<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, 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 October 31, 1998
938,154 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
<PAGE> 2
FORM 10-QSB
QUARTER ENDED SEPTEMBER 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 13-20
Part II - Other Information
Item 1. Legal Proceedings 20
Item 2. Change in Securities and Use of Proceeds 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
2.
<PAGE> 3
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,991 $ 3,348
Interest-bearing deposits with Federal Home Loan Bank 357 459
Federal funds sold and cash management account 1,336 9
-------- --------
Cash and cash equivalents 5,684 3,816
Interest-bearing deposits in other financial institutions 76
Securities available for sale,
at estimated fair value 29,955 5,474
Securities held to maturity (estimated
fair value: December 31, 1997 - $27,116) 27,158
Federal Home Loan Bank stock 974 859
Loans receivable, net 92,409 82,093
Premises and equipment, net 1,638 1,742
Other assets 1,394 1,495
-------- --------
Total assets $132,130 $122,637
======== ========
LIABILITIES
Deposits $101,972 $100,094
Federal Home Loan Bank advances 18,012 9,993
Accrued expenses and other liabilities 985 1,544
-------- --------
Total liabilities 120,969 111,631
SHAREHOLDERS' EQUITY
Common shares, no par value
Authorized: 2,000,000 shares;
Issued: 1,116,028 shares in 1998 and
1,111,828 shares in 1997
Paid-in capital 5,191 5,159
Treasury shares, at cost: 177,874 shares
in 1998 and 138,592 shares in 1997 (2,089) (1,399)
Unearned compensation on
recognition and retention plan (87) (87)
Unrealized gain (loss) on securities
available for sale, net of tax 175 (17)
Retained earnings, substantially restricted 7,971 7,350
-------- --------
Total shareholders' equity 11,161 11,006
-------- --------
Total liabilities and shareholders' equity $132,130 $122,637
======== ========
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3.
<PAGE> 4
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollars in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $1,907 $1,574 $5,298 $4,367
Securities 418 600 1,364 1,921
Other interest income 34 19 175 53
------ ------ ------ ------
Total interest income 2,359 2,193 6,837 6,341
------ ------ ------ ------
INTEREST EXPENSE
Interest on deposits 1,089 1,057 3,227 3,092
Other interest expense 195 137 527 334
------ ------ ------ ------
Total interest expense 1,284 1,194 3,754 3,426
------ ------ ------ ------
NET INTEREST INCOME 1,075 999 3,083 2,915
Provision for loan losses (485)
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,075 999 3,083 3,400
Loan and security gains (losses) 26 (7) 64 (81)
Other noninterest income 112 143 360 363
------ ------ ------ ------
Total noninterest income 138 136 424 282
------ ------ ------ ------
Compensation and benefits 343 344 1,086 979
Occupancy and equipment 100 94 286 282
Other noninterest expense 319 285 945 889
------ ------ ------ ------
Total noninterest expense 762 723 2,317 2,150
------ ------ ------ ------
INCOME BEFORE INCOME TAX 451 412 1,190 1,532
Income tax expense 154 138 405 519
------ ------ ------ ------
NET INCOME $ 297 $ 274 $ 785 $1,013
====== ====== ====== ======
Earnings per common share
Basic $ 0.32 $ 0.29 $ 0.83 $ 1.05
====== ====== ====== ======
Diluted $ 0.31 $ 0.28 $ 0.81 $ 1.03
====== ====== ====== ======
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4.
<PAGE> 5
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
- ---------------------------------------------------------------------------------------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
BALANCE - JANUARY 1 $11,006 $10,576
Net income for the nine months ended September 30 785 1,013
Issuance of common shares for the exercise
of stock options (4,200 in 1998 and 16,904 in 1997) 32 84
Purchase of treasury shares (39,282 in 1998
and 75,912 in 1997) (690) (791)
Cash dividends declared ($.17 per share in 1998
and $.125 per share in 1997) (164) (124)
Change in net unrealized loss on
securities available for sale 192 54
------- -------
BALANCE - SEPTEMBER 30 $11,161 $10,812
======= =======
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $297 $274 $785 $1,013
Other comprehensive income:
Change in unrealized loss on
securities available for sale arising
during the period 165 53 175 40
Transition adjustment from adoption
of SFAS No. 133 18 18
Reclassification adjustment for
accumulated (gains)/losses included
in net income (1) 5 (1) 14
---- ---- ---- ------
Unrealized gains on securities
available for sale 182 58 192 54
---- ---- ---- ------
COMPREHENSIVE INCOME $479 $332 $977 $1,067
==== ==== ==== ======
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5.
<PAGE> 6
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------
<CAPTION>
Nine months ended
September 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 785 $ 1,013
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 175 153
Provision for loan losses (485)
Net investment amortization 33 36
Net (gain) loss on:
Securities (13) 21
Loans (51) 60
Foreclosed real estate and
repossessed assets (50)
Other assets (64) (111)
Net increase in loans held for sale (3,459)
Proceeds from sale of loans held for sale 3,688
Stock dividend on FHLB stock (50) (45)
Change in other assets and liabilities (342) 404
-------- --------
Net cash from operating activities 702 996
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing balances with banks (76)
Securities available for sale
Proceeds from repayments, calls and maturities 3,077 3,012
Purchases (5,160)
Securities held to maturity
Proceeds from repayments, calls and maturities 5,031 3,224
Purchase of FHLB stock (65)
Redemption of FHLB stock 23
Net (increase) decrease in loans 5,720 (184)
Loan purchases (16,245) (14,833)
Proceeds from sale of loans 281
Proceeds from sale of foreclosed real estate
and repossessed assets 50
Proceeds from sale of other assets 100 192
Property and equipment expenditures (76) (123)
-------- --------
Net cash from investing activities (7,694) (8,358)
-------- --------
- ----------------------------------------------------------------------------------------------
</TABLE>
(Continued)
6.
<PAGE> 7
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited)
(Dollars in thousands)
- -------------------------------------------------------------------------------------
<CAPTION>
Nine months ended
September 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 1,878 3,574
Proceeds from FHLB advances 17,300 14,550
Repayments of FHLB advances (9,281) (9,777)
Net change in official checks (144) (215)
Net increase (decrease) in advances from
borrowers for taxes and insurance (71) (71)
Purchase of treasury shares (690) (791)
Issuance of common shares for
exercise of stock options 32 84
Cash dividends paid (164) (124)
------- -------
Net cash from financing activities 8,860 7,230
------- -------
Net change in cash and cash equivalents 1,868 (132)
Cash and cash equivalents at beginning of year 3,816 4,585
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,684 $ 4,453
======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 3,755 $ 3,454
Income taxes 370 106
- -------------------------------------------------------------------------------------
</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, also headquartered in East Liverpool,
Ohio. On August 21, 1998, The Potters Savings and Loan Company changed its name
to Potters Bank ("Potters").
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, 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.
As of July 1, 1998, Potters adopted SFAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities". Potters does not own any derivative
financial instruments at the present time and has no immediate plans to acquire
any such investments. However, to provide maximum flexibility for possible
future hedging strategies, all held-to-maturity securities were reclassified to
available for sale at the date of adoption. The amortized cost of
held-to-maturity securities as of July 1, 1998 was $22.1 million, and resulted
in an after-tax transition adjustment to comprehensive income of $18,000.
Basic earnings per share ("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 difference between
PFC's basic and diluted shares is attributable entirely to its outstanding stock
options. The weighted average number of shares outstanding for the calculation
of basic earnings per share was 930,100 for the third quarter of 1998 and
954,622 for the three months ended September 30, 1997. The weighted average
number of shares outstanding for the calculation of diluted EPS was 958,408 for
the third quarter of 1998 and 980,076 for the three months ended September 30,
1997. The weighted average number of shares outstanding for basic and fully
diluted earnings per share for the nine months ended September 30, 1998 were
942,997 and 974,228, respectively, while the similar number of shares for the
nine months ended September 30, 1997 were 962,348 and 984,421.
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 September 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 $ 6,638 $ 12 $ $ 6,650
Obligations of states and
political subdivisions 169 17 186
Equity securities 70 70
Other securities 522 8 530
Agency issued mortgage-
backed securities 22,292 227 22,519
------- ---- ----- -------
$29,691 $264 $ $29,955
======= ==== ===== =======
</TABLE>
The amortized cost and estimated fair value of debt securities at September
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
------------------
Amortized Estimated
Cost Fair Value
---- ----------
(Dollars in thousands)
<S> <C> <C>
Due in one year or less $ 2,142 $ 2,144
Due after one year through five years 4,067 4,083
Due after five years through ten years 598 609
Due after ten years 522 530
Agency issued mortgage-
backed securities 22,292 22,519
------- -------
$29,621 $29,885
======= =======
</TABLE>
Available-for-sale securities totaling $1.5 million were called at par during
the first nine months of 1998, one resulting in a gain of $2,000, and agency
securities totaling $510,000 matured. 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 $3.0 million were sold during the first
nine months of 1997 at a net loss of $21,000. The net unrealized holding loss on
securities available for sale increased by $192,000 during the first nine months
of 1998.
The carrying value of investment securities pledged as collateral for public
funds amounted to $7.7 million at September 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:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Real estate loans
One-to-four family residences $74,598 $66,718
Loans held for sale 629 106
Nonresidential property 6,920 6,211
Multifamily and other 2,153 1,537
------- -------
84,300 74,572
------- -------
Consumer and other loans
Home equity loans 5,509 5,224
Secured, unsecured consumer
loans and lines of credit 2,231 2,064
Commercial business loans 1,178 862
Other 1,745 1,575
------- -------
10,663 9,725
------- -------
Total loan principal balances 94,963 84,297
Loans in process (707) (340)
Unearned interest, purchase premiums
and deferred fees, net 370 279
Allowance for loan losses (2,217) (2,143)
------- -------
$92,409 $82,093
======= =======
</TABLE>
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of year $2,143 $2,630
Provision for loan losses (485)
Recoveries 111 19
Charge-offs (37) (59)
------ ------
Balance at end of year $2,217 $2,105
====== ======
</TABLE>
Nonaccrual and renegotiated loans totaled $222,000 and $207,000 at September 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>
September 30, December 31,
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
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
5.10% advance due July 7, 2008(1) 4,000
4.66% advance due September 22, 2008(1) 5,000
Fixed-rate advances with monthly principal and
interest payments:
6.05% advance due August 14, 1998 133
5.85% advance due September 1, 1999 62 110
------- ------
$18,012 $9,993
======= ======
</TABLE>
- ----------
(1) Convertible fixed-rate advances which, at the FHLB's option, can be
converted to the London Interbank Offering Rate on a quarterly basis after the
first year. If the FHLB exercises its option, Potters may pay off the advances
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 September 30,
1998, the aggregate future minimum annual principal payments on FHLB advances
were $755,000 in 1998, $2.8 million in 1999, $3.0 million in 2000 and $11.5
million in 2008. As of September 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 September 30, 1998, Potters had commitments to make loans (at market
rates) and unused lines of credit approximating $7.2 million, of which $1.1
million carry fixed rates from 6.50% to 8.875%, 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
September 30, 1998, the loan portfolio included approximately $20.3 million of
purchased residential real estate loans located in northwestern and southwestern
Ohio and $12.6 million located in Hilton Head, South Carolina. As of September
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, a savings
and loan institution. On August 21, 1998, The Potters Savings and Loan Company
changed its name to Potters Bank ("Potters") in an effort to simplify its
identity and provide a more direct description of the company. In the following
pages, management presents an analysis of PFC's financial condition as of
September 30, 1998 and December 31, 1997, and the results of operations for the
three and nine months ended September 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 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 $297,000 for the three months ended September 30,
1998, an 8.4% increase over net income of $274,000 for the third quarter of
1997. Basic and diluted earnings per share for the three months ended September
30, 1998 were $.32 and $.31, while basic and diluted earnings per share for the
comparable period in 1997 were $.29 and $.28. The return on average assets for
the three months ended September 30, 1998 was .93% compared to .91% for the same
period in 1997, while the return on average shareholders' equity was 10.77% for
the third quarter of 1998 compared to 10.07% for the three months ended
September 30, 1997. The increase in net income for the third quarter of 1998
compared to the third quarter of 1997 was brought about primarily from an
increase of $76,000, or 7.6%, in net interest income. Sales of fixed-rate real
estate loans on a servicing-released basis during 1998 continued to affect
positively noninterest income, increasing gains on sales of loans and securities
by $33,000. Excluding a nonrecurring gain of $58,000, or $.06 per diluted share,
on the sale of a company-owned property during the third quarter of 1997, other
noninterest income increased $27,000, or 31.8%, during the third quarter of
1998.
Net income for the nine months ended September 30, 1998 was $785,000, compared
to net income of $1.0 million for the same period in 1997. Basic and diluted
earnings per share were $.83 and $.81 for the nine months ended September 30,
1998, compared to $1.05 and $1.03 for the comparable period in 1997. Annualized
returns on average assets of .83% and 1.14% were realized for the nine months
ended September 30, 1998 and 1997, while annualized returns on average
shareholders' equity were 9.21% and 12.28% for the same respective time periods.
The primary reason for the decline in net income for the nine months ended
September 30, 1998 compared to the same time period in 1997 were negative
provisions for loan losses of $485,000 during the first nine months of 1997
which were not repeated in 1998. The provisions had an after-tax positive effect
on 1997 earnings of $320,000, or $.33 per diluted share, for the nine months
ended September 30, 1997. Excluding this item, earnings increased from $693,000,
or $.70 per diluted share, during the first nine months of 1997 to $785,000, or
$.81 per diluted share, for the first nine months of 1998, an increase of
$92,000, or 13.3%. The negative provisions were recorded during 1997 to remove
excess allowances for loan losses resulting from the favorable resolution of
several nonperforming loans and the reduced risk composition of Potters' loan
portfolio.
The increase in net income during the first nine months of 1998 compared to the
first nine months of 1997, excluding the 1997 negative provisions for loan
losses, resulted primarily from a $168,000, or 5.8%, increase in net interest
income and a $142,000, or 50.4%, increase in noninterest income, offset by a
$167,000, or 7.8%, increase in noninterest expense.
Interest income increased $166,000 and $496,000 for the three and nine months
ended September 30, 1998 compared to the same periods in 1997. Assets grew $4.0
million, or 3.1%, during the third quarter of 1998 and $9.5 million, or 7.7%,
during the first nine months of 1998, primarily the result of loan growth. Such
loan growth occurred through the origination and purchase of real estate loans
and has been funded through loan repayments, calls, repayments and maturities of
securities, deposit inflows and Federal Home Loan Bank ("FHLB") advances. At
September 30, 1998, loans represented 71.6% of total assets and 92.8% of
deposits, compared to 64.8% and 78.9%, respectively, at September 30, 1997. Loan
interest income increased $333,000, or 21.2%, during the third quarter of 1998
compared to the third quarter of 1997, and increased $931,000, or 21.3%, during
the first nine months of 1998 compared to the first nine months of 1997.
Interest on securities, however, declined $182,000, or 30.3%, during the third
quarter of 1998 compared to the third quarter of 1997, and decreased $557,000,
or 29.0%, during the first nine months of 1998 compared to the same time period
in 1997. The continued shift of assets from securities to loans has increased
the yield on earning assets during 1998 to 7.64%,
14.
<PAGE> 15
from 7.55% during the first nine months of 1997. Other interest income increased
$15,000 and $122,000 during the three and nine months ended September 30, 1998
due to the investment of excess funds in short-term instruments so funds were
accessible when loan purchases became available.
Interest expense increased $90,000 and $328,000 for the three and nine months
ended September 30, 1998 compared to the same time periods in 1997. The
increases were due primarily to a $1.9 million increase in deposits and an $8.0
million increase in FHLB advances from September 30, 1997 to September 30, 1998.
The cost of funds increased, from 4.32% in the first nine months of 1997, to
4.42% in the first nine months 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 nineteen basis point increase in savings account interest in
1998 over the first nine months of 1997. In addition, Potters has utilized FHLB
advances, which tend to cost more than deposits, over the last year to fund loan
growth.
Net interest income increased $76,000 and $168,000 for the three and nine months
ended September 30, 1998 compared to the same time periods in 1997, representing
increases of 7.6% and 5.8%, respectively. The increase in the asset yield has
limited the decrease in the interest rate spread to one basis point, from 3.23%
for the first nine months of 1997, to 3.22% during the first nine months of 1998
despite a rising cost of funds and a declining interest rate environment during
1998.
The allowance for loan losses at September 30, 1998 was $2.2 million,
representing an increase of $74,000 from $2.1 million at December 31, 1997,
primarily due to recoveries of $111,000, offset by charge-offs of $37,000.
Recoveries resulted primarily from payments from the bankruptcy Trustee relating
to the Bennett Funding Group equipment lease credits. During the first nine
months of 1997, the allowance for loan losses declined $525,000 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. During
the first nine months of 1997, net loan charge-offs totaled $40,000.
Nonperforming loans of $222,000 at September 30, 1998 represented an increase of
$15,000 from nonperforming loans of $207,000 at December 31, 1997, but a
decrease of $319,000 from nonperforming loans of $541,000 at September 30, 1997.
The allowance for loan losses increased from 389.9% of nonperforming loans at
September 30, 1997, to 1,035.3% at December 31, 1997 and declined to 998.7% at
September 30, 1998. No loans were designated impaired at September 30, 1998 or
December 31, 1997, but totaled $365,000 at September 30, 1997, consisting of the
Bennett Funding Group lease credits. A $267,000 nonperforming loan reported at
June 30, 1998 was paid in full during the third quarter of 1998. 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 $2,000 and $142,000 for the three and nine months
ended September 30, 1998, compared to the respective periods in 1997. During
1998, real estate loans totaling $3.7 million were sold on a servicing-released
basis, resulting in gains of $51,000, while gains totaling $13,000 were
recognized on calls of two securities during the first nine months of 1998.
Losses of $21,000 were recorded on sales of securities available for sale during
the first nine months 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 nine months of 1997, gains of $111,000 were
recorded on the sale of Potters' East End Office property and two properties
owned by Potters. During 1998, a $64,000 gain was recognized on the sale of
15.
<PAGE> 16
a parking lot owned by a subsidiary of Potters. Excluding such gains and losses,
other noninterest income continued to increase gradually, $27,000, or 31.8%,
during the three months ended September 30, 1998 and $44,000, or 17.5%, for the
nine months ended September 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 and commission income on the sale of loan
insurance products.
Noninterest expense increased $39,000 and $167,000 for the three and nine months
ended September 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
$117,000 from the first nine months of 1997 to the first nine 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 nine months of 1997 primarily from the addition of employees
skilled in commercial lending, loan processing and the secondary mortgage
market. 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 and training costs, 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 $132.1 million at September 30, 1998 from $122.6 million at
December 31, 1997, an increase of $9.5 million, or 7.7%. Potters continued to
restructure its balance sheet and pursue loan growth during 1998 in accordance
with its strategic plan. The declining interest rate environment and flat yield
curve caused difficulty in locating adjustable-rate loan purchases during 1998
and have produced significant prepayments in both loans and securities,
generating excess funds. As a result, cash and cash equivalents increased $1.9
million as Potters invested excess funds into short-term investments to be
available to fund loan growth.
Securities available for sale increased $24.5 million to $30.0 million at
September 30, 1998, compared to $5.5 million at December 31, 1997. As of July 1,
1998, Potters' adopted Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," and
transferred $22.1 million of securities held to maturity with an estimated fair
value of $22.1 million to securities available for sale. The resultant after-tax
transition adjustment to shareholders' equity totaled $18,000 at July 1, 1998.
Available-for-sale securities totaling $1.5 million were called during the first
nine months of 1998, resulting in gains of $2,000. A purchase of $5.1 million of
adjustable-rate mortgage-backed securities was funded with a convertible
fixed-rate FHLB advance, resulting in a current spread of 85 basis points.
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 an unrealized
gain of $175,000 at September 30, 1998.
At September 30, 1998, no securities were classified as held-to-maturity because
of the transfer of such securities to available-for-sale as a result of the
adoption of SFAS No. 133. 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.
16.
<PAGE> 17
Net loans receivable increased $10.3 million, from $82.1 million at December 31,
1997, to $92.4 million at September 30, 1998. Loan purchases during 1998 totaled
$16.2 million. The flat yield curve caused significant refinancing activity and
prepayments, causing a net decrease in loans, excluding loan purchases, of $2.3
million during 1998, compared to a slight increase during the first nine months
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 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 $1.9 million, or 1.9%, during the first half of 1998,
from $100.1 million at December 31, 1997 to $102.0 million at September 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 $18.0 million at September 30, 1998, compared to $10.0
million at December 31, 1997. Three advances totaling $11.5 million received
during 1998 were part of a convertible fixed-rate FHLB advance program in which,
after the first year, the FHLB has the option to convert the ten-year fixed-rate
advances 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. Potters used such
advances to fund loan growth and the purchase of $5.1 million of adjustable-rate
mortgage-backed securities at a positive spread.
Shareholders' equity increased $155,000 during the first nine months of 1998.
Net income of $785,000 for the nine months ended September 30, 1998, the
issuance of common shares upon the exercise of stock options and the generation
of a net unrealized gain of $192,000 on securities available for sale from the
transfer of held-to-maturity securities were offset by the purchase of 39,282
treasury shares for a total of $690,000 relating to a share repurchase program
and the payment of dividends totaling $164,000, or $.17 per share, during the
first nine months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Potters' normal, recurring sources of funds are primarily customer deposits,
securities available for sale, maturities, 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 operating activities during
the nine months ended September 30, 1998 included sales of loans held for sale
totaling $3.7 million and a net increase of $3.5 million in loans held for sale.
Significant investing activities during the same time period were loan purchases
of $16.2 million and purchases of available-for-sale securities of $5.2 million,
offset by repayments, calls and maturities of $5.0 million in securities held to
maturity and $3.1 million in securities available for sale and a net decrease in
loans of $5.7 million. Investing
17.
<PAGE> 18
activities during the first nine months of 1997 included loan purchases of $14.8
million, offset by repayments, calls and maturities of securities held to
maturity of $3.2 million and proceeds from sales of securities available for
sale of $3.0 million.
Financing activities during the nine months ended September 30, 1998 included
proceeds from FHLB advances of $17.3 million and net deposit inflows of $1.9
million, somewhat offset by repayments of FHLB advances of $9.3 million. In
addition, PFC purchased 39,282 treasury shares for a total of $690,000 during
the first nine months of 1998. Deposit inflows of $3.6 million occurred during
the first nine months of 1997, while FHLB advance activity included proceeds of
$14.6 million and repayments totaling $9.8 million.
Potters' average regulatory liquidity ratio for September 1998 was 12.14%. At
September 30, 1998, Potters had commitments to originate loans of $1.1 million
and unused lines of credit totaling $6.1 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 September 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 $10,258 7.81% $10,258 7.81% $11,090 17.01%
Minimum capital
requirement 1,969 1.50 3,938 3.00* 5,217 8.00
------- ---- ------- ---- ------- -----
Regulatory capital -
excess $ 8,289 6.31% $ 6,320 4.81% $ 5,873 9.01%
======= ==== ======= ==== ======= =====
</TABLE>
- ----------
* Under the prompt corrective action regulations of the Office of Thrift
Supervision, savings associations may be required to maintain minimum core
capital of 4.00%.
YEAR 2000
As with all financial institutions, Potters' operations depend almost entirely
on computer systems. The Board of Directors and management of Potters also
recognize the risks the year 2000 poses to all businesses utilizing computer or
embedded chip technology. Potters' "Year 2000 Committee" (the "Committee") was
formed to address the problems associated with the year 2000. The Committee
conducted a comprehensive review of all operations which will be impacted by the
year 2000. Because Potters does not use proprietary software or hardware, it
depends primarily on outside vendors for its data processing operations and
software. The Committee identified the vendors most critical to Potters'
operations, but has contacted all vendors to ensure that the issue is being
addressed, and to receive periodic updates. The Committee developed a detailed
plan to monitor the progress of vendors in modifying their software, if
necessary, and a testing plan to ensure that all vendors appropriately test
their software modifications and to perform detailed testing of each critical
software program by Potters' employees, if possible, to ensure that all
operational systems will accommodate the year 2000. The Committee developed a
contingency plan for all systems which identifies alternatives if existing
vendors show a lack of commitment or ability to make their systems year 2000
compliant. Contingency plans call for action if all vendors have not completed
the renovation of their systems and begun testing by December 31, 1998. At the
present time, all vendor communications report appropriate progress,
18.
<PAGE> 19
and there is no reason for management to believe that all mission critical
systems from outside vendors will not be year 2000 compliant. In conjunction
with the contingency plan, an analysis was conducted to determine the impact on
all department and branch functions if systems should fail when the year 2000
arrives. The committee is currently working on a business resumption contingency
plan for all mission critical vendors which will provide alternative means for
task completion should a mission critical system fail.
The Committee performed an assessment of the risk posed by all commercial
borrowers with loans in excess of $100,000 and has communicated with them
through letters and questionnaires and, in some cases, personal contact.
Contingency plans for borrowers not adequately addressing year 2000 compliance
may include declaring the loan immediately due.
Potters has developed and begun to implement a customer awareness program in
order to keep all customers informed of its progress in addressing year 2000
issues. A Customer Newsletter was mailed to all account holders in October 1998
and the Federal Deposit Insurance Corporation's pamphlet is available in the
branch locations and on Potters' website. Periodic statement stuffers,
additional newsletters, website updates and shareholder communications will be
used throughout the remainder of 1998 and 1999 in addition to a year 2000
hotline on which customers can leave messages for follow-up by Committee
members.
The overall plan, testing plan, initial contingency plan, operations impact
analysis, commercial borrower risk analysis and customer awareness plans were
approved by the Board of Directors, who receive detailed quarterly updates on
the Committee's progress. Beginning in the fourth quarter of 1998, the Board of
Directors will be updated on a monthly basis.
Expenses incurred to date relating to the year 2000 have been immaterial.
However, 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 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.
19.
<PAGE> 20
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998. SFAS No. 133 establishes standards for derivative
instruments and hedging activities and requires the recognition of all
derivatives as either assets or liabilities and measured at fair value in all
financial statements. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Potters opted for early adoption of
the statement as of July 1, 1998.
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.
None.
Item 5. Other Information.
None.
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 September 30, 1998
Exhibit 27.2 Amended and Restated Financial Included herewith.
Data Schedule for the quarter ended
September 30, 1997
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 9, 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
POTTERS FINANCIAL CORPORATION
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Quarter ended Nine months ended
------------- -----------------
September 30, September 30,
------------- -------------
1998 1997(1) 1998 1997(1)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income for basic and diluted $297,000 $274,000 $785,000 $1,013,000
======== ======== ======== ==========
Average basic shares outstanding 930,100 954,622 942,997 962,348
Add: Effect of stock options 28,308 25,454 31,231 22,073
-------- -------- -------- ----------
Average diluted shares outstanding 958,408 980,076 974,228 984,421
======== ======== ======== ==========
Basic earnings per common share $ 0.32 $ 0.29 $ 0.83 $ 1.05
======== ======== ======== ==========
Diluted earnings per common share $ 0.31 $ 0.28 $ 0.81 $ 1.03
======== ======== ======== ==========
</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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,991
<INT-BEARING-DEPOSITS> 357
<FED-FUNDS-SOLD> 1,336
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,955
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 94,626
<ALLOWANCE> 2,217
<TOTAL-ASSETS> 132,130
<DEPOSITS> 101,972
<SHORT-TERM> 5,012
<LIABILITIES-OTHER> 985
<LONG-TERM> 13,000
0
0
<COMMON> 5,191
<OTHER-SE> 5,970
<TOTAL-LIABILITIES-AND-EQUITY> 132,130
<INTEREST-LOAN> 5,298
<INTEREST-INVEST> 1,364
<INTEREST-OTHER> 175
<INTEREST-TOTAL> 6,837
<INTEREST-DEPOSIT> 3,227
<INTEREST-EXPENSE> 3,754
<INTEREST-INCOME-NET> 3,083
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 2,317
<INCOME-PRETAX> 1,190
<INCOME-PRE-EXTRAORDINARY> 1,190
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 785
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.81
<YIELD-ACTUAL> 3.44
<LOANS-NON> 222
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 229
<ALLOWANCE-OPEN> 2,143
<CHARGE-OFFS> 37
<RECOVERIES> 111
<ALLOWANCE-CLOSE> 2,217
<ALLOWANCE-DOMESTIC> 2,217
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,498
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0001010476
<NAME> POTTERS FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<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> 4,367
<INTEREST-INVEST> 1,921
<INTEREST-OTHER> 53
<INTEREST-TOTAL> 6,341
<INTEREST-DEPOSIT> 3,092
<INTEREST-EXPENSE> 3,426
<INTEREST-INCOME-NET> 2,915
<LOAN-LOSSES> (485)
<SECURITIES-GAINS> (21)
<EXPENSE-OTHER> 2,150
<INCOME-PRETAX> 1,532
<INCOME-PRE-EXTRAORDINARY> 1,532
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,013
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 3.45
<LOANS-NON> 541
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 234
<ALLOWANCE-OPEN> 2,630
<CHARGE-OFFS> 59
<RECOVERIES> 19
<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, 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
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Potters Bank 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 Potters Bank 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.
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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
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Potters Bank 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, Potters Bank 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 Potters Bank 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 Potters Bank's Earnings
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Potters Bank 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 Potters Bank 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, Potters Bank
may have to convert to a different financial institution charter or might be
regulated under federal law as a bank. If Potters Bank 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 Potters
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Bank. Potters Financial Corporation cannot predict the impact of the conversion
of Potters Bank to, or regulation of Potters Bank as, a bank until any
legislation requiring such change is enacted.
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