
Page
Number (s)
----------
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Comprehensive Income 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 19
Item 2. Change in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2.
<PAGE> 3
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,549 $ 3,348
Interest-bearing deposits with Federal Home Loan Bank 750 459
Federal funds sold and cash management account 12 9
-------- --------
Cash and cash equivalents 5,311 3,816
Interest-bearing deposits in other financial institutions 75
Securities available for sale,
at estimated fair value 4,989 5,474
Securities held to maturity (estimated
fair value: June 30, 1998 - $22,139;
December 31, 1997 - $27,116) 22,112 27,158
Federal Home Loan Bank stock 956 859
Loans receivable, net 91,529 82,093
Premises and equipment, net 1,657 1,742
Other assets 1,520 1,495
-------- --------
Total assets $128,149 $122,637
======== ========
LIABILITIES
Deposits $101,515 $100,094
Federal Home Loan Bank advances 14,561 9,993
Accrued expenses and other liabilities 1,139 1,544
-------- --------
Total liabilities 117,215 111,631
SHAREHOLDERS' EQUITY
Common shares, no par value
Authorized: 2,000,000 shares;
Issued: 1,115,028 shares in 1998 and
1,111,828 shares in 1997
Paid-in capital 5,183 5,159
Treasury shares, at cost: 163,792 shares
in 1998 and 138,592 shares in 1997 (1,886) (1,399)
Unearned compensation on
recognition and retention plan (87) (87)
Unrealized loss on securities
available for sale, net of tax (7) (17)
Retained earnings, substantially restricted 7,731 7,350
-------- --------
Total shareholders' equity 10,934 11,006
-------- --------
Total liabilities and shareholders' equity $128,149 $122,637
======== ========
- --------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
3.
<PAGE> 4
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $1,712 $1,449 $3,391 $2,793
Securities 455 649 946 1,321
Other interest income 88 15 141 34
------ ------ ------ ------
Total interest income 2,255 2,113 4,478 4,148
------ ------ ------ ------
INTEREST EXPENSE
Interest on deposits 1,065 1,031 2,138 2,035
Other interest expense 170 118 332 197
------ ------ ------ ------
Total interest expense 1,235 1,149 2,470 2,232
------ ------ ------ ------
NET INTEREST INCOME 1,020 964 2,008 1,916
Provision for loan losses (135) (485)
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,020 1,099 2,008 2,401
Loan and security gains (losses) 16 (74) 38 (74)
Other noninterest income 163 146 248 220
------ ------ ------ ------
Total noninterest income 179 72 286 146
------ ------ ------ ------
Compensation and benefits 368 305 743 635
Occupancy and equipment 96 94 186 188
Other noninterest expense 331 316 626 604
------ ------ ------ ------
Total noninterest expense 795 715 1,555 1,427
------ ------ ------ ------
INCOME BEFORE INCOME TAX 404 456 739 1,120
Income tax expense 138 155 251 381
------ ------ ------ ------
NET INCOME $ 266 $ 301 $ 488 $ 739
====== ====== ====== ======
Earnings per common share
Basic $ 0.28 $ 0.32 $ 0.51 $ 0.77
====== ====== ====== ======
Diluted $ 0.27 $ 0.31 $ 0.50 $ 0.75
====== ====== ====== ======
- --------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
4.
<PAGE> 5
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C>
BALANCE - JANUARY 1 $11,006 $10,576
Net income for the six months ended June 30 488 739
Issuance of 3,200 common shares for the exercise
of stock options in 1998 24 39
Purchase of treasury shares (25,200 in 1998
and 57,912 in 1997) (487) (573)
Cash dividends declared ($.11 per share in 1998
and $.08 per share in 1997) (107) (79)
Change in net unrealized loss on
securities available for sale 10 (4)
------- -------
BALANCE - JUNE 30 $10,934 $10,698
======= =======
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands)
- ----------------------------------------------------------------------------------------
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $266 $301 $488 $739
Other comprehensive income:
Change in unrealized loss on
securities available for sale arising
during the period 8 62 10 (18)
Reclassification adjustment for
accumulated losses included in
net income 14 14
---- ---- ---- ----
Unrealized gains (losses) on
securities available for sale 8 76 10 (4)
---- ---- ---- ----
COMPREHENSIVE INCOME $274 $377 $498 $735
==== ==== ==== ====
- ----------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
5.
<PAGE> 6
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
- -------------------------------------------------------------------------------------------
<CAPTION>
Six months ended
June 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 488 $ 739
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 111 100
Provision for loan losses (485)
Net investment amortization 26 23
Net (gain) loss on:
Securities (11) 14
Loans (27) 60
Foreclosed real estate and
repossessed assets (50)
Other assets (64) (53)
Stock dividend on FHLB stock (32) (30)
Change in other assets and liabilities (308) 123
-------- --------
Net cash from operating activities 183 441
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing balances with banks (75)
Securities available for sale
Proceeds from calls and maturities 500 1,986
Securities held to maturity
Proceeds from repayments, calls and maturities 5,031 1,801
Purchase of FHLB stock (65)
Redemption of FHLB stock 23
Net (increase) decrease in loans 2,940 (21)
Loan purchases (14,122) (11,352)
Proceeds from sale of loans 1,756 281
Proceeds from sale of foreclosed real estate
and repossessed assets 50
Proceeds from sale of other assets 100 72
Property and equipment expenditures (46) (92)
-------- --------
Net cash from investing activities (3,981) (7,252)
-------- --------
- -------------------------------------------------------------------------------------------
(Continued)
</TABLE>
6.
<PAGE> 7
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited)
(Dollars in thousands)
- ----------------------------------------------------------------------------------
<CAPTION>
Six months ended
June 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 1,421 2,134
Proceeds from FHLB advances 8,200 13,250
Repayments of FHLB advances (3,632) (8,511)
Net change in official checks (144) (193)
Net increase (decrease) in advances from
borrowers for taxes and insurance 18 (17)
Purchase of treasury shares (487) (573)
Issuance of common shares for
exercise of stock options 24 39
Cash dividends paid (107) (79)
------- -------
Net cash from financing activities 5,293 6,050
------- -------
Net change in cash and cash equivalents 1,495 (761)
Cash and cash equivalents at beginning of year 3,816 4,585
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,311 $ 3,824
======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 2,492 $ 2,197
Income taxes 260 105
- ----------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
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
June 30, 1998, 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 1997 Annual Report.
Comprehensive income is now reported for all periods under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," adopted in 1998. Comprehensive income for PFC includes
both net income and other comprehensive income. Other comprehensive income
includes the change in unrealized gains and losses on securities available for
sale. The prior period Statement of Operations has been restated to include
comprehensive income.
Earnings per share was computed under the provisions of SFAS No. 128, "Earnings
Per Share," which requires dual presentation of basic earnings per share ("EPS")
and diluted EPS. Basic EPS includes no dilution and is computed by dividing
earnings for the year available to common shareholders by the weighted average
common shares outstanding during the period. Diluted EPS reflects the potential
dilution of securities that could share in earnings such as stock options,
warrants or other common stock equivalents. The weighted average number of
shares outstanding for the calculation of basic earnings per share was 941,800
for the second quarter of 1998 and 954,980 for the three months ended June 30,
1997. The weighted average number of shares outstanding for the calculation of
diluted EPS was 974,566 for the second quarter of 1998 and 975,405 for the three
months ended June 30, 1997. The weighted average number of shares outstanding
for basic and fully diluted earnings per share for the six months ended June 30,
1998 were 949,552 and 982,335, respectively, while the similar number of shares
for the six months ended June 30, 1997 were 966,275 and 986,269.
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year.
- --------------------------------------------------------------------------------
8.
<PAGE> 9
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
At June 30, 1998, 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 $ 5,000 $ $ (11) $ 4,989
======= ==== ===== =======
Securities held to maturity:
U.S. Treasury and U.S.
Government agencies $ 3,133 $ 4 $ (3) $ 3,134
Obligations of states and
political subdivisions 169 12 (1) 180
Other securities 524 2 (1) 525
Agency issued mortgage-
backed securities 18,286 122 (108) 18,300
------- ---- ----- -------
$22,112 $140 $(113) $22,139
======= ==== ===== =======
</TABLE>
The amortized cost and estimated fair value of debt securities at June 30,1998,
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 $ 2,140 $ 2,137
Due after one year through five years $5,000 $4,989 1,121 1,132
Due after five years through ten years 41 45
Due after ten years 524 525
Agency issued mortgage-
backed securities 18,286 18,300
------ ------ ------- -------
$5,000 $4,989 $22,112 $22,139
====== ====== ======= =======
</TABLE>
An available-for-sale security totaling $500,000 was called at par during the
first six months of 1998. During that same time frame, agency securities held to
maturity totaling $750,000 were called, resulting in a gross gain of $11,000,
and $2.0 million of agency securities matured. Available-for-sale securities
totaling $2.0 million were sold during the second quarter of 1997 at a net loss
of $14,000. The net unrealized holding loss on securities available for sale
decreased by $10,000 during the first half of 1998.
The carrying value of investment securities pledged as collateral for public
funds amounted to $5.7 million at June 30, 1998.
- --------------------------------------------------------------------------------
9.
<PAGE> 10
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
At December 31, 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 $ 5,499 $ $ (25) $ 5,474
======= ==== ===== =======
Securities held to maturity:
U.S. Treasury and U.S.
Government agencies $ 5,866 $ 12 $ (15) $ 5,863
Obligations of states and
political subdivisions 168 13 181
Other securities 632 13 645
Agency issued mortgage-
backed securities 20,492 119 (184) 20,427
------- ---- ----- -------
$27,158 $157 $(199) $27,116
======= ==== ===== =======
</TABLE>
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized below:
June 30, December 31,
1998 1997
---- ----
(Dollars in thousands)
Real estate loans
One-to-four family residences $73,534 $66,718
Loans held for sale 807 106
Nonresidential property 6,931 6,211
Multifamily and other 2,187 1,537
------- -------
83,459 74,572
------- -------
Consumer and other loans
Home equity loans 5,387 5,224
Secured, unsecured consumer
loans and lines of credit 2,174 2,064
Commercial business loans 960 862
Other 1,567 1,575
------- -------
10,088 9,725
------- -------
Total loan principal balances 93,547 84,297
Loans in process (182) (340)
Unearned interest, purchase premiums
and deferred fees, net 368 279
Allowance for loan losses (2,204) (2,143)
------- -------
$91,529 $82,093
======= =======
- --------------------------------------------------------------------------------
10.
<PAGE> 11
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
Activity in the allowance for loan losses is as follows:
Six months ended
June 30,
----------------------
1998 1997
---- ----
(Dollars in thousands)
Balance at beginning of year $2,143 $2,630
Provision for loan losses (485)
Recoveries 87 9
Charge-offs (26) (43)
------ ------
Balance at end of year $2,204 $2,111
====== ======
Nonaccrual and renegotiated loans totaled $407,000 and $207,000 at June 30, 1998
and December 31, 1997, respectively. Potters is not committed to lend additional
funds to debtors whose loans have been modified.
Impaired loans were not material at any date or during any period presented.
NOTE 4 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank ("FHLB") advances are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Variable-rate Cash Management advance with
monthly interest payments:
6.45% advance due September 30, 1998 $ 5,500
Variable-rate advances with monthly interest payments:
5.90% advance due April 29, 1998 $1,300
Fixed-rate advances with monthly interest payments:
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 2,700
6.50% advance due June 27, 2000 1,500 1,500
6.50% advance due October 17, 2000 1,500 1,500
5.13% advance due March 17, 2008(1) 2,500
Fixed-rate advances with monthly principal and
interest payments:
6.05% advance due August 14, 1998 33 133
5.85% advance due September 1, 1999 78 110
------- ------
$14,561 $9,993
======= ======
</TABLE>
- ---------------
(1) Convertible fixed-rate advance which, at the FHLB's option, can be converted
to the London Interbank Offering Rate on a quarterly basis after the first year.
If the FHLB exercises its option, Potters may pay off the advance in whole or in
part on any of the quarterly repricing dates without prepayment penalty.
FHLB advances obtained through the Community Investment Program are amortizing
loans requiring monthly principal and interest payments. As of June 30, 1998,
the aggregate future minimum annual principal payments on FHLB advances were
$6.3 million in 1998, $2.8 million in 1999, $3.0 million in 2000 and $2.5
million thereafter. As of June 30, 1998, the Company was approved to borrow $5.5
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.
- --------------------------------------------------------------------------------
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 June 30, 1998, Potters had commitments to make loans (at market rates) and
unused lines of credit approximating $7.1 million, of which $966,000 carry fixed
rates of 6.875% to 14.25%, and $6.1 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
June 30, 1998, the loan portfolio included approximately $22.4 million of
purchased residential real estate loans located in northwestern and southwestern
Ohio and $10.8 million located in Hilton Head, South Carolina. As of June 30,
1998, the loan portfolio also included approximately $2.0 million in real estate
loans secured by nonresidential 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 June 30, 1998 and
December 31, 1997, and the results of operations for the three and six months
ended June 30, 1998 and 1997. 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. 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. 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. 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:
Results of Operations - 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.
Statements regarding the strategic focus and long-term goals of
Potters.
Financial Condition - Statements regarding the strategic focus and
long-term goals of Potters.
Management's statements regarding its plan for loan growth and its
belief that the recently opened loan production office will enable
Potters to become less reliant on loan purchases to grow the loan
portfolio.
Year 2000 - Management's expectation that Year 2000 issues will be
resolved in a satisfactory manner and will not pose significant
operational problems when the year 2000 arrives.
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 $266,000 for the three months ended June 30, 1998,
compared to $301,000 for the second quarter of 1997. Basic and diluted earnings
per share for the three months ended June 30, 1998 were $.28 and $.27, while
basic and diluted earnings per share for the comparable period in 1997 were $.32
and $.31. The return on average assets for the three months ended June 30, 1998
was .85% compared to 1.01% for the same period in 1997, while the return on
average shareholders' equity was 9.63% for the second quarter of 1998 compared
to 11.31% for the three months ended June 30, 1997.
Net income for the six months ended June 30, 1998 was $488,000, compared to net
income of $739,000 for the same period in 1997. Basic and diluted earnings per
share were $.51 and $.50 for the six months ended June 30, 1998, compared to
$.77 and $.75 for the comparable period in 1997. Annualized returns on average
assets of .78% and 1.26% were realized for the six months ended June 30, 1998
and 1997, while annualized returns on average shareholders' equity were 8.68%
and 13.71% for the same respective time periods.
The primary reason for the decline in net income for the three and six months
ended June 30, 1998 compared to the same time periods in 1997 were negative
provisions for loan losses of $135,000 in the second quarter of 1997 and
$485,000 for the first six months of 1997. The provisions had an after-tax
positive impact on 1997 earnings of $89,000, or $.09 per diluted share, for the
second quarter of 1997 and $320,000, or $.32 per diluted share, for the six
months ended June 30, 1997. Excluding this item, earnings increased from
$212,000 during the second quarter of 1997 to $266,000 for the second quarter of
1998, an increase of 25.5%, and increased from $419,000 during the first six
months of 1997 to $488,000 for the first half of 1998, an increase of 16.5%.
The increase in net income in the second quarter of 1998 compared to the second
quarter of 1997, excluding the 1997 negative provision, resulted primarily from
a 5.8% increase in net interest income and a 148.6% increase in noninterest
income, offset by an 11.2% increase in noninterest expense. Excluding the
negative provisions for loan losses during the first half of 1997, the increase
in net income during 1998 was primarily attributable to a $92,000, or 4.8%
increase in net interest income and a $140,000, or 95.9%, increase in
noninterest income, somewhat offset by an increase of $128,000, or 9.0%, in
noninterest expense.
Interest income increased $142,000 and $330,000 for the three and six months
ended June 30, 1998 compared to the same periods in 1997. The increases resulted
primarily from continued efforts to restructure the balance sheet. Funds from
loan and security repayments, maturities and calls, deposit inflows and Federal
Home Loan Bank ("FHLB") advances were used to originate and purchase residential
real estate loans. During the first quarter of 1998, it was more difficult to
purchase adjustable-rate loans than in 1997 as consumers preferred long-term
fixed-rate loans during the current low rate environment. Significant
prepayments on loans during 1998 have also made it difficult to maintain earning
asset balances. During the second quarter of 1998, however, Potters was
successful in establishing a relationship with a mortgage banking company
headquartered in Hilton Head, South Carolina. As a result, $11.0 million of
one-to-four family real estate loans were purchased, aproximately half at the
end of May 1998 and the other half at the end of June 1998. Loans receivable
increased from $74.0 million at June 30, 1997, to $91.5 million at June 30,
1998, an increase of $17.6 million, or 23.8%, and increased $9.4 million, or
11.5%, from December 31, 1997. Income on loans increased $263,000, or 18.2%,
during the second quarter of 1998 compared to the second quarter of 1997, and
increased $598,000, or 21.4%, during the first six months of 1998 compared to
the first six months of 1997. Interest on securities, however, declined
$194,000, or 29.9%, during the second quarter of 1998 compared to the second
quarter of 1997, and decreased $375,000, or 28.4%, during the first six months
of 1998 compared to the same time period in 1997. Other interest income
increased $73,000 and $107,000 during the three and six months ended June 30,
1998 due to the
14.
<PAGE> 15
investment of excess funds in short-term instruments so funds were accessible
when loan purchases became available.
Interest expense increased $86,000 and $238,000 for the three and six months
ended June 30, 1998 compared to the same time periods in 1997. The increases
were due primarily to a $2.1 million, or 2.1%, increase in deposits and a $4.7
million, or 48.2%, increase in FHLB advances from June 30, 1997 to June 30,
1998.
Net interest income increased $56,000 and $92,000 for the three and six months
ended June 30, 1998 compared to the same time periods in 1997, representing
increases of 5.8% and 4.8%, respectively. In accordance with its strategic plan,
Potters continued to change its asset mix by shifting from securities to loans.
The flat yield curve and low interest rates during the first half of 1998 have
narrowed the interest rate spread and caused significant prepayment in both
loans and securities. Despite the rate environment, the yield on
interest-earning assets increased from 7.49% for the first half of 1997, to
7.58% for the first half of 1998 as Potters' assets shifted from lower-yielding
securities into higher-yielding loans. The major cause of the shrinking spread
was an increase in the cost of funds, from 4.28% in the first half of 1997, to
4.43% in the first half of 1998. Competition for deposits in the local market is
intense causing Potters' interest costs on certificates of deposit to increase
during 1998, and a new savings account indexed to the 90-day Treasury bill has
caused a seventeen basis point increase in savings account interest in 1998 over
the first half of 1997. In addition, Potters has utilized FHLB advances, which
tend to cost more than deposits, over the last year to fund loan growth. The net
interest rate spread has declined from 3.21% for the first six months of 1997,
to 3.15% during the first six months of 1998.
The allowance for loan losses at June 30, 1998 was $2.2 million, representing an
increase of $61,000 from $2.1 million at December 31, 1997, primarily due to
recoveries of $87,000, offset by charge-offs of $26,000. Recoveries resulted
primarily from payments from the bankruptcy Trustee relating to the Bennett
Funding Group equipment lease credits. During the first six months of 1997, the
allowance for loan losses declined $519,000 due primarily to a negative loan
loss provision of $485,000 relating to the payoff and sale of two nonperforming
real estate loans on properties located in Colorado. The negative provisions
removed excess allowances for loan losses resulting from the decline in
nonperforming loans and the reduced risk composition of Potters' loan portfolio.
During the first half of 1997, net loan charge-offs totaled $34,000.
Nonperforming loans of $407,000 at June 30, 1998 represented an increase of
$200,000 from nonperforming loans of $207,000 at December 31, 1997, but a
decrease of $195,000 from nonperforming loans of $602,000 at June 30, 1997. The
allowance for loan losses increased from 350.7% of nonperforming loans at June
30, 1997, to 1,035.3% at December 31, 1997 and declined to 541.5% at June 30,
1998. No loans were designated impaired at June 30, 1998 or December 31, 1997,
but totaled $365,000 at June 30, 1997, consisting of the Bennett Funding Group
lease credits. Due to the current level of unallocated allowances, no provision
for loan losses is planned for the remainder of 1998, 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.
Noninterest income increased $107,000 and $140,000 for the three and six months
ended June 30, 1998, compared to the respective periods in 1997. During 1998,
gains resulting from loan sales and a call of a security were recognized. Real
estate loans totaling $1.8 million were sold on a servicing-released basis,
resulting in gains of $27,000. Potters recently became a seller/servicer with
the Federal Home Loan Mortgage Corporation ("FHLMC"), which will enable it to
control its interest rate risk through sales of long-term fixed-rate real estate
loans into the secondary mortgage market while maintaining the servicing, a new
source of fee income. An $11,000 gain was recognized on the call of a security
held to maturity during the first half of 1998. Losses of $14,000 were recorded
on sales of securities available for sale during the first
15.
<PAGE> 16
half of 1997 and a $60,000 loss was recognized on the sale of a nonperforming
loan. Nonrecurring gains occurred during both years on sales of other assets.
During the first half of 1997, gains of $53,000 were recorded on the sale of
Potters' East End Office property and a residential property owned by Potters.
During 1998, a $64,000 gain was recognized on the sale of a parking lot owned by
a subsidiary of Potters. Excluding such gains and losses, other noninterest
income continued to increase gradually, $7,000, or 7.5%, during the three months
ended June 30, 1998 and $18,000, or 10.8%, for the six months ended June 30,
1998 compared to the same time periods in 1997. The increases were due primarily
to increased service charges on deposits from inflows into checking accounts and
increases in automated teller machine ("ATM") and VISA Check Card fee income.
Noninterest expense increased $80,000 and $128,000 for the three and six months
ended June 30, 1998 compared to the same time periods in 1997. Included in
noninterest expense in 1997 was a $50,000 gain on the sale of foreclosed real
estate located in Colorado. Excluding the gain, noninterest expense increased
$78,000 from the first six months of 1997 to the first six months of 1998,
primarily from increased compensation and benefits. Potters continues to follow
its plan of blending the developing skills of its employees with new technology
to provide superior service to customers. Compensation and benefits increased in
1998 over the first half of 1997 primarily from the addition of employees
skilled in commercial lending, loan processing and the secondary mortgage
market. Potters continues to develop its human resources through continuing
education from internal and external sources. Expenses relating to the Boardman
loan production office have also contributed to the increase in noninterest
expense. ATM expenses relating to Potters ATMs, ATM cards and VISA Check Cards
have increased, as have data processing, training costs and public company
expenses, but legal and professional fees, insurance, check processing and other
miscellaneous expenses have declined as Potters continues to emphasize cost
control initiatives.
FINANCIAL CONDITION
PFC's assets grew to $128.1 million at June 30, 1998 from $122.6 million at
December 31, 1997, an increase of $5.5 million, or 4.5%. Potters continued to
restructure its balance sheet during 1998 in accordance with its strategic focus
and long-term goals of increasing interest income and the interest rate spread.
The interest rate environment and flat yield curve caused difficulty in locating
adjustable-rate loan purchases during the first quarter of 1998 and have
produced significant prepayments in both loans and securities, generating excess
funds. As a result, cash and cash equivalents increased $1.5 million as Potters
invested excess funds into short-term investments to be available to fund loan
growth.
Securities available for sale decreased $485,000, to $5.0 million at June 30,
1998, compared to $5.5 million at December 31, 1997. One available-for-sale
security was called during the first quarter of 1998. 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, net of tax, decreased from
$17,000 at year-end 1997 to $7,000 at June 30, 1998.
At June 30, 1998, the held-to-maturity securities portfolio totaled $22.1
million, a decrease of $5.0 million from $27.2 million at December 31, 1997.
Agency securities totaling $750,000 were called during 1998, one resulting in a
gain of $11,000. Agency securities totaling $2.0 million matured during 1998,
while repayments on held-to-maturity securities totaled over $2.0 million. In
addition, higher-rate mortgage-backed securities prepaid more quickly and
adjustable-rate mortgage-backed securities repriced downward, putting pressure
on the interest rate spread.
Net loans receivable increased $9.4 million, from $82.1 million at December 31,
1997, to $91.5 million at June 30, 1998. Adjustable-rate loan purchases during
1998 totaled $14.1 million. The flat yield curve caused significant refinancing
activity and prepayments, causing a net decrease in loans, excluding loan
purchases, of $2.9 million during 1998, compared to a slight increase
16.
<PAGE> 17
during the first half of 1997. Potters opened its first loan production office
in the Boardman area, a suburb of Youngstown, Ohio, in April 1998. The area is
growing, with new residential construction and business expansion. Potters' plan
is to utilize this loan production office to become less reliant on loan
purchases to grow the portfolio, although there can be no assurance that the
demand for loans will continue in surrounding local areas or that the Boardman
office will successfully penetrate that market. The Boardman office, with a
staff of two, has contributed to the increased origination of loans during the
second quarter of 1998. Potters' initiation of a 30-year fixed-rate real estate
loan program and sales of such loans on a servicing-released basis have
generated gains, but the recent acquisition of seller/servicer status with FHLMC
will enable Potters to retain the servicing on its 30-year loans, a new source
of noninterest income.
Total deposits increased $1.4 million, or 1.4%, during the first half of 1998,
from $100.1 million at December 31, 1997 to $101.5 million at June 30, 1998.
Inflows occurred primarily in the Treasury Index savings account and in
certificates of deposit. The Treasury Index savings account was developed in
late 1997 to aid in retaining funds which would otherwise flow to accounts at
brokerage firms. Potters has also competitively 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.
FHLB advances totaled $14.6 million at June 30, 1998, compared to $10.0 million
at December 31, 1997. An advance totaling $2.5 million received during 1998 was
part of a special FHLB program in which, after the first year, the FHLB has the
option to convert the ten-year fixed-rate advance to the London Interbank
Offering Rate on a quarterly basis. If the FHLB exercises its option, Potters
may pay off the advance in whole or in part on any of the quarterly repricing
dates without prepayment penalty.
Shareholders' equity decreased $72,000 during the first six months of 1998. Net
income of $488,000 for the six months ended June 30, 1998, the issuance of
common shares upon the exercise of stock options and a decrease in the net
unrealized loss on securities available for sale were offset by the purchase of
25,200 shares for a total of $487,000 relating to a share repurchase program and
the payment of $107,000 in dividends during the first six months of 1998.
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 six months ended June 30, 1998 were loan purchases of $14.1 million, offset
by repayments, calls and maturities of securities held to maturity of $5.0
million and repayments and other decreases in net loans of $2.9 million.
Investing activities during the first six months of 1997 included loan purchases
of $11.4 million, offset by repayments, calls and maturities of securities held
to maturity of $1.8 million and proceeds from sales of securities available for
sale of $2.0 million.
Financing activities during the six months ended June 30, 1998 included proceeds
from FHLB advances of $8.2 million and net deposit inflows of $1.4 million,
somewhat offset by repayments of FHLB advances of $3.6 million. In addition, PFC
purchased 25,200 PFC shares for a total of $487,000 during the first half of
1998. Deposit inflows of $2.1 million occurred during the first six months of
1997, while FHLB advance activity included proceeds of $13.2 million and
repayments totaling $8.5 million.
17.
<PAGE> 18
Potters' average regulatory liquidity ratio for June 1998 was 13.65 %. At June
30, 1998, Potters had commitments to originate loans of $1.2 million and unused
lines of credit totaling $5.8 million.
The following table details the minimum capital requirements set forth by
regulation for all federally insured savings institutions and Potters' capital
levels as of June 30, 1998 (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 $9,942 7.82% $9,942 7.82% $10,791 16.20%
Minimum capital
requirement 1,908 1.50 3,816 3.00 5,328 8.00
------ ---- ------ ---- ------- -----
Regulatory capital -
excess $8,034 6.32% $6,126 4.82% $ 5,463 8.20%
====== ==== ====== ==== ======= =====
</TABLE>
YEAR 2000
As with all financial institutions, Potters' operations depend almost entirely
on computer systems. Potters has formed a "Year 2000 Committee" (the
"Committee") to address the problems associated with the year 2000. The
Committee has conducted a comprehensive review of all operations which will be
impacted by the year 2000. Because Potters primarily uses outside vendors in its
computerized operations, the Committee has been in close contact with all
vendors to ensure that the problem is being addressed. The Committee developed a
detailed plan to monitor the progress of vendors in modifying their software and
to perform detailed testing of each software program by Potters' employees to
ensure that all operational systems will accommodate the year 2000. The
Committee has developed a testing plan to ensure that all vendors appropriately
test their software modifications and a contingency plan for all mission
critical systems which provides alternatives if existing vendors show a lack of
commitment or ability to make their systems year 2000 compliant. The Committee
is also addressing credit risk considerations arising from the year 2000 with
all major commercial borrowers. The overall plan, testing plan and contingency
plan were approved by the Board of Directors.
Potters has not yet identified any specific expenses that are reasonably likely
to be incurred by Potters in connection with year 2000 issues, but no assurance
can be given at this time that significant expense will not be incurred in
future periods. In the event that Potters is ultimately required to purchase
replacement computer systems, programs and equipment, or substantial expense
must be incurred to make Potters' current systems, programs and equipment year
2000 compliant, or Potters' vendors pass on to Potters their expenses of
becoming year 2000 compliant, Potters' net income and financial condition could
be adversely affected. Moreover, to the extent Potters' employees must spend
time ensuring that vendors are adequately preparing for year 2000, those
employees will not be focusing all of their time and energies toward achieving
other goals set by the management of Potters.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income and its components, which are required to be reported in a
financial statement with the same prominence as other financial statements.
PFC's comprehensive income reflects PFC's net income as affected by the change
in unrealized losses on securities available for sale. All comprehensive income
from prior periods will be included to be comparable to the new
18.
<PAGE> 19
standards. The difference between net income and comprehensive income for PFC
will depend on the components of securities available for sale over time and
their reaction to and volatility in the prevailing interest rate environment.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," changes the way public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about reportable segments in interim
financial reports issued to shareholders. SFAS No. 131 does not presently affect
PFC in that it operates within one reportable segment of banking.
SFAS Nos. 130 and 131 are both effective for PFC in 1998 financial statements
and reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of Potters Financial
Corporation was held on April 23, 1998. The matters presented to the Security
Holders and the votes cast were as follows:
1) Election of Directors of Potters Financial Corporation
Arthur T. Doak 748,736 FOR
36,250 WITHHELD
Timothy M. O'Hara 747,986 FOR
37,000 WITHHELD
Peter D. Visnic 748,786 FOR
36,200 WITHHELD
2) Approval of 1998 Stock Option and Incentive Plan
718,230 FOR
60,996 AGAINST
5,760 ABSTAIN
0 BROKER NONVOTES
3) Ratification of Crowe, Chizek and Company LLP as Auditors
747,406 FOR
34,630 AGAINST
2,950 ABSTAIN
0 BROKER NONVOTES
19.
<PAGE> 20
Item 5. Other Information.
Any proposals of shareholders intended to be included in PFC's
proxy statement and proxy card for the 1999 Annual Meeting of
Shareholders should be sent to PFC by certified mail and must be
received by PFC not later than November 25, 1998. In addition, if
a proposal is not received by January 27, 1999, then proxies
solicited by the Board of Directors of PFC for the 1999 Annual
Meeting of Shareholders of PFC may be voted in the discretion of
the proxies designated by the Board of Directors on any such
proposal without mention of such matter in the proxy statement or
on the proxy card for such meeting.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
<TABLE>
<S> <C>
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 Included herewith.
per share earnings
Exhibit 27.1 Financial Data Schedule for the Included herewith.
quarter ended June 30, 1998
Exhibit 27.2 Amended and Restated Financial Included herewith.
Data Schedule for the quarter ended
June 30, 1997
Exhibit 99 Safe Harbor Under the Private Included herewith.
Securities Litigation Reform Act of 1995
</TABLE>
B. Reports on Form 8-K - none.
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: August 5, 1998 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.
<PAGE> 1
<TABLE>
POTTERS FINANCIAL CORPORATION
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Quarter ended June 30, Six months ended June 30,
---------------------- -------------------------
1998 1997 (1) 1998 1997 (1)
---- -------- ---- --------
<S> <C> <C> <C> <C>
Net income for basic and diluted $266,000 $301,000 $488,000 $739,000
======== ======== ======== ========
Average basic shares outstanding 941,800 954,980 949,552 966,275
Add: Effect of stock options 32,766 20,425 32,783 19,994
-------- -------- -------- --------
Average diluted shares outstanding 974,566 975,405 982,335 986,269
======== ======== ======== ========
Basic earnings per common share $ .28 $ .32 $ 0.51 $ 0.77
======== ======== ======== ========
Diluted earnings per common share $ .27 $ .31 $ 0.50 $ 0.75
======== ======== ======== ========
</TABLE>
(1) Restated to reflect the November 1997 two-for-one stock split paid in
the form of a 100% stock dividend.
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0001010476
<NAME> POTTERS FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,549
<INT-BEARING-DEPOSITS> 750
<FED-FUNDS-SOLD> 12
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,989
<INVESTMENTS-CARRYING> 22,112
<INVESTMENTS-MARKET> 22,139
<LOANS> 93,733
<ALLOWANCE> 2,204
<TOTAL-ASSETS> 128,149
<DEPOSITS> 101,515
<SHORT-TERM> 6,347
<LIABILITIES-OTHER> 1,139
<LONG-TERM> 8,214
0
0
<COMMON> 5,183
<OTHER-SE> 5,751
<TOTAL-LIABILITIES-AND-EQUITY> 128,149
<INTEREST-LOAN> 3,391
<INTEREST-INVEST> 946
<INTEREST-OTHER> 141
<INTEREST-TOTAL> 4,478
<INTEREST-DEPOSIT> 2,138
<INTEREST-EXPENSE> 2,470
<INTEREST-INCOME-NET> 2,008
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 1,555
<INCOME-PRETAX> 739
<INCOME-PRE-EXTRAORDINARY> 488
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 488
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 3.36
<LOANS-NON> 407
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 231
<ALLOWANCE-OPEN> 2,192
<CHARGE-OFFS> 19
<RECOVERIES> 31
<ALLOWANCE-CLOSE> 2,204
<ALLOWANCE-DOMESTIC> 2,204
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,479
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0001010476
<NAME> POTTERS FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,567
<INT-BEARING-DEPOSITS> 47
<FED-FUNDS-SOLD> 210
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,876
<INVESTMENTS-CARRYING> 30,085
<INVESTMENTS-MARKET> 29,814
<LOANS> 76,063
<ALLOWANCE> 2,111
<TOTAL-ASSETS> 121,189
<DEPOSITS> 99,417
<SHORT-TERM> 4,500
<LIABILITIES-OTHER> 1,250
<LONG-TERM> 5,324
0
0
<COMMON> 4,919
<OTHER-SE> 5,779
<TOTAL-LIABILITIES-AND-EQUITY> 121,189
<INTEREST-LOAN> 2,793
<INTEREST-INVEST> 1,321
<INTEREST-OTHER> 34
<INTEREST-TOTAL> 4,148
<INTEREST-DEPOSIT> 2,035
<INTEREST-EXPENSE> 2,232
<INTEREST-INCOME-NET> 1,916
<LOAN-LOSSES> (485)
<SECURITIES-GAINS> (14)
<EXPENSE-OTHER> 1,427
<INCOME-PRETAX> 1,120
<INCOME-PRE-EXTRAORDINARY> 739
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 739
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 3.42
<LOANS-NON> 602
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 235
<ALLOWANCE-OPEN> 2,254
<CHARGE-OFFS> 13
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 2,111
<ALLOWANCE-DOMESTIC> 2,111
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,428
</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 June 30, 1998 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.
1
<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
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Loan Company's Earnings
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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 enacted a plan to recapitalize the SAIF in 1996. 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. 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 restrictive holding company requirements, including activity limits and
capital requirements similar to those imposed on The Potters Savings and
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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.
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