<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 JUNE 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 July 31, 2000
1,003,489 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
--------- -------
<PAGE> 2
FORM 10-QSB
QUARTER ENDED JUNE 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
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 and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of
Security Holders 18-19
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>
---------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
---- ----
ASSETS
<S> <C> <C>
Cash and due from financial institutions $ 4,402 $ 6,441
Interest-bearing deposits 383 801
Federal funds sold 4 38
----------- -----------
Cash and cash equivalents 4,789 7,280
Securities available for sale 21,196 22,751
Federal Home Loan Bank stock 1,228 1,184
Loans, net 119,476 108,360
Premises and equipment, net 1,931 1,960
Other assets 2,235 2,201
----------- -----------
Total assets $ 150,855 $ 143,736
=========== ===========
LIABILITIES
Deposits $ 117,303 $ 110,335
Federal Home Loan Bank advances 20,850 21,300
Accrued expenses and other liabilities 1,664 1,081
----------- -----------
Total liabilities 139,817 132,716
SHAREHOLDERS' EQUITY
Common shares, no par value
Authorized: 2,000,000 shares;
Issued: 1,116,528 shares in 2000 and 1999
Paid-in capital 5,276 5,429
Retained earnings 7,703 7,945
Accumulated other comprehensive income (494) (540)
Unearned compensation on
recognition and retention plan shares (60) (60)
Treasury stock, at cost: 113,039 shares
in 2000 and 89,689 in 1999 (1,387) (1,754)
----------- -----------
Total shareholders' equity 11,038 11,020
----------- -----------
Total liabilities and shareholders' equity $ 150,855 $ 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 Six months ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 2,418 $ 2,134 $ 4,725 $ 4,074
Securities 368 371 746 721
Federal funds sold and other 12 25 30 93
--------- --------- --------- ---------
2,798 2,530 5,501 4,888
INTEREST EXPENSE
Deposits 1,227 1,033 2,380 2,008
Federal Home Loan Bank advances 328 267 647 488
--------- --------- --------- ---------
1,555 1,300 3,027 2,496
--------- --------- --------- ---------
NET INTEREST INCOME 1,243 1,230 2,474 2,392
Provision for loan losses (75)
--------- --------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,243 1,230 2,474 2,467
NONINTEREST INCOME
Loan and security gains 19 32
Other noninterest income 143 106 305 202
--------- --------- --------- ---------
143 125 305 234
--------- --------- --------- ---------
NONINTEREST EXPENSE
Compensation and benefits 393 423 817 820
Occupancy and equipment 114 122 235 224
Other noninterest expense 823 337 1,148 661
--------- --------- --------- ---------
1,330 882 2,200 1,705
--------- --------- --------- ---------
INCOME BEFORE INCOME TAX 56 473 579 996
Income tax expense 19 164 197 343
--------- --------- --------- ---------
NET INCOME $ 37 $ 309 $ 382 $ 653
========= ========= ========= =========
Earnings per common share
Basic $ 0.04 $ 0.30 $ 0.38 $ 0.64
========= ======== ========= =========
Diluted $ 0.04 $ 0.29 $ 0.37 $ 0.62
========= ======== ========= =========
---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4.
<PAGE> 5
POTTERS FINANCIAL CORPORATION
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended Six months ended
June 30, June 30,
--------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $ 37 $ 309 $ 382 $ 653
Other comprehensive income (net of tax):
Change in unrealized loss on securities
available for sale arising during the period (1) (260) 46 (352)
Reclassification adjustment for accumulated
(gains)/losses included in net income (1)
--------- --------- --------- ---------
Total other comprehensive income (1) (260) 46 (353)
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 36 $ 49 $ 428 $ 300
========= ========= ========= =========
----------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C> <C>
BALANCE - JANUARY 1 $ 11,020 $ 11,157
Net income for the six months ended June 30 382 653
Issuance of 231 common shares for the exercise
of stock options 1
Tax benefit arising from recognition and
retention plan shares 14 24
Purchase of treasury shares (23,350 in 2000
and 41,377 in 1999) (231) (693)
Cash dividends declared ($.19 per share in 2000
and $.14 per share in 1999) (193) (141)
Change in unrealized loss on
securities available for sale 46 (353)
----------- -----------
BALANCE - JUNE 30 $ 11,038 $ 10,648
=========== ===========
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5.
<PAGE> 6
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
--------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 382 $ 653
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 156 148
Provision for loan losses (75)
Net amortization of securities 20 52
Net realized gain on:
Sales of securities (1)
Sales of loans (31)
Sales of foreclosed real estate
and repossessed assets (2)
Stock dividend on FHLB stock (44) (36)
Loans originated for sale (6,471)
Proceeds from sales of loans held for sale 55 5,154
Net change in other assets and liabilities 509 (843)
------- --------
Net cash from operating activities 1,076 (1,450)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Maturities, repayments and calls 1,605 6,246
Purchases (5,518)
Purchase of FHLB stock (116)
Loan originations and payments, net (3,616) 6,803
Loan purchases (7,628) (16,267)
Proceeds from sale of foreclosed real estate
and repossessed assets 10
Additions to property and equipment (91) (481)
-------- ---------
Net cash from investing activities (9,720) (9,333)
-------- ---------
------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
6.
<PAGE> 7
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
--------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 6,968 2,084
Proceeds from FHLB advances 3,400 5,279
Repayments of FHLB advances (3,850) (2,010)
Other financing activities 59 (39)
Repurchase of common stock (231) (693)
Proceeds from exercise of stock options 1
Cash dividends paid (193) (141)
-------- ---------
Net cash from financing activities 6,153 4,481
-------- ---------
Net change in cash and cash equivalents (2,491) (6,302)
Cash and cash equivalents at beginning of period 7,280 11,867
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,789 $ 5,565
======== =========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 2,961 $ 2,486
Income taxes 363 552
---------------------------------------------------------------------------------------------------------------
</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 June 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 June 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. Following is a summary of shares used in computing
EPS:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------- ----------------
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding for basic EPS 990,356 1,013,445 998,010 1,017,223
Add: Dilutive effects of assumed
exercises of stock options 20,257 27,261 20,258 30,746
----------- ----------- ----------- -----------
Average shares and dilutive potential
common shares 1,010,613 1,040,706 1,018,268 1,047,969
=========== =========== =========== ===========
</TABLE>
As of June 30, 2000 and June 30, 1999, there were 31,080 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>
June 30, 2000
-------------
U.S. government and
federal agencies $ 10,496 $ $ (464) $ 10,032
Other 473 25 498
Agency issued mortgage-
backed securities 10,953 11 (320) 10,644
----------- ----------- ----------- -----------
21,922 36 (784) 21,174
Equity securities 22 22
----------- ----------- ----------- -----------
$ 21,944 $ 36 $ (784) $ 21,196
=========== =========== =========== ===========
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 June 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>
<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 3,150 3,052
Due after five years through ten years 2,506 2,444
Due after ten years 5,310 5,031
Agency issued mortgage-
backed securities 10,953 10,644
-------- ---------
$ 21,922 $ 21,174
======== =========
</TABLE>
Available-for-sale securities totaling $3.0 million were called during the first
six months of 1999, resulting in a gain of $1,000.
The carrying value of securities pledged as collateral for public funds totaled
$7.9 million at June 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>
June 30, December 31,
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Real estate loans
One-to-four family residences $ 79,088 $ 70,732
Loans held for sale 55
Nonresidential property 17,747 14,257
Multifamily and other 2,900 3,055
----------- -----------
99,735 88,099
----------- -----------
Consumer and other loans
Home equity loans (1) 13,462 13,301
Purchased second mortgage loans 5,275 5,715
Secured, unsecured consumer
loans and lines of credit 2,302 2,309
Commercial business loans 813 472
Other 1,914 1,716
----------- -----------
23,766 23,513
----------- -----------
Total loan principal balances 123,501 111,612
Undisbursed loan funds (2,631) (1,848)
Premiums on purchased loans,
unearned interest and net
deferred loan (fees) costs 629 633
Allowance for loan losses (2,023) (2,037)
----------- -----------
$ 119,476 $ 108,360
=========== ===========
</TABLE>
----------------
(1) June 30, 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>
Six months ended
June 30,
--------------------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Beginning balance $ 2,037 $ 2,211
Provision for loan losses (75)
Recoveries 28 19
Charge-offs (42) (32)
----------- -----------
Ending balance $ 2,023 $ 2,123
=========== ===========
</TABLE>
Nonaccrual and renegotiated loans totaled $540,000 and $316,000 at June 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>
June 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 September 2000 through May 2010,
fixed rate, from 5.54% to 6.78%, averaging 6.04% $ 20,850
----------- -----------
$ 20,850 $ 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 June 30, 2000, scheduled maturities of advances were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Due in one year or less $ 4,850
Due after one year through two years 4,000
After five years 12,000
-----------
$ 20,850
===========
</TABLE>
NOTE 5 - STOCK OPTIONS
A summary of activity relating to stock options during the periods listed was as
follows:
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 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 26,355 8.57 31,500 12.44
Exercised (231) 4.33
Expired unexercised (1,576) 12.44
--------- --------
Outstanding - June 30 109,857 7.99 85,771 7.86
========= ========
-------------------------------------------------------------------------------------------------------------
</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 June 30, 2000 were as
follows:
Fixed Variable
Rate Rate
---- ----
(Dollars in thousands)
Commitments to make loans
(at market rates) $ 312 $ 3,602
Unused lines of credit and
letters of credit 5,848
Commitments to make loans are generally made for periods of 60 days or less. The
fixed-rate loan commitments have interest rates ranging from 8.00% to 8.50%,
with maturity dates of 15 to 30 years. Interest rates on variable-rate loan
commitments have interest rates ranging from 8.50% 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. At June 30, 2000, the loan portfolio included
approximately $22.6 million of purchased one-to-four family real estate loans,
$11.9 million on properties located in northwestern Ohio, $2.9 million on
properties in southwestern Ohio and $6.4 million on properties in Hilton Head,
South Carolina. As of June 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, $6.8 million of first mortgage home
equity loans and $5.3 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 $7.6
million at June 30, 2000. Of the $7.6 million, $575,000 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 June 30, 2000, the related consolidated statements of income and
comprehensive income for the quarters and year-to-date periods ended June 30,
2000 and 1999, and the consolidated statements of changes in shareholders'
equity and cash flows for the year-to-date periods ended June 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
July 25, 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 June 30, 2000 and December 31, 1999, and its
results of operations for the three and six months ended June 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.
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
Potters Bank's 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.
RESULTS OF OPERATIONS
Net income of $37,000, or $.04 per diluted share, was recorded for the three
months ended June 30, 2000, compared to $309,000, or $.29 per diluted share, for
the same three months in 1999. The annualized return on average shareholders'
equity declined to 1.31% for the second quarter of 2000, from 11.44% during the
comparable period in 1999, while the annualized return on
14.
<PAGE> 15
average assets decreased to .10% from .89%. Second quarter 2000 net income was
negatively affected by a $296,000 nonrecurring expense, net of tax, 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 to Potters Bank 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. Excluding this
nonrecurring item that caused a $.29 drop in diluted earnings per share for the
quarter, diluted earnings per share for the second quarter of 2000 were $.33, a
13.8% increase over the second quarter 1999 diluted earnings per share of $.29.
Net income for the six months ended June 30, 2000 was $382,000, or $.37 per
diluted share, compared to net income of $653,000, or $.62 per diluted share,
for the first six months of 1999. Returns on average shareholders' equity and
average assets during the first six months of 2000 were 6.81% and .52%, compared
to 11.99% and .97% during the first six months of 1999. However, nonrecurring
events in both years affected net income. During 2000, noninterest expense was
negatively impacted by the check fraud expense discussed above and 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 impact of nonrecurring events during
2000 was a reduction of $.27 per diluted share. During the first half of 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 increased to 11.60% during the
first six months of 2000, compared to 11.08% during the comparable period in
1999. On a core earnings basis, the annualized return on average assets remained
relatively constant at .89% during 2000 versus .90% during the first six months
of 1999, while earnings per diluted share increased $.07, or 12.3%, during 2000.
Interest income increased $268,000, or 10.6%, during the second quarter of 2000,
primarily from a 13.3% increase in loan interest income. During the first six
months of 2000, interest income increased $613,000, or 12.5%, as loan interest
income grew $651,000. Loan principal balances increased 13.7% during the last
year, from $108.6 million at June 30, 1999, to $123.5 million at June 30, 2000,
with real estate loans growing $14.7 million. Interest expense increased
$255,000, or 19.6%, during the second quarter of 2000 over 1999 and increased
$531,000, or 21.3%, for the first six months of 2000 over 1999, from higher
deposit and borrowing balances and higher rates paid on those instruments. Net
interest income increased $13,000, or 1.1%, during the second quarter of 2000
and $82,000, or 3.4%, 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 3.52% during the
first six months of 1999, to 3.31% during 2000. The asset yield increased, from
7.62% through June 30, 1999, to 7.81% through June 30, 2000, but the cost of
funds rose to 4.50% during 2000 from 4.10% through June 30, 1999. In this rising
rate environment, the cost of funds increases faster than the yield on earning
assets. Indexed deposits reprice and the certificate of deposit market becomes
competitive rather quickly, while consumers hold on to lower fixed-rate loans
and many variable-rate assets take longer to reprice than deposits. 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 $37,000, or 34.9%, during the second
quarter of 2000 over the second quarter of 1999. Excluding nonrecurring PFC
miscellaneous income, noninterest income increased $74,000, or 36.6%, during
2000 compared to the first six months of 1999. No loan and
15.
<PAGE> 16
securities gains were recorded during 2000, compared to $19,000 during the
second quarter of 1999 and $32,000 during the first six months of 1999.
Excluding the $448,000 nonrecurring item ($296,000 after-tax) relating to the
check fraud described above, noninterest expense remained constant at $882,000
during the three months ended June 30, 2000 and 1999 and increased $47,000, or
2.8%, for the first six months of 2000 compared to 1999. Compensation and
benefits decreased $30,000 during the second quarter of 2000 and decreased
$3,000 during the year to date 2000 compared to 1999, primarily from higher loan
deferral costs and, in the second quarter, the closing of the Mentor loan
production office, offset by higher performance-based compensation. Other
noninterest expenses increased $38,000 during the second quarter of 2000 over
1999, and increased $39,000 during the first six months of 2000 over 1999.
Increased advertising, professional fees, employee training and ATM/Check Card
costs were offset by lower deposit insurance premiums, a decrease in regulatory
supervisory fees and stable data processing costs. During the second quarter of
2000, Potters Bank utilized the services of a consultant to help in the
development of a technology plan, which contributed to the increase in
professional fees, as did legal fees from the check fraud and outside auditing
fees from the required quarterly reviews of Securities and Exchange Commission
reports.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses was $2.0 million at June 30, 2000 and at December
31, 1999. Charge-offs totaling $42,000, primarily consumer loans, were somewhat
offset by $28,000 in recoveries. During the first six months of 1999, a negative
loan loss provision of $75,000 and charge-offs of $32,000 were offset by $19,000
in recoveries.
Nonperforming loans of $540,000 at June 30, 2000 represented increases of
$224,000 from nonperforming loans of $316,000 at December 31, 1999, and $284,000
from nonperforming loans of $256,000 at June 30, 1999. At June 30, 2000,
nonperforming loans represented .36% of total assets. The allowance for loan
losses represented 374.6% of nonperforming loans at June 30, 2000, compared to
644.6% at December 31, 1999 and 829.3% of nonperforming loans at June 30, 1999.
No loans were designated impaired at June 30, 2000 or December 31, 1999. Due to
the current modest level of nonperforming and problem loans, as well as recent
charge-off levels, 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 $150.9 million at June 30, 2000, from $143.7 million at
December 31, 1999, an increase of $7.1 million, or 5.0%.
Securities available for sale decreased $1.6 million, to $21.2 million at June
30, 2000, compared to $22.8 million at December 31, 1999. No purchases of
securities were made in 2000, but repayments totaled $1.6 million. 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 $494,000 at June 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 $119.5 million
at June 30, 2000, an increase of $11.1 million, or 10.3%. Loan purchases totaled
$7.6 million during 2000 and loan originations caused a $3.6 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
16.
<PAGE> 17
Potters Bank retains in its portfolio. Therefore, no loans were originated for
sale during 2000. Real estate loans increased $11.6 million, or 13.2%, during
2000, with $8.3 million, or 11.7%, in one-to-four family real estate loans, and
$3.3 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 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 $7.6 million at June 30, 2000,
$575,000 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 $7.0 million, or 6.3%, during 2000, to $117.3 million
at June 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 amount of deposit.
FHLB advances totaled $20.9 million at June 30, 2000, compared to $21.3 million
at December 31, 1999. Advances have been used to partially finance loan growth
during 2000 and to meet liquidity needs.
Shareholders' equity increased $18,000 during 2000 due primarily to net income
of $382,000 and a $46,000 decrease in the unrealized loss on securities
available for sale, offset by the repurchase of 23,350 shares for a total of
$231,000 and the payment of $193,000, or $.19 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 six months of 2000 were net loan originations of $3.6 million and loan
purchases of $7.6 million, offset by $1.6 million in maturities and repayments
of securities. Operating activities during the first six months of 1999 included
$6.5 million in loans originated for sale and $5.2 million in sales of loans
held for sale. Significant investing activities during the same time period were
loan purchases of $16.3 million and purchases of securities of $5.5 million,
offset by repayments, calls and maturities of $6.2 million and a net decrease of
$6.8 million in loans receivable.
Financing activities during the six months ended June 30, 2000 included deposit
inflows of $7.0 million and proceeds from FHLB advances of $3.4 million, offset
by repayments of FHLB
17.
<PAGE> 18
advances of $3.9 million. In addition, PFC purchased 23,350 treasury shares for
a total of $231,000 during 2000. Deposit inflows of $2.1 million occurred during
the first six months of 1999, while other financing activities included FHLB
advance proceeds of $5.3 million and the purchase of 41,377 shares for $693,000.
Potters Bank's average regulatory liquidity ratio for June 2000 was 11.54%. At
June 30, 2000, Potters Bank had commitments to originate loans of $3.9 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 June 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 $11,199 7.44% $ 11,199 7.44% $12,333 13.73%
Minimum capital
requirement 2,259 1.50 6,025 4.00* 7,188 8.00
------- ---- ---------- ---- ------- -----
Regulatory capital -
excess $ 8,940 5.94% $ 5,174 3.44% $ 5,145 5.73%
======= ==== ========== ==== ======= =====
</TABLE>
-------------------
*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 the year 2000 ("Y2K")
computer-related problems and all contingency plans were in place prior to the
arrival of January 1, 2000. 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 and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of Potters Financial Corporation was
held on April 27, 2000. The matters presented to the Security Holders and the
votes cast were as follows:
18.
<PAGE> 19
1) Election of Directors of Potters Financial Corporation
Arthur T. Doak 675,663 FOR
87,530 WITHHELD
Timothy M. O'Hara 675,663 FOR
87,530 WITHHELD
Peter D. Visnic 675,663 FOR
87,530 WITHHELD
2) Ratification of Crowe, Chizek and Company LLP as Auditors
746,753 FOR
1,643 AGAINST
14,797 ABSTAIN
<TABLE>
<CAPTION>
<S> <C>
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
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.
Anne S. Myers
Exhibit 10.3 Employment Contract with Included herewith.
Stephen A. Beadnell
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 June 30, 2000
Exhibit 99 Safe Harbor Under the Private Included herewith.
Securities Litigation Reform Act of 1995
B. Reports on Form 8-K.
</TABLE>
On July 10, 2000, Potters Financial Corporation filed a Form 8-K to
report on the issuance of a press release concerning a lawsuit Potters Bank, its
subsidiary, filed relating to a check fraud scheme, an accrued loss recorded
from that scheme and the impact of that loss on second quarter and year-to-date
2000 earnings.
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: August 2, 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.
