<PAGE> 1
Page 1 of 20 pages
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2000
------------------
[ ] 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
--------------
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Common Shares, no par value Outstanding at October 31, 2000
997,989 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
------- -------
<PAGE> 2
.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 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:
<TABLE>
<CAPTION>
Page
Number(s)
---------
<S> <C>
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Comprehensive Income 5
Condensed 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 19
Item 2. Change in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
2.
<PAGE> 3
POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 3,716 $ 6,441
Interest-bearing deposits 755 801
Federal funds sold 1,563 38
-------- --------
Cash and cash equivalents 6,034 7,280
Securities available for sale 19,750 22,751
Federal Home Loan Bank stock 1,251 1,184
Loans, net 119,974 108,360
Premises and equipment, net 1,967 1,960
Other assets 2,347 2,201
-------- --------
Total assets $151,323 $143,736
======== ========
LIABILITIES
Deposits $119,114 $110,335
Federal Home Loan Bank advances 19,500 21,300
Accrued expenses and other liabilities 1,330 1,081
-------- --------
Total liabilities 139,944 132,716
SHAREHOLDERS' EQUITY
Common shares, no par value
Authorized: 2,000,000 shares;
Issued: 1,116,528 shares in 2000 and 1999
Paid-in capital 5,281 5,429
Retained earnings 7,935 7,945
Accumulated other comprehensive income (354) (540)
Unearned compensation on
recognition and retention plan shares (46) (60)
Treasury stock, at cost: 118,539 shares
in 2000 and 89,689 in 1999 (1,437) (1,754)
-------- --------
Total shareholders' equity 11,379 11,020
-------- --------
Total liabilities and shareholders' equity $151,323 $143,736
======== ========
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to financial statements.
3.
<PAGE> 4
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $2,500 $2,292 $7,225 $6,366
Securities 367 348 1,113 1,069
Federal funds sold and other 18 34 48 127
------ ------ ------ ------
2,885 2,674 8,386 7,562
INTEREST EXPENSE
Deposits 1,323 1,093 3,703 3,101
Federal Home Loan Bank advances 295 278 942 766
------ ------ ------ ------
1,618 1,371 4,645 3,867
------ ------ ------ ------
NET INTEREST INCOME 1,267 1,303 3,741 3,695
Provision for loan losses (75)
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,267 1,303 3,741 3,770
NONINTEREST INCOME
Loan and security gains 8 6 8 38
Other noninterest income 144 126 449 328
------ ------ ------ ------
152 132 457 366
------ ------ ------ ------
NONINTEREST EXPENSE
Compensation and benefits 402 428 1,219 1,248
Occupancy and equipment 122 106 357 330
Cashier's check loss 448
Other noninterest expense 391 348 1,091 1,009
------ ------ ------ ------
915 882 3,115 2,587
------ ------ ------ ------
INCOME BEFORE INCOME TAX 504 553 1,083 1,549
Income tax expense 171 195 368 538
------ ------ ------ ------
NET INCOME $ 333 $ 358 $ 715 $1,011
====== ====== ====== ======
Earnings per common share
Basic $ 0.34 $ 0.35 $ 0.72 $ 0.99
====== ====== ====== ======
Diluted $ 0.33 $ 0.34 $ 0.70 $ 0.97
====== ====== ====== ======
</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 Nine months ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $333 $358 $715 $1,011
Other comprehensive income (net of tax):
Change in unrealized loss on securities
available for sale arising during the period 140 (54) 186 (406)
Reclassification adjustment for accumulated
(gains)/losses included in net income (1)
---- ---- ---- ------
Total other comprehensive income 140 (54) 186 (407)
---- ---- ---- ------
COMPREHENSIVE INCOME $473 $304 $901 $ 604
==== ==== ==== ======
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
BALANCE - JANUARY 1 $11,020 $11,157
Net income for the nine months ended September 30 715 1,011
Issuance of 231 common shares for the exercise
of stock options 4
Tax benefit arising from recognition and
retention plan shares 19 34
Recognition and retention plan shares earned 14 15
Purchase of treasury shares (28,850 in 2000
and 41,377 in 1999) (281) (693)
Cash dividends declared ($.29 per share in 2000
and $.23 per share in 1999) (294) (229)
Change in unrealized loss on
securities available for sale 186 (407)
------- -------
BALANCE - SEPTEMBER 30 $11,379 $10,892
======= =======
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to financial statements.
5.
<PAGE> 6
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 715 $ 1,011
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 235 214
Provision for loan losses (75)
Net amortization of securities 30 74
Net realized gain on:
Sales of securities (1)
Sales of loans (8) (37)
Sales of foreclosed real estate
and repossessed assets (2)
Stock dividend on FHLB stock (67) (57)
Loans originated for sale (713) (5,052)
Proceeds from sales of loans held for sale 776 5,829
Net change in other assets and liabilities 284 (540)
------- --------
Net cash from operating activities 1,250 1,366
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Maturities, repayments and calls 3,252 7,450
Purchases (8,018)
Purchase of FHLB stock (116)
Loan originations and payments, net (4,060) 2,552
Loan purchases (7,855) (16,440)
Proceeds from sale of foreclosed real estate
and repossessed assets 10
Net additions to property and equipment (187) (519)
------- --------
Net cash from investing activities (8,840) (15,091)
------- --------
</TABLE>
--------------------------------------------------------------------------------
(Continued)
6.
<PAGE> 7
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Dollars in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 8,779 4,219
Proceeds from FHLB advances 4,150 11,700
Repayments of FHLB advances (5,950) (7,797)
Other financing activities (60) (139)
Repurchase of common stock (281) (693)
Proceeds from exercise of stock options 4
Cash dividends paid (294) (229)
------- -------
Net cash from financing activities 6,344 7,065
------- -------
Net change in cash and cash equivalents (1,246) (6,660)
Cash and cash equivalents at beginning of period 7,280 11,867
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,034 $ 5,207
======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 4,556 $ 3,823
Income taxes 363 552
Supplemental noncash disclosure:
Transfer from loans to foreclosed real estate and
repossessed assets $ 183
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to financial statements.
7.
<PAGE> 8
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include Potters Financial Corporation
("PFC") and its wholly-owned subsidiary, Potters Bank, both headquartered in
East Liverpool, Ohio. Significant intercompany transactions and balances have
been eliminated in consolidation. These interim financial statements are
prepared without audit and reflect all adjustments, which, in the opinion of
management, are necessary to present fairly the consolidated financial position
of PFC at September 30, 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.
The consolidated balance sheet as of September 30, 2000 reflects a 5% stock
dividend, which was paid from treasury shares in July 2000, and reduced retained
earnings by $430,000. A 10% stock dividend was paid from treasury shares in
March 1999, which reduced retained earnings by $1.3 million. All references to
common shares, earnings and dividends per share have been restated to reflect
all stock dividends and stock splits.
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 and shares earned under the recognition and
retention plan. Following is a summary of shares used in computing EPS:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------- -----------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding for basic EPS 990,139 1,015,736 995,337 1,016,792
Add: Dilutive effects of assumed
exercises of stock options and
recognition and retention plan 20,933 28,332 21,879 30,451
--------- --------- --------- ---------
Average shares and dilutive potential
common shares 1,011,072 1,044,068 1,017,216 1,047,243
========= ========= ========= =========
</TABLE>
As of September 30, 2000 and September 30, 1999, there were 31,078 and 32,655
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 antidilutive stock options were excluded from the above calculation.
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year.
--------------------------------------------------------------------------------
8.
<PAGE> 9
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 2 - SECURITIES AVAILABLE FOR SALE
Securities available for sale were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
September 30, 2000
------------------
U.S. government and
federal agencies $ 9,496 $ 9 $(415) $ 9,090
Other 431 28 459
Agency issued mortgage-
backed securities 10,338 16 (175) 10,179
------- --- ----- -------
20,265 53 (590) 19,728
Equity securities 22 22
------- --- ----- -------
$20,287 $53 $(590) $19,750
======= === ===== =======
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 September 30,
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>
Amortized Estimated
Cost Fair Value
---- ----------
(Dollars in thousands)
<S> <C> <C>
Due in one year or less $ 7 $ 7
Due after one year through five years 3,265 3,361
Due after five years through ten years 2,618 2,321
Due after ten years 4,037 3,860
Agency issued mortgage-
backed securities 10,338 10,179
------- -------
$20,265 $19,728
======= =======
</TABLE>
Available-for-sale securities totaling $1.0 million were called in 2000,
resulting in no gain or loss, and $3.0 million were called during 1999,
resulting in a gain of $1,000.
The carrying value of securities pledged as collateral for public funds totaled
$7.5 million at September 30, 2000.
--------------------------------------------------------------------------------
9.
<PAGE> 10
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Real estate loans
One-to-four family residences $ 79,093 $ 70,732
Loans held for sale 55
Nonresidential property 19,019 14,257
Multifamily and other 2,870 3,055
-------- --------
100,982 88,099
-------- --------
Consumer and other loans
Home equity loans (1) 13,714 13,301
Purchased second mortgage loans 4,957 5,715
Secured, unsecured consumer
loans and lines of credit 2,404 2,309
Commercial business loans 701 472
Other 1,810 1,716
-------- --------
23,586 23,513
-------- --------
Total loan principal balances 124,568 111,612
Undisbursed loan funds (3,210) (1,848)
Premiums on purchased loans,
unearned interest and net
deferred loan (fees) costs 586 633
Allowance for loan losses (1,970) (2,037)
-------- --------
$119,974 $108,360
======== ========
</TABLE>
----------
(1) September 30, 2000 and December 31, 1999 totals include $6.6 million and
$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>
Nine months ended
September 30,
------------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Beginning balance $2,037 $2,211
Provision for loan losses (75)
Recoveries 30 22
Charge-offs (97) (74)
------ ------
Ending balance $1,970 $2,084
====== ======
</TABLE>
Nonaccrual and renegotiated loans totaled $876,000 and $316,000 at September 30,
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>
September 30, 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 March 2001 through May 2010,
fixed rate, from 5.54% to 6.50%, averaging 5.99% $19,500
------- -------
$19,500 $21,300
======= =======
</TABLE>
FHLB advances are payable at maturity, or prior to maturity with prepayment
penalties. At June 30, 2000, advances totaling $12.0 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 September 30, 2000, scheduled maturities of advances were as follows:
<TABLE>
<CAPTION>
Maturities
----------
(Dollars in thousands)
<S> <C>
Due in one year or less $ 2,000
Due after one year through two years 4,000
Due after two years through three years 1,500
After five years 12,000
-------
$19,500
=======
</TABLE>
NOTE 5 - STOCK OPTIONS
A summary of activity relating to stock options during the periods listed was as
follows:
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding - January 1 85,078 $ 7.80 54,502 $ 5.20
Granted 26,351 8.57 31,500 12.44
Exercised (924) 4.33
Expired unexercised (1,580) 12.44
------- ------
Outstanding - September 30 109,849 7.99 85,078 7.80
======= ======
</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. A $296,000 nonrecurring expense, net of tax, was recorded during the
second quarter of 2000 relating to a check fraud scheme. Potters Bank deposited
bank cashier's checks issued by a regional financial institution into a
customer's account, and provided the customer immediate use of those funds as is
customary in the industry when dealing with cashier's checks. Payments on those
official checks were stopped by the issuing bank. Potters Bank intends to
aggressively pursue all available options for the recovery of the funds and has
filed suit against the financial institution and others relating to this fraud.
Management does not believe there now are any other such matters that will have
a material effect on the financial statements.
Loan Commitments: Some financial instruments, such as loan commitments, credit
lines, letters of credit and overdraft protection are issued to meet customer
financing needs. These are agreements to provide credit or to support the credit
of others, as long as conditions established in the contract are met, and
usually have expiration dates. Commitments may expire without being used.
Off-balance sheet risk of credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies used to make commitments are also used for loans, including obtaining
collateral at exercise of the commitment.
Financial instruments with off-balance sheet risk at September 30, 2000 were as
follows:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate
---- ----
(Dollars in thousands)
<S> <C> <C>
Commitments to make loans
(at market rates) $796 $1,660
Unused lines of credit and
letters of credit 5,868
</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 8.0% to 8.375%,
with maturity dates of 15 to 30 years.
NOTE 7 - CONCENTRATIONS OF CREDIT RISK
Current local loan origination activities are with customers located within the
immediate lending area, which includes portions of Columbiana and Jefferson
Counties in northeastern Ohio and northern Hancock County in West Virginia. The
Boardman loan production office focuses on originating loans in Mahoning and
Trumbull Counties in northeastern Ohio and Beaver and Allegheny Counties in
northwestern Pennsylvania. At September 30, 2000, the loan portfolio included
approximately $11.7 million of one-to-four family real estate loans on
properties located in northwestern Ohio, $2.7 million on properties in
southwestern Ohio and $6.2 million on properties in Hilton Head, South Carolina.
As of September 30, 2000, multifamily and nonresidential real estate loan
purchases totaling $ 1.1 million were secured by properties located in northwest
Ohio and $2.0 million in southwest Ohio. The loan portfolio also included $4.6
million of real estate loans, $6.6 million of first mortgage home equity loans
and $5.0 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 $7.3
million at September 30, 2000. Of the $7.3 million, $572,000 were purchased real
estate loans from southwest Ohio also reported above.
NOTE 8 - SUBSEQUENT EVENT
On November 6, 2000, Potters Bank settled all claims against the regional
financial institution relating to the check fraud lawsuit discussed in Note 6
upon mutually agreeable terms, resulting in recovery of a portion of the expense
recognized in the second quarter. This recovery will be recorded in the fourth
quarter of 2000. The lawsuit against the regional financial institution was
dismissed by the Columbiana County Common Pleas Court on November 8, 2000. All
claims against other parties, however, remain pending.
--------------------------------------------------------------------------------
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 September 30, 2000, the related consolidated statements of income and
comprehensive income for the quarters and year-to-date periods ended September
30, 2000 and 1999, and the condensed consolidated statements of changes in
shareholders' equity and cash flows for the year-to-date periods ended September
30, 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
October 31, 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 September 30, 2000 and December 31, 1999, and
its results of operations for the three and nine months ended September 30, 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.
Management's statements regarding its plan to aggressively pursue all available
options for the recovery of funds relating to a check fraud expensed during
the 2000 second quarter.
Management's statements regarding the expectation of higher than usual legal
fees until the check fraud lawsuit is resolved.
Statements regarding management's intention to establish a full-service office
in Beaver, Pennsylvania in order to expand its loan growth and deposit
base, and the net expense which will be incurred during the construction
and initial start-up of operations.
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.
Management's statements regarding the expectation that provisions for loan
losses will resume in 2001.
Financial Condition - Statements regarding the strategic focus and long-term
goals of Potters Bank.
Statements regarding the ability of internal loan generation to reduce Potters
Bank's reliance on purchased loans to grow the loan portfolio.
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 $333,000, or $.33 per diluted share, was recorded for the three
months ended September 30, 2000, compared to $358,000, or $.34 per diluted
share, for the same three months in 1999. The annualized return on average
shareholders' equity declined to 11.78% for the third quarter of 2000, from
13.20% during the comparable period in 1999, while the annualized return on
average assets decreased to .89% from 1.03%. Continued net interest margin
pressures resulted in lower net interest income during the third quarter of
2000, compared to the third quarter 1999, and increased legal fees relating to
the check fraud lawsuit caused higher noninterest expense. Noninterest income
continued to increase, posting a 15.2% gain over the third quarter 1999.
Net income for the first nine months of 2000 was $715,000, or $.70 per diluted
share, compared to net income of $1.0 million, or $.97 per diluted share, for
the first nine months of 1999. Returns on average shareholders' equity and
average assets during the first nine months of 2000 were 8.39% and .64%,
compared to 12.13% and .99% during the first nine months of 1999. However,
nonrecurring events in both years affected net income.
During the second quarter of 2000, Potters Bank deposited bank cashier's checks
issued by a regional financial institution into a customer's account, and
provided the customer immediate use of those funds as is customary in the
industry when dealing with cashier's checks. Payments to Potters Bank on those
official checks were stopped by the issuing bank. As a result, Potters Bank
recorded a $296,000 nonrecurring expense, net of tax during the second quarter.
Potters Bank intends to aggressively pursue all available options for the
recovery of the funds and has filed suit against the financial institution and
others relating to this fraud. Also during 2000, noninterest income was
positively impacted by the receipt of a one-time payment of $29,000 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 the
OTS's control regulations. The net after-tax impact of nonrecurring events
during 2000 was a reduction of $.27 per diluted share. During 1999, a negative
loan loss provision of $75,000 was recorded, which had an after-tax positive
effect of $.05 per diluted share. On a core earnings basis, the annualized
return on average shareholders' equity was 11.36% during the first nine months
of 2000, compared to 11.53% during the comparable period in 1999. On a core
earnings basis, the annualized return on average assets declined to .89% during
2000 versus .94% during the first nine months of 1999, while earnings per
diluted share increased $.05, or 5.4%, during 2000.
Interest income increased $211,000, or 7.9%, during the third quarter of 2000,
primarily from a 9.1% increase in loan interest income. During the first nine
months of 2000, interest income increased $824,000, or 10.9%, as loan interest
income grew $859,000. Loan principal balances increased 12.47% during the last
year, from $110.8 million at September 30, 1999, to $124.6 million at September
30, 2000, with real estate loans growing $13.9 million. Interest expense
increased $247,000, or 18.0%, during the third quarter of 2000 over 1999 and
increased $778,000, or 20.1%, for the first nine months of 2000 over 1999, due
to a higher level of deposits and higher rates paid on both deposits and
borrowings. Net interest income decreased $36,000, or 2.8%, during the third
quarter of 2000, but increased $46,000, or 1.2%, on a year-to-date basis
compared to the same time periods in 1999.
Rising interest rates negatively affected the cost of funds and prompted a
narrowing of the interest rate spread, which declined from 3.59% during the
first nine months of 1999, to 3.31% during the first nine months of 2000. The
asset yield increased, from 7.75% through September 30, 1999, to 7.87% through
September 30, 2000, but the cost of funds rose to 4.56% during the first nine
months of 2000 from 4.16% through September 30, 1999. In the rising rate
environment of 2000, the cost of funds increased faster than the yield on
earning assets. Indexed deposits repriced weekly and the certificate of deposit
market became competitive rather quickly, while consumers
15.
<PAGE> 16
hold on to lower fixed-rate loans and many variable-rate assets have not yet
repriced. Continued increases in interest rates could put further pressure on
the interest rate spread and negatively affect future earnings.
Other noninterest income, primarily fees from loans, deposits and other customer
services and rental income, increased $18,000, or 14.3%, during the third
quarter of 2000 over the second quarter of 1999. Excluding nonrecurring PFC
miscellaneous income, noninterest income increased $92,000, or 28.0%, during
2000 compared to the first nine months of 1999. A loan sale during the third
quarter 2000 generated a gain of $8,000, compared to $6,000 during the third
quarter of 1999 and $38,000 during the first nine months of 1999.
Noninterest expense increased $33,000, or 3.7%, during the third quarter of
2000, compared to the third quarter of 1999, primarily from increased legal fees
relating to the check fraud lawsuit. Excluding the $448,000 nonrecurring item
($296,000 after-tax) relating to the check fraud described above, noninterest
expense increased $80,000, or 3.1%, for the first nine months of 2000 compared
to 1999.
Compensation and benefits decreased $26,000 during the third quarter of 2000 and
decreased $29,000 during the year to date 2000 compared to 1999, primarily from
higher loan deferral costs and the closing of the Mentor loan production office.
Other noninterest expenses increased $43,000 during the third quarter of 2000
over 1999, and, excluding the $448,000 nonrecurring item, increased $82,000
during the first nine months of 2000 over 1999. Savings were realized from lower
deposit insurance premiums and regulatory supervisory fees, offset by higher
employee training and ATM/Check Card costs. Legal fees increased as a result of
the lawsuit and will continue to be higher than usual until the lawsuit is
resolved. Professional fees also increased as Potters Bank utilized the services
of a consultant during 2000 to aid in the development of a technology plan.
During the third quarter of 2000, Potters Bank announced that it had submitted
applications to the Federal Deposit Insurance Corporation and the State of Ohio
for approval to establish a branch office in Beaver, Pennsylvania. The strategic
plan includes the pursuit of expansion in geographic and service markets, and
management believes Beaver, a neighboring community approximately twenty miles
east of East Liverpool, is a logical step in that expansion. Potters Bank has
been originating loans in that area and plans a full-service facility intended
to widen the deposit base needed to fund loan growth, although there can be no
assurance that the branch will be established or that it will be successful in
attracting additional loans or deposits. During construction and the initial
start-up of operations, the branch will be incurring net expense.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses was $2.0 million at September 30, 2000 and at
December 31, 1999. Charge-offs totaling $97,000, primarily consumer and real
estate loans, were offset by $30,000 in recoveries. During the first nine months
of 1999, a negative loan loss provision of $75,000 and charge-offs of $74,000
were offset by $22,000 in recoveries.
Nonperforming loans of $876,000 at September 30, 2000 represented increases of
$560,000 from nonperforming loans of $316,000 at December 31, 1999, and $782,000
from nonperforming loans of $94,000 at September 30, 1999. Nonperforming loans
at September 30, 2000 consisted primarily of one-to-four family real estate
loans, with approximately 30% resulting from the nonconforming loan programs and
approximately 37% resulting from purchased loan packages. At September 30, 2000,
nonperforming loans represented .58% of total assets. The allowance for loan
losses represented 224.9% of nonperforming loans at September 30, 2000, compared
to 644.6% at December 31, 1999 and 2,217.0% of nonperforming loans at September
30, 1999. The decline in the allowance percentage was the result of both
increasing nonperforming loans
16.
<PAGE> 17
and growth in the loan portfolio. No loans were designated impaired at September
30, 2000 or December 31, 1999. Based on management's ongoing analysis of the
allowance for loan losses, 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 further increases in nonperforming loans.
It is anticipated that regular provisions will resume in 2001.
FINANCIAL CONDITION
PFC's assets grew to $151.4 million at September 30, 2000, from $143.7 million
at December 31, 1999, an increase of $7.6 million, or 5.3%.
Securities available for sale decreased $3.0 million, to $19.8 million at
September 30, 2000, compared to $22.8 million at December 31, 1999. No purchases
of securities were made in 2000, but calls and repayments totaled $3.3 million.
Securities available for sale 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 $354,000 at September 30, 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 $120.0 million
at September 30, 2000, an increase of $11.6 million, or 10.7%. Loan purchases of
$7.9 million during 2000 and $4.1 million of net loan originations caused the
increase in loans. Rising interest rates have resulted in a shift in customer
demand from fixed-rate to adjustable-rate real estate loans, which Potters Bank
retains in its portfolio. Loans originated for sale during 2000 totaled
$713,000. Proceeds from sales of loans totaled $776,000, generating a gain of
$8,000. Real estate loans increased $12.9 million, or 14.6%, during 2000, with
$8.4 million, or 11.8%, in one-to-four family real estate loans, and $4.6
million growth in multifamily and commercial real estate loans. The Mentor loan
production office was closed in April 2000 because its loan volume was not
sufficient to offset the expenses of continuing the loan production office. The
strategic plan calls for utilization of internal loan generation to become less
reliant on loan purchases to grow the portfolio, although there can be no
assurance that the demand for loans will continue in surrounding local areas, or
that the Boardman loan production office or the proposed Beaver Office will
successfully penetrate their respective markets.
Two nonconforming real estate loan programs, which charge slightly higher
interest rates on single family residential real estate loans to persons who are
considered slightly higher credit risks, totaled $7.3 million at September 30,
2000, $572,000 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. Of such
loans, $268,000 were nonperforming at September 30, 2000.
Total deposits increased $8.8 million, or 8.0%, during 2000, to $119.1 million
at September 30, 2000. Inflows occurred primarily in certificates of deposit,
the Treasury Index savings account tied to the 90-day Treasury bill and checking
accounts. The Asset and Liability Management Committee continues to focus on
strategies for reduced interest rate risk and responsible deposit management.
Such strategies include setting competitive rates on selected certificates of
deposit with maturity dates exceeding one year and utilizing tiered interest
rates based on the amount on deposit.
17.
<PAGE> 18
FHLB advances totaled $19.5 million at September 30, 2000, compared to $21.3
million at December 31, 1999. Advances were used primarily to meet liquidity
needs during 2000. As deposit inflows occurred during 2000, $1.8 million of the
advances were repaid.
Shareholders' equity increased $359,000 during 2000 due primarily to net income
of $715,000 and a $186,000 decrease in the unrealized loss on securities
available for sale, offset by the repurchase of 28,850 shares for a total of
$281,000 and the payment of $294,000, or $.29 per share, in dividends. A 5%
stock dividend was declared in June 2000, which reduced retained earnings by
$430,000. The dividend was paid from treasury shares on July 24, 2000, to
shareholders of record as of July 6, 2000.
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 nine months of 2000 were net loan originations of $4.1 million and
loan purchases of $7.9 million, offset by $3.3 million in calls, maturities and
repayments of securities. Operating activities during the first nine months of
1999 included $5.1 million in loans originated for sale and $5.8 million in
sales of loans held for sale. Significant investing activities during the same
time period were loan purchases of $16.4 million and purchases of securities of
$8.0 million, offset by repayments, calls and maturities of $7.5 million and a
net decrease of $2.6 million in loans receivable.
Financing activities during the nine months ended September 30, 2000 included
deposit inflows of $8.8 million and proceeds from FHLB advances of $4.2 million,
offset by repayments of FHLB advances of $6.0 million. In addition, PFC
purchased 28,850 treasury shares for a total of $281,000 during 2000. Deposit
inflows of $4.2 million occurred during the first nine months of 1999, while
other financing activities included net FHLB advance proceeds of $3.9 million
and the purchase of 41,377 shares for $693,000.
Potters Bank's average regulatory liquidity ratio for September 2000 was 12.12%.
At September 30, 2000, Potters Bank had commitments to originate loans of $2.4
million and unused lines of credit totaling $5.9 million.
The following table details the minimum capital requirements set forth by
regulation for all federally insured savings institutions and Potters Bank's
capital levels as of September 30, 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 $11,580 7.66% $11,580 7.66% $12,782 13.39%
Minimum capital
requirement 2,269 1.50 6,050 4.00* 7,634 8.00
------- ---- ------- ---- ------- -----
Regulatory capital -
excess $ 9,311 5.16% $ 5,530 3.66% $ 5,148 5.39%
======= ==== ======= ==== ======= =====
</TABLE>
----------
*Savings associations that meet certain requirements may be permitted to
maintain minimum core capital of 3.00%.
18.
<PAGE> 19
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>
<CAPTION>
<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 10.1 Employment Contract with Included herewith.
Edward L. Baumgardner
Exhibit 10.2 Employment Contract with Included herewith.
Albert E. Sampson
Exhibit 11 Statement re: computation of See Note 1 to 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 September 30, 2000
Exhibit 99 Safe Harbor Under the Private Included herewith.
Securities Litigation Reform Act of 1995
</TABLE>
B. Reports on Form 8-K.
On August 16, 2000, Potters Financial Corporation filed a Form 8-K to
report on the issuance of a press release regarding Potters Bank's filing of
applications to the Federal Deposit Insurance Corporation and the State of Ohio
for approval to open a full-service banking office in Beaver, Pennsylvania.
19.
<PAGE> 20
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
POTTERS FINANCIAL CORPORATION
Date: November 8, 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
20.
