1
Page 1 of 20 pages
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM TO
-------------- --------------
Commission file number: 0-27980
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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
incorporation or organization) Identification 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 April 30, 1998
966,936 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
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2
FORM 10-QSB
QUARTER ENDED MARCH 31, 1998
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 and Comprehensive Income 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
Signatures 20
2.
3
POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in thousands)
- -----------------------------------------------------------------------------------------
March 31, December 31,
1998 1997
---- ----
ASSETS
Cash and due from banks $ 4,839 $ 3,348
Interest-bearing deposits with Federal Home Loan Bank 3,440 459
Federal funds sold and cash management account 3,729 9
-------- --------
Cash and cash equivalents 12,008 3,816
Securities available for sale,
at estimated fair value 4,977 5,474
Securities held to maturity (estimated
fair value: March 31, 1998 - $24,872;
December 31, 1997 - $27,116) 24,884 27,158
Federal Home Loan Bank stock 874 859
Loans receivable, net 80,639 82,093
Premises and equipment, net 1,711 1,742
Other assets 1,485 1,495
-------- --------
Total assets $126,578 $122,637
======== ========
LIABILITIES
Deposits $102,390 $100,094
Federal Home Loan Bank advances 12,427 9,993
Accrued expenses and other liabilities 740 1,544
-------- --------
Total liabilities 115,557 111,631
SHAREHOLDERS' EQUITY
Common shares, no par value
Authorized: 2,000,000 shares;
Issued: 1,115,028 shares in 1998 and
1,111,828 shares in 1997
Paid-in capital 5,183 5,159
Treasury shares, at cost: 148,092 shares
in 1998 and 138,592 shares in 1997 (1,583) (1,399)
Unearned compensation on
recognition and retention plan (87) (87)
Unrealized loss on investment
securities available for sale, net of tax (15) (17)
Retained earnings, substantially restricted 7,523 7,350
-------- --------
Total shareholders' equity 11,021 11,006
-------- --------
Total liabilities and shareholders' equity $126,578 $122,637
======== ========
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
3.
4
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (unaudited)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three months ended
March 31,
------------------
1998 1997
---- ----
INTEREST INCOME
Loans $1,679 $1,344
Securities 491 672
Other interest income 53 19
------ ------
Total interest income 2,223 2,035
------ ------
INTEREST EXPENSE
Interest on deposits 1,073 1,004
Other interest expense 162 79
------ ------
Total interest expense 1,235 1,083
------ ------
NET INTEREST INCOME 988 952
Provision for loan losses (350)
------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 988 1,302
Loan and security gains 22
Other noninterest income 85 74
------ ------
Total noninterest income 107 74
------ ------
Compensation and benefits 375 330
Occupancy and equipment 90 94
FDIC deposit insurance premiums 16 16
Other noninterest expense 279 272
------ ------
Total noninterest expense 760 712
------ ------
INCOME BEFORE INCOME TAX 335 664
Income tax expense 113 226
------ ------
NET INCOME 222 438
Other comprehensive income:
Change in unrealized loss on
securities available for sale 2 (80)
------ ------
COMPREHENSIVE INCOME $ 224 $ 358
====== ======
Earnings per common share
Basic $ 0.24 $ 0.45
====== ======
Diluted $ 0.23 $ 0.44
====== ======
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
4.
5
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
1998 1997
---- ----
BALANCE - JANUARY 1 $11,006 $10,576
Net income for the three months ended March 31 222 438
Issuance of 3,200 common shares for the exercise
of stock options in 1998 24
Purchase of treasury shares (9,500 in 1998
and 50,000 in 1997) (184) (487)
Cash dividends declared ($.05 per share in 1998
and $.035 per share in 1997) (49) (36)
Change in net unrealized loss on
securities available for sale 2 (80)
------- -------
BALANCE - MARCH 31 $11,021 $10,411
======= =======
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
5.
6
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------------
Three months ended
March 31,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 222 $ 438
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 53 48
Provision for loan losses (350)
Net investment amortization 12 11
Net gain on:
Securities (11)
Loans (11)
Foreclosed real estate and
repossessed assets (50)
Stock dividend on FHLB stock (15) (15)
Change in other assets and liabilities (702) 90
------- -------
Net cash from operating activities (452) 172
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Proceeds from calls and maturities 500
Securities held to maturity
Proceeds from repayments, calls and maturities 2,274 854
Net decrease in loans 2,862 1,129
Loan purchases (2,000) (5,924)
Proceeds from sale of loans 596
Proceeds from sale of foreclosed real estate
and repossessed assets 50
Property and equipment expenditures (16) (42)
------- -------
Net cash from investing activities 4,216 (3,933)
------- -------
- --------------------------------------------------------------------------------
(Continued)
6.
7
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Three months ended
March 31,
1998 1997
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 2,296 687
Proceeds from FHLB advances 2,500 4,000
Repayments of FHLB advances (66) (1,565)
Net change in official checks (22) (169)
Net decrease in advances from
borrowers for taxes and insurance (71) (72)
Purchase of treasury shares (184) (487)
Issuance of common shares for
exercise of stock options 24
Cash dividends paid (49) (36)
------- -------
Net cash from financing activities 4,428 2,358
------- -------
Net change in cash and cash equivalents 8,192 (1,403)
Cash and cash equivalents at beginning of year 3,816 4,585
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $12,008 $ 3,182
======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 1,236 $ 1,059
Income taxes 195 85
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7.
8
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
March 31, 1998, 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 1997 Annual Report.
Comprehensive income is now reported for all periods under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," adopted in 1998. Comprehensive income for PFC includes
both net income and other comprehensive income. Other comprehensive income
includes the change in unrealized gains and losses on securities available for
sale. The prior period Statement of Operations has been restated to include
comprehensive income.
Earnings per share was computed under the provisions of SFAS No. 128, "Earnings
Per Share," which requires dual presentation of basic earnings per share ("EPS")
and diluted EPS. Basic EPS includes no dilution and is computed by dividing
earnings for the year available to common shareholders by the weighted average
common shares outstanding during the period. Diluted EPS reflects the potential
dilution of securities that could share in earnings such as stock options,
warrants or other common stock equivalents. The weighted average number of
shares outstanding was 936,207 for the first quarter of 1998 and 977,696 for the
three months ended March 31, 1997. The weighted average number of shares
outstanding for the calculation of diluted EPS was 968,999 for the first quarter
of 1998 and 997,248 for the three months ended March 31, 1997.
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year.
NOTE 2 - SECURITIES
At March 31, 1998, 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 $ 5,000 $ $ (23) $ 4,977
======= ==== ===== =======
Securities held to maturity:
U.S. Treasury and U.S.
Government agencies $ 4,630 $ 4 $ (7) $ 4,627
Obligations of states and
political subdivisions 169 11 180
Other securities 584 7 591
Agency issued mortgage-
backed securities 19,501 114 (141) 19,474
------- ---- ----- -------
$24,884 $136 $(148) $24,872
======= ==== ===== =======
- --------------------------------------------------------------------------------
(Continued)
8.
9
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated fair value of debt securities at March 31,1998,
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 $4,500 $4,478 $ 3,636 $ 3,634
Due after one year through five years $ 500 $ 499 70 69
Due after five years through ten years 1,093 1,103
Due after ten years 584 592
Agency issued mortgage-
backed securities 19,501 19,474
------ ------ ------- -------
$5,000 $4,977 $24,884 $24,872
====== ====== ======= =======
An available-for-sale security totaling $500,000 was called at par during the
first three months of 1998. During the first quarter of 1998, agency securities
held to maturity totaling $750,000 were called, resulting in a gross gain of
$11,000, and a $500,000 agency security matured. No gains or losses were
recorded from investment activity in the first quarter of 1997. The net
unrealized holding loss on securities available for sale decreased by $2,000
during the first quarter of 1998.
The carrying value of investment securities pledged as collateral for public
funds amounted to $5.6 million at March 31, 1998.
At December 31, 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 $ 5,499 $ $ (25) $ 5,474
======= ==== ===== =======
Securities held to maturity:
U.S. Treasury and U.S.
Government agencies $ 5,866 $ 12 $ (15) $ 5,863
Obligations of states and
political subdivisions 168 13 181
Other securities 632 13 645
Agency issued mortgage-
backed securities 20,492 119 (184) 20,427
------- ---- ----- -------
$27,158 $157 $(199) $27,116
======= ==== ===== =======
- --------------------------------------------------------------------------------
(Continued)
9.
10
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized below:
March 31, December 31,
1998 1997
---- ----
(Dollars in thousands)
Real estate loans
One-to-four family residences $65,176 $66,718
Loans held for sale 171 106
Nonresidential property 6,342 6,211
Multifamily and other 1,511 1,537
------- -------
73,200 74,572
------- -------
Consumer and other loans
Home equity loans 5,199 5,224
Secured, unsecured consumer
loans and lines of credit 2,012 2,064
Commercial business loans 875 862
Other 1,526 1,575
------- -------
9,612 9,725
------- -------
Total loan principal balances 82,812 84,297
Loans in process (279) (340)
Unearned interest, purchase premiums
and deferred fees, net 298 279
Allowance for loan losses (2,192) (2,143)
------- -------
$80,639 $82,093
======= =======
Activity in the allowance for loan losses is as follows:
Three months ended
March 31,
--------------------------
1998 1997
---- ----
(Dollars in thousands)
Balance at beginning of year $2,143 $2,630
Provision for loan losses (350)
Recoveries 56 4
Charge-offs (7) (30)
------ ------
Balance at end of year $2,192 $2,254
====== ======
Nonaccrual and renegotiated loans totaled $160,000 and $207,000 at March 31,
1998 and December 31, 1997, respectively. Potters is not committed to lend
additional funds to debtors whose loans have been modified.
Information regarding impaired loans is as follows:
Three months ended
March 31,
----------------------
1998 1997
---- ----
(Dollars in thousands)
Average investment in impaired loans $0 $365
== ====
Interest income recognized on impaired loans
including interest income recognized on a cash basis $0 $ 0
== ====
Interest income recognized on impaired loans
on a cash basis $0 $ 0
== ====
- --------------------------------------------------------------------------------
(Continued)
10.
11
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:
March 31, December 31,
1998 1997
---- ----
(Dollars in thousands)
Balance of impaired loans $0 $0
Less portion for which no allowance for
loan losses is allocated 0 0
-- --
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:
March 31, December 31,
1998 1997
---- ----
(Dollars in thousands)
Variable-rate advances with monthly interest payments:
5.90% advance due April 29, 1998 $ 1,300 $1,300
Fixed-rate advances with monthly interest payments:
6.30% advance due June 24, 1998 2,000 2,000
5.67% advance due November 27, 1998 750 750
6.50% advance due June 26, 1999 2,700 2,700
6.50% advance due June 27, 2000 1,500 1,500
6.50% advance due October 17, 2000 1,500 1,500
5.13% advance due March 17, 2008(1) 2,500
Fixed-rate advances with monthly principal and
interest payments:
6.05% advance due August 14, 1998 83 133
5.85% advance due September 1, 1999 94 110
------- ------
$12,427 $9,993
======= ======
- ----------
(1) Convertible fixed-rate advance which, at the FHLB's option, can be converted
to the London Interbank Offering Rate on a quarterly basis after the first year.
If the FHLB exercises its option, Potters may pay off the advance in whole or in
part on any of the quarterly repricing dates without prepayment penalty.
FHLB advances obtained through the Community Investment Program are amortizing
loans requiring monthly principal payments. As of March 31, 1998, the aggregate
future minimum annual principal payments on FHLB advances were $4.2 million in
1998, $2.7 million in 1999, $3.0 million in 2000 and $2.5 million thereafter. As
of March 31, 1998, the Company was approved to borrow $5.0 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)
11.
12
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 March 31, 1998, Potters had commitments to make loans (at market rates)
and unused lines of credit approximating $5.9 million, of which $1.0 million
carry fixed rates of 6.875% to 14.00%, and $4.9 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
March 31, 1998, the loan portfolio included approximately $24.7 million of
purchased residential real estate loans, $21.6 million on properties located in
northwestern Ohio and $3.1 million on properties in southwestern Ohio. As of
March 31, 1998, the loan portfolio also included approximately $2.1 million in
nonresidential real estate loans secured by property located in the State of
Colorado.
- --------------------------------------------------------------------------------
12.
13
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 March 31, 1998 and
December 31, 1997, and the results of operations for the three months ended
March 31, 1998 and 1997. In addition to the historical information, the
following discussion contains forward-looking statements that involve risks and
uncertainties, including regulatory policy changes, interest rate fluctuations,
loan demand and other risks. Economic circumstances, operations and actual
strategies and results in future time periods may differ materially from those
currently expected. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and in Potters' general market area. Such
forward-looking statements represent PFC's judgment as of the current date. PFC
disclaims, however, any intent or obligation to update such forward-looking
statements. See Exhibit 99, attached hereto, which is incorporated herein by
reference.
Without limiting the foregoing, some of the forward-looking statements included
herein are the statements under the following headings and regarding the
following matters:
Results of Operations - 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.
Financial Condition - Statements regarding the strategic focus and
long-term goals of Potters.
Management's statements regarding its plan for loan growth and its
belief that the recently opened loan production office will enable
Potters to become less reliant on loan purchases to grow the loan
portfolio.
Year 2000 - Management's expectation that Year 2000 issues will be
resolved in a satisfactory manner and will not pose significant
operational problems when the year 2000 arrives.
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.
13.
14
RESULTS OF OPERATIONS
PFC recorded net income of $222,000 for the three months ended March 31, 1998,
compared to $438,000 for the first quarter of 1997. Basic and diluted earnings
per share for the three months ended March 31, 1998 were $.24 and $.23, while
basic and diluted earnings per share for the comparable period in 1997 were $.45
and $.44. The return on average assets for the three months ended March 31, 1998
was .71% compared to 1.53% for the same period in 1997, while the return on
shareholders' equity was 7.93% for the first quarter of 1998 compared to 16.56%
for the three months ended March 31, 1997. The primary reason for the decline in
net income from the first quarter of 1997 to the first quarter of 1998 was a
negative provision for loan losses of $350,000 in 1997, which had an after-tax
positive impact on first quarter 1997 earnings of $231,000, or $.24 per basic
share. Excluding this item, earnings increased from $207,000 during the first
quarter of 1997 to $222,000 for the first quarter of 1998, an increase of 7.2%.
The increase in net income in the first quarter of 1998 compared to the first
quarter of 1997, excluding the 1997 negative provision, resulted primarily from
a 3.8% increase in net interest income and a 44.6% increase in noninterest
income. Noninterest expense increased $48,000 during the three months ended
March 31, 1998 compared to the same period in 1997.
The $188,000 increase in interest income during the first three months of 1998
compared to the same period in 1997 has resulted from continued efforts to
restructure the balance sheet. Funds from loan and security repayments,
maturities and calls, deposit inflows and Federal Home Loan Bank ("FHLB")
advances were used to originate and purchase residential real estate loans.
However, it has become more difficult to purchase adjustable-rate loans than in
1997 as consumers prefer long-term fixed-rate loans during the current low rate
environment. Significant prepayments on loans during 1998 have made it difficult
to maintain earning asset balances. Loans receivable increased from $67.6
million at March 31, 1997, to $80.6 million at March 31, 1998, an increase of
19.3%, but declined $1.5 million during the first quarter of 1998, from $82.1
million at December 31, 1997. Income on loans increased $335,000, or 24.9%,
during the first quarter of 1998 compared to the first quarter of 1997, while
interest on securities declined $181,000, or 26.9% during the same time period.
Other interest income increased $34,000 in 1998 due to the investment of excess
funds in short-term instruments so funds are accessible when loan purchases
become available and originations increase.
Interest expense increased $152,000 from the first quarter of 1997 to the first
quarter of 1998 due primarily to a $4.4 million, or 4.5%, increase in deposits
and a $4.9 million, or 65.3%, increase in FHLB advances from March 31, 1997 to
March 31, 1998.
Net interest income increased from $952,000 during the first three months of
1997 to $988,000 for 1998, an increase of $36,000, or 3.8%. In accordance with
its strategic plan, Potters continued to change its asset mix by shifting from
securities to loans. The flat yield curve and low interest rates during the
first quarter of 1998 have narrowed the interest rate spread and caused
significant prepayment in both loans and securities. Despite the rate
environment, the yield on interest-earning assets increased from 7.50% for the
first quarter of 1997, to 7.57% for the first quarter of 1998 as Potters' assets
shifted from lower-yielding securities into higher-yielding loans. The major
cause of the shrinking spread was an increase in the cost of funds, from 4.27%
in the first quarter of 1997, to 4.49% in the first quarter of 1998. Competition
for deposits in the local market is intense and Potters' interest costs on
certificates of deposit have increased fifteen basis points over the first
quarter of 1997, and a new savings account indexed to the 90-day Treasury bill
has caused a fourteen basis point increase in savings account interest in 1998
over the first quarter of 1997. In addition, Potters has utilized FHLB advances,
which tend to cost more than deposits, over the last year to fund loan growth.
The net interest rate spread has declined from 3.23% for the first quarter of
1997, to 3.08% during the first quarter of 1998.
14.
15
The allowance for loan losses at March 31, 1998 was $2.2 million, representing
an increase of $49,000 from $2.1 million at December 31, 1997, primarily due to
recoveries of $56,000, offset by charge-offs of $7,000. Recoveries resulted
primarily from monthly payments from the bankruptcy Trustee relating to the
Bennett Funding Group equipment lease credits. During the first three months of
1997, the allowance for loan losses declined $376,000 due primarily to a
negative loan loss provision relating to the payoff of a nonperforming real
estate loan on property located in Colorado. The negative provision removed
excess allowances for loan losses resulting from the decline in nonperforming
loans and the risk composition of Potters' loan portfolio. During the first
quarter of 1997, net loan charge-offs totaled $26,000. Due to the current level
of unallocated allowances, no provision for loan losses is planned for the
remainder of 1998, 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.
Nonperforming loans of $160,000 at March 31, 1998 represented decreases of
$47,000 from nonperforming loans of $207,000 at December 31, 1997, and $815,000
from nonperforming loans of $975,000 at March 31, 1997. The allowance for loan
losses increased from 231.2% of nonperforming loans at March 31, 1997, to
1,035.3% at December 31, 1997 and to 1,368.9% at March 31, 1998. No loans were
designated impaired at March 31, 1998 or December 31, 1997, but totaled $365,000
at March 31, 1997, consisting of the Bennett Funding Group lease credits.
Noninterest income increased $33,000 for the three months ended March 31, 1998,
compared to the respective period in 1997. During 1998, gains resulting from
loan sales and a call of a security were recognized. Real estate loans totaling
$585,000 were sold on a servicing-released basis, resulting in gains of $11,000.
Potters recently became a seller/servicer with the Federal Home Loan Mortgage
Corporation ("FHLMC"), which will enable it to control its interest rate risk
through sales of long-term fixed-rate real estate loans into the secondary
mortgage market while maintaining the servicing, a new source of fee income. An
$11,000 gain was recognized on the call of a security held to maturity during
the first quarter of 1998. No gains or losses on loans or securities were
recorded during the first quarter of 1997. Other noninterest income increased
14.9% during the first quarter of 1998 compared to the first quarter of 1997.
The increase during 1998 compared to 1997 resulted primarily from an increase in
service charges on deposits from increased checking accounts and an increase in
other income, primarily from higher ATM and VISA Check Card income.
Noninterest expense increased $48,000 during the first quarter of 1998 compared
to the first quarter of 1997. Included in noninterest expense in 1997 was a
$50,000 gain on the sale of foreclosed real estate located in Colorado.
Excluding the gain, noninterest expense actually declined $2,000 from 1997 to
1998. Potters continues to follow its plan of blending the developing skills of
its employees with new technology to provide superior service to customers.
Compensation and benefits increased in 1998 over the first quarter of 1997
primarily from the addition of employees with commercial lending, loan
processing, sales and branch management expertise. Automated teller machine
("ATM") expenses relating to Potters ATMs, ATM cards and VISA Check Cards have
increased, but legal and professional fees, insurance and printing and supplies
expenses have declined compared to the first quarter of 1997.
FINANCIAL CONDITION
PFC's assets at March 31, 1998 totaled $126.6 million, an increase of $3.9
million, or 3.2%, from $122.6 at December 31, 1997. Potters has attempted to
continue the restructure of its balance sheet during the first quarter of 1998
in accordance with its strategic focus and long-term goals of increasing
interest income and the interest rate spread. The interest rate environment and
flat yield curve, however, have caused difficulty in locating adjustable-rate
loan purchases and have produced significant prepayments in both loans and
securities, generating excess funds. As a result, cash and cash equivalents
increased $8.2 million as Potters invested excess funds into short-term
investments to be available to fund loan growth.
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Securities available for sale decreased $497,000, to $5.0 million at March 31,
1998, compared to $5.5 million at December 31, 1997. One available-for-sale
security was called during the first quarter of 1998. 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, net of tax, decreased from
$17,000 at year-end 1997 to $15,000 at March 31, 1998.
At March 31, 1998, the held-to-maturity securities portfolio totaled $24.9
million, a decrease of $2.3 million from $27.2 million at December 31, 1997. Two
agency securities totaling $750,000 were called during the first quarter of
1998, one resulting in a gain of $11,000. Another agency security totaling
$500,000 matured during the first quarter of 1998, while repayments on
held-to-maturity securities totaled over $1.0 million. In addition, higher-rate
mortgage-backed securities prepaid more quickly and adjustable-rate
mortgage-backed securities repriced downward, putting pressure on the interest
rate spread.
Net loans receivable decreased $1.5 million, from $82.1 million at December 31,
1997, to $80.6 million at March 31, 1998. The scarcity of adjustable-rate loan
purchases during 1998 was illustrated in a decline in loan purchases, from $5.9
million during the first quarter of 1997, to $2.0 million during the first
quarter of 1998. The flat yield curve caused significant refinancing activity
and prepayments, causing a net decrease in loans, excluding loan purchases, of
$2.9 million during the first quarter of 1998, compared to $1.1 million during
the first quarter of 1997. Potters opened its first loan production office in
the Boardman area, a suburb of Youngstown, Ohio, in April 1998. The area is
growing, with new residential construction and business expansion. Potters' plan
is to utilize this loan production office to become less reliant on loan
purchases to grow the portfolio, although there can be no assurance that the
demand for loans will continue in surrounding local areas or that the Boardman
office will successfully penetrate that market. Potters' initiation of a 30-year
fixed-rate real estate loan program and sales of such loans on a
servicing-released basis have generated gains, but the recent acquisition of
seller/servicer status with FHLMC will enable Potters to retain the servicing on
its 30-year loans, a new source of noninterest income.
Total deposits increased $2.3 million, or 2.3%, during the first three months of
1998, from $100.1 million at December 31, 1997 to $102.4 million at March 31,
1998. Inflows occurred primarily in the Treasury Index savings account and in
certificates of deposit. The Treasury Index savings account was developed in
late 1997 to aid in retaining funds which would otherwise flow to accounts at
brokerage firms. Potters has also 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 $12.4 million at March 31, 1998, compared to $10.0 million
at December 31, 1997. An advance totaling $2.5 million received during the first
three months of 1998 was part of a special FHLB program in which, after the
first year, the FHLB has the option to convert the ten-year fixed-rate advance
to the London Interbank Offering Rate on a quarterly basis. If the FHLB
exercises its option, Potters may pay off the advance in whole or in part on any
of the quarterly repricing dates without prepayment penalty.
Shareholders' equity increased $15,000 during the first quarter of 1998. Net
income of $222,000 for the three months ended March 31, 1998, the issuance of
3,200 common shares upon the exercise of stock options with exercise prices
totaling $24,000 and a $2,000 decrease in the net unrealized loss on securities
available for sale increased shareholders' equity during the quarter. Offsetting
the increase was the purchase of 9,500 shares for a total of $184,000 and the
payment of $49,000 in dividends during the first quarter of 1998.
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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.
The most significant components of cash flows from investing activities during
the first three months of 1998 were loan repayments and other decreases in net
loans of $2.9 million and proceeds from repayments, calls and maturities of
securities held to maturity of $2.3 million, somewhat offset by loan purchases
of $2.0 million. Investing activities during the first three months of 1997
included loan purchases of $5.9 million, offset by a net decrease in loans of
$1.1 million and proceeds from repayments, calls and maturities of securities
held to maturity of $854,000.
Financing activities during the three months ended March 31, 1998 included
proceeds from FHLB advances of $2.5 million and net deposit inflows of $2.3
million. In addition, PFC purchased 9,500 PFC shares for a total of $184,000
during the first quarter of 1998. Deposit inflows of $687,000 occurred during
the first three months of 1997, while FHLB advance activity included proceeds of
$4.0 million and repayments totaling $1.6 million.
Potters' average regulatory liquidity ratio for March 1998 was 20.32%. At March
31, 1998, Potters had commitments to originate loans of $1.0 million and unused
lines of credit totaling $4.9 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 March 31, 1998 (dollars in thousands):
Tangible Core Risk-based
Capital Capital Capital
--------------- ---------------- ----------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
Regulatory capital -
computed $9,892 7.88% $9,892 7.88% $10,667 17.62%
Minimum capital
requirement 1,882 1.50 3,764 3.00 4,844 8.00
------ ---- ------ ---- ------- -----
Regulatory capital -
excess $8,010 6.38% $6,128 4.88% $ 5,823 9.62%
====== ==== ====== ==== ======= =====
YEAR 2000
As with all financial institutions, Potters' operations depend almost entirely
on computer systems. Potters has formed a "Year 2000 Committee" (the
"Committee") to address the problems associated with the year 2000. The
Committee has conducted a comprehensive review of all operations which will be
impacted by the year 2000. Because Potters primarily uses outside vendors in its
computerized operations, the Committee has been in close contact with all
vendors to ensure that the problem is being addressed. The Committee developed a
detailed plan to monitor the progress of vendors in modifying their software and
to perform detailed testing of each software program by Potters' employees to
ensure that all operational systems will accommodate the year 2000. The
Committee has also developed a contingency plan for all mission critical systems
which provides alternatives if existing vendors show a lack of commitment or
ability to make their systems year 2000 compliant. The Committee is also
addressing credit risk considerations arising from the year 2000 with all major
commercial borrowers. The overall plan and the contingency plan were approved by
the Board of Directors.
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Potters has not yet identified any specific expenses that are reasonably likely
to be incurred by Potters in connection with year 2000 issues, but no assurance
can be given at this time that significant expense will not be incurred in
future periods. In the event that Potters is ultimately required to purchase
replacement computer systems, programs and equipment, or substantial expense
must be incurred to make Potters' current systems, programs and equipment year
2000 compliant, or Potters' vendors pass on to Potters their expenses of
becoming year 2000 compliant, Potters' net income and financial condition could
be adversely affected. Moreover, to the extent Potters' employees must spend
time ensuring that vendors are adequately preparing for year 2000, those
employees will not be focusing all of their time and energies toward achieving
other goals set by the management of Potters.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income and its components, which are required to be reported in a
financial statement with the same prominence as other financial statements.
PFC's comprehensive income reflects PFC's net income as affected by the change
in unrealized losses on securities available for sale. All comprehensive income
from prior periods will be included to be comparable to the new standards. The
difference between net income and comprehensive income for PFC will depend on
the components of securities available for sale over time and their reaction to
and volatility in the prevailing interest rate environment.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," changes the way public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about reportable segments in interim
financial reports issued to shareholders. SFAS No. 131 does not presently affect
PFC in that it operates within one reportable segment of banking.
SFAS Nos. 130 and 131 are both effective for PFC in 1998 financial statements
and reporting.
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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.
None.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 3.1 Articles of Incorporation of Potters Incorporated by reference to the
Financial Corporation Form 8-A filed with the SEC on
March 4, 1996 (the "8-A").
Exhibit 3.2 Code of Regulations of Potters Incorporated by reference to the 8-A.
Financial Corporation
Exhibit 10.1 Potters Financial Corporation 1998 Incorporated by reference to Exhibit
Stock Option and Incentive Plan A to the Proxy Statement for the 1998
Annual Meeting.
Exhibit 11 Statement re: computation of Included herewith.
per share earnings
Exhibit 27.1 Financial Data Schedule for the Included herewith.
quarter ended March 31, 1998
Exhibit 27.2 Amended and Restated Financial Included herewith.
Data Schedule for the quarter ended
March 31, 1997
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: May 11, 1998 By: /s/ Edward L. Baumgardner
------------------------------------------
Edward L. Baumgardner
Duly Authorized Representative,
President and Chief Executive Officer
By: /s/ Anne S. Myers
------------------------------------------
Anne S. Myers
Principal Financial Officer and
Principal Accounting Officer
20.