<PAGE> 1
Page 1 of 19 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 MARCH 31, 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 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 April 30, 1999
981,179 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
------- -------
<PAGE> 2
FORM 10-QSB
QUARTER ENDED MARCH 31, 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 13-18
Part II - Other Information
Item 1. Legal Proceedings 18
Item 2. Change in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2.
<PAGE> 3
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in thousands)
- ---------------------------------------------------------------------------------------
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 3,251 $ 5,612
Interest-bearing deposits 604 792
Federal funds sold 308 5,463
-------- --------
Cash and cash equivalents 4,163 11,867
Securities available for sale 24,286 23,714
Federal Home Loan Bank stock 1,014 991
Loans, net 101,453 94,911
Premises and equipment, net 1,961 1,646
Other assets 1,689 1,345
-------- --------
Total assets $134,566 $134,474
======== ========
LIABILITIES
Deposits $103,855 $104,644
Federal Home Loan Bank advances 18,531 17,247
Accrued expenses and other liabilities 1,511 1,426
-------- --------
Total liabilities 123,897 123,317
SHAREHOLDERS' EQUITY
Common shares, no par value
Authorized: 2,000,000 shares;
Issued: 1,116,528 shares in 1999 and
1,116,528 shares in 1998
Paid-in capital 5,404 5,218
Retained earnings 7,198 8,233
Accumulated other comprehensive income (134) (41)
Unearned compensation on
recognition and retention plan shares (74) (74)
Treasury stock, at cost: 134,972 shares
in 1999 and 90,092 in 1998 (1,725) (2,179)
-------- --------
Total shareholders' equity 10,669 11,157
-------- --------
Total liabilities and shareholders' equity $134,566 $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)
- --------------------------------------------------------------------------------
<CAPTION>
Three months ended
March 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $1,940 $1,679
Securities 350 491
Federal funds sold and other 68 53
------ ------
2,358 2,223
INTEREST EXPENSE
Deposits 975 1,073
Federal Home Loan Bank advances 221 162
------ ------
1,196 1,235
------ ------
NET INTEREST INCOME 1,162 988
Provision for loan losses (75)
------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,237 988
NONINTEREST INCOME
Loan and security gains 13 22
Other noninterest income 96 85
------ ------
109 107
------ ------
NONINTEREST EXPENSE
Compensation and benefits 397 375
Occupancy and equipment 102 90
FDIC deposit insurance premiums 16 16
Other noninterest expense 308 279
------ ------
823 760
------ ------
INCOME BEFORE INCOME TAX 523 335
Income tax expense 179 113
------ ------
NET INCOME $ 344 $ 222
====== ======
Earnings per common share
Basic $ 0.35 $ 0.22
====== ======
Diluted $ 0.34 $ 0.21
====== ======
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
4.
<PAGE> 5
POTTERS FINANCIAL CORPORATION
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
Three months ended
March 31,
--------------------
1999 1998
---- ----
<S> <C> <C>
NET INCOME $344 $222
Other comprehensive income (net of tax):
Change in unrealized loss on securities
available for sale arising during the period (92) 2
Reclassification adjustment for accumulated
(gains)/losses included in net income (1)
---- ----
Total other comprehensive income (93) 2
---- ----
COMPREHENSIVE INCOME $251 $224
==== ====
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
BALANCE - JANUARY 1 $11,157 $11,006
Net income for the three months ended March 31 344 222
Issuance of common shares for the exercise
of stock options (220 in 1999 and 3,520 in 1998) 1 24
Tax benefit arising from recognition and
retention plan shares 11
Purchase of treasury shares (41,000 in 1999
and 9,500 in 1998) (688) (184)
Cash dividends declared ($.07 per share in 1999
and $.045 per share in 1998) (63) (49)
Change in unrealized loss on
securities available for sale (93) 2
------- -------
BALANCE - MARCH 31 $10,669 $11,021
======= =======
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
5.
<PAGE> 6
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
- -----------------------------------------------------------------------------------
<CAPTION>
Three months ended
March 31,
------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 344 $ 222
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 74 53
Provision for loan losses (75)
Net amortization of securities 30 12
Net realized (gain) loss on:
Sales of securities (1) (11)
Sales of loans (12) (11)
Stock dividend on FHLB stock (17) (15)
Loans originated for sale (3,059) (661)
Proceeds from sales of loans held for sale 2,497 596
Compensation expense related to recognition
and retention plan 11
Net change in other assets and liabilities (95) (702)
------- -------
Net cash from operating activities (303) (517)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Maturities, repayments and calls 4,776 500
Purchases (5,518)
Activity in held-to-maturity securities:
Maturities, repayments and calls 2,274
Purchase of FHLB stock (6)
Loan originations and payments, net 2,785 3,523
Loan purchases (8,701) (2,000)
Additions to property and equipment (366) (16)
------- -------
Net cash from investing activities (7,030) 4,281
------- -------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
6.
<PAGE> 7
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
<CAPTION>
Three months ended
March 31,
-------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (789) 2,296
Proceeds from FHLB advances 5,900 2,500
Repayments of FHLB advances (4,616) (66)
Other financing activities (116) (93)
Repurchase of common stock (688) (184)
Proceeds from exercise of stock options 1 24
Cash dividends paid (63) (49)
------- -------
Net cash from financing activities (371) 4,428
------- -------
Net change in cash and cash equivalents (7,704) 8,192
Cash and cash equivalents at beginning of year 11,867 3,816
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,163 $12,008
======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 1,203 $ 1,236
Income taxes 242 195
</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
March 31, 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 banking 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. All
such costs previously capitalized as of December 31, 1998 should be written off
as of January 1, 1999 as a cumulative effect of a change in accounting
principle. The adoption of this statement does not materially impact the
financial statements.
The Board of Directors declared a 10% stock dividend that was 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>
Quarter ended March 31,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Weighted average common shares
outstanding for basic EPS 972,420 1,029,828
Add: Dilutive effects of assumed
exercises of stock options 32,188 36,071
--------- ---------
Average shares and dilutive potential
common shares 1,004,608 1,065,899
========= =========
</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>
March 31,1999
- -------------
U.S. government and
federal agencies $ 8,496 $ 2 $(128) $ 8,370
States and municipalities 166 21 187
Other 398 3 401
Agency issued mortgage-
backed 15,331 31 (113) 15,249
------- --- ----- -------
24,391 57 (241) 24,207
Equity securities 97 (18) 79
------- --- ----- -------
$24,488 $57 $(259) $24,286
======= === ===== =======
December 31,1998
- ----------------
U.S. government and
federal agencies $ 5,999 $ 6 $ (8) $ 5,997
States and municipalities 166 22 (1) 187
Other 463 4 467
Agency issued mortgage-
backed 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 March 31, 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 borrowers 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 $ 3 $ 3
Due after one year through five years 1,622 1,633
Due after five years through ten years 4,041 4,009
Due after ten years 3,394 3,313
Agency issued mortgage-
backed securities 15,331 15,249
------- -------
$24,391 $24,207
======= =======
</TABLE>
- --------------------------------------------------------------------------------
9.
<PAGE> 10
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES AVAILABLE FOR SALE (Continued)
Available-for-sale securities totaling $3.0 million were called during the first
three months of 1999, resulting in a gain of $1,000. The net unrealized holding
loss on securities available for sale increased by $93,000 during the first
quarter of 1999.
The carrying value of securities pledged as collateral for public funds amounted
to $14.3 million at March 31, 1999.
NOTE 3 - LOANS RECEIVABLE
Loans receivable were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Real estate loans
One-to-four family residences $ 74,484 $76,543
Loans held for sale 1,359 797
Nonresidential property 8,368 8,350
Multifamily and other 1,943 2,010
-------- -------
86,154 87,700
-------- -------
Consumer and other loans
Home equity loans (1) 13,192 5,746
Secured, unsecured consumer
loans and lines of credit 2,208 2,102
Commercial business loans 733 654
Other 1,765 1,726
-------- -------
17,898 10,228
-------- -------
Total loan principal balances 104,052 97,928
Undisbursed loan funds (928) (1,167)
Premiums on purchased loans,
unearned interest and net
deferred loan (fees) costs 473 361
Allowance for loan losses (2,144) (2,211)
-------- -------
$101,453 $94,911
======== =======
</TABLE>
- -------------------
(1) Includes $7.4 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 is as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Beginning balance $2,211 $2,143
Provision for loan losses (75)
Recoveries 13 56
Charge-offs (5) (7)
------ ------
Ending Balance $2,144 $2,192
====== ======
</TABLE>
- --------------------------------------------------------------------------------
10.
<PAGE> 11
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
Nonaccrual and renegotiated loans totaled $217,000 and $224,000 at March 31,
1999 and December 31, 1998, 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 were as follows:
<TABLE>
<CAPTION>
March 31, 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 September 1999 through September 2008,
fixed rate, from 4.66% to 6.50%, averaging 5.32% $18,531
------- -------
$18,531 $17,247
======= =======
</TABLE>
FHLB advances are payable at maturity, with prepayment penalties. At March 31,
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 March 31, 1999, scheduled maturities of advances for the next five years
were as follows:
<TABLE>
<CAPTION>
Maturities
----------
(Dollars in thousand)
<S> <C>
Due in one year or less $ 31
Due after one year through two years 5,000
Due after two years through three years 2,000
After five years 11,500
-------
$18,531
=======
</TABLE>
NOTE 5 - STOCK OPTIONS
A summary of activity relating to stock options during the periods listed was as
follows:
<TABLE>
<CAPTION>
Quarter ended Quarter ended
March 31, 1999 March 31, 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 (220) 4.55 (3,520) 6.74
------ ------
Outstanding - March 31 81,687 8.25 53,557 5.52
====== ======
</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 March 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate
---- ----
(Dollars in thousands)
<S> <C> <C>
Commitments to make loans
(at market rates) $940 $ 29
Unused lines of credit and
letters of credit 5,116
</TABLE>
Commitments to make loans are generally made for periods of 60 days or less. The
fixed-rate loan commitments have interest rates ranging from 6.50% to 9.75%,
with maturities ranging from 15 to 30 years.
NOTE 7 - CONCENTRATIONS OF CREDIT RISK
Most 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 March 31,
1999, the loan portfolio included approximately $31.9 million of purchased
residential real estate loans, $14.7 million located in northwestern Ohio, $4.5
million in southwestern Ohio and $11.2 million located in Hilton Head, South
Carolina. The loan portfolio also included $7.4 million of first mortgage home
equity loans from various parts of the country, purchased from a bank in
Indiana.
- --------------------------------------------------------------------------------
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 March 31, 1999 and December 31, 1998, and its
results of operations for the three months ended March 31, 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
PFC recorded net income of $344,000 for the three months ended March 31, 1999,
or $.34 per diluted share, compared to $222,000, or $.21 per diluted share, for
the first three months of 1998. The annualized return on average assets rose to
1.05% for the first quarter of 1999, from .71% during the comparable period in
1998, while the annualized return on average shareholders' equity increased to
12.91% from 7.93%.
One factor contributing to the increase in net income was a negative provision
for loan losses of $75,000, recorded during the first quarter of 1999, that
produced an after-tax improvement in earnings of $49,500, or $.05 per diluted
share. The negative provision was recorded to remove excess allowances resulting
primarily from the payoff of a $540,000 loan on a Colorado property. Excluding
the after-tax effect of the negative provision, first quarter 1999 earnings
improved $72,500, or 32.7%, over the first quarter of 1998.
Interest income increased $135,000, to $2.4 million, during the first three
months of 1999, primarily from a 15.5% increase in loan interest income.
Interest expense, however, decreased $39,000, or 3.2%, with lower deposit costs
offset by an increase in Federal Home Loan Bank advances. Certificate of deposit
balances declined from March 31, 1998 to March 31, 1999, while balances
increased in demand and NOW accounts and the treasury index savings account that
is tied to the 90-day Treasury bill. The asset yield remained flat despite the
low rate environment due primarily to increased loan levels, offset by
reductions in the securities portfolio. The result was an increase in the
interest rate spread during 1999, to 3.48%, from 3.08% during the first quarter
of 1998, due to consistent asset yields, offset by declining rates paid on
deposits and borrowings. 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.
Noninterest income increased marginally from the first quarter of 1998, but fees
from deposit products and ATM/check card services increased $13,000, or almost
24%, in 1999 over the first quarter of 1998. Gains on sales of securities
declined from $11,000 during the first quarter of 1998, to only $1,000 for the
comparable period in 1999.
Noninterest expense increased $63,000, to $823,000, for the first quarter of
1999, compared to $760,000 for the first quarter of 1998. Salary and benefits
increased $22,000, or 5.9%, in 1999, primarily from performance-based incentive
compensation, while occupancy and equipment expenses increased $12,000, or
13.3%, primarily from increased utilities costs and depreciation of new
technology. Other noninterest expenses increased $29,000, or 10.4%, primarily
from higher data processing and communication costs related to the new telephone
banking system and increased utilization of outsourced computer services.
Increases also occurred in check and ATM/check card processing costs consistent
with planned growth in these products and services. Included in 1999 noninterest
expense was $6,500 in costs associated with the year 2000 (Y2K) computer
problem, described later in this discussion.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses at March 31, 1999 was $2.1 million, representing a
decrease of $67,000, from $2.2 million at December 31, 1998. The decrease was
primarily due to the negative provision of $75,000 and recoveries of $13,000
relating to the Colorado loan payoff, offset by charge-offs of $5,000. During
the first three months of 1998, recoveries of $56,000 resulted primarily from
payments from the bankruptcy Trustee relating to the Bennett Funding Group
equipment lease credits, while charge-offs totaled $7,000.
- --------------------------------------------------------------------------------
14.
<PAGE> 15
Nonperforming loans of $217,000 at March 31, 1999 represented a decrease of
$7,000 from nonperforming loans of $224,000 at December 31, 1998, but an
increase of $57,000 from nonperforming loans of $160,000 at March 31, 1998. The
allowance for loan losses represented 986% of nonperforming loans at March 31,
1999, compared to 987% at December 31, 1998 and 1,369% at March 31, 1998. No
loans were designated impaired at March 31, 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.
FINANCIAL CONDITION
PFC's assets grew slightly, to $134.6 million at March 31, 1999 from $134.5
million at December 31, 1998. Funds from calls and sales of securities and loan
repayments late in 1998 were deployed into loans and securities during the first
quarter of 1999. Therefore, cash and cash equivalents decreased significantly,
by $7.7 million from year-end 1998. The current interest rate environment and
competition continues to produce significant repayments of both loans and
securities. These cash inflows during the first quarter of 1999 funded local
lending and loan purchases to continue planned loan growth.
Securities available for sale increased $570,000, to $24.3 million at March 31,
1999, compared to $23.7 million at December 31, 1998. Securities totaling $3.0
million were called during the first quarter of 1999, resulting in a gain of
$1,000, and repayments on mortgage-backed securities totaled $1.7 million.
Securities totaling $5.5 million were purchased during the first quarter of
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 $134,000 at
March 31, 1999.
Net loans increased from $94.9 million at December 31, 1998, to $101.5 million
at March 31, 1999, an increase of $6.6 million, or 6.9%. Loan purchases totaling
$8.7 million were made during 1999, $7.4 million of which were first mortgage
home equity loans purchased from a bank in Indiana. Loans totaling $3.1 million
were originated for sale during the first quarter of 1999, and $2.5 million were
sold, generating gains of $12,000. The Boardman loan production office continues
to contribute significantly to local loan originations. Another loan production
office will open 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 that the demand for loans will continue in surrounding
local areas or that the loan production offices will successfully penetrate the
Boardman or Mentor markets.
Total deposits decreased $789,000 during the first quarter of 1999, to $103.9
million at March 31, 1999. Outflows occurred primarily in demand and NOW
accounts, offset by increases in the Treasury Index savings account and in
certificates of deposit. 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.
FHLB advances totaled $18.5 million at March 31, 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.
- --------------------------------------------------------------------------------
15.
<PAGE> 16
Shareholders' equity decreased $488,000 during the first three months of 1999
due primarily to the repurchase of 41,000 common shares for a total of $688,000
and the payment of $63,000, or .064 per share, in dividends. 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 three months of 1999 included sales of loans held for sale totaling
$2.5 million and originations of $3.1 million. Significant investing activities
during the same time period were loan purchases of $8.7 million, purchases of
available-for-sale securities of $5.5 million, offset by repayments, calls and
maturities of $4.8 million in securities available for sale and a net decrease
in loans of $2.8 million. Investing activities during the first three months of
1998 included loan purchases of $2.0 million, offset by repayments, calls and
maturities of securities held to maturity of $2.3 million and a net decrease of
$3.5 million in portfolio loans.
Financing activities during the three months ended March 31, 1999 included
proceeds from FHLB advances of $5.9 million, somewhat offset by repayments of
FHLB advances of $4.6 million and deposit outflows of $789,000. In addition, PFC
purchased 41,000 treasury shares for a total of $688,000 during the first three
months of 1999. Deposit inflows of $2.3 million occurred during the first
quarter of 1998, while FHLB advance activity included proceeds of $2.5 million.
Potters Bank's average regulatory liquidity ratio for March 1999 was 12.89%. At
March 31, 1999, Potters Bank had commitments to originate loans of $969,000 and
unused lines of credit totaling $5.1 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 March 31, 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 $10,374 7.72% $10,374 7.72% $11,287 15.72%
Minimum capital
requirement 2,015 1.50 5,372 4.00* 5,745 8.00
------- ---- ------- ---- ------- -----
Regulatory capital -
excess $ 8,359 6.22% $ 5,002 3.72% $ 5,542 7.72%
======= ==== ======= ==== ======= =====
</TABLE>
- -------------------
*Savings associations that meet certain requirements may be permitted to
maintain minimum core capital of 3.00%.
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
16.
<PAGE> 17
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 also 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 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. Detailed
testing of each critical software program has been completed by participating in
proxy testing through the vendor or performing on-site testing and independently
verifying results.
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 Y2K compliant. The contingency plan provides for contracting with
alternative identified vendors if existing vendors do not meet their established
deadlines for completion of tasks with respect to making their operations Y2K
compliant. At the present time, all communications with both critical and
noncritical vendors report appropriate progress, and there is no reason for
management to believe that systems or software will fail to be Y2K compliant.
The Committee is nearing completion of its business resumption contingency plan
that 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. The Committee is currently training
appropriate employees in these manual processes. Prior to June 30, 1999, plans
are to complete and test the business resumption contingency plan and obtain
board of director approval. A liquidity plan was also developed and will be
revised throughout 1999 to properly address cash needs at the end of 1999 and
the beginning of 2000.
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 has been 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 and again in late February
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 customers can leave a message for follow-up
by Committee members.
The overall plan, testing plan, contingency plan, operations impact analysis,
commercial borrower risk analysis and customer awareness plans were approved by
the Board of Directors, who receive detailed quarterly progress updates.
Beginning in the fourth quarter of 1998, the Board of Directors began to receive
progress reports on a monthly basis.
17.
<PAGE> 18
Excluding a considerable amount of employee time, expenses incurred to date
relating to Y2K totaled approximately $31,000 as of March 31, 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, or substantial expense must be incurred to
make current systems, programs and equipment Y2K compliant, or outside vendors
pass on expenses of becoming Y2K compliant, net income and financial condition
could be adversely affected. Moreover, to the extent employees must spend time
ensuring that vendors are adequately preparing for Y2K, those employees will not
be focusing all of their time and energies toward achieving other goals set by
management.
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 Financial Data Schedule for the Included herewith.
quarter ended March 31, 1999
Exhibit 99 Safe Harbor Under the Private Included herewith.
Securities Litigation Reform Act of 1995
</TABLE>
B. Reports on Form 8-K - none.
18.
<PAGE> 19
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: May 4, 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
19.
<PAGE> 1
POTTERS FINANCIAL CORPORATION
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Quarter ended
March 31,
-------------
1999 1998 (1)
---- ----
<S> <C> <C>
Net income for basic and diluted $ 344,000 $ 222,000
========== ==========
Average basic shares outstanding 972,420 1,029,828
Add: Effect of stock options 32,188 36,071
---------- ----------
Average diluted shares outstanding 1,004,608 1,065,899
========== ==========
Basic earnings per common share $ 0.35 $ 0.22
========== ==========
Diluted earnings per common share $ 0.34 $ 0.21
========== ==========
</TABLE>
(1) Restated to reflect the 10% stock dividend effective March 1999.
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<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> MAR-31-1999
<CASH> 3,251
<INT-BEARING-DEPOSITS> 604
<FED-FUNDS-SOLD> 308
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,286
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 103,597
<ALLOWANCE> 2,144
<TOTAL-ASSETS> 134,566
<DEPOSITS> 103,855
<SHORT-TERM> 31
<LIABILITIES-OTHER> 1,511
<LONG-TERM> 18,500
0
0
<COMMON> 5,404
<OTHER-SE> 5,265
<TOTAL-LIABILITIES-AND-EQUITY> 134,566
<INTEREST-LOAN> 1,940
<INTEREST-INVEST> 350
<INTEREST-OTHER> 68
<INTEREST-TOTAL> 2,358
<INTEREST-DEPOSIT> 975
<INTEREST-EXPENSE> 1,196
<INTEREST-INCOME-NET> 1,162
<LOAN-LOSSES> (75)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 823
<INCOME-PRETAX> 523
<INCOME-PRE-EXTRAORDINARY> 523
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 344
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 3.67
<LOANS-NON> 217
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 227
<ALLOWANCE-OPEN> 2,211
<CHARGE-OFFS> 5
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 2,144
<ALLOWANCE-DOMESTIC> 2,144
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,147
</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 March 31, 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.
1
<PAGE> 2
Construction loans may also be negatively affected by such economic conditions,
particularly loans made to developers who do not have a buyer for a property
before the loan is made. The risk of default on consumer loans increases during
periods of recession, high unemployment and other adverse economic conditions.
When consumers have trouble paying their bills, they are more likely to pay
mortgage loans than consumer loans, and the collateral securing such loans, if
any, may decrease in value more rapidly than the outstanding balance of the
loan.
Competition
- -----------
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.
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
2
<PAGE> 3
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.
3
