Page 1 of 22 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, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM ________ TO ________
Commission file number: 0-27980
Potters Financial Corporation
------------------------------------
(Exact name of small business issuer
as specified in its charter)
Ohio 34-1817924
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
519 Broadway, East Liverpool, Ohio 43920
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (330) 385-0770
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes ____X____ No _________
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Shares, no par value Outstanding at October 22, 1996
506,169 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes _________ No ____X____
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1996
Part I - Financial Information
Item 1. Financial Statements
Interim financial information required by Regulation 210.10-01 of
Regulation S-X is included in this Form 10-QSB as referenced below:
Page
Number(s)
----------
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-21
Part II - Other Information
Item 1. Legal Proceedings 21
Item 2. Change in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of
Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
-2-
POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in thousands)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Cash and due from banks $ 2,394 $ 3,076
Interest-bearing deposits with Federal Home Loan Bank 335 2,675
Federal funds sold and cash management account 344 5,479
--------- ---------
Cash and cash equivalents 3,073 11,230
Investment securities available for sale,
at estimated fair value (Note 2) 27,785 10,952
Investment securities held to maturity (estimated
fair value: September 30, 1996 - $7,790;
December 31, 1995 - $8,899) (Note 2) 7,923 8,872
Mortgage-backed securities held to
maturity (estimated fair value: September 30, 1996 -
$25,539; December 31, 1995 - $29,041) (Note 2) 26,216 29,240
Federal Home Loan Bank stock 808 709
Loans receivable, net (Note 3) 56,076 49,889
Premises and equipment, net 1,776 1,585
Other assets 1,840 1,765
--------- ---------
Total assets $ 125,497 $ 114,242
========= =========
LIABILITIES
Deposits $ 97,954 $ 98,697
Federal Home Loan Bank advances (Note 4) 15,901 3,018
Official checks 435 755
Advances from borrowers for taxes and insurance 86 166
Accrued expenses and other liabilities 820 417
--------- ---------
Total liabilities 115,196 103,053
--------- ---------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
Common shares, no par value at September 30, 1996;
$1.00 par value at December 31, 1995
Authorized: 10,000,000 shares;
Issued: 532,809 shares 533
Paid-in capital 4,813 4,280
Treasury shares (26,640 shares at cost) (436)
Unearned compensation on
recognition and retention plan (118) (118)
Unrealized loss on investment
securities available for sale, net of tax (176) (23)
Retained earnings, substantially restricted 6,218 6,517
--------- ---------
Total shareholders' equity 10,301 11,189
--------- ---------
Total liabilities and shareholders' equity $ 125,497 $ 114,242
========= =========
See accompanying notes to financial statements.
-3-
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(Dollars in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
------ ------ ------ ------
Interest income
Loans $ 1,096 $ 1,137 $ 3,295 $ 3,324
Investment securities 541 347 1,336 1,047
Mortgage-backed securities 434 507 1,340 1,539
Other interest income 15 61 132 101
-------- ------- ------- -------
Total interest income 2,086 2,052 6,103 6,011
-------- ------- ------- -------
Interest expense
Interest on deposits 1,050 1,074 3,168 3,081
Other interest expense 130 31 192 74
-------- ------- ------- -------
Total interest expense 1,180 1,105 3,360 3,155
-------- ------- ------- -------
Net interest income 906 947 2,743 2,856
Provision for loan losses (Note 3) 45 249 200
-------- ------- ------- -------
Net interest income after
provision for loan losses 906 902 2,494 2,656
Loan and investment security gains (losses) (4) 2 (3) 5
Other noninterest income 75 64 193 180
-------- ------- ------- -------
Total noninterest income 71 66 190 185
-------- ------- ------- -------
Compensation and benefits 368 338 1,036 1,020
Occupancy and equipment 99 80 263 242
FDIC deposit insurance premiums 701 64 829 193
Other noninterest expense 284 256 840 792
-------- ------- ------- -------
Total noninterest expense 1,452 738 2,968 2,247
-------- ------- ------- -------
Income (loss) before income tax (475) 230 (284) 594
Income tax benefit (157) (79)
--------- ------- -------- --------
Net income (loss) $ (318) $ 230 $ (205) $ 594
========= ======= ======== =======
Earnings (loss) per share $ (0.63) $ 0.43 $ (0.39) $ 1.12
========= ======= ======== =======
See accompanying notes to financial statements.
-4-
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
1996 1995
------ ------
Balance - January 1 $ 11,189 $ 9,793
Net income for the nine months ended September 30 (205) 594
Purchase of 26,640 treasury shares (436)
Cash dividends declared ($.18 per share in 1996
and $.10 per share in 1995) (94) (53)
Change in net unrealized gain (loss) on
securities available for sale (153) 509
-------- --------
Balance - September 30 $ 10,301 $ 10,843
======== ========
See accompanying notes to financial statements.
-5-
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
Nine months ended
September 30,
1996 1995
------ ------
Cash flows from operating activities
Net income $ (205) $ 594
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 108 94
Provision for losses 249 200
Net investment amortization 51 76
Net (gain) loss on:
Investment and mortgage-backed securities 4 (3)
Sale of student loans (1) (2)
Sale of foreclosed real estate and
repossessed assets 14 3
Stock dividend on FHLB stock (37) (35)
Change in other assets and liabilities 330 (478)
-------- -------
Net cash from operating activities 513 449
-------- -------
Cash flows from investing activities
Net change in interest-bearing balances with banks 100
Investment securities available for sale
Proceeds from sales 3,494 3,385
Proceeds from calls and maturities 3,296 250
Purchases (23,856) (3,578)
Investment securities held to maturity
Proceeds from repayments, calls and maturities 1,936 2,513
Purchases (984) (2,503)
Mortgage-backed securities held to maturity
Proceeds from principal repayments 2,967 2,854
Purchase of FHLB stock (62) (16)
Net increase in loans (153) (1,201)
Loan purchases (6,822)
Proceeds from sale of loans 513 300
Proceeds from sale of foreclosed real estate
and repossessed assets 88 40
Property and equipment expenditures (297) (23)
-------- -------
Net cash from investing activities (19,880) 2,121
-------- -------
(Continued)
-6-
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
Nine months ended
September 30,
1996 1995
------ ------
Cash flows from financing activities
Net decrease in deposits (743) (799)
Proceeds from FHLB advances 15,580 3,350
Repayments of FHLB advances (2,697) (1,017)
Net change in official checks (320) (7)
Net decrease in advances from
borrowers for taxes and insurance (80) (57)
Treasury share purchases (436)
Cash dividends paid (94) (53)
-------- -------
Net cash from financing activities 11,210 1,417
-------- -------
Net change in cash and cash equivalents (8,157) 3,987
Cash and cash equivalents at beginning of year 11,230 3,038
-------- -------
Cash and cash equivalents at end of year $ 3,073 $ 7,025
======== =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 3,302 $ 3,139
Income taxes 116 210
Noncash transactions
Transfer from loans to foreclosed real estate
and repossessed assets 23 12
Transfer from investment securities available
for sale to investment securities held to maturity 1,000
See accompanying notes to consolidated financial statements.
-7-
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Potters Financial Corporation ("PFC"), a unitary savings and loan holding
company, owns all of the issued and outstanding common shares of The Potters
Savings and Loan Company ("Potters"), a savings and loan association. Both
entities are headquartered at 519 Broadway in East Liverpool, Ohio.
The accompanying consolidated financial statements include the accounts of
PFC, Potters and its wholly-owned subsidiary, Potters Financial Service
Corporation. All significant intercompany accounts and transactions 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, 1996, and
its results of operations and statement of 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 Potters
and notes thereto included in the 1995 Annual Report.
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights" was adopted by Potters on January 1, 1996, and
requires companies to recognize as separate assets, rights to service mortgage
loans for others, however those servicing rights are acquired. Mortgage
servicing rights are recorded as a separate asset when loans are sold or
securitized, and amortized in proportion to, and over the period of, estimated
net servicing income. Because Potters did not sell or securitize loans in
1996, the adoption of this statement did not impact net income for the period.
Based on Potters' historical sales volume, SFAS No. 122 is not expected to
have a material impact on Potters' net income. Any loan sales occurring in the
future will be recorded according to the provisions of SFAS No. 122.
In 1996, PFC is adopting SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, use of a fair
value based method to account for plans such as PFC's stock option plan. If
the fair value accounting treatment encouraged by SFAS No. 123 is not adopted,
entities must disclose the pro forma effect on net income and earnings per
share had such accounting treatment been adopted. PFC elected to disclose the
pro forma effect of the fair value accounting for stock options granted in
1995 and thereafter, and will include appropriate disclosures in the 1996
annual financial statements.
Earnings per share was calculated on the basis of the weighted average number
of shares outstanding during the period. Such weighted average shares were
506,169 for the third quarter of 1996 and 522,114 for the nine months ended
September 30, 1996. Weighted average shares during both periods in 1995
totaled 529,809.
The provision for income taxes is based upon the effective tax rate expected
to be applicable for the entire year.
(Continued)
-8-
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair value of investments in debt and equity
securities and mortgage-backed securities are as follows at September 30, 1996
(dollars in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Investment securities available
for sale:
U.S. Treasury and U.S.
Government agencies $ 22,286 $ 13 $ (246) $ 22,053
Mutual funds 5,766 (34) 5,732
--------- --------- --------- ---------
$ 28,052 $ 13 $ (280) $ 27,785
========= ========= ========= =========
Investment securities held to
maturity:
U.S. Treasury and U.S.
Government agencies $ 6,851 $ $ (180) $ 6,671
Obligations of states and
political subdivisions 178 34 212
Other securities 894 13 907
--------- --------- --------- ---------
$ 7,923 $ 47 $ (180) $ 7,790
========= ========= ========= =========
Mortgage-backed securities $ 26,216 $ 48 $ (725) $ 25,539
========= ========= ========== =========
The amortized cost and estimated fair value of debt securities at September
30,1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity
-------------------- ------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
(dollars in thousands)
Due in one year or less $ 29 $ 29
Due after one year through five years $18,492 $17,344 4,151 4,088
Due after five years through ten years 3,794 4,709 2,393 2,321
Due after ten years 1,350 1,352
------- ------- ------- --------
$22,286 $22,053 $ 7,923 $ 7,790
======= ======= ======= ========
(Continued)
-9-
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
Proceeds from the sale of investment securities available for sale during the
nine months ended September 30, 1996 totaled $3.5 million and resulted in a
loss of $4,000. During 1996, securities totaling $3.8 million were called. The
net unrealized holding loss on securities available for sale increased by
$225,000 during 1996. There were no sales or transfers of investment or
mortgage-backed securities held to maturity during any period presented.
Proceeds from the sale of investment securities available for sale during the
nine months ended September 30, 1995 totaled $3.4 million and resulted in a
$3,000 gain. Two agency securities totaling $1.0 million were transferred, at
fair value, from the available for sale portfolio to the held to maturity
portfolio during 1995.
The carrying value of investment securities pledged as collateral for public
funds amounted to $2.0 million at September 30, 1996.
The amortized cost and estimated fair value of investments in debt and equity
securities are as follows at December 31, 1995 (dollars in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Investment securities available
for sale:
U. S. Government agencies $ 10,994 $ 8 $ (50) $ 10,952
========= ========= ========= =========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Investment securities held to maturity:
U.S. Treasury and U.S.
Government agencies $ 7,666 $ 18 $ (41) $ 7,643
Obligations of states and
political subdivisions 178 37 215
Other securities 1,028 13 1,041
--------- --------- --------- ---------
$ 8,872 $ 68 $ (41) $ 8,899
========= ========= ========= =========
Mortgage-backed securities $ 29,240 $ 120 $ (319) $ 29,041
========= ========= ========== =========
(Continued)
-10-
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized below (dollars in thousands):
September 30, December 31,
1996 1995
------------- ------------
Real estate loans
One-to-four family residences $ 42,561 $ 33,007
Nonresidential property 6,236 9,385
Multifamily and other 2,023 2,106
--------- ---------
50,820 44,498
Consumer and other loans
Loans on deposits 564 562
Home improvement and equity loans 3,875 3,314
Automobile loans 383 413
Mobile home loans 963 1,280
Commercial loans and unsecured lines of credit 852 1,563
Other 946 1,043
--------- ---------
7,583 8,175
--------- ---------
Total loan principal balances 58,403 52,673
Loans in process (242) (477)
Unearned interest and deferred fees,net 16 (67)
Allowance for loan losses (2,101) (2,240)
--------- ---------
$ 56,076 $ 49,889
========= =========
Nonaccrual and renegotiated loans totaled $2.7 million and $2.4 million at
September 30, 1996 and December 31, 1995, respectively. Potters is not
committed to lend additional funds to debtors whose loans have been modified.
Activity in the allowance for loan losses is as follows (dollars in
thousands):
Nine months ended
September 30,
1996 1995
------ ------
Balance at beginning of year $ 2,240 $ 1,963
Provision for loan losses 249 200
Recoveries 28 38
Charge-offs (416) (43)
-------- -------
Balance at end of year $ 2,101 $2,158
======== ======
Information regarding impaired loans, which is included in nonaccrual and
renegotiated loans disclosed above, is as follows for the nine months ended
September 30, 1996 (dollars in thousands):
1996 1995
------ ------
Average investment in impaired loans $ 403 $ 330
======= =======
Interest income recognized on impaired loans
including interest income recognized on a
cash basis $ 23 $ 0
======= =======
Interest income recognized on impaired loans
on a cash basis $ 23 $ 0
======= =======
(Continued)
-11-
NOTE 3 - LOANS RECEIVABLE (Continued)
Information regarding impaired loans at September 30, 1996 and December 31,
1995 is as follows (dollars in thousands):
September 30, December 31,
1996 1995
------------- ------------
Balance of impaired loans $ 489 $ 193
Less portion for which no allowance for
loan losses is allocated (489) (193)
------- -------
Portion of impaired loan balance for which an
allowance for loan losses is allocated $ 0 $ 0
======= =======
Portion of allowance for loan losses allocated
to the impaired loan balance $ 0 $ 0
======= =======
NOTE 4 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank ("FHLB") advances as of September 30, 1996 are as
follows (dollars in thousands):
Variable-rate advances with monthly interest payments:
5.650% Libor Advance due December 23, 1996 $ 1,000
5.726% Libor Advance due July 15, 1999 1,000
5.542% Libor Advance due August 22, 2000 1,000
5.710% Libor Advance due July 17, 2001 1,000
5.675% Libor Advance due July 23, 2001 1,000
5.550% Libor Advance due August 21, 2001 1,000
5.581% Libor Advance due August 27, 2001 1,000
5.687% Libor Advance due September 4, 2001 1,000
5.706% Libor Advance due September 5, 2001 1,000
5.550% Libor Advance due November 13, 2001 1,000
Variable-rate Cash Management Advance with monthly interest payments:
5.450% Cash Management Advance due November 25, 1996 750
Fixed-rate advances with monthly interest payments:
5.67% Advance due November 27, 1998 750
5.80% Advance due May 28, 1997 3,830
Fixed-rate advances with monthly principal and
interest payments:
6.05% Advance due August 14, 1998 383
5.85% Advance due September 1, 1999 188
--------
$ 15,901
========
FHLB advances obtained through the Community Investment Program are amortizing
loans requiring monthly principal payments. As of September 30, 1996, the
aggregate future minimum annual principal payments on FHLB advances are $1.8
million in 1996, $4.1 million in 1997, $945,000 in 1998, $1.0 million in 1999
and $8.0 million in 2000 and beyond. As of September 30, 1996, the Company has
requested and was approved to borrow a total of $5.5 million in cash
management advances. FHLB advances are collateralized by all shares of FHLB
stock owned by Potters and by 100% of its qualified real estate loan
portfolio.
(Continued)
-12-
NOTE 5 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, Potters has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. These include certain claims
and legal actions arising in the ordinary course of business. In the opinion
of management, after consultation with legal counsel, the ultimate disposition
of these matters is not expected to have a material adverse effect on the
consolidated financial position of PFC.
Potters is a party to and a creditor in the Chapter 11 Bankruptcy Proceedings
of the Bennett Funding Group, Inc. (the "Bennett Group"). Bankruptcy counsel
in New York has been engaged to represent Potters' interests in the case. A
Trustee appointed by the bankruptcy court continues the investigation into the
activities of the Bennett Group. Counsel has advised Potters that there is no
certainty at this time as to the exact duration of the case nor the amount of
funds which will ultimately be collected through the Trustee. At September 30,
1996, Potters' investment in the equipment lease credit was $365,000 after
$377,000 was charged off in the first quarter of 1996.
Loan Commitments
As of September 30, 1996, Potters had commitments to make loans (at market
rates) and unused lines of credit approximating $3,191,000, of which $159,000
carry fixed rates, ranging from 7.875% to 10.99%, and $3,032,000 carry
adjustable rates. Since loan commitments may expire without being used, the
amounts do not necessarily represent future cash commitments.
NOTE 6 - CONCENTRATIONS OF CREDIT RISK
Most of Potters' current business activities are with customers located within
the immediate lending area, which includes portions of Columbiana and
Jefferson Counties in northeastern Ohio and northern Hancock County in West
Virginia. As of September 30, 1996, Potters' loan portfolio included
approximately $5.1 million in nonresidential real estate loans secured by
property located primarily in the State of Colorado. At September 30, 1996,
Potters' loan portfolio also included $6.5 million of purchased one-to-four
family real estate loans, $5.6 million in northwestern Ohio and $873,000 in
southwestern Ohio.
-13-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Certain matters disclosed herein may be deemed to be forward-looking
statements that involve risks and uncertainties, including regulatory policy
changes, interest rate fluctuations, loan demand and other risks. Actual
strategies and results in future time periods may differ materially from those
currently expected. 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.
On February 23, 1996, the shareholders of The Potters Savings and Loan Company
("Potters") were asked to approve the reorganization of Potters into the
holding company structure of ownership. The reorganization was approved and
was completed on March 11, 1996. As a result, Potters Financial Corporation
("PFC"), a unitary savings and loan holding company, became the holder of all
of the outstanding common shares of Potters, and the former shareholders of
Potters received common shares of PFC. PFC declared dividends of $.12 per
share on April 24, 1996 (paid on May 24, 1996) and $.06 per share on July 25,
1996 (paid on August 23, 1996 to shareholders of record as of August 3, 1996).
PFC successfully completed the repurchase of 5% of its 532,809 outstanding
common shares on June 12, 1996. The stock repurchase program, announced on
June 7, 1996, resulted in the repurchase of 26,640 shares at an average price
of $16.375 per common share. PFC began a second stock repurchase plan on
October 10, 1996, in which up to 10% of its outstanding common shares may be
purchased during the next twelve months. The Board of Directors is using the
second stock repurchase as a continuation of PFC's commitment to enhance
shareholder value.
Federal Deposit Insurance Corporation Assessment
The deposit accounts of Potters and other savings associations are insured by
the Federal Deposit Insurance Corporation ("FDIC") in the Savings Association
Insurance Fund ("SAIF"). Because a significant portion of the assessments paid
into the fund by savings associations are used to pay the cost of prior thrift
failures, the reserves of the SAIF are below the level required by law. The
deposit accounts of commercial banks are insured by the FDIC in the Bank
Insurance Fund ("BIF"), except to the extent such banks have acquired SAIF
deposits. The reserves of the BIF met the level required by law in May 1995.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy commercial banks were reduced significantly below
the level paid by healthy savings associations effective in mid-1995. In 1996,
no BIF assessments are required for healthy commercial banks except a $2,000
minimum fee.
Congress passed legislation to recapitalize the SAIF and to eliminate this
significant premium disparity. The recapitalization plan, enacted on September
30, 1996, provides for, among other things, a special assessment of $.657 per
-14-
$100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Potters had a deposit base of $97.9
million at March 31, 1995. Potters' special assessment of $.657 per $100 in
deposits totaled $643,000 and had a $424,000, or $.84 per common share, net
negative impact on third quarter 1996 earnings. Pro rata sharing of the
Financing Corporation obligation between BIF and SAIF members will begin by
January 1, 2000. Until that time, partial sharing will occur, with SAIF
deposits assessed at $.0644 per $100 in deposits and BIF deposits at $.0129
per $100 in deposits. No later than January 1, 2000, deposit insurance
premiums for thrifts will be further reduced to $.024 per $100 in deposits.
Through December 31, 1998, SAIF assessments for healthy institutions can never
be reduced below the level set for healthy BIF institutions. If Potters'
September 30, 1996 deposit base and number of outstanding shares remains
constant, SAIF insurance premiums for 1997 are expected to be approximately
$63,000, increasing net income by $109,000, or $.22 per share. The
recapitalization plan will also reduce deposit assessment rates substantially
and the disparity which has existed between bank and thrift deposit assessment
rates.
The recapitalization plan also provides for the merger of the SAIF and the BIF
insurance funds on January 1, 1999, if there are no savings associations under
federal law. Pending legislation introduced in late September 1996 proposes
the elimination of the federal thrift charter and of the separate federal
regulation of thrifts prior to the merger of the deposit insurance funds. The
Treasury Department has been directed to report to Congress by March 31, 1997
with its recommendation regarding a common charter for banks and federal
savings institutions. If this pending legislation is enacted as proposed,
Potters would be regulated as a bank under federal law. As a result, Potters
would become subject to the more restrictive activity limits imposed on
national banks. In addition, if required to become a bank holding company, PFC
would be subject to more restrictive activity limits and to capital
requirements similar to those imposed on Potters. It is not expected that such
new activity limits will have a material effect on the financial condition or
operations of PFC or Potters.
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.
Results of Operations
PFC recorded a net loss of $318,000, or $.63 per common share, for the third
quarter of 1996 compared to earnings of $230,000, or $.43 per share, for
Potters during the third quarter of 1995. The decrease in net income resulted
in annualized returns on average assets and average shareholders' equity of
(1.06)% and (12.06)%, respectively, for the three months ended September 30,
1996, compared to .82% and 8.66%, respectively, for the comparable periods
during 1995. The decline in net income during the third quarter of 1996
compared to the third quarter of 1995 was primarily caused by the one-time
FDIC assessment discussed above. Net income for the third quarter of 1996
excluding the FDIC assessment was $106,000, or $.21 per share. A decline in
net interest income during the third quarter of 1996 compared to the third
quarter of 1995 was largely offset by a reduction in the provision for loan
losses during the same time period.
-15-
A net loss of $205,000, or $.39 per common share, was recorded for the nine
months ended September 30, 1996, compared to net income of $594,000, or $1.12
per share for the nine months ended September 30, 1995. Net income for the
nine months ended September 30, 1996 excluding the FDIC assessment was
$219,000, or $.42 per share. The annualized return on assets for the nine
months ended September 30, 1996 was (.23)% compared to .71% for the comparable
period in 1995, while annualized returns on shareholders' equity for the same
respective periods were (2.52)% and 7.47%. The principal reasons for the
$799,000 decrease in 1996 net income were higher noninterest expense due
primarily to the FDIC assessment, lower net interest income and a higher
provision for loan losses. The increase in the provision for loan losses
related to the extension of credit by Potters for an investment in equipment
leases with Bennett Funding Group, Inc. (the "Bennett Group"), a Syracuse, New
York leasing corporation, and Bennett Leasing Corporation, a related entity.
Potters learned late in the first quarter of 1996 that the Securities and
Exchange Commission commenced proceedings against Bennett Funding charging
fraud in connection with the sale of equipment leases. On March 29, 1996, the
Bennett Group filed for protection from creditors under Chapter 11 of the
federal bankruptcy laws.
Consistent with Potters' historically proactive approach to dealing with
problem assets, $377,000 of the $754,000 equipment lease credit was charged
off in the first quarter of 1996. In addition, the provision for loan losses
was increased, resulting in a $49,000 increase in the 1996 provision over last
year. Potters also ceased the accrual of interest on the remaining investment
until more information is obtained with respect to potential future cash
flows. A trustee appointed by the bankruptcy court continues the investigation
into the activities of the Bennett Group, and Potters' legal counsel is
working actively with such trustee. No payments have been received since the
announcement of the bankruptcy. Because Potters placed the asset on a
nonaccrual status in March 1996, it has been included in nonperforming and
impaired loans.
The allowance for loan losses of Potters at September 30, 1996 was $2.1
million, representing a decline of $139,000 from $2.2 million at December 31,
1995. During 1996, the provision for loan losses of $249,000 was offset by net
loan charge-offs of $388,000, including $377,000 relating to the Bennett Group
lease matter. Due primarily to the significant reduction in the Colorado
nonresidential real estate portfolio and the increase in unallocated
allowances for loan losses during 1996, no provision for loan losses was
recorded during the third quarter of 1996. The provision for loan losses
during the first nine months of 1995 totaled $200,000, and net loan
charge-offs totaled $5,000.
Nonperforming loans of $2.7 million at September 30, 1996 represented
increases of $311,000 over the $2.4 million level at December 31, 1995 and
$211,000 over the $2.5 million level at September 30, 1995. The increase,
caused primarily by the inclusion of the Bennett Group credits, reduced the
allowance as a percentage of nonperforming loans to 76.4%, or 3.6% of total
loans, at September 30, 1996 from 91.9%, or 4.3% of total loans, at December
31, 1995 and from 85.0%, or 4.0% of total loans, at September 30, 1995.
Impaired loans as of September 30, 1996 totaled $489,000 compared to $193,000
at December 31, 1995. Once again, the increase was caused by the addition of
the $377,000 equipment lease credit. At September 30, 1996, Potters' allowance
included $1.0 million of reserves which were not allocated to any specific
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loan or group of loans. Based upon historic experience, the management of
Potters believes that such unallocated reserves will be sufficient to absorb
general loan losses in the portfolio.
Also contributing to the decline in net income during 1996 was a decrease in
net interest income and a contraction in the interest rate spread. Such
contraction was primarily attributable to a decline in the average yield on
loans and an increase in the cost of funds.
Interest income increased $34,000 and $92,000 for the three and nine months
ended September 30, 1996, respectively, compared to the same periods for 1995.
Yields on interest-earning assets declined by 15 basis points, from 7.49% for
the first nine months of 1995 to 7.34% for the same period during 1996. Calls
of $3.8 million on higher yielding agency securities and payoffs of $2.8
million on nonresidential real estate loans located in Colorado, with a
weighted average yield of 9.07%, negatively affected the interest rate spread.
Interest expense increased $75,000, to $1.2 million, and $205,000, to $3.4
million, for the three and nine months ended September 30, 1996, respectively,
compared to the same periods during 1995. Such increases were primarily
attributable to increased average balances of FHLB advances and an increase in
the yields on such advances during 1996 compared to 1995. Also contributing
were increased rates on certificates of deposit and money market deposit
accounts. The cost of funds increased from 4.19% for the nine months ended
September 30, 1995 to 4.31% for the comparable period in 1996.
The increase in the cost of funds outpaced the increase in interest-earning
assets, resulting in a contraction of the interest rate spread from 3.30%
during the first nine months of 1995 to 3.03% for the same period in 1996 and
a decline in net interest income of $113,000 during 1996 compared to net
interest income during 1995. Net interest income declined $41,000 during the
third quarter of 1996, from $947,000 for the three months ended September 30,
1995 to $906,000 for the comparable period during 1996.
Noninterest income increased $5,000 for the three and nine months ended
September 30, 1996 compared to the respective periods in 1995. Included in
1996 noninterest income was a nonrecurring net loss of $20,000 on foreclosed
real estate operations due primarily to the payment of real estate taxes on
foreclosed real estate. As a result of an analysis of the existing fee
structure on deposit and loan products and the implementation of several
changes, deposit account fee income and other income have increased 8.4% and
25.4%, respectively, during 1996 compared to 1995.
Noninterest expense increased $714,000 and $721,000 for the three and nine
months ended September 30, 1996, respectively, compared to the same periods in
1995. The primary reason for the increase was the one-time special assessment
required by the FDIC to recapitalize the SAIF fund. As discussed above, this
charge in 1996 will result in the reduction of future deposit insurance
premiums. Compensation and benefits expense increased during the third quarter
due primarily to the addition of a new Senior Loan Officer to Potters' senior
management team in July 1996. The lending and mortgage banking experience the
Senior Loan Officer brings to Potters will help it move forward in the
implementation of its strategic lending objectives.
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While ongoing efforts to contain expenses continued in other areas, Potters
continued its strategic commitment to invest in employee training and
development during the first nine months of 1996. In the second quarter of
1996, new state-of-the-art teller hardware and software was installed in order
to improve customer service and achieve greater branch operations efficiency.
Office occupancy expense increased during the three and nine months ended
September 30, 1996 over 1995 due to increased depreciation expense from the
new loan and deposit operations equipment and software, and increased expenses
for maintenance of and improvements to Potters' offices. Included in
noninterest expense during 1996 were $16,000 of losses on sales of repossessed
mobile homes, increased advertising, franchise tax, data processing and
employee education expenses over the 1995 level, somewhat offset by reduced
legal and consulting services.
Financial Condition
PFC's assets at September 30, 1996 increased $11.3 million to $125.5 million
compared to $114.2 million at December 31, 1995. The increase in assets was
primarily attributable to a short-term leveraged growth strategy employed
during the quarter in which variable-rate FHLB advances were used to purchase
fixed-rate investment securities with an average spread of 164 basis points.
During the first nine months of 1996, cash and cash equivalents and proceeds
from calls and repayments of loans and securities were utilized to purchase
investment securities available for sale and real estate loans, and to fund
deposit outflows.
Cash and cash equivalents decreased $8.2 million, from $11.2 million at
December 31, 1995 to $3.1 million at September 30, 1996. Funds invested in
short-term investment instruments at December 31, 1995, along with other
sources, were used to purchase equity funds and agency securities for the
available for sale portfolio and $6.8 million of one-to-four family real
estate loans located in northwestern and southwestern Ohio.
Available-for-sale investment securities increased to $27.8 million at
September 30, 1996 from $11.0 million at December 31, 1995. Equity funds and
agency securities of $23.9 million were purchased for the available-for-sale
portfolio during 1996, $10.0 million of which were part of the short-term
leveraged growth strategy financed by variable-rate FHLB advances. The growth
strategy is monitored at each quarterly interest rate reset of the FHLB
advance and can be terminated at that time. Higher yielding agency securities
totaling $3.0 million were called. Net proceeds from sales of equity funds and
available-for-sale securities totaled $3.5 million during 1996, resulting in a
loss of $4,000. The available-for-sale portfolio included an unrealized loss
of $267,000 at September 30, 1996, compared to an unrealized loss of $42,000
at December 31, 1995. The unrealized loss increased $308,000 to $350,000 at
June 30, 1996 due primarily to a general rise in interest rates during the
first six months of 1996, then decreased $83,000 during the third quarter as
the increase in rates eased somewhat. The unrealized loss net of tax on
investment securities available for sale, reflected in shareholders' equity,
increased from $23,000 at December 31, 1995 to $176,000 at September 30, 1996.
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Mortgage-backed securities held to maturity declined $3.0 million during 1996
due to repayments. No purchases were made during 1996.
Net loans receivable increased $6.2 million during the first nine months of
1996, from $49.9 million at December 31, 1995 to $56.1 million at September
30, 1996. However, two significant changes in loan composition occurred in
1996. Loan purchases totaling $6.8 million, $5.9 million of which were
adjustable rate, and $964,000 of which were fixed rate, and a net increase of
$2.7 million in local loan originations resulted in a net increase of $9.6
million, or 29.0%, in one-to-four family residential real estate loans.
Conversely, five large loan payoffs totaling $2.8 million reduced the level of
nonresidential real estate loans located in Colorado to approximately $5.1
million. Such payoffs negatively affected the interest rate spread, but aided
Potters in its strategy of reducing the risk in the real estate loan portfolio
from out-of-area nonresidential properties.
Total deposits at September 30, 1996 were $98.0 million compared to $98.7
million at December 31, 1995, a decrease of $743,000. Outflows occurred
primarily in certificates of deposit. Strong competition for certificates of
deposit in the local area continues to affect the cost of funds. In response,
the Asset and Liability Management Committee has focused on strategies for
reduced interest rate risk and responsible deposit management.
FHLB advances totaled $15.9 million at September 30, 1996, compared to $3.0
million at December 31, 1995. The short-term leveraged growth strategy was the
reason for $10.0 million of the $12.9 million increase in FHLB advances. Other
new advances financed one of the loan purchases and were used for cash
management purposes. Repayments totaling $2.7 million occurred during 1996.
Shareholders' equity decreased $888,000 during 1996 due to a net loss of
$205,000 for the nine months ended September 30, 1996, treasury share
purchases of $436,000, an increase in the unrealized loss, net of tax, on
investment securities available for sale of $153,000 and dividends paid of
$94,000.
Liquidity and Capital Resources
Potters' normal, recurring sources of funds are primarily customer deposits,
investment securities available for sale, maturities, calls and repayments of
investment and mortgage-backed securities held to maturity, loan repayments
and other funds provided by operations. Potters has the ability to borrow from
the FHLB when needed as a secondary source of liquidity.
Significant components of cash flows from investing activities during the
first nine months of 1996 were purchases of $23.9 million of securities
available for sale somewhat offset by $3.5 million in sales, $250,000 in
maturities and $3.0 million in calls of such securities. Repayments, calls and
maturities of investment and mortgage-backed securities held to maturity
totaled $4.9 million during the year. Loans purchased totaled $6.8 million
during the first nine months of 1996. Investing activities during the first
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nine months of 1995 included the purchase of $3.6 million in securities
available for sale and $2.5 million in securities held to maturity offset by
$2.5 million in repayments and $250,000 in maturities of such securities.
Sales of securities available for sale during 1995 totaled $3.4 million.
Financing activities during the nine months ended September 30, 1996 included
net deposit outflows of $743,000, proceeds from FHLB advances of $15.6 million
and advance repayments totaling $2.7 million. In addition, PFC purchased
26,640 treasury shares for a total of $436,000. Deposit outflows of $799,000
occurred during the first nine months of 1995, while FHLB advance activity
included proceeds totaling $3.4 million and repayments of $1.0 million.
Potters' average regulatory liquidity ratio for September 1996 was 27.05%. At
September 30, 1996, Potters had commitments to originate loans of $486,000 and
unused lines of credit totaling $2.7 million.
The following table details the minimum capital requirements set forth by
regulation for all federally insured savings institutions and Potters' capital
levels as of September 30, 1996 (dollars in thousands):
Tangible Core Risk-based
Capital Capital Capital
-------------- -------------- -------------
Amount % Amount % Amount %
-------------- -------------- -------------
Regulatory capital -
computed $10,368 8.24 $10,368 8.24% $11,048 20.85%
Minimum capital
requirement 1,887 1.50 3,775 3.00 4,238 8.00
------- ---- ------- ---- ------- -----
Regulatory capital -
excess $8,481 6.74% $6,593 5.24% $ 6,810 12.85%
====== ==== ======== ==== ========= =====
Bad Debt Reserve Recapture
On August 20, 1996, President Clinton signed into law the Small Business Jobs
Protection Act of 1996. The new law eliminates the percent-of-taxable-income
method for computing additions to the tax bad debt reserves for all thrifts
for tax years beginning after December 31, 1995. The new rules also require
that thrift institutions recapture all or a portion of their tax bad debt
reserves added since their base year (the last taxable year beginning before
January 1, 1998). Because Potters has average total assets of less than $500
million, it is considered a small bank and is permitted to maintain the
greater of the reserves for bad debts as of the base year or the 1995 reserve
balance for bad debts allowable under the experience method. Any excess of the
1995 reserve balances over the greater of the reserve balances must be
recaptured into income ratably over six years, although a two-year delay may
be permitted for institutions meeting a residential mortgage loan origination
test. Prospectively, small institutions such as Potters will use the
experience method for deducting bad debts for tax purposes. The unrecaptured
base year reserves will not be subject to recapture as long as the institution
continues to carry on the business of banking. Likewise, if an institution is
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acquired via a merger by another financial institution, no recapture of base
year reserves will result as long as the acquiring institution continues with
the business of banking. However, if an institution ceases to qualify as a
bank or converts to a credit union, the base year reserves must be recaptured
in accordance with previous law. This recapture would not be material for
Potters, because it has used the experience method of calculating its bad debt
deductions in recent years, which is the same method used by banks. In 1995,
Potters' bad debt deduction was based on a percentage of taxable income, for
which a deferred tax liability has been recognized. As a result, the recapture
of the bad debt reserve will not impact future net income.
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 - none.
B. Reports on Form 8-K - none.
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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, 1996 By: /s/ Edward L. Baumgardner
-----------------------------------
Edward L. Baumgardner
Duly Authorized Representative,
President and Chief Executive Officer
By: /s/ James F. Hoffman
-----------------------------------
James F. Hoffman
Principal Financial Officer and
Principal Accounting Officer
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