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Page 1 of 21 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, 1997
[ ] 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 July 31, 1997
491,326 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
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FORM 10-QSB
QUARTER ENDED JUNE 30, 1997
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 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
Part II - Other Information
Item 1. Legal Proceedings 19
Item 2. Change in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19-20
Signatures 21
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POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in Thousands)
- --------------------------------------------------------------------------------
June 30, December 31,
1997 1996
---- ----
ASSETS
Cash and due from banks $ 3,567 $ 4,376
Interest-bearing deposits with Federal Home Loan Bank 47 51
Federal funds sold and cash management account 210 158
------- --------
Cash and cash equivalents 3,824 4,585
Securities available for sale,
at estimated fair value (Note 2) 8,876 10,878
Securities held to maturity (estimated
fair value: June 30, 1997 - $29,814;
December 31, 1996 - $31,576) (Note 2) 30,085 31,913
Federal Home Loan Bank stock 829 822
Loans receivable, net (Note 3) 73,952 62,450
Premises and equipment, net 1,726 1,738
Other assets 1,897 1,786
-------- --------
Total assets $121,189 $114,172
======== ========
LIABILITIES
Deposits $ 99,417 $ 97,283
Federal Home Loan Bank advances (Note 4) 9,824 5,085
Accrued expenses and other liabilities 1,250 1,228
-------- --------
Total liabilities 110,491 103,596
-------- --------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
Common shares, no par value
Authorized: 10,000,000 shares;
Issued: 542,426 shares in 1997 and
538,470 shares in 1996
Paid-in capital 4,919 4,880
Treasury shares (55,596 shares in 1997
and 26,640 shares in 1996, at cost) (1,009) (436)
Unearned compensation on
recognition and retention plan (100) (100)
Unrealized loss on investment
securities available for sale, net of tax (98) (94)
Retained earnings, substantially restricted 6,986 6,326
-------- --------
Total shareholders' equity 10,698 10,576
-------- --------
Total liabilities and shareholders' equity $121,189 $114,172
======== ========
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
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POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
---------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
INTEREST INCOME
Loans $1,449 $1,085 $2,793 $2,199
Securities 649 884 1,321 1,701
Other interest income 15 32 34 117
------ ------ ------ ------
Total interest income 2,113 2,001 4,148 4,017
------ ------ ------ ------
INTEREST EXPENSE
Interest on deposits 1,031 1,056 2,035 2,118
Other interest expense 118 22 197 62
------ ------ ------ ------
Total interest expense 1,149 1,078 2,232 2,180
------ ------ ------ ------
NET INTEREST INCOME 964 923 1,916 1,837
Provision for loan losses (Note 3) (135) 30 (485) 249
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,099 893 2,401 1,588
Loan and security gains (losses) (74) (74) 1
Other noninterest income 146 57 220 118
------ ------ ------ ------
Total noninterest income 72 57 146 119
------ ------ ------ ------
Compensation and benefits 305 335 635 668
Occupancy and equipment 94 80 188 164
FDIC deposit insurance premiums 16 64 32 128
Other noninterest expense 300 298 572 556
------ ------ ------ ------
Total noninterest expense 715 777 1,427 1,516
------ ------ ------ ------
INCOME BEFORE INCOME TAX 456 173 1,120 191
Income tax expense 155 70 381 78
------ ------ ------ ------
NET INCOME $ 301 $ 103 $ 739 $ 113
====== ====== ====== ======
Earnings per share $ 0.62 $ 0.20 $ 1.50 $ 0.22
====== ====== ====== ======
-------------------------------------------------------------------------------
See accompanying notes to financial statements.
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POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
1997 1996
---- ----
BALANCE - JANUARY 1 $10,576 $11,189
Net income for the six months ended June 30 739 113
Issuance of 3,956 common shares for the exercise
of stock options 39
Purchase of treasury shares (28,956 in 1997
and 26,640 in 1996) (573) (436)
Cash dividends declared ($.16 per share in 1997
and $.12 per share in 1996) (79) (64)
Change in net unrealized loss on
securities available for sale (4) (208)
------- -------
BALANCE - JUNE 30 $10,698 $10,594
======= =======
-------------------------------------------------------------------------------
See accompanying notes to financial statements.
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POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Six months ended
June 30,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 739 $ 113
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 100 65
Provision for losses (485) 249
Net Investment amortization 23 38
Net (gain) loss on sale of:
Securities 14 (1)
Loans 60
Foreclosed real estate and
repossessed assets (50) 14
Other assets (53)
Stock dividend on FHLB stock (30) (24)
Change in other assets and liabilities 123 (379)
------- --------
Net cash from operating activities 441 75
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing balances with banks 100
Securities available for sale
Proceeds from sales 1,986 2,500
Proceeds from calls and maturities 3,296
Purchases (14,782)
Securities held to maturity
Proceeds from repayments, calls and maturities 1,801 3,340
Purchases (984)
Sale of FHLB stock 23
Net (increase) decrease in loans (21) 1,343
Loan purchases (11,352) (3,027)
Proceeds from sale of loans 281
Proceeds from sale of foreclosed real estate
and repossessed assets 50 82
Proceeds from sale of other assets 72
Property and equipment expenditures (92) (140)
------- -------
Net cash from investing activities (7,252) (8,272)
------- -------
-------------------------------------------------------------------------------
(Continued)
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POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Six months ended
June 30,
1997 1996
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 2,134 1,897
Proceeds from FHLB advances 13,250 1,000
Repayments of FHLB advances (8,511) (1,632)
Net change in official checks (193) 2
Net decrease in advances from
borrowers for taxes and insurance (17) (9)
Purchase of treasury shares (573) (436)
Issuance of common shares for
exercise of stock options 39
Cash dividends paid (79) (64)
------- -------
Net cash from financing activities 6,050 758
------- -------
Net change in cash and cash equivalents (761) (7,439)
Cash and cash equivalents at beginning of year 4,585 11,230
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,824 $ 3,791
======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 3,302 $ 2,189
Income taxes 105 96
Noncash transactions
Transfer from loans to foreclosed real estate and
repossessed assets 23
-------------------------------------------------------------------------------
See accompanying notes to financial statements.
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POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Potters Financial Corporation ("PFC") is a unitary savings and loan holding
company headquartered in East Liverpool, Ohio. PFC is the sole shareholder of
The Potters Savings and Loan Company ("Potters"), also headquartered in East
Liverpool, Ohio.
The accompanying consolidated financial statements include the accounts of PFC
and Potters. All 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, 1997, and its results of operations and statements 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
PFC and notes thereto included in the 1996 Annual Report.
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
was adopted in 1997. It revised the accounting for transfers of financial
assets, such as loans and securities, and for distinguishing between sales and
secured borrowings. It is effective for some transactions in 1997 and others in
1998. The adoption of SFAS No. 125 did not materially impact PFC's financial
statements, and management does not anticipate that it will have a material
impact in the future.
Earnings per share was calculated on the basis of the weighted average number
of shares outstanding during the period. Such weighted average shares were
487,250 for the second quarter of 1997 and 492,898 for the six months ended
June 30, 1997. Weighted average shares were 527,247 for the second quarter of
1996 and 530,028 for the six months ended June 30, 1996.
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year.
NOTE 2 - SECURITIES
At June 30, 1997, the amortized cost and estimated fair value of securities are
as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars in thousands)
Securities available for sale:
U.S. Treasury and U.S.
Government agencies $ 7,990 $ $(137) $ 7,853
Mutual funds 1,034 (11) 1,023
------- ---- ----- -------
$ 9,024 $ $(148) $ 8,876
======= ==== ===== =======
Securities held to maturity:
U.S. Treasury and U.S.
Government agencies $ 6,860 $ 6 $ (51) $ 6,815
Obligations of states and
political subdivisions 176 33 209
Other securities 743 16 759
Agency issued mortgage-
backed securities 22,306 83 (358) 22,031
------- ---- ----- -------
$30,085 $138 $(409) $29,814
======= ==== ===== =======
-------------------------------------------------------------------------------
(Continued)
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POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated fair value of debt securities at June 30,1997,
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 $ 2,010 $ 2,001
Due after one year through five years $5,996 $5,908 2,068 2,066
Due after five years through ten years 1,994 1,945 2,282 2,267
Due after ten years 1,419 1,449
Agency issued mortgage-
backed securities 22,306 22,031
------ ------ ------- -------
$7,990 $7,853 $30,085 $29,814
====== ====== ======= =======
Available-for-sale securities totaling $2.0 million were sold during the second
quarter of 1997 at a net loss of $14,000. The net unrealized holding loss on
securities available for sale increased by $4,000 during 1997.
The carrying value of investment securities pledged as collateral for public
funds amounted to $3.5 million at June 30, 1997.
At December 31, 1996, the amortized cost and estimated fair value of securities
are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars in thousands)
Securities available for sale:
U.S. Treasury and U.S.
Government agencies $ 9,988 $ $(135) $ 9,853
Mutual funds 1,034 (9) 1,025
------- ---- ----- -------
$11,022 $ $(144) $10,878
======= ==== ===== =======
Securities held to maturity:
U.S. Treasury and U.S.
Government agencies $ 6,854 $ 7 $ (74) $ 6,787
Obligations of states and
political subdivisions 175 7 182
Other securities 866 6 872
Agency issued mortgage-
backed securities 24,018 82 (365) 23,735
------- ---- ----- -------
$31,913 $102 $(439) $31,576
======= ==== ===== =======
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(Continued)
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POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized below:
June 30, December 31,
1997 1996
---- ----
(Dollars in thousands)
Real estate loans
One-to-four family residences $59,499 $49,086
Nonresidential property 5,395 5,897
Multifamily and other 1,955 2,034
------- -------
66,849 57,017
------- -------
Consumer and other loans
Home equity loans 4,461 3,859
Commercial loans and unsecured lines of credit 1,486 1,316
Mobile home loans 772 906
Other 2,393 2,347
------- -------
9,112 8,428
------- -------
Total loan principal balances 75,961 65,445
Loans in process (109) (466)
Unearned interest and deferred fees, net 211 101
Allowance for loan losses (2,111) (2,630)
------- -------
$73,952 $62,450
======= =======
Activity in the allowance for loan losses is as follows:
Six months ended
June 30,
------------------------
1997 1996
---- ----
(Dollars in thousands)
Balance at beginning of year $2,630 $2,240
Provision for loan losses (485) 249
Recoveries 9 19
Charge-offs (43) (412)
------ ------
Balance at end of year $2,111 $2,096
====== ======
Nonaccrual and renegotiated loans totaled $602,000 and $1.7 million at June
30, 1997 and December 31, 1996, respectively. Potters is not committed to lend
additional funds to debtors whose loans have been modified.
Information regarding impaired loans is as follows:
Six months ended
June 30,
------------------------
1997 1996
---- ----
(Dollars in thousands)
Average investment in impaired loans $365 $354
---- ----
Interest income recognized on impaired loans
including interest income recognized on a cash basis $ 0 $ 14
---- ----
Interest income recognized on impaired loans
on a cash basis $ 0 $ 14
==== ====
------------------------------------------------------------------------------
(Continued)
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POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
Information regarding impaired loans, which are included in nonaccrual and
renegotiated loans disclosed above, is as follows:
June 30, December 31,
1997 1996
---- ----
(Dollars in thousands)
Balance of impaired loans $ 365 $ 365
Less portion for which no allowance for
loan losses is allocated (365) (365)
----- -----
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 are as follows:
June 30, December 31,
1997 1996
---- ----
(Dollars in thousands)
Variable-rate Cash Management Advance with monthly interest payments:
5.75% advance due September 22, 1997 $1,200
Variable-rate advances with monthly interest payments:
5.90% advance due April 29, 1998 1,300
Fixed-rate advances with monthly interest payments:
5.80% advance due May 28, 1997 $3,830
6.30% advance due June 24, 1998 2,000
5.67% advance due November 27, 1998 750 750
6.50% advance due June 26, 1999 2,700
6.50% advance due June 27, 2000 1,500
Fixed-rate advances with monthly principal and interest payments:
6.05% advance due August 14, 1998 233 333
5.85% advance due September 1, 1999 141 172
------ ------
$9,824 $5,085
====== ======
FHLB advances obtained through the Community Investment Program are amortizing
loans requiring monthly principal payments. As of June 30, 1997, the aggregate
future minimum annual principal payments on FHLB advances were $1.3 million in
1997, $4.2 million in 1998, $2.8 million in 1999 and $1.5 million in 2000. As
of June 30, 1997, the Company 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)
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POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, various outstanding commitments and
contingent liabilities 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.
Loan Commitments
As of June 30, 1997, Potters had commitments to make loans (at market rates)
and unused lines of credit approximating $4.5 million, of which $46,000 carry a
fixed rate of 8.50%, and $4.5 million 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. At
June 30, 1997, the loan portfolio included approximately $20.8 million of
purchased one-to-four family real estate loans, $18.1 million on properties
located in northwestern Ohio and $2.6 million on properties in southwestern
Ohio. As of June 30, 1997, the loan portfolio also included approximately $3.5
million in nonresidential real estate loans secured by property located
primarily in the State of Colorado.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Potters Financial Corporation, a unitary thrift holding company ("PFC"), owns
all of the outstanding shares of The Potters Savings and Loan Company
("Potters"), a savings and loan institution. In the following pages, management
presents an analysis of PFC's financial condition as of June 30, 1997 and
December 31, 1996, and the results of operations for the three and six months
ended June 30, 1997, as compared to the same periods in the prior year. 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. 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. 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' general market area. See Exhibit
99, 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:
1) RESULTS OF OPERATIONS - Management's belief that the final settlement
documents in the Bennett Funding Group Inc. ("Bennett") bankruptcy matter
will be approved and that no additional losses will be incurred.
Management's statements regarding the amount and adequacy of the allowance
for loan losses and future loan loss provisions.
Statements regarding management's intent to continue the shifting of funds
from securities and other investments into loans.
Management's statement that the outsourcing of part of the internal audit
and compliance functions should contain future audit and compliance costs
while allowing management to concentrate on implementing Potters'
strategic initiatives.
2) RECENT ACCOUNTING PRONOUNCEMENTS - Management's expectation that the new
accounting requirements for calculating earnings per share will not
significantly affect future basic earnings per share and diluted earnings
per share.
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,
the following discussion essentially concerns the operations of Potters.
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RESULTS OF OPERATIONS
PFC recorded net income of $301,000, or $.62 per common share, for the three
months ended June 30, 1997, compared to $103,000, or $.20 per share, for the
comparable period during 1996. The increase in net income resulted in
annualized returns on average assets and average shareholders' equity of 1.01%
and 11.31%, respectively, for the three months ended June 30, 1997, compared to
.36% and 3.76%, respectively, for the comparable period during 1996.
Net income for the six months ended June 30, 1997 was $739,000, or $1.50 per
common share, compared to net income of $113,000, or $.22 per share, for the
six months ended June 30, 1996. Annualized returns on average assets and
average shareholders' equity of 1.26% and 13.71%, respectively, for the six
months ended June 30, 1997, compared favorably to .21% and 2.11%, respectively,
for the comparable period during 1996.
Contributing to the increase in net income for the second quarter of 1997 was a
negative provision for loan losses of $135,000 less a $60,000 loss on the sale
of loans, both of which related to the sale of a nonperforming loan. In
addition, the property housing Potters' East End Office, which ceased
operations on March 31, 1997, and a residential property adjacent to another of
Potters' offices were sold during the second quarter of 1997, generating total
gains of $53,000. Such nonrecurring items had an after tax positive impact of
$85,000 on second quarter 1997 earnings. Excluding the nonrecurring items, net
income for the second quarter of 1997 was $217,000, more than double net income
for the comparable period during 1996. During the second quarter of 1997, net
interest income increased 4.4% and noninterest income increased 26.3%, while
noninterest expense decreased 8.0%, compared to the same period in 1996.
Contributing to the increase in net income for the six months ended June 30,
1997 were negative provisions for loan losses to remove excess allowances for
loan losses. In January 1997, a $756,000 nonperforming loan located in Colorado
was repaid and in June 1997, a $341,000 nonperforming Colorado loan was sold at
a loss of $60,000. Through the removal of the allowances specifically allocated
to the loans, the portion of the allowance for loan losses not allocated to any
specific loan or group of loans increased by over $485,000. In addition to
management's ongoing review of all loans with respect to the adequacy of the
allowance for loan losses, a periodic analysis of the percentages allocated to
various types of real estate, consumer and commercial loans is conducted.
Because of the decline in nonperforming loans and the change in the risk
profile of Potters' loan portfolio, and primarily because of the payoff and
sale of two Colorado nonresidential real estate loans, a negative provision for
loan losses of $485,000 was recorded during the first six months of 1997 to
remove excess allowances for loan losses. The provision had a $320,000 after
tax positive impact on 1997 earnings. At June 30, 1997, nonperforming loans
totaled $602,000, or .50% of total assets, compared to $2.7 million, or 2.33%
of assets, at June 30, 1996, a decrease of 77.4%. The unallocated allowance for
loan losses has increased from $960,000 at June 30, 1996 to more than $1.4
million at June 30, 1997. In addition, the allowance for loan losses totaled
$2.1 million at both June 30, 1997 and 1996, but such allowance represented
350.7% of nonperforming loans at June 30, 1997, compared to 78.8% at June 30,
1996.
The $79,000, or 4.3%, increase in net interest income during 1997 compared to
the same period in 1996 has resulted from the continued restructuring of the
balance sheet in accordance with Potters' strategic initiatives. Funds from
loan and security repayments, sales of securities available for sale, deposit
inflows and Federal Home Loan Bank ("FHLB") advances were used to originate and
purchase one-to-four family real estate loans. Loans receivable increased from
$51.3 million at June 30, 1996, to $62.5 million at December 31, 1996 and to
$74.0 million at June 30, 1997, representing increases of 44.2% from June 30,
1996 and 18.4% from year-end 1996.
The addition of a third automated teller machine ("ATM") in the Penn Sparkle
Market for the convenience of East End customers and the introduction of a VISA
Check Card program
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have contributed to the 22.7% increase in noninterest income during 1997. Lower
Federal Deposit Insurance Corporation ("FDIC") deposit insurance premiums and
compensation costs are primarily responsible for the 5.9% reduction in
noninterest expense during 1997, somewhat offset by increased occupancy and
equipment costs and professional fees due to the utilization of upgraded
technology and the outsourcing of portions of the internal audit and compliance
functions. Somewhat offsetting these positive variances was a $303,000 increase
in income taxes in 1997 due to the $929,000 increase in net income before
income taxes.
Earnings for the first six months of 1996 were negatively affected by an
additional provision for loan losses of $188,500 relating to the writedown of
the Bennett equipment lease credits by 50% upon learning of Bennett's
bankruptcy filing and investigation by the Securities and Exchange Commission
for alleged securities fraud. The Court has since ruled that the manner in
which the lease credits were structured and recorded was sufficient to perfect
Potters' position in the lease credits as a secured creditor. Further, in
January 1997, the bankruptcy Trustee extended various settlement options to all
financial institutions involved in the case. After careful consideration,
Potters' Board of Directors agreed to accept one of the settlement options. On
February 27, 1997, the motions for settlement were heard and approved by the
Court, subject to the approval of final settlement documents by Potters' Board
of Directors. Attorneys continue to work on finalizing the documents. While
the amount Potters will receive is uncertain under the terms of the settlement
offer and depends upon events outside Potters' control, and no assurances can
be given that additional losses will not be incurred or that additional
provisions will not be required, no additional losses are anticipated on the
Bennett lease credits.
The allowance for loan losses at June 30, 1997 was $2.1 million, representing a
decline of $519,000 from $2.6 million at December 31, 1996 primarily from the
negative provision of $485,000 during 1997. During 1997, net loan charge-offs
totaled $34,000, compared to $393,000 for the first six months of 1996. Due to
the current level of unallocated allowances, no provision for loan losses is
planned for the remainder of 1997, 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. The provision for loan losses during the first six months
of 1996 totaled $249,000, relating primarily to the Bennett credits.
Nonperforming loans of $602,000 at June 30, 1997 represented decreases of $1.1
million from the $1.7 million level at December 31, 1996, and $2.1 million from
a level of $2.7 million at June 30, 1996. The decrease, despite the inclusion
of the Bennett credits, resulted primarily from payoffs and the loan sale in
the Colorado portfolio. The allowance for loan losses increased from 78.8% of
nonperforming loans at June 30, 1996, to 152.5% at December 31, 1996 and to
350.7% at June 30, 1997. Impaired loans totaled $365,000 at December 31, 1996
and June 30, 1997, and consisted solely of the Bennett credits.
Interest income increased $112,000 and $131,000 for the three and six months
ended June 30, 1997, compared to the same periods for 1996. The overall
increase in interest income was primarily attributable to the change in the
composition of interest-earning assets. Interest income on loans increased
$364,000, or 33.5%, from the second quarter of 1996 to the second quarter of
1997, while interest on securities and other investments declined $252,000, or
27.5%, during the same period. Loan interest income increased $594,000 during
the first six months of 1997 compared to 1996 while interest on securities and
other investments declined by $463,000 during the same period. The shifting of
funds from securities and other investments into loans occurred throughout
1996, continued during the first half of 1997 and should continue into the
future as Potters' strategic initiatives are executed, although no assurances
can be provided that loan demand will continue. Loan originations are affected
by many circumstances and events, including interest rates nationally and
locally, competition and other changes in the national and local economy.
Yields on interest-earning assets increased by 11 basis points, from 7.38% for
the first six months of 1996 to 7.49% for the same period during 1997. Although
the yield on loans
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actually decreased between the two years, more of Potters' assets were placed
into loans which yield significantly higher than securities and other
investments.
Interest expense decreased $71,000 and $52,000 for the three and six months
ended June 30, 1997 compared to the same period during 1996. The decrease was
primarily attributable to a decline in the average balances and yields on
deposit accounts and a decrease in the yield on FHLB advances from the first
half of 1996 to the first half of 1997. The increased use of FHLB advances
during 1997 compared to 1996 had somewhat of a negative impact on interest
expense because such instruments generally bear higher interest rates than
deposits. The cost of funds decreased marginally, from 4.30% for the six months
ended June 30, 1996 to 4.28% for the comparable period in 1997.
The increase in the yield on interest-earning assets and the decline in the
cost of funds resulted in a widening of the interest rate spread from 3.07%
during the first six months of 1996 to 3.21% for the same period in 1997 and an
increase in net interest income of $41,000 and $79,000 during the three and six
months ended June 30, 1997, respectively, compared to net interest income
during the same period in 1996.
Noninterest income increased $15,000 and $27,000 for the three and six months
ended June 30, 1997, respectively, compared to the respective periods in 1996.
The increase during 1997 compared to 1996 resulted primarily from increased
service charges on deposit accounts, ATM and other customer fees from the
development and implementation of new products and services. Depressing
noninterest income during 1997 were losses of $14,000 on the sale of
available-for-sale securities and a $60,000 loss on the sale of a nonperforming
loan. Also included in 1997 noninterest income were $53,000 in gains on the
sale of Potters' East End Office property and a residential property owned by
Potters. Excluding such gains and losses, noninterest income increased 40.3%
during 1997 compared to 1996.
Noninterest expense decreased $62,000 and $89,000 for the three and six months
ended June 30, 1997, respectively, compared to the same period in 1996. Due to
the recapitalization of the Savings Association Insurance Fund, deposit
insurance premiums during the first half of 1997 declined $96,000 from the
first half of 1996. Included in 1997 noninterest expense was a $50,000 gain on
the sale of foreclosed real estate in Colorado. Compensation and benefits
expense decreased $33,000, or 4.9%, between 1996 and 1997, while occupancy and
equipment expense increased due to the utilization of upgraded technology.
Professional fees increased significantly during 1997 from the settlement of
the Bennett lease credits and from Potters' decision to outsource part of its
internal audit and compliance functions. Such an arrangement should contain
future audit and compliance costs while allowing management to concentrate on
implementing Potters' strategic initiatives.
As part of management's ongoing process to contain costs, branch operations at
Potters' East End Office were terminated on March 31, 1997. An ATM has been
installed in an East End grocery store in order to utilize technology to
accommodate more customers in the East End. Potters has continued its commitment
to provide its employees with the training and technology they need to help
Potters achieve its strategic initiatives.Throughout 1997 training efforts will
continue to reflect this philosophy.
FINANCIAL CONDITION
PFC's assets at June 30, 1997 increased $7.0 million, or 6.1%, to $121.2
million compared to $114.2 million at December 31, 1996. Potters continued to
restructure its balance sheet during 1997 in accordance with its strategic
focus and long-term goals of increasing interest income and the interest rate
spread. During 1997, funds from loan and security repayments, deposit inflows
and FHLB advances were utilized to originate loans and purchase one-to-four
family real estate loans.
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Cash and cash equivalents decreased $761,000, from $4.6 million at December 31,
1996 to $3.8 million at June 30, 1997.
Securities available for sale decreased $2.0 million, to $8.9 million at June
30, 1997, compared to $10.9 million at December 31, 1996. Sales of $2.0 million
in securities available for sale resulted in losses of $14,000 during 1997.
Securities designated as available for sale are carried at their fair values,
with resulting unrealized gains or losses added to or deducted from
shareholders' equity, net of tax. The unrealized loss on securities available
for sale increased from $144,000 at year-end 1996 to $149,000 at June 30, 1997
due to a general rise in interest rates during the first quarter of 1997 which
reversed somewhat during the second quarter. The effect on equity, representing
unrealized losses, net of tax, on securities available for sale, increased from
$94,000 at December 31, 1996 to $174,000 at March 31, 1997 and then declined to
$98,000 at June 30, 1997.
At June 30, 1997, the held-to-maturity securities portfolio totaled $30.1
million and consisted of agency issued mortgage-backed securities totaling
$22.3 million and $7.8 million of other securities, primarily U.S. Government
agency securities. Repayments on such securities, totaling $1.8 million during
1997, were used to fund loan growth.
Net loans receivable increased $11.5 million, from $62.5 million at December
31, 1996, to $74.0 million at June 30, 1997. Loan purchases and local loan
originations during 1997 resulted in a net increase of $10.4 million, or 21.2%,
in one-to-four family real estate loans. Consumer and other loans also
increased $684,000, or 8.1%, during 1997, primarily from increased home equity
lines of credit. Loan purchases totaled $11.4 million of adjustable-rate real
estate loans during 1997 on properties located in northwestern and southwestern
Ohio. The adjustable-rate features of the loan purchases continued
management's asset/liability strategy of controlling exposure to interest rate
risk.
Total deposits increased $2.1 million during the first six months of 1997, from
$97.3 million at December 31, 1996 to $99.4 million at June 30, 1997. Inflows
occurred primarily in certificates of deposit. Potters has aggressively priced
selected certificates of deposit with maturities exceeding one year in an
attempt to maintain deposit levels despite strong competition for certificates
of deposit in the local area. The Asset and Liability Management Committee
continues to focus on strategies for reduced interest rate risk and responsible
deposit management.
FHLB advances totaled $9.8 million at June 30, 1997, compared to $5.1 million
at December 31, 1996. Advances totaling $13.3 million received during the first
six months of 1997 were used to fund loan purchases and for cash management
purposes. The maturity of several advances used to fund loan purchases were
matched to selected securities maturing within the next two years. Repayments
totaling $8.5 million occurred during 1997.
Despite net income of $739,000 for the six months ended June 30, 1997,
shareholders' equity increased only $122,000 during 1997 due primarily to the
repurchase of 28,956 PFC shares for $573,000 relating to a repurchase program
announced in October 1996; an increase of $4,000 in the unrealized loss, net of
income tax, on securities available for sale; and dividends paid of $79,000, or
$.16 per share. The issuance of 3,956 common shares upon the exercise of stock
options also contributed $39,000 to the increase in shareholders' equity during
1997.
LIQUIDITY AND CAPITAL RESOURCES
Potters' normal, recurring sources of funds are primarily customer deposits,
securities available for sale, maturities, calls and repayments of 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.
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The most significant component of cash flows from investing activities during
the first six months of 1997 were loan purchases of $11.4 million, somewhat
offset by sales of $2.0 million available-for-sale securities and $1.8 million
in repayments on held-to-maturity securities. Investing activities during the
first six months of 1996 included the purchase of $14.8 million in securities
available for sale, offset by $2.5 million in sales of such securities and $6.6
million in calls and maturities of both available-for-sale and held-to-maturity
securities. Loan purchases during 1996 totaled $3.0 million, offset by a $1.3
million net decrease in loans.
Financing activities during the six months ended June 30, 1997 included net
deposit inflows of $2.1 million and proceeds from FHLB advances of $13.2
million offset by advance repayments totaling $8.5 million. In addition, PFC
purchased 28,956 PFC shares for a total of $573,000, of which 3,956 shares were
purchased for a total of $86,000 during the second quarter of 1997. Deposit
inflows of $1.9 million occurred during the first six months of 1996, while
FHLB advance activity included proceeds of $1.0 million and repayments totaling
$1.6 million.
Potters' average regulatory liquidity ratio for June 1997 was 10.63%. At June
30, 1997, Potters had commitments to originate loans of $124,000 and unused
lines of credit totaling $4.4 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 June 30, 1997 (dollars in thousands):
Tangible Core Risk-based
Capital Capital Capital
--------------- ---------------- ----------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
Regulatory capital -
computed $10,295 8.52 $10,295 8.52% $11,032 19.16%
Minimum capital
requirement 1,812 1.50 3,625 3.00 4,606 8.00
------- ---- ------- ---- ------- -----
Regulatory capital -
excess $ 8,483 7.02% $ 6,670 5.52% $ 6,426 11.16%
======= ==== ======= ==== ======= =====
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the accounting requirements for calculating earnings per share
were revised. Basic earnings per share for 1997 and later will be calculated
solely on average common shares outstanding. Diluted earnings per share will
reflect the potential dilution of stock options and other common stock
equivalents. All prior calculations will be restated to be comparable to the
new methods. As PFC has not had significant dilution from stock options, the
new calculation methods will not significantly affect future basic earnings per
share and diluted earnings per share.
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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.
The Annual Meeting of Shareholders of Potters Financial
Corporation was held on April 24, 1997. The matters presented to the Security
Holders and the votes cast were as follows:
1) Election of Directors of Potters Financial Corporation
William L. Miller 376,538 FOR
8,100 WITHHELD
Wm. Gaylord Billingsley 376,488 FOR
8,150 WITHHELD
Edward L. Baumgardner 376,538 FOR
8,100 WITHHELD
Suzanne B. Fitzgerald 376,538 FOR
8,100 WITHHELD
2) Ratification of Crowe Chizek as Auditors
383,938 FOR
100 AGAINST
600 ABSTAIN
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 2.1 Agreement and Plan of Reorganization Incorporated by reference to the
dated December 14, 1995, by and among Annual Report on Form 10-KSB
Potters Financial Corporation, The Potters filed by PFC with the Securities
Savings and Loan Company and Potters and Exchange Commission
Merger Corp. ("SEC") for the year ended
December 31, 1995, Exhibit 2.1.
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
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Exhibit 10 Employment Contract with Included herewith.
Anne S. Myers
Exhibit 11 Statement re: computation of Incorporated by reference to Note 1
per share earnings to the Consolidated Financial
Statements.
Exhibit 27 Financial Data Schedule Included herewith.
Exhibit 99 Safe Harbor Under the Private Included herewith.
Securities Litigation Reform Act of 1995
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: August 6, 1997 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
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