<PAGE> 1
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, 2000
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT FOR THE TRANSITION PERIOD FROM ___________ TO ___________
Commission file number: 0-27980
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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
--------------
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 28, 2000
955,793 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
------- -------
<PAGE> 2
FORM 10-QSB
QUARTER ENDED MARCH 31, 2000
Part I - Financial Information
Item 1. Financial Statements
Interim financial information required by Regulation 210.10-01 of
Regulation S-X is included in this Form 10-QSB as referenced below:
Page
Number (s)
----------
Consolidated Balance Sheets 3
Consolidated Statements of 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
Independent Accountants' Report 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-18
Part II - Other Information
Item 1. Legal Proceedings 18
Item 2. Change in Securities 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
2.
<PAGE> 3
<TABLE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------------
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 5,192 $ 6,441
Interest-bearing deposits 677 801
Federal funds sold 1,046 38
-------- --------
Cash and cash equivalents 6,915 7,280
Securities available for sale 22,069 22,751
Federal Home Loan Bank stock 1,206 1,184
Loans, net 117,010 108,360
Premises and equipment, net 1,961 1,960
Other assets 2,156 2,201
-------- --------
Total assets $151,317 $143,736
======== ========
LIABILITIES
Deposits $115,892 $110,335
Federal Home Loan Bank advances 23,000 21,300
Accrued expenses and other liabilities 1,276 1,081
-------- --------
Total liabilities 140,168 132,716
SHAREHOLDERS' EQUITY
Common shares, no par value
Authorized: 2,000,000 shares;
Issued: 1,116,528 shares in 2000 and 1999
Paid-in capital 5,436 5,429
Retained earnings 8,192 7,945
Accumulated other comprehensive income (493) (540)
Unearned compensation on
recognition and retention plan shares (60) (60)
Treasury stock, at cost: 154,735 shares
in 2000 and 137,385 in 1999 (1,926) (1,754)
-------- --------
Total shareholders' equity 11,149 11,020
-------- --------
Total liabilities and shareholders' equity $151,317 $143,736
======== ========
- --------------------------------------------------------------------------------------
</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,
------------------------
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $2,307 $1,940
Securities 378 350
Federal funds sold and other 18 68
------ ------
2,703 2,358
INTEREST EXPENSE
Deposits 1,153 975
Federal Home Loan Bank advances 319 221
------ ------
1,472 1,196
------ ------
NET INTEREST INCOME 1,231 1,162
Provision for loan losses (75)
------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,231 1,237
NONINTEREST INCOME
Loan and security gains 13
Other noninterest income 162 96
------ ------
162 109
------ ------
NONINTEREST EXPENSE
Compensation and benefits 424 397
Occupancy and equipment 121 102
Other noninterest expense 325 324
------ ------
870 823
------ ------
INCOME BEFORE INCOME TAX 523 523
Income tax expense 178 179
------ ------
NET INCOME $ 345 $ 344
====== ======
Earnings per common share
Basic $ 0.36 $ 0.35
====== ======
Diluted $ 0.35 $ 0.34
====== ======
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4.
<PAGE> 5
<TABLE>
POTTERS FINANCIAL CORPORATION
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
Three months ended
March 31,
------------------
2000 1999
---- ----
<S> <C> <C>
NET INCOME $345 $344
Other comprehensive income (net of tax):
Change in unrealized loss on securities
available for sale arising during the period 47 (92)
Reclassification adjustment for accumulated
(gains)/losses included in net income (1)
---- ----
Total other comprehensive income 47 (93)
---- ----
COMPREHENSIVE INCOME $392 $251
==== ====
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
BALANCE - JANUARY 1 $11,020 $11,157
Net income for the three months ended March 31 345 344
Issuance of common shares for the exercise
of stock options (200 in 1999) 1
Tax benefit arising from recognition and
retention plan shares 7 11
Purchase of treasury shares (17,350 in 2000
and 41,000 in 1999) (172) (688)
Cash dividends declared ($.10 per share in 2000
and $.07 per share in 1999) (98) (63)
Change in unrealized loss on
securities available for sale 47 (93)
------- -------
BALANCE - MARCH 31 $11,149 $10,669
======= =======
</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,
-----------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 345 $ 344
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 79 74
Provision for loan losses (75)
Net amortization of securities 11 30
Net realized gain on:
Sales of securities (1)
Sales of loans (12)
Sales of foreclosed real estate
and repossessed assets (1)
Stock dividend on FHLB stock (22) (17)
Loans originated for sale (3,059)
Proceeds from sales of loans held for sale 55 2,497
Compensation expense related to
recognition and retention plan 7 11
Net change in other assets and liabilities 367 (95)
------- -------
Net cash from operating activities 841 (303)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Maturities, repayments and calls 742 4,776
Purchases (5,518)
Purchase of FHLB stock (6)
Loan originations and payments, net (3,540) 2,785
Loan purchases (5,221) (8,701)
Proceeds from sale of foreclosed real estate
and repossessed assets 2
Additions to property and equipment (60) (366)
------- -------
Net cash from investing activities (8,077) (7,030)
------- -------
- ----------------------------------------------------------------------------------
</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,
------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 5,558 (789)
Proceeds from FHLB advances 3,400 5,900
Repayments of FHLB advances (1,700) (4,616)
Other financing activities (117) (116)
Repurchase of common stock (172) (688)
Proceeds from exercise of stock options 1
Cash dividends paid (98) (63)
------- -------
Net cash from financing activities 6,871 (371)
------- -------
Net change in cash and cash equivalents (365) (7,704)
Cash and cash equivalents at beginning of period 7,280 11,867
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,915 $ 4,163
======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 1,408 $ 1,203
Income taxes 28 242
- ---------------------------------------------------------------------------------
</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, 2000, 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 1999 Annual Report.
All banking operations are considered by management to be aggregated in one
reportable operating segment.
Comprehensive income is reported for all periods. Other comprehensive income
includes the change in unrealized gains and losses on securities available for
sale.
A 10% stock dividend was paid from treasury shares in March 1999, which reduced
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,
-----------------------
<S> <C> <C>
2000 1999
---- ----
Weighted average common shares
outstanding for basic EPS 957,775 972,420
Add: Dilutive effects of assumed
exercises of stock options 20,448 32,188
------- ---------
Average shares and dilutive potential
common shares 978,223 1,004,608
======= =========
</TABLE>
As of March 31, 2000 and March 31, 1999, there were 31,100 and 1,100
antidilutive stock options. Antidilutive stock options are those in which the
exercise price of the option exceeds the fair market value of the underlying
stock.
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 31,2000
- -------------
U.S. government and
federal agencies $10,496 $ $(488) $10,008
Other 473 15 488
Agency issued mortgage-
backed securities 11,828 33 (308) 11,553
------- --- ----- -------
22,797 48 (796) 22,049
Equity securities 22 (2) 20
------- --- ----- -------
$22,819 $48 $(798) $22,069
======= === ===== =======
December 31,1999
- ----------------
U.S. government and
federal agencies $10,496 $ $(578) $ 9,918
Other 500 15 515
Agency issued mortgage-
backed securities 12,551 48 (302) 12,297
------- --- ----- -------
23,547 63 (880) 22,730
Equity securities 22 (1) 21
------- --- ----- -------
$23,569 $63 $(881) $22,751
======= === ===== =======
</TABLE>
Contractual maturities of debt securities available for sale at March 31, 2000
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 $ 3 $ 3
Due after one year through five years 3,153 3,050
Due after five years through ten years 2,503 2,390
Due after ten years 5,310 5,053
Agency issued mortgage-
backed securities 11,828 11,553
------- -------
$22,797 $22,049
======= =======
</TABLE>
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 carrying value of securities pledged as collateral for public funds totaled
$10.6 million at March 31, 2000.
- --------------------------------------------------------------------------------
9.
<PAGE> 10
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Real estate loans
One-to-four family residences $ 76,969 $ 70,732
Loans held for sale 55
Nonresidential property 16,834 14,257
Multifamily and other 2,928 3,055
-------- --------
96,731 88,099
-------- --------
Consumer and other loans
Home equity loans (1) 13,279 13,301
Purchased second mortgage loans 5,532 5,715
Secured, unsecured consumer
loans and lines of credit 2,205 2,309
Commercial business loans 766 472
Other 1,925 1,716
-------- --------
23,707 23,513
-------- --------
Total loan principal balances 120,438 111,612
Undisbursed loan funds (2,069) (1,848)
Premiums on purchased loans,
unearned interest and net
deferred loan (fees) costs 656 633
Allowance for loan losses (2,015) (2,037)
-------- --------
$117,010 $108,360
======== ========
</TABLE>
- -------------
(1) March 31, 2000 and December 31, 1999 totals include $6.8 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>
Three months ended
March 31,
----------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Beginning balance $2,037 $2,211
Provision for loan losses (75)
Recoveries 15 13
Charge-offs (37) (5)
------ ------
Ending balance $2,015 $2,144
====== ======
</TABLE>
Nonaccrual and renegotiated loans totaled $423,000 and $316,000 at March 31,
2000 and December 31, 1999. 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>
March 31, December 31,
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Maturities March 2000 through December 2009, primarily
fixed rate, from 4.75% to 6.50%, averaging 5.43% $21,300
Maturities June 2000 through March 2010,
fixed rate, from 5.32% to 6.50%, averaging 5.89% $23,000
------- -------
$23,000 $21,300
======= =======
</TABLE>
FHLB advances are payable at maturity, or prior to maturity with prepayment
penalties. At March 31, 2000, advances totaling $14.0 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, 2000, scheduled maturities of advances were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Due in one year or less $ 5,000
Due after one year through two years 2,000
Due after two years through three years 2,000
After five years 14,000
-------
$23,000
=======
</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, 2000 March 31, 1999
-------------- --------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding - January 1 81,027 $ 8.28 51,907 $ 5.46
Granted 30,000 13.06
Exercised (220) 4.55
Expired unexercised (1,500) 13.06
------ ------
Outstanding - March 31 79,527 8.19 81,687 8.25
====== ======
</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, 2000 were as
follows:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate
---- ----
(Dollars in thousands)
<S> <C> <C>
Commitments to make loans
(at market rates) $374 $1,640
Unused lines of credit and
letters of credit 71 5,749
</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 7.5%, with a maturity date of
15 years. Interest rates on variable-rate loan commitments have interest rates
ranging from 7.625% to 13.00%.
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 and Beaver and Allegheny Counties in
northwestern Pennsylvania, while the Mentor loan production office focuses its
originations in Geauga and Lake Counties in northern Ohio. At March 31, 2000,
the loan portfolio included approximately $22.6 million of purchased one-to-four
family real estate loans, $12.5 million on properties located in northwestern
Ohio, $3.2 million on properties in southwestern Ohio and $6.9 million on
properties in Hilton Head, South Carolina. As of March 31, 2000, multifamily and
nonresidential real estate loan purchases totaling $ 1.1 million were secured by
properties located in northwest Ohio and $1.9 million in southwest Ohio. The
loan portfolio also included $4.7 million of real estate loans, $6.8 million of
first mortgage home equity loans and $5.5 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 $7.2
million at March 31, 2000. Of the $7.2 million, $678,000 were purchased real
estate loans from southwest Ohio also reported above.
- --------------------------------------------------------------------------------
12.
<PAGE> 13
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
Potters Financial Corporation
East Liverpool, Ohio
We have reviewed the consolidated balance sheet of Potters Financial Corporation
as of March 31, 2000, and the related consolidated statements of income,
comprehensive income, changes in shareholders' equity and cash flows for the
quarters ended March 31, 2000 and 1999. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the AICPA. A
review of interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Columbus, Ohio
May 3, 2000
13.
<PAGE> 14
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, 2000 and December 31, 1999, and its
results of operations for the three months ended March 31, 2000 and 1999. 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 rising interest rates and
increasing deposit and borrowing costs, possibly negatively affecting
the interest rate spread and future earnings.
Allowance and Provision for Loan Losses - Management's statements
regarding the amount and adequacy of the allowance for loan losses and
its belief that no additional provisions will be required in 2000.
Financial Condition - Statements regarding the strategic focus and
long-term goals of Potters Bank.
Statements regarding the ability of loan production offices to reduce
reliance on purchased loans to grow the loan portfolio.
Year 2000 - Management's expectation that any subsequent Year 2000
issues will be resolved in a satisfactory manner and will not pose
significant operational problems.
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.
14.
<PAGE> 15
RESULTS OF OPERATIONS
Net income of $345,000, or $.35 per diluted share, was recorded for the first
three months of 2000, $1,000 above the $344,000, or $.34 per diluted share,
recorded during first quarter of 1999. However, nonrecurring events in both
years positively affected net income. Included in noninterest income for 2000
was $29,000 received as a one-time payment from a shareholder who was required
by the Office of Thrift Supervision (OTS) to pay such amount to PFC as a
consequence of signing a consent order relating to OTS's control regulations.
The payment added $19,000, or $.02 per share, to after-tax net income. A
negative loan loss provision of $75,000 recorded during the first quarter of
1999 had a $.05 per diluted share after-tax positive effect on 1999 earnings.
Excluding that nonrecurring income from both years, net income increased
$31,000, or 10.5%, while diluted earnings per share increased $.04, or 13.8%.
Returns on average shareholders' equity and average assets for the first quarter
of 2000 were 12.48% and .94%, versus 12.91% and 1.05% for the first quarter of
1999. On a core earnings basis, the return on average shareholders' equity
increased during the first quarter of 2000 to 11.79% from 11.05% during the
first quarter of 1999. The return on average assets from core operations was
.89% for the first quarter of 2000, compared to .90% for the first quarter of
1999.
Interest income during the first quarter of 2000 increased $345,000, or 14.6%,
from the first quarter of 1999, primarily from higher loan levels. Gross loan
balances increased 15.7% during the last year, from $104.1 million at March 31,
1999, to $120.4 million at March 31, 2000, with real estate loans growing by
$10.6 million and consumer and other loans growing by $5.8 million. Interest
expense, however, increased $276,000, or 23.1%, during the first quarter of 2000
compared to 1999, from higher deposit and borrowing balances and higher rates
paid on those instruments. Net interest income of $1.2 million for the first
quarter of 2000 increased $69,000, or 5.9%, from that of the first quarter of
1999. Rising interest rates negatively affected the cost of funds and prompted a
narrowing of the interest rate spread, which declined from 3.48% during the
first quarter of last year, to 3.33% for the first quarter of 2000. The asset
yield increased, from 7.55% through March 31, 1999, to 7.75% through March 2000,
but the cost of funds rose to 4.42% during 2000 compared to 4.07% during the
first quarter of 1999. Continued increases in interest rates could put further
pressure on the interest rate spread and negatively affect future earnings.
Excluding nonrecurring PFC miscellaneous income, other noninterest income
increased $37,000, or 38.5%, over the first quarter of 1999, due primarily to
fees from loans, deposits and other customer services and rental income. No loan
and securities gains were recorded during 2000, compared to $13,000 during the
first quarter of 1999.
Noninterest expense increased $47,000, or 5.7%, during the first quarter of
2000, compared to the first quarter of 1999. Salary and benefits increased
$27,000 during 2000, primarily from staffing the Mentor loan production office
and an increased use of performance-based compensation. Occupancy and equipment
expenses increased $19,000 during the first quarter of 2000, caused primarily by
rent expense from Mentor and off-site ATM locations, increased office building
depreciation from corporate office renovation and improvements, depreciation of
new technology and maintenance of equipment and systems. Other noninterest
expense increased $1,000 during the first quarter of 2000 compared to the first
quarter of 1999, with Mentor office expenses, increased advertising and
ATM/Check Card costs offset by lower Federal Deposit Insurance Corporation
deposit insurance premiums, a decrease in regulatory supervisory fees and stable
consulting and professional fees.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses at March 31, 2000 was $2.0 million, a decrease of
$22,000 from December 31, 1999. The decrease during 2000 was due to $37,000 in
charge-offs, primarily
15.
<PAGE> 16
consumer loans, somewhat offset by $15,000 in recoveries. During the first three
months of 1999, a negative loan loss provision of $75,000 and charge-offs of
$5,000 were offset by $13,000 in recoveries.
Nonperforming loans of $423,000 at March 31, 2000 represented an increase of
$107,000 from nonperforming loans of $316,000 at December 31, 1999, and an
increase of $206,000 from nonperforming loans of $217,000 at March 31, 1999. At
March 31, 2000, nonperforming loans represented .28% of total assets. The
allowance for loan losses represented 476.4% of nonperforming loans at March 31,
2000, compared to 644.6% at December 31, 1999 and 986.0% at March 31, 1999. No
loans were designated impaired at March 31, 2000 and December 31, 1999. Due to
the current level of unallocated allowances, no provision for loan losses is
planned for the remainder of 2000, 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 to $151.3 million at March 31, 2000, from $143.7 million at
December 31, 1999, an increase of $7.6 million, or 5.3%.
Securities available for sale decreased $682,000, to $22.1 million at March 31,
2000, compared to $22.8 million at December 31, 1999. No purchases of securities
were made in 2000, but repayments totaled $742,000 for the quarter. Securities
are carried at fair value, with resulting unrealized gains or losses added to or
deducted from shareholders' equity, net of tax. The unrealized loss on
securities available for sale, net of tax, decreased from $540,000 at year-end
1999 to $493,000 at March 31, 2000, primarily from rising prices on
adjustable-rate mortgage-backed securities and stepped-rate notes from the
Federal Home Loan Bank (FHLB).
Net loans increased from $108.4 million at December 31, 1999, to $117.0 million
at March 31, 2000, an increase of $8.7 million, or 8.0%. Loan purchases totaled
$5.2 million during 2000 and loan originations caused a $3.5 million net
increase in loans. Rising interest rates have resulted in a shift in customer
demand from fixed-rate to variable-rate real estate loans, which Potters Bank
retains in its portfolio. Therefore, no loans were originated for sale during
2000. Real estate loans increased $8.6 million, or 9.8%, during 2000, with $2.5
million growth in multifamily and commercial real estate loans, and $6.2
million, or 8.7%, in one-to-four family real estate loans. The Mentor loan
production office was closed as of April 28, 2000. Due to the rising interest
rate environment, loan volume has not been sufficient to offset the expenses of
continuing the loan production office. 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 that the Boardman loan production office will be
successful.
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 $7.2 million at March 31, 2000,
$877,000 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 $5.6 million, or 5.0%, during 2000, to $115.9 million
at March 31,2000. Inflows occurred primarily in certificates of deposit, the
Treasury Index savings account tied to a
16.
<PAGE> 17
90-day Treasury security 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.
FHLB advances totaled $23.0 million at March 31,2000, compared to $21.3 million
at December 31, 1999. Advances have been used to partially finance a loan
purchase during 2000 and to meet liquidity needs.
Shareholders' equity increased $129,000 during 2000 due primarily to net income
of $345,000 and a $47,000 decrease in the unrealized loss on securities
available for sale, offset by the repurchase of 17,350 common shares for a total
of $172,000 and the payment of $98,000, or $.10 per share, in dividends.
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 investing activities during
the first quarter of 2000 were loan purchases of $5.2 million and a net increase
of $3.5 million in loans, offset by repayments of $742,000 in securities
available for sale. Operating activities during the first three months of 1999
included originations of loans held for sale of $3.1 million and $2.5 million in
sales of such loans. Investing activities during that time frame included loan
purchases of $8.7 million and available-for-sale securities purchases of $5.5
million, offset by repayments, calls and maturities of securities of $4.8
million and a net decrease of $2.8 million in portfolio loans.
Financing activities during the three months ended March 31, 2000 included
deposit inflows of $5.6 million and proceeds from FHLB advances of $3.4 million,
somewhat offset by repayments of FHLB advances of $1.7 million. In addition, PFC
purchased 17,350 treasury shares for a total of $172,000 during 2000. Deposit
outflows of $789,000 occurred during the first three months of 1999, while other
financing activities included FHLB advance proceeds of $5.9 million and the
purchase of 41,000 shares for $688,000.
Potters Bank's average regulatory liquidity ratio for March 2000 was 14.52%. At
March 31, 2000, Potters Bank had commitments to originate loans of $2.0 million
and unused lines of credit totaling $5.8 million.
The following table details the minimum capital requirements set forth by
regulation for all federally insured savings institutions and Potters Bank's
capital levels as of March 31, 2000 (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 $11,196 7.43% $11,196 7.43% $12,323 13.66%
Minimum capital
requirement 2,261 1.50 6,029 4.00* 7,215 8.00
------- ---- ------- ---- ------- -----
Regulatory capital -
excess $ 8,935 5.93% $ 5,167 3.43% $ 5,108 5.66%
======= ==== ======= ==== ======= =====
</TABLE>
- ----------------
17.
<PAGE> 18
*Savings associations that meet certain requirements may be permitted to
maintain minimum core capital of 3.00%.
YEAR 2000 READINESS DISCLOSURE
Significant time was spent over the last several years on Y2K and all
contingency plans were in place prior to the arrival of January 1, 2000.
Selected employees reported to work on January 1, 2000 to ensure that all
computer and other systems were functioning correctly. The Y2K Customer
Information telephone line was updated to reflect that all systems had
successfully made the transition to 2000. All systems had previously been
upgraded or replaced to bring them into Y2K compliance and they functioned
without interruption during and after the change-over. Contingency plans are in
place for all subsequent Y2K dates throughout the year 2000 and will be used if
problems occur. At the present time, there is no reason to believe that all
systems will not continue to operate correctly in relationship to Y2K.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
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 See Note 1 to the consolidated
per share earnings financial statements included herewith.
Exhibit 15 Letter re: unaudited interim Included herewith.
financial information
Exhibit 27 Financial Data Schedule for the Included herewith.
quarter ended March 31,2000
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 5, 2000 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
Exhibit 15
Board of Directors and Shareholders
Potters Financial Corporation
East Liverpool, Ohio
We have reviewed, in accordance with standards established by the AICPA, the
unaudited interim financial information of Potters Financial Corporation for the
periods ended March 31, 2000 and 1999 as indicated in our report dated May 3,
2000. Because we did not perform an audit, we expressed no opinion on that
information. We are aware that our report referred to above, which was included
in this quarterly report on Form 10-Q, is being incorporated by reference in
Registration Statement Nos. 333-11353, 333-27985 and 333-68259 on Forms S-8.
We also are aware that our report referred to above, under Rule 436(c) under the
Securities Act of 1933, is not considered a part of the registration statement
prepared or certified by an accountant or a report prepared or certified by an
accountant within the meaning of Sections 7 and 11 of the Act.
/s/CROWE, CHIZEK AND COMPANY
Crowe, Chizek and Company LLP
May 3, 2000
Columbus, Ohio
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001010476
<NAME> POTTERS FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,192
<INT-BEARING-DEPOSITS> 677
<FED-FUNDS-SOLD> 1,046
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,069
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 119,025
<ALLOWANCE> 2,015
<TOTAL-ASSETS> 151,317
<DEPOSITS> 115,892
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 1,276
<LONG-TERM> 18,000
0
0
<COMMON> 5,436
<OTHER-SE> 5,713
<TOTAL-LIABILITIES-AND-EQUITY> 151,317
<INTEREST-LOAN> 2,307
<INTEREST-INVEST> 378
<INTEREST-OTHER> 18
<INTEREST-TOTAL> 2,703
<INTEREST-DEPOSIT> 1,153
<INTEREST-EXPENSE> 1,472
<INTEREST-INCOME-NET> 1,231
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 870
<INCOME-PRETAX> 523
<INCOME-PRE-EXTRAORDINARY> 523
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 345
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 3.51
<LOANS-NON> 423
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,037
<CHARGE-OFFS> 37
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 2,015
<ALLOWANCE-DOMESTIC> 1,324
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 691
</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, 2000 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
<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 Superintendent of the
Division of Financial Institutions of the Ohio Department of Commerce 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 subject to regulation and examination by the Office of Thrift
Supervision (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.
On November 12, 1999, the Gramm-Leach-Bliley Act (the GLB Act) was enacted into
law. The GLB Act repealed prior laws which had generally prevented banks from
affiliating with securities and insurance firms and makes other significant
changes in the financial services in which various types of financial
institutions may engage.
Prior to the GLB Act, unitary savings and loan holding companies which met
certain requirements were the only financial institution holding companies that
were permitted to engage in any type of business activity, whether or not the
activity was a financial service. The GLB Act continues those broad powers for
unitary thrift holding companies in existence on May 4, 1999, including PFC. Any
thrift holding company formed after May 3, 1999, however, will be subject to the
same restrictions as multiple thrift holding companies, which generally are
limited to activities that are considered incidental to banking.
2
<PAGE> 3
The GLB authorizes a new "financial holding company," which can own banks and
thrifts and which are also permitted to engage in a variety of financial
activities, including insurance and securities underwriting and agency
activities, as long as the depository institutions it owns are well capitalized,
well managed and meet certain other tests.
The GLB Act is not expected to have a material effect on the activities in which
PFC and Potters Bank currently engage, except to the extent that competition
from other types of financial institutions may increase as they engage in
activities not permitted prior to enactment of the GLB Act.
3
