<PAGE> 1
Page 1 of 20 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, 1999
------------------
[ ] 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
incorporation or organization) Identification 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 29, 1999
981,843 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
<PAGE> 2
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1999
Part I - Financial Information
Item 1. Financial Statements
Interim financial information required by Regulation 210.10-01 of
Regulation S-X is included in this Form 10-QSB as referenced below:
<TABLE>
<CAPTION>
Page
Number(s)
---------
<S> <C>
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-19
Part II - Other Information
Item 1. Legal Proceedings 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 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
2.
<PAGE> 3
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
- ----------------------------------------------------------------------------------
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 4,804 $ 5,612
Interest-bearing deposits 400 792
Federal funds sold 3 5,463
-------- --------
Cash and cash equivalents 5,207 11,867
Securities available for sale 23,592 23,714
Federal Home Loan Bank stock 1,164 991
Loans, net 108,083 94,911
Premises and equipment, net 2,002 1,646
Other assets 2,086 1,345
-------- --------
Total assets $142,134 $134,474
======== ========
LIABILITIES
Deposits $108,863 $104,644
Federal Home Loan Bank advances 21,150 17,247
Accrued expenses and other liabilities 1,229 1,426
-------- --------
Total liabilities 131,242 123,317
SHAREHOLDERS' EQUITY
Common shares, no par value
Authorized: 2,000,000 shares;
Issued: 1,116,528 shares in 1999 and 1998
Paid-in capital 5,422 5,218
Retained earnings 7,698 8,233
Accumulated other comprehensive income (448) (41)
Unearned compensation on
recognition and retention plan shares (59) (74)
Treasury stock, at cost: 134,685 shares
in 1999 and 90,092 in 1998 (1,721) (2,179)
-------- --------
Total shareholders' equity 10,892 11,157
-------- --------
Total liabilities and shareholders' equity $142,134 $134,474
======== ========
- ----------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3.
<PAGE> 4
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
- -----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $2,292 $1,907 $6,366 $5,298
Securities 348 418 1,069 1,364
Federal funds sold and other 34 34 127 175
------ ------ ------ ------
2,674 2,359 7,562 6,837
INTEREST EXPENSE
Deposits 1,093 1,089 3,101 3,227
Federal Home Loan Bank advances 278 195 766 527
------ ------ ------ ------
1,371 1,284 3,867 3,754
------ ------ ------ ------
NET INTEREST INCOME 1,303 1,075 3,695 3,083
Provision for loan losses (75)
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,303 1,075 3,770 3,083
NONINTEREST INCOME
Loan and security gains 6 26 38 64
Gain on sale of other assets 64
Other noninterest income 126 112 328 296
------ ------ ------ ------
132 138 366 424
------ ------ ------ ------
NONINTEREST EXPENSE
Compensation and benefits 428 343 1,248 1,086
Occupancy and equipment 106 100 330 286
Other noninterest expense 348 319 1,009 945
------ ------ ------ ------
882 762 2,587 2,317
------ ------ ------ ------
INCOME BEFORE INCOME TAX 553 451 1,549 1,190
Income tax expense 195 154 538 405
------ ------ ------ ------
NET INCOME $ 358 $ 297 $1,011 $ 785
====== ====== ====== ======
Earnings per common share
Basic $ 0.37 $ 0.29 $ 1.04 $ 0.76
====== ====== ====== ======
Diluted $ 0.36 $ 0.28 $ 1.01 $ 0.73
====== ====== ====== ======
- -----------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4.
<PAGE> 5
<TABLE>
POTTERS FINANCIAL CORPORATION
(Unaudited)
(Dollars in thousands)
- ---------------------------------------------------------------------------------------
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $358 $297 $1,011 $785
Other comprehensive income (net of tax):
Change in unrealized loss on securities
available for sale arising during the period (54) 165 (406) 175
Transition adjustment from adoption
of SFAS No. 133 18 18
Reclassification adjustment for accumulated
(gains)/losses included in net income (1) (1) (1)
---- ---- ------ ----
Total other comprehensive income (54) 182 (407) 192
---- ---- ------ ----
COMPREHENSIVE INCOME $304 $479 $ 604 $977
==== ==== ====== ====
- ---------------------------------------------------------------------------------------
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
1999 1998
---- ----
<S> <C> <C> <C>
BALANCE - JANUARY 1 $11,157 $11,006
Net income for the nine months ended September 30 1,011 785
Issuance of common shares for the exercise
of stock options (880 in 1999 and 3,520 in 1998) 4 32
Recognition and retention plan shares earned 15
Tax benefit arising from recognition and
retention plan shares 34
Purchase of treasury shares (45,477 in 1999
and 39,282 in 1998) (693) (690)
Cash dividends declared ($.24 per share in 1999
and $.15 per share in 1998) (229) (164)
Change in unrealized loss on
securities available for sale (407) 192
------- -------
BALANCE - SEPTEMBER 30 $10,892 $11,161
======= =======
- ---------------------------------------------------------------------------------------
</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,
-----------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,011 $ 785
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 214 175
Provision for loan losses (75)
Net amortization of securities 74 33
Net realized gain on:
Sales of securities (1) (13)
Sales of loans (37) (51)
Sales of other assets (64)
Stock dividend on FHLB stock (57) (50)
Loans originated for sale (5,308) (3,459)
Proceeds from sales of loans held for sale 6,085 3,688
Compensation expense related to
recognition and retention plan 34
Net change in other assets and liabilities (574) (342)
-------- --------
Net cash from operating activities 1,366 702
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Maturities, repayments and calls 7,450 3,077
Purchases (8,018) (5,160)
Activity in held-to-maturity securities:
Maturities, repayments and calls 5,031
Purchase of FHLB stock (116) (65)
Loan originations and payments, net 2,552 5,720
Loan purchases (16,440) (16,245)
Proceeds from sale of other assets 100
Additions to property and equipment (519) (76)
-------- --------
Net cash from investing activities (15,091) (7,618)
-------- --------
- --------------------------------------------------------------------------------
</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,
-----------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 4,219 1,878
Proceeds from FHLB advances 11,700 17,300
Repayments of FHLB advances (7,797) (9,281)
Other financing activities (139) (215)
Repurchase of common stock (693) (690)
Proceeds from exercise of stock options 4 32
Cash dividends paid (229) (164)
------- -------
Net cash from financing activities 7,065 8,860
------- -------
Net change in cash and cash equivalents (6,660) 1,944
Cash and cash equivalents at beginning of period 11,867 3,816
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,207 $ 5,760
======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 3,823 $ 3,755
Income taxes 552 370
- --------------------------------------------------------------------------------
</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
The consolidated financial statements include Potters Financial Corporation
(PFC) and its wholly-owned subsidiary, Potters Bank, both headquartered in East
Liverpool, Ohio. 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, 1999, and its statements of income, comprehensive income and 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 1998 Annual Report.
A new accounting standard 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. All operations are considered
by management to be aggregated in one reportable operating segment of banking.
Comprehensive income is reported for all periods. Other comprehensive income
includes the change in unrealized gains and losses on securities available for
sale.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) No. 98-5, "Start-up Costs", which is effective for years
beginning after December 15, 1998. Under SOP 98-5, applicable start-up,
preoperating and organization costs, which had been capitalized under prior
accounting principles, are now to be expensed as part of current operations. SOP
98-5 requires all such costs previously capitalized as of December 31, 1998 be
written off as of January 1, 1999 as a cumulative effect of a change in
accounting principle. The adoption of this statement did not materially impact
the financial statements.
The Board of Directors declared a 10% stock dividend paid from treasury shares
in March 1999, reducing retained earnings by $1.3 million.
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
EPS includes the potential dilution resulting from the issuance of common shares
upon stock option exercises. All references to common shares, earnings and
dividends per share have been restated to reflect all stock dividends and stock
splits. Following is a summary of shares used in computing EPS:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding for basic EPS 967,367 1,023,110 968,374 1,037,296
Add: Dilutive effects of assumed
exercises of stock options 26,024 31,139 28,942 34,355
------- --------- ------- ---------
Average shares and dilutive potential
common shares 993,391 1,054,249 997,316 1,071,651
======= ========= ======= =========
</TABLE>
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 AVAILABLE FOR SALE
Securities available for sale were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
September 30,1999
- -----------------
U.S. government and
federal agencies $10,996 $10 $(445) $10,561
Other 512 18 530
Agency issued mortgage-
backed securities 12,665 17 (273) 12,409
------- --- ----- -------
24,173 45 (718) 23,500
Equity securities 97 (5) 92
------- --- ----- -------
$24,270 $45 $(723) $23,592
======= === ===== =======
December 31,1998
- ----------------
U.S. government and
federal agencies $ 5,999 $ 6 $ (8) $ 5,997
Other 629 26 (1) 654
Agency issued mortgage-
backed securities 17,072 51 (134) 16,989
------- --- ----- -------
23,700 83 (143) 23,640
Equity securities 75 (1) 74
------- --- ----- -------
$23,775 $83 $(144) $23,714
======= === ===== =======
</TABLE>
Contractual maturities of debt securities available for sale at September 30,
1999 were as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately. Expected maturities will
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---- ----------
(Dollars in thousands)
<S> <C> <C>
Due in one year or less $ 503 $ 502
Due after one year through five years 3,122 3,057
Due after five years through ten years 2,542 2,397
Due after ten years 5,341 5,135
Agency issued mortgage-
backed securities 12,665 12,409
------- -------
$24,173 $23,500
======= =======
</TABLE>
Available-for-sale securities totaling $3.0 million were called during 1999,
resulting in a gain of $1,000.
The carrying value of securities pledged as collateral for public funds totaled
$11.9 million at September 30, 1999.
- --------------------------------------------------------------------------------
9.
<PAGE> 10
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Real estate loans
One-to-four family residences $ 72,250 $76,543
Loans held for sale 57 797
Nonresidential property 12,950 8,350
Multifamily and other 1,835 2,010
-------- -------
87,092 87,700
-------- -------
Consumer and other loans
Home equity loans (1) 13,331 5,746
Purchased second mortgage loans 5,840
Secured, unsecured consumer
loans and lines of credit 2,283 2,102
Commercial business loans 466 654
Other 1,787 1,726
-------- -------
23,707 10,228
-------- -------
Total loan principal balances 110,799 97,928
Undisbursed loan funds (1,326) (1,167)
Premiums on purchased loans,
unearned interest and net
deferred loan (fees) costs 694 361
Allowance for loan losses (2,084) (2,211)
-------- -------
$108,083 $94,911
======== =======
</TABLE>
- -------------------
(1) September 30, 1999 total includes $6.9 million of first mortgage home equity
loans from various parts of the country purchased from a bank in Indiana.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Beginning balance $2,211 $2,143
Provision for loan losses (75)
Recoveries 22 111
Charge-offs (74) (37)
------ ------
Ending balance $2,084 $2,217
====== ======
</TABLE>
Nonaccrual and renegotiated loans totaled $94,000 and $224,000 at September 30,
1999 and December 31, 1998, respectively. Potters Bank is not committed to lend
additional funds to debtors whose loans have been modified. Impaired loans were
not material at any date or during any period presented.
- --------------------------------------------------------------------------------
10.
<PAGE> 11
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank (FHLB) advances were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Maturities February 1999 through September 2008,
fixed rate, from 4.66% to 6.50%, averaging 5.44% $17,247
Maturities December 1999 through September 2009,
fixed rate, from 5.10% to 6.50%, averaging 5.52% $21,150
------- -------
$21,150 $17,247
======= =======
</TABLE>
FHLB advances are payable at maturity, with prepayment penalties. At September
30, 1999, advances totaling $11.5 million were convertible fixed-rate advances
which, at the FHLB's option, can be converted to the London Interbank Offering
Rate on a quarterly basis after the first year. If the FHLB exercises its
option, the advances may be repaid in whole or in part on any of the quarterly
repricing dates without prepayment penalty. Advances are collateralized by all
shares of FHLB stock and by 100% of the qualified real estate loan portfolio.
As of September 30, 1999, scheduled maturities of advances were as follows:
<TABLE>
<CAPTION>
(Dollars in thousand)
<S> <C>
Due in one year or less $ 2,150
Due after one year through two years 3,500
Due after two years through three years 4,000
After five years 11,500
-------
$21,150
=======
</TABLE>
NOTE 5 - STOCK OPTIONS
A summary of activity relating to stock options during the periods listed was as
follows:
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1999 September 30, 1998
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding - January 1 51,907 $ 5.46 57,077 $5.60
Granted 30,000 13.06
Exercised (880) 4.55 (4,620) 6.95
------ ------
Outstanding - June 30 81,027 8.28 52,457 5.48
====== ======
</TABLE>
- --------------------------------------------------------------------------------
11.
<PAGE> 12
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Loan Commitments: Some financial instruments, such as loan commitments, credit
lines, letters of credit and overdraft protection are issued to meet customer
financing needs. These are agreements to provide credit or to support the credit
of others, as long as conditions established in the contract are met, and
usually have expiration dates. Commitments may expire without being used.
Off-balance sheet risk of credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies used to make commitments are also used for loans, including obtaining
collateral at exercise of the commitment.
Financial instruments with off-balance sheet risk at September 30, 1999 were as
follows:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate
---- ----
(Dollars in thousands)
<S> <C> <C>
Commitments to make loans
(at market rates) $394 $ 356
Unused lines of credit and
letters of credit 6,066
</TABLE>
Commitments to make loans are generally made for periods of 60 days or less. The
fixed-rate loan commitment has an interest rate of 7.50%, with a maturity date
of 15 years.
NOTE 7 - CONCENTRATIONS OF CREDIT RISK
Current local loan origination activities are with customers located within the
immediate lending area, which includes portions of Columbiana and Jefferson
Counties in northeastern Ohio and northern Hancock County in West Virginia. The
Boardman loan production office focuses on originating loans in Mahoning and
Trumbull counties in northeastern Ohio, while the Mentor loan production office
focuses its originations in Geauga and Lake counties in northern Ohio. At
September 30, 1999, the loan portfolio included approximately $26.8 million of
purchased residential real estate loans, $13.8 million located in northwestern
Ohio, $3.9 million in southwestern Ohio and $8.4 million located in Hilton Head,
South Carolina. The loan portfolio also included $6.9 million of first mortgage
home equity loans and $5.8 million of second mortgage loans from various parts
of the country, purchased from a bank in Indiana. Two nonconforming real estate
loan programs, which charge a slightly higher interest rate on single family
residential mortgage loans, are available to persons who are considered slightly
higher credit risks. Such loans totaled $6.9 million at September 30, 1999. Of
the $6.9 million, $684,000 were purchased real estate loans from southwestern
Ohio also reported above.
- --------------------------------------------------------------------------------
12.
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
In the following pages, management presents an analysis of the financial
condition of Potters Financial Corporation (PFC) and its wholly-owned
subsidiary, Potters Bank, as of September 30, 1999 and December 31, 1998, and
its results of operations for the three and nine months ended September 30, 1999
and 1998. 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 Bank's 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 - Statements regarding efforts to attract lower
costing deposit products and increase the number of relationships with
customers.
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
Bank.
Financial Condition - Statements regarding the strategic focus and
long-term goals of Potters Bank.
Management's statements regarding its plan for loan growth and its
belief that loan production offices will enable Potters Bank 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 Bank, the following
discussion essentially concerns the operations of Potters Bank.
13.
<PAGE> 14
RESULTS OF OPERATIONS
Net income of $358,000, or $.36 per diluted share, was recorded for the three
months ended September 30, 1999, compared to $297,000, or $.28 per diluted
share, for the same three months in 1998. The annualized return on average
shareholders' equity rose to 13.20% for the third quarter of 1999, from 10.77%
during the comparable period in 1998, while the annualized return on average
assets increased to 1.03% from .93%. The 28.6% increase in third quarter 1999
earnings per diluted share compared to the third quarter of 1998 was primarily
the result of a 21.2% increase in net interest income, offset by higher
noninterest expenses.
Net income for the nine months ended September 30, 1999 was $1.0 million, or
$1.01 per diluted share, compared to net income of $785,000, or $.73 per diluted
share, for the first nine months of 1998. The 38.4% increase in earnings per
diluted share was attributable to a 19.9% increase in net interest income and a
10.8% increase in other noninterest income, somewhat offset by lower gains on
sales of assets and an 11.7% increase in noninterest expense. Annualized returns
on average shareholders' equity of 12.13% and 9.21% were realized for the nine
months ended September 30, 1999 and 1998, while annualized returns on average
assets were .99% and .83%.
Nonrecurring events in each year produced approximately $50,000 of additional
income after tax. During the first nine months of 1998, $77,000 in nonrecurring
gains resulted from sales of securities and other assets, while during 1999, a
negative provision for loan losses of $75,000 was recorded to remove excess
allowances resulting primarily from the payoff of a $540,000 loan on a Colorado
property. Therefore, the improvement in net income during 1999 resulted
primarily from the basic operations of the bank.
Interest income increased $315,000, or 13.4%, during the third quarter of 1999,
primarily from a 20.2% increase in loan interest income. During the first nine
months of 1999, interest income increased $725,000, or 10.6%, as loan interest
income grew $1.1 million, offset by a $343,000 decline in securities and other
interest income. Loan purchases of higher-yielding home equity and second
mortgage loans, combined with higher commercial real estate loan originations
have contributed significantly to increased interest income during 1999.
Interest expense increased $87,000, or 6.8%, during the third quarter of 1999
over 1998 and increased $113,000, or 3.0%, for the first nine months of 1999
over 1998. Deposit interest was marginally higher during the third quarter of
1999 than in 1998 but actually declined $126,000 during the first nine months of
1999 despite an increase of $6.9 million in deposits from September 1998 to
September 1999. Interest on Federal Home Loan Bank (FHLB) advances increased
$83,000 during the third quarter of 1999 and $239,000 during the first nine
months of 1999 compared to 1998 because advances were used to purchase consumer
loans. Net interest income increased $228,000, or 21.2%, during the third
quarter of 1999 and $612,000, or 19.9%, on a year-to-date basis compared to the
same time periods in 1998.
The asset yield increased from 7.64% during the first nine months of 1998 to
7.75% during 1999, primarily from increased loan levels, including the purchase
of higher-yielding second mortgage loans, and a marginal increase in the yield
on loans, offset by reductions in the securities portfolio resulting from calls
and repayments and lower yields on securities. Deposit and FHLB advance balances
increased, while the cost of funds declined to 4.16% during 1999, compared to
4.42% for the first nine months of 1998. Although rates paid on certificates of
deposit increased in 1999 compared to 1998, rates paid on most basic deposits
declined, causing a 30 basis point decline in the cost of deposits. As a result,
the interest rate spread increased during 1999, to 3.59%, from 3.22% during the
first nine months of 1998. The strategic plan calls for continued efforts to
attract lower costing deposit products and increase the number of relationships
with customers, although there can be no assurances that such efforts will be
successful.
14.
<PAGE> 15
Other noninterest income, primarily fees from loans, deposits and other customer
services, increased $14,000, or 12.5%, over the third quarter of 1998, and
increased $32,000, or 10.8%, during 1999 compared to the first nine months of
1998. Loan and securities gains declined during 1999, by $20,000 during the
third quarter of 1999 and by $26,000 during the first nine months of 1999
compared to the same periods in 1998. Also included in 1998 noninterest income
was a gain of $64,000 on the sale of a local parking lot.
During 1999, Potters Bank introduced a new financial investment service at
OneSource Financial Center. Located at Potters Bank's downtown East Liverpool
Office, the OneSource Financial Center provides tax-deferred annuities,
tax-exempt investment trusts, mutual funds and life insurance products through
Compulife Agency, Inc. and Compulife Investor Services, Inc. The addition of
this service is part of a strategic initiative to provide customers with a wide
array of financial services and enhance the development of total customer
relationships. Income from the program consists of a nominal monthly fee to
Potters Bank until all expenses are recouped by Compulife, then a share in the
income generated from customer accounts.
Noninterest expense increased $120,000, or 15.7%, during the three months ended
September 30, 1999 over 1998 and increased $270,000, or 11.7%, for the first
nine months of 1999 compared to 1998. Salary and benefits increased $85,000
during the third quarter of 1999 and $162,000 during 1999 compared to 1998,
primarily from grants of shares from the recognition and retention plan,
staffing the Mentor loan production office and performance-based incentive
compensation, offset by higher deferral of loan origination costs. Occupancy and
equipment expenses increased $6,000 during the third quarter of 1999 compared to
1998, and increased $44,000, or 15.4%, during the first nine months of 1999
compared to 1998. Increases were caused primarily by rent from the Boardman and
Mentor loan production offices, office building depreciation from corporate
office renovation and improvements, increased utilities costs, depreciation of
new technology and maintenance of equipment and systems. Other noninterest
expenses increased $29,000 during the third quarter of 1999 over 1998, and
increased $64,000 during the first nine months of 1999 over 1998. Data
processing and communication costs increased from the telephone banking system
and the loan production offices. Increases also occurred in costs associated
with checking accounts and ATM/check card services consistent with planned
growth in these products and services. Included in 1999 noninterest expense was
$18,500 in costs associated with year 2000 (Y2K) readiness, described later in
this discussion. Offsetting these increases was a decrease in franchise tax and
continuing cost control.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses at September 30, 1999 was $2.1 million,
representing a decrease of $127,000, from $2.2 million at December 31, 1998. The
decrease was primarily due to the negative provision of $75,000 relating to a
Colorado loan payoff and $22,000 in recoveries, offset by charge-offs of
$74,000, primarily in consumer loans. During the first nine months of 1998,
recoveries of $111,000 resulted primarily from payments from the bankruptcy
Trustee relating to the Bennett Funding Group equipment lease credits, while
charge-offs totaled $37,000.
Nonperforming loans of $94,000 at September 30, 1999 represented a decrease of
$130,000 from nonperforming loans of $224,000 at December 31, 1998, and a
decrease of $128,000 from nonperforming loans of $222,000 at September 30, 1998.
The allowance for loan losses represented 2,217.0% of nonperforming loans at
September 30, 1999, compared to 987.1% at December 31, 1998 and 998.6% at
September 30, 1998. No loans were designated impaired at September 30, 1999,
1998 and December 31, 1998. Due to the current level of unallocated allowances,
no provision for loan losses is planned for the remainder of 1999, 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.
15.
<PAGE> 16
FINANCIAL CONDITION
PFC's assets grew to $142.1 million at September 30, 1999, from $134.5 million
at December 31, 1998, an increase of $7.7 million, or 5.7%. Funds from calls and
sales of securities and loan repayments, received late in 1998 and included in
year-end cash and cash equivalents, were deployed into loans and securities
during 1999. Therefore, cash and cash equivalents decreased significantly, by
$6.7 million from year-end 1998. These cash inflows, plus deposit inflows and
increased FHLB borrowing during 1999, funded internal loan originations and loan
purchases to continue planned loan growth.
Securities available for sale decreased $122,000, to $23.6 million at September
30, 1999, compared to $23.7 million at December 31, 1998. Securities totaling
$3.0 million were called during 1999, resulting in a gain of $1,000, and
repayments on mortgage-backed and other securities totaled $4.5 million.
Securities totaling $8.0 million were purchased during 1999, to replace called
securities and provide continuing liquidity for the bank. 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,
increased from $41,000 at year-end 1998 to $448,000 at September 30, 1999,
primarily due to increases in the market rate of interest during 1999, compared
to PFC's portfolio yields.
Net loans increased from $94.9 million at December 31, 1998, to $108.1 million
at September 30, 1999, an increase of $13.2 million, or 13.9%. Loan purchases
totaled $16.4 million during 1999, $7.4 million of which were first mortgage
home equity loans and $6.0 million of which were second mortgage loans, both
purchased from a bank in Indiana. Loans totaling $5.1 million were originated
for sale during 1999, and $5.8 million were sold, generating gains of $37,000.
Loans originated for sale are 15-year and 30-year fixed-rate real estate loans,
and are sold in accordance with interest rate risk management policies. The
Boardman loan production office continues to contribute to local loan
originations. Another loan production office opened in Mentor, Ohio, a suburb of
Cleveland, in May 1999. The Boardman and Mentor areas are growing, with new
residential construction and business expansion. The strategic plan calls for
utilization of loan production offices to become less reliant on loan purchases
to grow the portfolio, although there can be no assurance the demand for loans
will continue in surrounding local areas or the loan production offices will
successfully penetrate the Boardman or Mentor markets.
Two nonconforming real estate loan programs, which charge slightly higher
interest rates on single family residential real estate loans to persons who are
considered slightly higher credit risks, totaled $6.9 million at September 30,
1999, $684,000 of which were purchased loans. Such loans involve greater
underwriting and default risk than conforming real estate loans. The increased
risk is somewhat mitigated by charging a higher interest rate than on conforming
loans and adherence to regulatory limitations on the total of such loans and
regulatory reporting requirements to the Board of Directors. Such loans are also
specifically identified and addressed in management's ongoing review of the
allowance for loan losses, and a larger percentage of the allowance is allocated
to the nonconforming products than to conforming real estate loans.
Total deposits increased $4.2 million during 1999, to $108.9 million at
September 30, 1999. Inflows occurred primarily in certificates of deposit, the
Treasury Index savings account tied to the 90-day Treasury bill and checking
accounts. The Asset and Liability Management Committee continues to focus on
strategies for reduced interest rate risk and responsible deposit management.
Such strategies include setting competitive rates on selected certificates of
deposit with maturity dates exceeding one year and utilizing tiered interest
rates based on amount of deposit.
16.
<PAGE> 17
FHLB advances totaled $21.2 million at September 30, 1999, compared to $17.2
million at December 31, 1998. Advances have been used to partially finance loan
growth during 1999 and to meet liquidity needs.
Shareholders' equity decreased $265,000 during 1999 due primarily to the
repurchase of 45,477 common shares for a total of $693,000, an increase in the
unrealized loss on securities available for sale of $407,000 and the payment of
$229,000, or $.24 per share, in dividends, offset by $1.0 million in net income.
A 10% stock dividend was also paid from treasury shares during the first quarter
of 1999, which reduced retained earnings by $1.3 million.
LIQUIDITY AND CAPITAL RESOURCES
Normal, recurring sources of funds are primarily customer deposits, securities
available for sale, maturities, loan repayments and other funds provided by
operations. Potters Bank has the ability to borrow from the FHLB when needed as
a secondary source of liquidity.
The most significant components of cash flows from operating activities during
the first nine months of 1999 included sales of loans held for sale totaling
$5.8 million and originations of $5.1 million. Significant investing activities
during the same time period were loan purchases of $16.4 million, purchases of
available-for-sale securities of $8.0 million, offset by repayments, calls and
maturities of $7.5 million in securities available for sale and a net decrease
in loans of $2.6 million. Operating activities during the first nine months of
1998 included originations of loans held for sale of $3.5 million and $3.7
million of sales of such loans. Investing activities during that time frame
included loan purchases of $16.2 million and available-for-sale securities
purchases of $5.2 million, offset by repayments, calls and maturities of
securities of $8.1 million and a net decrease of $5.7 million in portfolio
loans.
Financing activities during the nine months ended September 30, 1999 included
proceeds from FHLB advances of $11.7 million, somewhat offset by repayments of
FHLB advances of $7.8 million, and deposit inflows of $4.2 million. In addition,
PFC purchased 45,477 treasury shares for a total of $693,000 during 1999.
Deposit inflows of $1.9 million occurred during the first nine months of 1998,
while other financing activities included FHLB advance proceeds of $17.3 million
and the purchase of 39,282 shares for $690,000.
Potters Bank's average regulatory liquidity ratio for September 1999 was 12.73%.
At September 30, 1999, Potters Bank had commitments to originate loans of
$750,000 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 Bank's
capital levels as of September 30, 1999 (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 $10,831 7.63% $10,831 7.63% $11,888 14.23%
Minimum capital
requirement 2,130 1.50 5,681 4.00* 6,682 8.00
------- ---- ------- ---- ------- -----
Regulatory capital -
excess $ 8,701 6.13% $ 5,150 3.63% $ 5,206 6.23%
======= ==== ======= ==== ======= =====
</TABLE>
- -----------------
*Savings associations that meet certain requirements may be permitted to
maintain minimum core capital of 3.00%.
17.
<PAGE> 18
YEAR 2000 READINESS DISCLOSURE
As the year 2000 approaches, many computer operations will be impacted by major
system failures or miscalculations if programs are not adapted to accommodate a
four-digit year. In the past, when computer storage capacity was limited and
expensive, many programs were written using two digits rather than four to
define a year. When the year 2000 arrives, computer programs that run
time-sensitive software may identify a date using "00" as the year 1900 rather
than the year 2000.
As with all financial institutions, operations depend almost entirely on
computer systems. The Board of Directors and management recognize the risks the
year 2000 poses to all businesses utilizing computer or embedded chip
technology. A "Y2K Committee" (the Committee) was formed to address the problems
associated with the year 2000. In 1997, the Committee conducted a comprehensive
review of all operations which will be impacted by Y2K. Because Potters Bank
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 operations, but contacted all vendors to
ensure that the issue was 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. Detailed testing of
each critical software program was completed by participating in proxy testing
through the vendor or performing on-site testing and independently verifying
results.
At the present time, all communications with both critical and noncritical
vendors report Y2K compliance or appropriate progress in their plans, and there
is no reason for management to believe that systems or software will fail to be
Y2K compliant. The Committee has completed its business resumption contingency
plan which includes courses of action that will be taken should a system or
vendor fail in the year 2000 despite its apparent readiness in 1999. All core
business functions were identified and alternative methods of accomplishing such
tasks developed. The business resumption contingency plan primarily calls for
the manual processing of transactions and the Committee has trained all
employees in these manual processes. A liquidity plan was developed and will
continue to be updated throughout 1999 to properly address cash needs at the end
of 1999 and the beginning of 2000. The Board of Directors receive monthly
progress updates on the Y2K project.
An assessment of the risk posed by all commercial borrowers with loans in excess
of $100,000 was performed and communication has been established through letters
and questionnaires and, in some cases, personal contact. Contingency plans for
borrowers not adequately addressing Y2K compliance may include declaring the
loan immediately due.
A customer awareness program was developed and implemented in order to keep
customers informed of progress in addressing Y2K issues. A customer newsletter
was mailed to all account holders in October 1998, in late February 1999 and
again in October 1999, and an FDIC pamphlet and brochures detailing Potters
Bank's progress are available in the branch locations and on Potters Bank's
website. Periodic statement stuffers, additional newsletters and lobby
brochures, website updates and shareholder communications will be used
throughout 1999 in addition to a Y2K customer information line on which Y2K
updates are provided and customers can leave a message for follow-up by
Committee members. The Committee developed a survey of cash needs which was sent
as a statement stuffer and will be maintained in the branches to assess customer
opinions on the need for additional cash towards the end of 1999 and to aid in
planning cash levels.
18.
<PAGE> 19
All of Potters Bank's computer systems have been upgraded or replaced to bring
them into Y2K compliance. Testing of all mission-critical systems has been
completed and was successful. Y2K-ready systems are now being used in all daily
operations. Throughout the remainder of 1999, the Committee will continue to
test the business resumption contingency plan and maintain contact with all
third party vendors to ensure that operations maintain their Y2K compliance.
The most significant cost incurred in the Y2K project by far has been the amount
of employee time spent on Y2K compliance instead of on the company's strategic
objectives. Excluding that employee time, expenses incurred since the beginning
of the Y2K project totaled approximately $39,000 as of September 30, 1999.
However, no assurance can be given at this time that significant expense will
not be incurred in future periods. In the event that replacement computer
systems, programs and equipment are required despite their Y2K compliant status,
or if outside vendors pass on expenses of becoming Y2K compliant, net income and
financial condition could be adversely affected.
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
Exhibit 3.1 Articles of Incorporation Incorporated by reference to the
of Potters Financial Corporation Form 8-A filed with the SEC on
March 4, 1996 (the "8-A").
Exhibit 3.2 Code of Regulations of Incorporated by reference to the
Potters Financial Corporation 8-A.
Exhibit 11 Statement re: computation of Included herewith.
per share earnings
Exhibit 27 Financial Data Schedule for Included herewith.
the quarter ended September 30, 1999
Exhibit 99 Safe Harbor Under the Private Included herewith.
Securities Litigation Reform Act of
1995
B. Reports on Form 8-K - none.
19.
<PAGE> 20
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 1, 1999 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
20.
<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,
------------- -------------
1999 1998(1) 1999 1998(1)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income for basic and diluted $358,000 $ 297,000 $1,011,000 $ 785,000
======== ========== ========== ==========
Average basic shares outstanding 967,367 1,023,110 968,374 1,037,296
Add: Effect of stock options 26,024 31,139 28,942 34,355
-------- ---------- ---------- ----------
Average diluted shares outstanding 993,391 1,054,249 997,316 1,071,651
======== ========== ========== ==========
Basic earnings per common share $ 0.37 $ 0.29 $ 1.04 $ 0.76
======== ========== ========== ==========
Diluted earnings per common share $ 0.36 $ 0.28 $ 1.04 $ 0.73
======== ========== ========== ==========
</TABLE>
(1) Restated to reflect the 10% stock dividend effective March 1999.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001010476
<NAME> POTTERS FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,804
<INT-BEARING-DEPOSITS> 400
<FED-FUNDS-SOLD> 3
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,592
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 110,167
<ALLOWANCE> 2,084
<TOTAL-ASSETS> 142,134
<DEPOSITS> 108,863
<SHORT-TERM> 2,150
<LIABILITIES-OTHER> 1,229
<LONG-TERM> 19,000
0
0
<COMMON> 5,422
<OTHER-SE> 5,470
<TOTAL-LIABILITIES-AND-EQUITY> 142,134
<INTEREST-LOAN> 6,366
<INTEREST-INVEST> 1,069
<INTEREST-OTHER> 127
<INTEREST-TOTAL> 7,562
<INTEREST-DEPOSIT> 3,101
<INTEREST-EXPENSE> 3,867
<INTEREST-INCOME-NET> 3,695
<LOAN-LOSSES> (75)
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 2,587
<INCOME-PRETAX> 1,549
<INCOME-PRE-EXTRAORDINARY> 1,549
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,011
<EPS-BASIC> 1.04
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 3.78
<LOANS-NON> 94
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 224
<ALLOWANCE-OPEN> 2,211
<CHARGE-OFFS> 74
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 2,084
<ALLOWANCE-DOMESTIC> 1,283
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 801
</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 quarter ended September 30, 1999 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
- ----------------------------------------------------
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. Construction loans may also be negatively
affected by such economic conditions, particularly loans made to developers who
do not
1
<PAGE> 2
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
- -----------
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
- ----------------------------------------------------------------------------
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.
In November 1999, Congress adopted legislation, expected to be signed into law,
making substantial changes to the laws governing financial services. The
legislation, which affects the types of activities in which financial
institutions are permitted to engage, is not expected to have a material effect
on the activities in which Potters Financial Corporation and Potters Bank
currently engage, although it may have a material effect on the activities in
which they may engage in the future and on competition among companies providing
various types of financial services.
2
