Page 1 of 19 pages
United States
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, 2001
------------------
[ ] 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, 2001
998,614 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
------------- -------------
.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2001
Part I - Financial Information
Item 1. Financial Statements
Interim financial information required by Item 310(b) of Regulation S-B
is included in this Form 10-QSB as referenced below:
Page
Number(s)
---------
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Comprehensive Income 5
Condensed Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-17
Part II - Other Information
Item 1. Legal Proceedings 18
Item 2. Change in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2.
POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2001 2000
--------- ---------
ASSETS
Cash and due from financial institutions $ 4,110 $ 3,930
Interest-bearing deposits 2,759 401
Federal funds sold 4,252 489
--------- ---------
Cash and cash equivalents 11,121 4,820
Securities available for sale 22,304 21,177
Federal Home Loan Bank stock 1,344 1,274
Loans, net 107,176 119,903
Premises and equipment, net 3,011 2,016
Other assets 2,015 2,245
--------- ---------
Total assets $ 146,971 $ 151,435
========= =========
LIABILITIES
Deposits $ 114,980 $ 117,792
Federal Home Loan Bank advances 17,500 19,500
Accrued expenses and other liabilities 1,231 1,810
--------- ---------
Total liabilities 133,711 139,102
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized: 2,000,000 shares;
Issued: 1,116,528 shares in 2001 and 2000
Paid-in capital 5,310 5,288
Retained earnings 9,133 8,567
Accumulated other comprehensive income (loss) 277 (39)
Unearned compensation on
recognition and retention plan shares (31) (46)
Treasury stock, at cost: 117,914 shares
in 2001 and 118,539 in 2000 (1,429) (1,437)
--------- ---------
Total shareholders' equity 13,260 12,333
--------- ---------
Total liabilities and shareholders' equity $ 146,971 $ 151,435
========= =========
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
3.
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------ --------------------
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $2,192 $2,500 $6,945 $7,225
Securities 365 367 1,081 1,113
Federal funds sold and other 70 18 163 48
------ ------ ------ ------
2,627 2,885 8,189 8,386
INTEREST EXPENSE
Deposits 1,176 1,323 3,691 3,703
Federal Home Loan Bank advances 267 295 819 942
------ ------ ------ ------
1,443 1,618 4,510 4,645
------ ------ ------ ------
NET INTEREST INCOME 1,184 1,267 3,679 3,741
Provision for loan losses 15 45
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,169 1,267 3,634 3,741
NONINTEREST INCOME
Loan gains 10 8 29 8
Other noninterest income 146 144 430 449
------ ------ ------ ------
156 152 459 457
------ ------ ------ ------
NONINTEREST EXPENSE
Compensation and benefits 470 402 1,298 1,219
Occupancy and equipment 122 122 349 357
Cashier's check loss 448
Merger costs 139 170
Other noninterest expense 355 391 978 1,091
------ ------ ------ ------
1,086 915 2,795 3,115
------ ------ ------ ------
INCOME BEFORE INCOME TAX 239 504 1,298 1,083
Income tax expense 62 171 383 368
------ ------ ------ ------
NET INCOME $ 177 $ 333 $ 915 $ 715
====== ====== ====== ======
Earnings per common share
Basic $ 0.18 $ 0.34 $ 0.93 $ 0.72
====== ====== ====== ======
Diluted $ 0.17 $ 0.33 $ 0.90 $ 0.70
====== ====== ====== ======
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
4.
POTTERS FINANCIAL CORPORATION
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
------ ------ ------ ------
NET INCOME $ 177 $ 333 $ 915 $ 715
Other comprehensive income (net of tax):
Change in unrealized gain/(loss) on securities
available for sale arising during the period 227 140 316 186
Reclassification adjustment for accumulated
(gains)/losses included in net income
------ ------ ------ ------
Total other comprehensive income 227 140 316 186
------ ------ ------ ------
COMPREHENSIVE INCOME $ 404 $ 473 $1,231 $ 901
====== ====== ====== ======
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
2001 2000
---- ----
BALANCE - JANUARY 1 $ 12,333 $ 11,020
Net income for the nine months ended September 30 915 715
Issuance of 625 common shares for the exercise
of stock options 7
Recognition and retention plan shares earned 15 14
Tax benefit arising from recognition and
retention plan shares and option exercises 23 19
Purchase of 28,850 treasury shares (281)
Cash dividends declared ($.35 per share in 2001
and $.29 per share in 2000) (349) (294)
Change in unrealized gain/(loss) on
securities available for sale 316 186
-------- --------
BALANCE - SEPTEMBER 30 $ 13,260 $ 11,379
======== ========
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
5.
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Nine months ended
September 30,
-----------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 915 $ 715
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 235 235
Provision for loan losses 45
Net amortization of securities 6 30
Net realized gain on:
Sales of loans (29) (8)
Sales of foreclosed real estate
and repossessed assets (23) (2)
Stock dividend on FHLB stock (70) (67)
Loans originated for sale (2,232) (713)
Proceeds from sales of loans held for sale 2,082 776
Net change in other assets and liabilities (226) 284
-------- --------
Net cash from operating activities 703 1,250
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Maturities, repayments and calls 11,797 3,252
Purchases (12,451)
Loan originations and payments, net 13,831 (4,060)
Loan purchases (1,275) (7,855)
Proceeds from sale of foreclosed real estate
and repossessed assets 261 10
Additions to property and equipment (1,167) (187)
-------- --------
Net cash from investing activities 10,996 (8,840)
-------- --------
- --------------------------------------------------------------------------------
(Continued)
6.
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Nine months ended
September 30,
-------------------
2001 2000
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (2,812) 8,779
Proceeds from FHLB advances 1,550 4,150
Repayments of FHLB advances (3,550) (5,950)
Other financing activities (244) (60)
Proceeds from exercise of stock options 7
Repurchase of common stock (281)
Cash dividends paid (349) (294)
-------- --------
Net cash from financing activities (5,398) 6,344
-------- --------
Net change in cash and cash equivalents 6,301 (1,246)
Cash and cash equivalents at beginning of period 4,820 7,280
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,121 $ 6,034
======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 4,671 $ 4,556
Income taxes 568 363
Supplemental noncash disclosure:
Transfer from loans to foreclosed real estate and
Repossessed assets $ 241 $ 183
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7.
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, 2001, 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
accounting principles generally accepted in the United States of America 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 2000 Annual Report.
All banking operations are considered by management to be aggregated in one
reportable operating segment.
Comprehensive income is reported for all periods. Other comprehensive income
includes the change in unrealized gains and losses on securities available for
sale.
A 5% stock dividend, paid from treasury shares in July 2000, reduced retained
earnings by $430,000. 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 vesting of recognition and retention plan
shares. Following is a summary of shares used in computing EPS:
Three months ended Nine months ended
------------------- -----------------
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Weighted average common shares
outstanding for basic EPS 989,963 990,139 988,398 995,337
Add: Dilutive effects of assumed
exercises of stock options and
recognition and retention plan 40,953 20,933 33,978 21,879
--------- --------- ----------- ---------
Average shares and dilutive potential
common shares 1,030,916 1,011,072 1,022,376 1,017,216
========= ========= =========== =========
As of September 30, 2001, there were no antidilutive stock options. As of
September 30, 2000, there were 31,078 antidilutive stock options. Antidilutive
stock options are those for 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.
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES AVAILABLE FOR SALE
Securities available for sale were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(Dollars in thousands)
September 30, 2001
- ------------------
U.S. government and
federal agencies $ 8,909 $ 130 $ (17) $ 9,022
States and municipalities 3,839 133 (4) 3,968
Other 186 1 187
Mortgage-backed securities 8,928 177 (7) 9,098
-------- -------- -------- --------
21,862 441 (28) 22,275
Equity securities 22 7 29
-------- -------- -------- --------
$ 21,884 $ 448 $ (28) $ 22,304
======== ======== ======== ========
December 31, 2000
- -----------------
U.S. government and
federal agencies $ 9,496 $ 9 $ (110) $ 9,395
States and municipalities 2,282 95 2,377
Other 259 1 260
Mortgage-backed securities 9,176 22 (75) 9,123
-------- -------- -------- --------
21,213 127 (185) 21,155
Equity securities 22 22
-------- -------- -------- --------
$ 21,235 $ 127 $ (185) $ 21,177
======== ======== ======== ========
Contractual maturities of debt securities available for sale at September 30,
2001 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.
Amortized Estimated
Cost Fair Value
---- ----------
(Dollars in thousands)
Due in one year or less $ 3 $ 3
Due after one year through five years 4,093 4,214
Due after five years through ten years 1,366 1,370
Due after ten years 7,472 7,590
Mortgage-backed securities 8,928 9,098
-------- ---------
$ 21,862 $ 22,275
======== =========
Available-for-sale securities totaling $9.5 million were called in 2001,
resulting in no gain or loss.
The carrying value of securities pledged as collateral for public funds totaled
$7.7 million at September 30, 2001.
- --------------------------------------------------------------------------------
9.
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable were as follows: September 30, December 31,
2001 2000
---- ----
(Dollars in thousands)
Real estate loans
One-to-four family residences $ 66,981 $ 78,463
Loans held for sale 275 96
Nonresidential property 20,169 19,572
Multifamily and other 2,683 2,839
----------- -----------
90,108 100,970
----------- -----------
Consumer and other loans
Home equity loans 11,945 13,282
Purchased second mortgage loans 3,417 4,631
Consumer loans and lines of credit 1,493 1,920
Commercial business loans 1,426 1,555
Other 1,581 1,854
----------- -----------
19,862 23,242
----------- -----------
Total loan principal balances 109,970 124,212
Undisbursed loan funds (1,426) (2,909)
Premiums on purchased loans,
and net deferred loan (fees) costs 460 564
Allowance for loan losses (1,828) (1,964)
----------- -----------
$ 107,176 $ 119,903
=========== ===========
Activity in the allowance for loan losses was as follows:
Nine months ended
September 30,
-------------------------------
2001 2000
---- ----
(Dollars in thousands)
Beginning balance $ 1,964 $ 2,037
Provision for loan losses 45
Recoveries 25 30
Charge-offs (206) (97)
----------- -----------
Ending balance $ 1,828 $ 1,970
=========== ===========
Nonaccrual and renegotiated loans totaled $1,003,000 and $841,000 at September
30, 2001 and December 31, 2000. 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 because nonperforming loans
consisted primarily of residential mortgages and consumer loans that are not
separately analyzed for impairment.
NOTE 4 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank ("FHLB") advances were as follows:
September 30, December 31,
2001 2000
---- ----
(Dollars in thousands)
Maturities March 2001 through May 2010, primarily
convertible fixed rate, from 5.54% to 6.50%, averaging 5.99% $ 19,500
Maturities March 2002 through May 2010, primarily
convertible fixed rate, from 5.61% to 6.50%, averaging 6.04% $ 17,500
----------- -----------
$ 17,500 $ 19,500
=========== ===========
- --------------------------------------------------------------------------------
10.
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - FEDERAL HOME LOAN BANK ADVANCES (Continued)
FHLB advances are payable at maturity, or prior to maturity with prepayment
penalties. At September 30, 2001, 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, 2001, scheduled maturities of advances were as follows:
Maturities
----------
(Dollars in thousands)
Due in one year or less $ 4,000
Due after one year through two years 1,500
Due after two years through three years
Due after five years 12,000
-----------
$ 17,500
NOTE 5 - STOCK OPTIONS
A summary of activity relating to stock options during the periods listed was as
follows:
Nine months ended Nine months ended
September 30, 2001 September 30, 2000
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding - January 1 106,069 $ 7.86 85,078 $ 7.80
Granted 26,351 8.57
Exercised (625) 11.82
Expired unexercised (787) 12.44 (1,580) 12.44
--------- --------
Outstanding - September 30 104,657 7.81 109,849 7.99
========= ========
NOTE 6 - COMMITMENTS AND CONTINGENCIES
LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
LOAN COMMITMENTS: Some financial instruments, such as loan commitments, credit
lines, letters of credit and overdraft protection are issued to meet customer
financing needs. These are agreements to provide credit or to support the credit
of others, as long as conditions established in the contract are met, and
usually have expiration dates. Commitments may expire without being used.
Off-balance sheet risk of credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies used to make commitments are also used for loans, including obtaining
collateral at exercise of the commitment.
- --------------------------------------------------------------------------------
11.
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued)
Financial instruments with off-balance sheet risk at September 30, 2001 were as
follows:
Fixed Variable
Rate Rate
---- ----
(Dollars in thousands)
Commitments to make loans
(at market rates) $ 1,439 $ 1,146
Unused lines of credit and
letters of credit 6,435
Commitments to make loans are generally made for periods of 60 days or less. The
fixed-rate loan commitments have interest rates ranging from 6.375% to 7.125%,
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. Loan purchases have been used to supplement local
loan originations and have resulted in the following concentrations as of
September 30, 2001 (dollars in thousands):
Northwest Southwest Hilton Local
Ohio Ohio Head, SC Indiana(1) and other Total
---- ---- -------- ------- --------- -----
(Dollars in thousands)
One-to-four family residences $ 7,430 $ 1,836 $ 3,018 $ 3,764 $16,048
Multifamily and nonresidential 2,562 1,973 $ 458 4,993
First mortgage home equity 4,949 4,949
Second mortgages 3,417 3,417
------- ------- ------- ------- ------- -------
Total Purchased Loans $ 9,992 $ 3,809 $ 3,018 $12,130 $ 458 $29,407
======= ======= ======= ======= ======= =======
- ----------
(1) 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 $7.0
million at September 30, 2001. Of the $7.0 million, $285,000 were purchased real
estate loans from southwestern Ohio, also reported above.
NOTE 8 - SIGNING OF AGREEMENT AND PLAN OF MERGER
On September 6, 2001, PFC announced that its directors had signed a definitive
agreement to be acquired by United Community Financial Corp., the $1.9 billion
holding company of The Home Savings and Loan Company and Butler Wick Corp.
United Community has agreed to pay $22.00 per share in cash to PFC shareholders.
The transaction is subject to approval by regulatory authorities and PFC
shareholders, and is expected to close during the first quarter of 2002. At that
time, Potters Bank will be merged into The Home Savings and Loan Company and
Potters Bank branches will become offices of Home Savings. Home Savings operates
29 full-service banking offices and four loan production offices across
northeastern and northcentral Ohio. Butler Wick provides retail brokerage,
capital markets and trust services in northern Ohio and western Pennsylvania.
- --------------------------------------------------------------------------------
12.
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, 2001 and December 31, 2000, and
its results of operations for the three and nine months ended September 30, 2001
and 2000. 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:
ALLOWANCE AND PROVISION FOR LOAN LOSSES - Management's statements regarding the
amount and adequacy of the allowance for loan losses.
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.
PENDING MERGER
On September 6, 2001, Potters Financial Corporation announced that its directors
had signed a definitive agreement to be acquired by United Community Financial
Corp., the $1.9 billion holding company of The Home Savings and Loan Company and
Butler Wick Corp. United Community has agreed to pay $22.00 per share in cash to
PFC shareholders, subject to the approval of regulatory authorities and PFC
shareholders. The transaction is expected to be complete during the first
quarter of 2002. At that time, Potters Bank will be merged into The Home Savings
and Loan Company and Potters Bank branches will become offices of Home Savings.
Home Savings operates 29 full-service banking offices and four loan production
offices throughout northeastern and northcentral Ohio. Butler Wick provides
retail brokerage, capital markets and trust services in northern Ohio and
western Pennsylvania.
RESULTS OF OPERATIONS
PFC recorded net income of $177,000, or $.17 per diluted share, for the third
quarter of 2001, compared to net income of $333,000, or $.33 per diluted share,
for the third quarter of 2000. Third quarter 2001 net income was $156,000 lower
than during the same quarter of 2000, primarily from higher noninterest expense
and lower net interest income. The increase in noninterest expense was
attributable to costs of operating the new Beaver Office and costs related to
the impending merger. Earnings per diluted share decreased $.16 compared to
earnings per diluted share of $.33 during the third quarter of 2000. Annualized
returns on average
13.
shareholders' equity and average assets were 5.41% and .48% for the three months
ended September 30, 2001, compared to 11.78% and .89% for the third quarter of
2000.
Net income for the nine months ended September 30, 2001 was $915,000, or $.90
per diluted share, compared to $715,000, or $.70 per diluted share, an increase
of 28.0% in net income and an increase of 28.6% in earnings per share. Excluding
nonrecurring events during both years, the check fraud loss of $448,000
($296,000 net of tax) and the receipt of $29,000 ($19,000 net of tax) from a
shareholder pursuant to an order of the Office of Thrift Supervision under its
change of control regulations during 2000 and merger related costs of $170,000
($112,000 net of tax) during 2001, net income for the nine months ended
September 30, 2001 was $1.0 million, an increase of $35,000, or 3.5%, over net
income of $992,000 through September 30, 2000. Adjusted earnings per share also
increased, from $.97 per diluted share during the first three quarters of 2000
to $1.00 per diluted share for the same time period during 2001, an increase of
3.1%. Annualized returns on average shareholders' equity and average assets for
the first nine months of 2001 were 9.28% and .81%, compared to 8.39% and .64%
for the first nine months of 2000. Returns adjusted for nonrecurring income and
expense of 10.33% on average shareholders' equity and .91% on average assets
were realized during the nine months ended September 30, 2001, compared to
11.36% and .89% through September 2000.
Interest income decreased $258,000, or 8.9%, during the third quarter of 2001
compared to 2000, primarily from a 12.3% decrease in loan interest income due to
significant repayment activity and heightened loan refinancing from declining
interest rates and calls of higher yielding securities. Interest expense
decreased $175,000, or 10.8%, during the third quarter of 2001 compared to 2000
due primarily to declining rates and lower levels of deposits and borrowings.
Net interest income decreased $83,000, or 6.6%, during the third quarter of
2001.
Net interest income for the nine months ended September 30, 2001 of $3.7 million
was $62,000, or 1.7%, lower than for the first nine months of 2000, with a
decrease of $197,000 in interest income and a decrease of $135,000 in interest
expense. Average balances of loans were $4.0 million lower during the first nine
months of 2001 than during 2000, while the yield on loans increased to 8.23%
during 2001 from 8.21% during 2000. An increase of $3.2 million in the average
balance of deposits occurred during the first nine months of 2001 compared to
the first nine months of 2000, along with a decrease of $3.1 million in the
average balance of borrowings. The rates paid on average deposits declined, from
4.31% during the first nine months of 2000 to 4.19% during 2001, while the rates
paid on borrowed funds increased from 5.92% during the first nine months of 2000
to 6.03% during 2001.
The yield on average earning assets declined from 7.87% during the first nine
months of 2000, to 7.77% during the first nine months of 2001 due to repayment
of higher yielding loans and calls of higher yielding securities. The cost of
funds decreased from 4.56% to 4.43% during the same time periods from reduced
rates paid on deposits indexed to market rates and lower rates paid on new and
renewing certificates of deposit. The result was a slightly increasing interest
rate spread, from 3.31% during the first nine months of 2000, to 3.34% during
the first nine months of 2001.
During the three and nine months ended September 30, 2001, gains generated on
loan sales were $10,000 and $29,000, compared to gains of $8,000 for the third
quarter and the first nine months of 2000. All loan sales during 2000 and most
sales during 2001 were on a servicing released basis. During the third quarter
of 2001, other noninterest income remained near static, while for the nine
months ended September 30, 2001, noninterest income increased $10,000, or 2.4%,
excluding nonrecurring PFC miscellaneous income from 2000. Deposit service
charges, ATM/VISA check card fees, loan fees and other fees for customer
services increased $66,000, or 20.6%, during the first nine months of 2001
compared to the prior year. Offsetting these increases were a decrease of
$14,000 in rental income on leased office space, net costs of $13,000 on
foreclosed real estate and lower other nonoperating income.
14.
Noninterest expense increased $171,000, or 18.7%, during the third quarter of
2001, compared to the third quarter of 2000, primarily from professional fees
relating to the proposed merger and increased costs from the new Beaver Branch.
Compensation and benefits increased $68,000, primarily due to the addition of
the Beaver Office staff, increased costs for healthcare benefits and lower
deferrals for loan originations due to lower loan volume. Occupancy and
equipment costs remained constant during both third quarters, fees relating to
the proposed merger of $139,000 were incurred during the third quarter of 2001
and other noninterest expense decreased $36,000 from the year ago quarter.
Noninterest expense decreased $320,000, or 10.3%, during the first nine months
of 2001 compared to 2000, with a $79,000 increase in compensation and benefits,
an $8,000 decrease in occupancy and equipment costs, a $113,000 decrease in
other noninterest expense, the $448,000 check fraud expense during 2000 and
$170,000 in merger related costs during 2001. The closing of the Mentor loan
production office in 2000 had a positive impact on all noninterest expense, as
did cost controls, while Potters Bank's new full-service facility in Beaver,
Pennsylvania, completed during the second quarter and opened on July 2, 2001,
had a negative impact on noninterest expense compared to 2000. Data processing
and advertising costs increased during 2001 compared to 2000, as did
communication costs with the addition of the new branch, while ATM/VISA check
card fees and dues and subscriptions decreased. Legal and professional fees
increased during 2001 due to costs related to the United Community merger.
Excluding merger related costs of $170,000 during 2001 and the check fraud loss
of $448,000 during 2000, noninterest expense decreased $42,000, or 1.6%, despite
the opening of the Beaver office.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses decreased $136,000 from year-end and was $1.8
million at September 30, 2001. Charge-offs of $206,000, primarily residential
real estate and consumer loans, during the first nine months of 2001 were
somewhat offset by provisions of $45,000 and recoveries of $25,000. During the
first nine months of 2000, the allowance for loan losses remained relatively the
same at $2.0 million. Charge-offs totaled $97,000 during the first nine months
of 2000, consisting primarily of consumer loans, and were partially offset by
$30,000 in recoveries.
Nonperforming loans of $1.0 million at September 30, 2001 increased from
$841,000 at December 31, 2000. Nonperforming loans at September 30, 2001
consisted primarily of one-to-four family real estate secured loans, with
approximately 61.4% resulting from the purchased loan packages, 24.9% from
internally generated one-to-four family real estate loans, 8.0% from commercial
real estate loans, 3.9% resulting from consumer loans and 1.8% resulting from
nonconforming real estate loan programs. At September 30, 2001, nonperforming
loans represented .68% of total assets. The allowance for loan losses
represented 182.3% of nonperforming loans at September 30, 2001, compared to
233.5% at December 31, 2000. The decline in the allowance percentage was the
result of both increasing nonperforming loans and increasing charge-offs in the
loan portfolio. No loans were designated impaired at September 30, 2001 or
December 31, 2000.
FINANCIAL CONDITION
PFC's assets declined during the first nine months of 2001, from $151.4 million
at December 31, 2000 to $147.0 million at September 30, 2001. Significant loan
repayment activity, heightened loan refinancing from declining interest rates
and calls of securities were experienced during 2001, from uncertainty in the
financial markets regarding the future course of the economy and interest rates.
Excess cash flows were used to pay off a Federal Home Loan Bank ("FHLB")
15.
advance and to fund deposit outflows resulting from a less aggressive pricing
strategy on interest rates offered for public funds and certificates of deposit.
Repayments in the loan portfolio resulted in a significant increase in cash and
cash equivalents at September 30, 2001 from December 31, 2000.
Securities available for sale increased $1.1 million, to $22.3 million at
September 30, 2001, compared to $21.2 million at December 31, 2000. Securities
totaling $9.5 million were called during the first three quarters of 2001 and
replaced. 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 $39,000 at year-end 2000 and became an unrealized gain of
$277,000 at September 30, 2001, primarily from declining interest rates.
Net loans decreased from $119.9 million at December 31, 2000, to $107.2 million
at September 30, 2001, a decrease of $12.7 million, or 10.6%. Loans purchased
totaled $1.3 million during 2001 and loan repayments exceeded loans originated
by $13.8 million. Loans originated for sale during 2001 totaled $2.2 million and
proceeds from sales of loans totaled $2.1 million, generating gains of $29,000.
Real estate loans decreased $10.9 million, or 10.8%, during 2001, with an $11.3
million decrease in one-to-four family real estate loans, somewhat offset by a
$441,000 increase in multifamily and commercial real estate loans.
Two nonconforming real estate loan programs, which charge slightly higher
interest rates on single-family residential real estate loans to persons who are
considered slightly higher credit risks, totaled $6.9 million at September 30,
2001, $285,000 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, by following stringent loan collection procedures and by adhering 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
nonconforming loans than to conforming real estate loans. One such loan totaling
$18,000 was nonperforming at September 30, 2001.
Total deposits decreased $2.8 million during 2001, to $115.0 million at
September 30, 2001. Outflows occurred primarily in certificates of deposit. The
Asset and Liability Management Committee continues to focus on strategies for
reduced interest rate risk and responsible deposit management. Such strategies
include setting competitive rates on selected certificates of deposit with
maturity dates exceeding one year and utilizing tiered interest rates based on
the amount on deposit.
FHLB advances totaled $17.5 million at September 30, 2001, compared to $19.5
million at December 31, 2000. Advances were used primarily to meet liquidity
needs during 2001. Advance repayments totaled $3.6 million during 2001.
Shareholders' equity increased $927,000 during 2001 due primarily to net income
of $915,000 and a $316,000 positive change in the unrealized gain/loss on
securities available for sale, offset by the payment of $349,000, or $.35 per
share, in dividends.
LIQUIDITY AND CAPITAL RESOURCES
Normal, recurring sources of funds are primarily customer deposits, securities
available for sale, maturities, loan repayments and other funds provided by
operations. Potters Bank has the ability to borrow from the FHLB when needed as
a secondary source of liquidity.
16.
The most significant components of cash flows from investing activities during
the first nine months of 2001 were net loan payments of $13.8 million and
securities calls and repayments of $11.8 million, offset by $12.5 million in
securities purchases. Significant investing activities during the first nine
months of 2000 were loan purchases of $7.9 million and net loan originations of
$4.1 million, offset by securities repayments of $3.3 million.
Financing activities during 2001 included deposit outflows of $2.8 million and
proceeds from FHLB advances of $1.6 million, offset by repayments of $3.6
million. Deposit inflows of $8.8 million occurred during the first nine months
of 2000, while other financing activities included net FHLB advance repayments
of $1.8 million and the purchase of 28,850 shares for $281,000.
Potters Bank's average regulatory liquidity ratio for September 2001 was 16.66%.
At September 30, 2001, Potters Bank had commitments to originate loans of $2.6
million and unused lines and letters of credit totaling $6.4 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, 2001 (dollars in thousands):
Tangible Core Risk-based
Capital Capital Capital
------------------ ------------------ ------------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
Regulatory capital -
computed $12,574 8.56% $12,574 8.56% $13,723 15.04%
Minimum capital
requirement 2,204 1.50 5,878 4.00* 7,300 8.00
------- ----- ------- ----- ------- -----
Regulatory capital -
excess $10,370 7.06% $ 6,696 4.56% $ 6,423 7.04%
======= ===== ======= ===== ======= =====
- ----------
*Savings associations that meet certain requirements may be permitted to
maintain minimum core capital of 3.00%.
17.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 2 Agreement and Plan of Merger Incorporated by reference to the
Form 8-K filed with the Securities
and Exchange Commission (the
"SEC") on September 6, 2001.
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 (SEC File No. 0-27980).
Exhibit 3.2 Code of Regulations of Potters Incorporated by reference to the
Financial Corporation Form 8-A filed with the SEC on
March 4, 1996 (SEC File No.
0-27980).
Exhibit 11 Statement re: computation of See Note 1 to consolidated
per share earnings financial statements included
herewith.
Exhibit 99 Safe Harbor Under the Private Included herewith.
Securities Litigation Reform Act of 1995
B. Reports on Form 8-K.
On September 6, 2001, Potters Financial Corporation filed a Form 8-K
reporting that it had entered into a definitive agreement to be acquired by
United Community Financial Corp.
18.
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 7, 2001 By: /s/ Edward L. Baumgardner
-----------------------------------------
Edward L. Baumgardner
Duly Authorized Representative,
President and Chief Executive Officer
By: /s/ Anne S. Myers
------------------------------------------
Anne S. Myers
Principal Financial Officer and
Principal Accounting Officer
19.