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, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM ________ TO ________
Commission file number: 0-27980
Potters Financial Corporation
(Exact name of small business issuer
as specified in its charter)
Ohio 34-1817924
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
519 Broadway, East Liverpool, Ohio_ 43920
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (330) 385-0770
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes ___X____ No _________
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Common Shares, no par value Outstanding at July 15, 1996
506,169 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes _________ No ___X____
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<PAGE>
FORM 10-QSB
QUARTER ENDED JUNE 30, 1996
Part I - Financial Information
Item 1. Financial Statements
Interim financial information required by Regulation 210.10-01
of Regulation S-X is included in this Form 10-QSB as referenced
below:
Page
Number (s)
-----------
Consolidated Balance Sheets ........................................... 3
Consolidated Statements of Operations ................................. 4
Consolidated Statements of Changes in Shareholders' Equity ............ 5
Consolidated Statements of Cash Flows ............................... 6-7
Notes to Consolidated Financial Statements ......................... 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............ 13-19
Part II - Other Information
Item 1. Legal Proceedings ........................................... 19
Item 2. Change in Securities ........................................ 19
Item 3. Defaults Upon Senior Securities ............................. 20
Item 4. Submission of Matters to a Vote of
Security Holders ............................................ 20
Item 5. Other Information ........................................... 20
Item 6. Exhibits and Reports on Form 8-K ............................ 20
Signatures ........................................................... 21
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<PAGE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
June 30, December 31,
1996 1995
ASSETS
Cash and due from banks .......................... $ 3,067 $ 3,076
Interest-bearing deposits with Federal
Home Loan Bank ................................ 186 2,675
Federal funds sold and cash management account ... 538 5,479
--------- ---------
Cash and cash equivalents ...................... 3,791 11,230
Investment securities available for sale,
at estimated fair value (Note 2) ............... 19,625 10,952
Investment securities held to maturity
(estimated fair value: June 30, 1996 -
$8,335; December 31, 1995 - $8,899) (Note 2) .. 8,482 8,872
Mortgage-backed securities held to
maturity (estimated fair value: June 30, 1996 -
$26,436; December 31, 1995 - $29,041) (Note 2) . 27,237 29,240
Federal Home Loan Bank stock ..................... 733 709
Loans receivable, net (Note 3) ................... 51,299 49,889
Premises and equipment, net ...................... 1,663 1,585
Other assets ..................................... 1,884 1,765
--------- ---------
Total assets ................................... $ 114,714 $ 114,242
========= =========
LIABILITIES
Deposits ......................................... $ 100,594 $ 98,697
Federal Home Loan Bank advances (Note 4) ......... 2,386 3,018
Official checks .................................. 757 755
Advances from borrowers for taxes and insurance .. 157 166
Accrued expenses and other liabilities ........... 226 417
--------- ---------
Total liabilities .............................. 104,120 103,053
--------- ---------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
Common shares, no par value at June 30, 1996;
$1.00 par value at December 31, 1995
Authorized: 10,000,000 shares;
Issued: 532,809 shares ........................ 533
Paid-in capital .................................. 4,813 4,280
Treasury shares (26,640 shares at cost) .......... (436)
Unearned compensation on
recognition and retention plan ................. (118) (118)
Unrealized loss on investment
securities available for sale, net of tax ...... (231) (23)
Retained earnings, substantially restricted ...... 6,566 6,517
--------- ---------
Total shareholders' equity ..................... 10,594 11,189
--------- ---------
Total liabilities and shareholders' equity ..... $ 114,714 $ 114,242
========= =========
See accompanying notes to financial statements.
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<PAGE>
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,
1996 1995 1996 1995
Interest income
Loans .............................. $1,085 $1,082 $2,199 $2,187
Investment securities .............. 445 366 795 700
Mortgage-backed securities ......... 439 512 906 1,032
Other interest income .............. 32 26 117 40
------ ------ ------ ------
Total interest income ............ 2,001 1,986 4,017 3,959
------ ------ ------ ------
Interest expense
Interest on deposits ............... 1,056 1,031 2,118 2,007
Other interest expense ............. 22 26 62 43
------ ------ ------ ------
Total interest expense ........... 1,078 1,057 2,180 2,050
------ ------ ------ ------
Net interest income .................... 923 929 1,837 1,909
Provision for loan losses (Note 3) ..... 30 75 249 155
------ ------ ------ ------
Net interest income after
provision for loan losses ............ 893 854 1,588 1,754
Loan and investment security gains ..... 9 1 3
Other noninterest income ............... 57 55 118 116
------ ------ ------ ------
Total noninterest income ......... 57 64 119 119
------ ------ ------ ------
Compensation and benefits .............. 335 350 668 682
Occupancy and equipment ................ 80 81 164 162
FDIC deposit insurance premiums ........ 64 64 128 129
Other noninterest expense .............. 298 284 556 536
------ ------ ------ ------
Total noninterest expense ........ 777 779 1,516 1,509
------ ------ ------ ------
Income before income tax ............... 173 139 191 364
Income tax ............................. 70 78
------ ------ ------ ------
Net income ............................. $ 103 $ 139 $ 113 $ 364
====== ====== ====== ======
Earnings per share ..................... $ 0.20 $ 0.26 $ 0.22 $ 0.69
====== ====== ====== ======
See accompanying notes to financial statements.
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<PAGE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
1996 1995
------ ------
Balance - January 1 ........................... $ 11,189 $ 9,793
Net income for the six months ended June 30 ... 113 364
Purchase of 26,640 treasury shares ............ (436)
Cash dividends declared ($.12 per share in 1996
and $.10 per share in 1995) .................. (64) (53)
Change in net unrealized gain (loss) on
securities available for sale ................ (208) 450
-------- --------
Balance - June 30 ............................. $ 10,594 $ 10,554
======== ========
See accompanying notes to financial statements.
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<PAGE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
- ------------------------------------------------------------------------------
Six months ended
June 30,
1996 1995
------ ------
Cash flows from operating activities
Net income .......................................... $ 113 $ 364
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization ..................... 65 69
Provision for losses .............................. 249 155
Net investment amortization ....................... 38 47
Net (gain) loss on:
Investment and mortgage-backed securities ...... (1) (3)
Sale of foreclosed real estate and
repossessed assets ........................... 14 1
Stock dividend on FHLB stock ...................... (24) (22)
Change in other assets and liabilities ............ (279) (384)
-------- -------
Net cash from operating activities ........... 175 227
-------- -------
Cash flows from investing activities
Net change in interest-bearing balances
with banks ....................................... 100
Investment securities available for sale
Proceeds from sales ............................ 2,500 3,380
Proceeds from calls and maturities ............. 3,296
Purchases ...................................... (14,782) (2,828)
Investment securities held to maturity
Proceeds from repayments, calls and maturities .... 1,375 1,513
Purchases ......................................... (984) (1,503)
Mortgage-backed securities held to maturity
Proceeds from principal repayments ................ 1,965 1,837
Purchase of FHLB stock .............................. (16)
Net decrease in loans ............................... 1,343 575
Loan purchases ...................................... (3,027)
Proceeds from sale of loans ......................... 109
Proceeds from sale of foreclosed real estate
and repossessed assets ............................ 82 35
Property and equipment expenditures ................. (140) (61)
-------- -------
Net cash from investing activities ................ (8,372) 3,141
-------- -------
(Continued)
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<PAGE>
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Six months ended
June 30,
1996 1995
------ ------
Cash flows from financing activities
Net increase (decrease) in deposits ............... 1,897 (896)
Proceeds from FHLB advances ....................... 1,000 2,500
Repayments of FHLB advances ....................... (1,632) (1,000)
Net change in official checks ..................... 2 (299)
Net increase (decrease) in advances from
borrowers for taxes and insurance ............... (9) 20
Treasury share purchases .......................... (436)
Cash dividends paid ............................... (64) (53)
-------- -------
Net cash from financing activities .............. 758 272
-------- -------
Net change in cash and cash equivalents ............... (7,439) 3,640
Cash and cash equivalents at beginning of year ........ 11,230 3,038
-------- -------
Cash and cash equivalents at end of year .............. $ 3,791 $ 6,678
======== =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest ........................................ $ 2,189 $ 2,044
Income taxes .................................... 96 163
Noncash transactions
Transfer from loans to foreclosed real estate
and repossessed assets ........................ 23 5
Transfer from investment securities available
for sale to investment securities held to
maturity ...................................... 1,000
See accompanying notes to consolidated financial statements.
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<PAGE>
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Potters Financial Corporation ("PFC"), a unitary savings and loan holding
company, owns all of the issued and outstanding common shares of The Potters
Savings and Loan Company ("Potters"), a savings and loan association. Both
entities are headquartered at 519 Broadway in East Liverpool, Ohio.
The accompanying consolidated financial statements include the accounts of
PFC, Potters and its wholly-owned subsidiary, Potters Financial Service
Corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present
fairly the consolidated financial position of PFC at June 30, 1996, and its
results of operations and statement of cash flows for the periods presented.
All such adjustments are normal and recurring in nature. The accompanying
consolidated financial statements do not purport to contain all the necessary
financial disclosures required by generally accepted accounting principles
that might otherwise be necessary in the circumstances and should be read in
conjunction with the consolidated financial statements of Potters and notes
thereto included in the 1995 Annual Report.
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights" was adopted by Potters on January 1, 1996, and
requires companies to recognize as separate assets, rights to service mortgage
loans for others, however those servicing rights are acquired. Mortgage
servicing rights are recorded as a separate asset when loans are sold or
securitized, and amortized in proportion to, and over the period of, estimated
net servicing income. Because Potters did not sell or securitize loans in the
first quarter of 1996, the adoption of this statement did not impact net
income for the period. Based on Potters' historical sales volume, SFAS No. 122
is not expected to have a material impact on Potters' net income. Any loan
sales occurring in the future will be recorded according to the provisions of
SFAS No. 122.
In 1996, PFC is adopting SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, use of a fair
value based method to account for plans such as PFC's stock option plan. If
the fair value accounting treatment encouraged by SFAS No. 123 is not adopted,
entities must disclose the pro forma effect on net income and earnings per
share had such accounting treatment been adopted. PFC elected to disclose the
pro forma effect of the fair value accounting for stock options granted in
1995 and thereafter, and will include appropriate disclosures in the 1996
annual financial statements.
Earnings per share was calculated on the basis of the weighted average number
of shares outstanding during the period. Such weighted average shares were
527,247 for the second quarter of 1996 and 530,028 for the six months ended
June 30, 1996. Weighted average shares during both periods in 1995 totaled
529,809.
The provision for income taxes is based upon the effective tax rate expected
to be applicable for the entire year.
(Continued)
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<PAGE>
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair value of investments in debt and equity
securities and mortgage-backed securities are as follows at June 30, 1996
(dollars in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Investment securities
available for sale:
U.S. Treasury and U.S.
Government agencies $14,283 $ 2 $ (307) $13,978
Mutual funds 5,693 (46) 5,647
------- ------- ------- -------
$19,976 $ 2 $ (353) $19,625
======= ======= ======= =======
Investment securities held
to maturity:
U.S. Treasury and U.S.
Government agencies $ 7,348 $ 3 $ (197) $ 7,154
Obligations of states and
political subdivisions 178 35 213
Other securities 956 12 968
------- ------- ------- -------
$ 8,482 $ 50 $ (197) $ 8,335
======= ======= ======= =======
Mortgage-backed securities $27,237 $ 32 $ (833) $26,436
======= ======= ======= =======
The amortized cost and estimated fair value of debt securities at June
30,1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
Available for Sale Held to Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
(dollars in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 504 $ 505
Due after one year through
five years $ 9,492 $ 9,282 4,161 4,077
Due after five years through
ten years 4,791 4,696 2,392 2,319
Due after ten years 1,425 1,434
------ ------ ------ ------
$14,283 $13,978 $8,482 $8,335
======= ======= ====== ======
</TABLE>
Proceeds from the sale of investment securities available for sale during the
six months ended June 30, 1996 totaled $2.5 million and resulted in no gain or
loss. During 1996, securities totaling $3.8 million were called, resulting in
a $1,000 gain. The net unrealized holding loss on securities available for
sale increased by $308,000 during 1996. There were no sales or transfers of
investment or mortgage-backed securities held to maturity during 1996. Two
agency securities totaling $1.0 million were transferred, at fair value, from
the available for sale portfolio to the held to maturity portfolio during
1995.
The carrying value of investment securities pledged as collateral for public
funds amounted to $2.0 million at June 30, 1996.
(Continued)
-9-
<PAGE>
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
The amortized cost and estimated fair value of investments in debt and equity
securities are as follows at December 31, 1995 (dollars in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Investment securities
available for sale:
U. S. Government agencies ....... $10,994 $ 8 $ (50) $10,952
======= ===== ======= =======
Investment securities held
to maturity:
U.S. Treasury and U.S. ..........
Government agencies ........... $ 7,666 $ 18 $ (41) $ 7,643
Obligations of states and
political subdivisions ........ 178 37 215
Other securities ................ 1,028 13 1,041
------- ----- ------- -------
$ 8,872 $ 68 $ (41) $ 8,899
======= ===== ======= =======
Mortgage-backed securities
held to maturity .................. $29,240 $ 120 $ (319) $29,041
======= ===== ======= =======
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized below (dollars in thousands):
June 30, December 31,
1996 1995
Real estate loans
One-to-four family residences ..................... $ 37,236 $ 33,007
Nonresidential property ........................... 7,652 9,385
Multifamily and other ............................. 2,052 2,106
-------- --------
46,940 44,498
-------- --------
Consumer and other loans
Loans on deposits ................................. 527 562
Home improvement and equity loans ................. 3,318 3,314
Educational loans held for sale ................... 10 438
Automobile loans .................................. 429 413
Mobile home loans ................................. 1,032 1,280
Commercial loans and unsecured lines of credit .... 960 1,563
Other ............................................. 846 605
-------- --------
7,122 8,175
-------- --------
Total loan principal balances ..................... 54,062 52,673
Loans in process .................................. (633) (477)
Unearned interest and deferred fees,net ........... (34) (67)
Allowance for loan losses ......................... (2,096) (2,240)
-------- --------
$ 51,299 $ 49,889
======== ========
The estimated fair value of educational loans held for sale exceeds the
carrying value of such loans.
(Continued)
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<PAGE>
NOTE 3 - LOANS RECEIVABLE (Continued)
Nonaccrual and renegotiated loans totaled $2.7 million and $2.4 million at
June 30, 1996 and December 31, 1995, respectively. Potters is not committed to
lend additional funds to debtors whose loans have been modified.
Activity in the allowance for loan losses is as follows (dollars in
thousands):
Six months ended
June 30,
1996 1995
Balance at beginning of year ............ $2,240 $1,963
Provision for loan losses ............... 249 155
Recoveries .............................. 19 27
Charge-offs ............................. (412) (27)
------ ------
Balance at end of year .................. $2,096 $2,118
======= ======
Information regarding impaired loans, which is included in nonaccrual and
renegotiated loans disclosed above, is as follows for the six months ended
June 30, 1996 and 1995 (dollars in thousands):
1996 1995
Average investment in impaired loans ........ $ 354 $ 340
====== ======
Interest income recognized on impaired
loans including interest income recognized
on a cash basis ........................... $ 14 $ 0
====== ======
Interest income recognized on impaired loans
on a cash basis ........................... $ 14 $ 0
====== ======
Information regarding impaired loans at June 30, 1996 and December 31, 1995 is
as follows (dollars in thousands):
June 30, December 31,
1996 1995
Balance of impaired loans ................... $ 511 $ 193
Less portion for which no allowance for
loan losses is allocated .................. (511) (193)
------ ------
Portion of impaired loan balance for which
an allowance for loan losses is allocated . $ 0 $ 0
====== ======
Portion of allowance for loan losses
allocated to the impaired loan balance .... $ 0 $ 0
====== ======
(Continued)
-11-
<PAGE>
NOTE 4 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances as of June 30, 1996 are as follows (dollars in
thousands):
Variable rate advance:
5.6125% Libor Advance due December 20, 2001 $ 1,000
Fixed rate advances with monthly interest payments:
5.67% Advance due November 27, 1998 750
Fixed rate advances with monthly principal and
interest payments:
6.05% Advance due August 14, 1998 433
5.85% Advance due September 1, 1999 203
-------
$ 2,386
=======
FHLB advances obtained through the Community Investment Program are amortizing
loans requiring monthly principal payments. As of June 30, 1996, the aggregate
future minimum annual principal payments on FHLB advances are $131,000 in
1996, $262,000 in 1997, $946,000 in 1998, $47,000 in 1999 and $1.0 million in
2001. As of June 30, 1996, Potters had requested and was approved to borrow a
total of $5.5 million in cash management advances. FHLB advances are
collateralized by all shares of FHLB stock owned by Potters and by 100% of its
qualified real estate loan portfolio.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, Potters has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. These include Potters being a
defendant in certain claims and legal actions arising in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated financial position of PFC.
Potters is a party to and a creditor in the Chapter 11 Bankruptcy Proceedings
of the Bennett Funding Group, Inc. (the "Bennett Group"). Bankruptcy counsel
in New York has been engaged to represent Potters' interests in the case. A
Trustee appointed by the bankruptcy court continues the investigation into the
activities of the Bennett Group. Counsel has advised Potters that there is no
certainty at this time as to the exact duration of the case nor the amount of
funds which will ultimately be collected through the Trustee. At June 30,
1996, Potters' investment in the equipment lease credit was $365,000 after the
$377,000 write-down.
Loan Commitments
As of June 30, 1996, Potters had commitments to make loans (at market rates)
and unused lines of credit approximating $4,302,000, of which $315,000 carry
fixed rates, ranging from 7.75% to 9.25%, and $3,987,000 carry adjustable
rates. Since loan commitments may expire without being used, the amounts do
not necessarily represent future cash commitments.
NOTE 6 - CONCENTRATIONS OF CREDIT RISK
Most of Potters' current business activities are with customers located within
the immediate lending area which includes portions of Columbiana and Jefferson
Counties in northeastern Ohio and northern Hancock County in West Virginia. As
of June 30, 1996, Potters' loan portfolio included approximately $6.5 million
in nonresidential real estate loans secured by property located primarily in
the State of Colorado.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operationsk
Introduction
On February 23, 1996, the shareholders of The Potters Savings and Loan Company
("Potters") were asked to approve the reorganization of Potters into the
holding company structure of ownership. The reorganization was approved and
was completed on March 11, 1996. As a result, Potters Financial Corporation
("PFC"), a unitary savings and loan holding company, became the holder of all
of the outstanding common shares of Potters, and the former shareholders of
Potters received common shares of PFC. PFC declared its first dividend of $.12
per share on April 24, 1996, paid on May 24, 1996, to shareholders of record
as of May 4, 1996.
PFC successfully completed the repurchase of 5% of its 532,809 outstanding
common shares on June 12, 1996. The stock repurchase program, announced on
June 7, 1996, resulted in the repurchase of 26,640 shares at an average price
of $16.375 per common share. The shares will be held as treasury shares by PFC
to be available for general corporate purposes.
The following discussion and financial information are presented to provide
shareholders with a more comprehensive review of the financial position and
operating results than could be obtained from an examination of the financial
statements alone. The review should be read in conjunction with the
consolidated financial statements and accompanying notes.
Results of Operations
PFC recorded earnings of $103,000, or $.20 per common share, for the second
quarter of 1996 compared to $139,000, or $.26 per share, for Potters for the
second quarter of 1995. The decrease in net income resulted in annualized
returns on average assets and average shareholders' equity of .36% and 3.76%,
respectively, for the three months ended June 30, 1996, compared to .50% and
5.33%, respectively, for the comparable period during 1995. The decline in net
income during the second quarter of 1996 versus the second quarter of 1995 was
primarily caused by a provision for income taxes during 1996. Potters has not
recorded an income tax provision for the past two years because of the
continuing reduction in the valuation allowance against deferred tax assets.
The valuation allowance was reduced as the deferred tax asset became more
likely to be realized as Potters paid taxes and established a history of
generating taxable income, and such allowance was eliminated as of December
31, 1995. As a result, Potters began to recognize income tax expense in 1996.
Net income on a pretax basis for the second quarter of 1996, however, exceeded
that of the comparable period in 1995 by $34,000, or 24.5%, due primarily to a
lower provision for loan losses in the second quarter of 1996.
Net income for the six months ended June 30, 1996 was $113,000, or $.22 per
common share, compared to net income of $364,000, or $.69 per share for the
six months ended June 30, 1995. The annualized return on assets for the six
months ended June 30, 1996 was .21% compared to .65% for the comparable period
-13-
<PAGE>
in 1995, while annualized returns on shareholders' equity for the same
respective periods were 2.11% and 7.04%. The principal reasons for the
$251,000 decrease in 1996 net income were a higher provision for loan losses,
the provision for income taxes previously discussed and decreased net interest
income. The increase in the provision for loan losses related to the extension
of credit by Potters for an investment in equipment leases with Bennett
Funding Group, Inc. (the "Bennett Group"), a Syracuse, New York leasing
corporation, and Bennett Leasing Corporation, a related entity. Potters
learned late in the first quarter of 1996 that the Securities and Exchange
Commission commenced proceedings against Bennett Funding charging fraud in
connection with the sale of equipment leases. On March 29, 1996, the Bennett
Group filed for protection from creditors under Chapter 11 of the federal
bankruptcy laws.
Consistent with Potters' historically proactive approach to dealing with
problem assets, $377,000 of the $754,000 equipment lease credit was charged
off in the first quarter of 1996. In addition, the provision for loan losses
was increased, resulting in a $94,000 increase in the 1996 provision over last
year. Potters also ceased the accrual of interest on the remaining investment
until more information is obtained with respect to potential future cash
flows. Bankruptcy counsel in New York has been engaged to represent Potters'
interests in the case. A trustee appointed by the bankruptcy court continues
the investigation into the activities of the Bennett Group and Potters'
counsel is working actively with such trustee. Once the priority of interests
in the case has been determined, it is Potters' intention, and that of its
counsel, to pursue the collection of rental streams due Potters. It is
anticipated, as advised by counsel, that the priority of interests should be
determined during the fourth quarter of 1996. No payments have been received
since the announcement of the bankruptcy. Because Potters placed the asset on
a nonaccrual status in March 1996, it has been included in nonperforming and
impaired loans.
The allowance for loan losses of Potters at June 30, 1996 was $2.1 million,
representing a decline of $144,000 from $2.2 million at December 31, 1995.
During the six months ended June 30, 1996, the provision for loan losses of
$249,000 was offset by net loan charge-offs of $393,000, including $377,000
relating to the Bennett Group lease portfolio. The provision for loan losses
during the first six months of 1995 totaled $155,000, while no net loan
charge-offs were experienced during such period.
Nonperforming loans of $2.7 million at June 30, 1996 represented increases of
$222,000 over the $2.4 million level at December 31, 1995 and $83,000 over the
$2.6 million level at June 30, 1995. The increase, caused primarily by the
inclusion of the Bennett Group credits, reduced the allowance as a percentage
of nonperforming loans to 78.8%, or 3.9% of total loans, at June 30, 1996
compared to 91.9%, or 4.3% of total loans, at December 31, 1995 and 82.2%, or
4.1% of total loans, at June 30, 1995. Impaired loans as of June 30, 1996
totaled $511,000 compared to $193,000 at December 31, 1995. Once again, the
increase was caused by the addition of the $377,000 equipment lease credits.
At June 30, 1996, Potters' allowance included $960,000 of reserves which were
not allocated to any specific loan or group of loans. Based upon historic
experience, the management of Potters believes that such unallocated reserves
will be sufficient to absorb any additional general loan losses in the
portfolio.
-14-
<PAGE>
Also contributing to the decline in net income during 1996 was a decrease in
net interest income and a contraction in the interest rate spread. Such
contraction was primarily attributable to continued strong competition for
deposits, which resulted in upward pricing on certificates of deposit and a
rising cost of funds.
Interest income increased $15,000 and $58,000 for the three and six months
ended June 30, 1996, respectively, compared to the same periods for 1995.
Yields on interest-earning assets declined from 7.41% for the first six months
of 1995 to 7.38% for the same period during 1996. Calls of $3.8 million on
higher yielding agency securities and payoffs of $1.6 million on higher
yielding nonresidential real estate loans located in Colorado negatively
affected the interest rate spread.
Interest expense increased $21,000, to $1.1 million, and $130,000, to $2.2
million, for the three and six months ended June 30, 1996, respectively,
compared to the same periods during 1995. Such increases were attributable to
higher balances of deposits during 1996 and higher rates on certificates of
deposit. The cost of funds increased significantly, from 4.12% for the six
months ended June 30, 1995 to 4.30% for the comparable period in 1996.
The increase in the cost of funds and the decrease in the yield on
interest-earning assets resulted in a contraction of the interest rate spread
from 3.29% during the first six months of 1995 to 3.07% for the first half of
1996 and a decline in net interest income of $72,000 during 1996 compared to
1995. Net interest income for the second quarter of 1996 totaled $923,000, a
decrease of $6,000 from $929,000 during the second quarter of 1995.
Noninterest income decreased $7,000 for the three months ended June 30, 1996
compared to the same period in 1995, and remained identical at $119,000 for
the first half of 1996 compared to 1995. Included in 1996 noninterest income
was a net expense of $20,000 on foreclosed real estate operations due
primarily to the payment of real estate taxes on foreclosed real estate. In an
effort to enhance noninterest income, an analysis of the existing fee
structure on deposit and loan products has been completed and several changes
are in varying stages of implementation.
Noninterest expense remained virtually the same with a $2,000 decrease during
the second quarter of 1996 versus 1995 and a $7,000 increase for the first six
months of 1996 versus the comparable period during 1995. Despite ongoing
efforts to contain expenses, Potters continued its strategic commitment to
invest in employee training and development during the first six months of
1996. In the second quarter of 1996, new teller hardware and software was
installed in order to improve customer service and achieve greater branch
operations efficiency. Potters also continues to carefully evaluate all
expenses with the objective of holding 1996 noninterest expense to the 1995
level. Included in noninterest expense during 1996 were $14,000 of losses on
sales of repossessed mobile homes, increased advertising, franchise tax and
employee education expenses over the 1995 level, somewhat offset by reduced
legal and consulting services and lower compensation and benefits.
-15-
<PAGE>
Financial Condition
PFC's assets at June 30, 1996 were $114.7 million compared to $114.2 million
for Potters at December 31, 1995. During the first six months of 1996, cash
and cash equivalents, proceeds from calls and repayments of loans and
securities and deposit inflows were utilized to purchase investment securities
available for sale and adjustable-rate real estate loans.
Cash and cash equivalents decreased $7.4 million, from $11.2 million at
December 31, 1995 to $3.8 million at June 30, 1996. Funds invested in
short-term investment instruments at December 31, 1995, along with other
sources, were used to purchase equity funds and agency securities for the
available for sale portfolio and $3.0 million of adjustable-rate, one-to-four
family real estate loans located in northwestern Ohio.
Available for sale investment securities increased to $19.6 million at June
30, 1996 from $11.0 million at December 31, 1995. Equity funds and agency
securities of $14.8 million were purchased for the available for sale
portfolio during 1996 while $3.0 million of higher yielding agency securities
were called. Net proceeds from sales of equity funds totaled $2.5 million
during the quarter. The available for sale portfolio included an unrealized
loss of $351,000 at June 30, 1996, compared to an unrealized loss of $42,000
at December 31, 1995. The increase in the unrealized loss was attributable to
a general rise in interest rates during the first six months of 1996. The
unrealized loss net of tax on investment securities available for sale,
reflected in shareholders' equity, increased from $23,000 at December 31, 1995
to $231,000 at June 30, 1996. During the second quarter of 1996, the purchase
of a $1.0 million fixed rate, callable Federal Home Loan Bank ("FHLB")
security was financed with a variable-rate FHLB advance at an initial interest
rate spread of 186 basis points. The interest rate spread will be monitored at
each quarterly interest rate reset of the FHLB advance and the advance can be
repaid at any repricing date if it is in Potters' best interest to do so.
Mortgage-backed securities held to maturity declined $2.0 million during 1996
due to repayments. No purchases were made during the period.
Net loans receivable increased $1.4 million during the first six months of
1996, from $49.9 million at December 31, 1995 to $51.3 million at June 30,
1996. However, two significant changes in loan composition occurred in 1996.
The purchase of $3.0 million of adjustable-rate loans and a net increase of
$1.2 million in local loan originations resulted in a net increase of $4.2
million in one-to-four family residential real estate loans. Conversely, three
large loan payoffs totaling $1.6 million reduced the level of nonresidential
real estate loans located in Colorado to approximately $6.5 million. Such
payoffs negatively affected the interest rate spread, but aided Potters in its
strategy of reducing the risk in the real estate loan portfolio from
out-of-area nonresidential properties.
Total deposits at June 30, 1996 were $100.6 million compared to $98.7 million
at December 31, 1995, an increase of $1.9 million. Inflows occurred primarily
in passbook and checking account products. Potters introduced new commercial
checking and savings products to position it to more aggressively pursue
-16-
<PAGE>
commercial account relationships. Strong competition for certificates of
deposit in the local area continues to affect the cost of funds. In response,
the Asset and Liability Management Committee has continued to focus on
strategies for reduced interest rate risk and responsible deposit management.
FHLB advances totaled $2.4 million at June 30, 1996, compared to $3.0 million
at December 31 1995. The decrease was the result of repayments of $1.6
million, somewhat offset by a new advance totaling $1.0 million. The new
advance was used to purchase an FHLB security, as previously discussed herein.
Shareholders' equity decreased $595,000 during 1996 due to treasury share
purchases of $436,000, an increase in the unrealized loss, net of tax, on
investment securities available for sale of $208,000 and dividends paid of
$64,000, offset by the addition of $113,000 in net income for the six months
ended June 30, 1996.
Liquidity and Capital Resources
Potters' normal, recurring sources of funds are primarily customer deposits,
investment securities available for sale, maturities, calls and repayments of
investment and mortgage-backed securities held to maturity, loan repayments
and other funds provided by operations. Potters has the ability to borrow from
the FHLB when needed as a secondary source of liquidity.
Significant components of cash flows from investing activities during the
first six months of 1996 were purchases of $14.8 million of securities
available for sale somewhat offset by $2.5 million in sales, $250,000 in
maturities and $3.0 million in calls of such securities. Repayments, calls and
maturities of investment and mortgage-backed securities held to maturity
totaled $3.3 million during the year. Loans purchased totaled $3.0 million
during the first six months of 1996. Investing activities during the first
half of 1995 included the purchase of $2.8 million in securities available for
sale and $1.5 million in securities held to maturity offset by $1.5 million in
repayments on such securities. Sale of securities available for sale during
1995 totaled $3.4 million.
Financing activities during the six months ended June 30, 1996 included net
deposit inflows of $1.9 million, proceeds of FHLB advances of $1.0 million and
advance repayments totaling $1.6 million. In addition, PFC purchased 26,640
treasury shares totaling $436,000. Deposit outflows of $896,000 occurred
during the first half of 1995, while FHLB advance activity included proceeds
totaling $2.5 million and repayments of $1.0 million.
Potters' average regulatory liquidity ratio for June 1996 was 21.61%. At June
30, 1996, Potters had commitments to originate loans of $731,000 and unused
lines of credit totaling $3.6 million.
-17-
<PAGE>
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, 1996 (dollars in thousands):
Tangible Core Risk-based
Capital Capital Capital
------------- ------------- --------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
Regulatory capital -
computed $10,679 9.30% $10,679 9.30% $11,311 23.03%
Minimum capital
requirement 1,723 1.50 3,446 3.00 3,930 8.00
------ ---- ------ ---- ------- -----
Regulatory capital -
excess $8,956 7.80% $7,233 6.30% $7,381 15.03%
====== ==== ====== ==== ====== =====
Proposed FDIC Assessment
The deposit accounts of Potters and other savings associations are insured by
the FDIC in the Savings Association Insurance Fund ("SAIF"). Because a
significant portion of the assessments paid into the fund by savings
associations are used to pay the cost of prior thrift failures, the reserves
of the SAIF are below the level required by law. The deposit accounts of
commercial banks are insured by the FDIC in the Bank Insurance Fund ("BIF"),
except to the extent such banks have acquired SAIF deposits. The reserves of
the BIF met the level required by law in May 1995. Because of the differing
reserve levels of the funds, deposit insurance assessments paid by healthy
commercial banks were reduced significantly below the level paid by healthy
savings associations effective in mid-1995. Beginning in 1996, no BIF
assessments are required for healthy commercial banks except a $2,000 minimum
fee. Such a disparity in the premium could have a negative competitive impact
on Potters and other savings associations.
Congress is considering legislation to recapitalize the SAIF and to eliminate
this significant premium disparity. Currently, the recapitalization plan
provides for a special assessment of approximately $.85 per $100 of SAIF
deposits held at March 31, 1995, in order to increase SAIF reserves to the
level required by law. Certain banks holding SAIF deposits would pay a lower
special assessment. In addition, the cost of prior thrift failures would be
shared by both the SAIF and the BIF. Such cost sharing might increase BIF
assessments. Subsequent SAIF assessments for healthy institutions would be set
at a significantly lower level, but could never be reduced below the level set
for healthy BIF institutions.
The recapitalization plan also provides for the merger of the SAIF and the BIF
on January 1, 1998. As currently proposed, the SAIF recapitalization
legislation provides for the elimination of the federal thrift charter and of
the separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. If such proposal is adopted, Potters would be regulated as a
bank under federal law. As a result, Potters would become subject to the more
restrictive activity limits imposed on national banks. In addition, if
-18-
<PAGE>
required to become a bank holding company, PFC would be subject to more
restrictive activity limits and to capital requirements similar to those
imposed on Potters. It is not expected that such new activity limits will have
a material effect on the financial condition or operations of PFC or Potters.
Upon conversion to a bank charter, each thrift would be required to recapture
into taxable income any bad debt reserves in excess of those allowed for
banks. This recapture would not be material for Potters, because it has used
the experience method of calculating its bad debt deductions in recent years,
which is the same method used by banks. In 1995, Potters' bad debt deduction
was based on a percentage of taxable income, for which a deferred tax
liability has been recognized.
Potters had a deposit base of $97.9 million at March 31, 1995. If a special
assessment of $.85 per $100 in deposits at March 31, 1995 is imposed, Potters
will pay an additional assessment of $832,000. The assessment should be tax
deductible, but it will reduce earnings and capital in the period recorded. If
the proposal is enacted into law, the provisions of the law will dictate the
period in which the assessment is expensed.
No assurances can be given that the SAIF recapitalization plan will be enacted
into law or in what form it may be enacted. In addition, Potters can give no
assurances that the disparity between BIF and SAIF assessments will be
eliminated and cannot be certain of the impact of its being regulated as or
converted to a bank until the legislation requiring such change is enacted.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Potters is a party to and a creditor in certain Chapter 11
Bankruptcy Proceedings filed on March 29, 1996 in the United States Bankruptcy
Court for the Northern District of New York, and being in re Bennett Funding
Group, Inc. et al., and being Case No. 96-61934 (SDG). Potters has engaged the
services of counsel in the State of New York, Harter, Secrest & Emery, to
represent it in connection with these proceedings. Potters had previously
funded certain loans to the Bennett Funding Group, Inc. and Bennett Leasing
Company, also known as Aloha Capital, which were secured and collateralized by
an assignment of equipment leases and Uniform Commercial Code Financing
Statements filed in the respective jurisdictions. Potters is taking the
position through its counsel that it is a secured creditor to the extent of
the lease stream payments from certain end users of the equipment under the
leases which were duly assigned to Potters. Resumption of the payment stream
to Potters and other secured bank creditors has not yet materialized and
counsel is currently filing motions in the United States Bankruptcy Court
requesting relief from the automatic stay provisions of the Bankruptcy Code
and further authorizing the Trustee to again commence payment of amounts due
under the terms of the leases which the Trustee has been accumulating. At June
30, 1996, Potters' investment in the equipment lease credit was $365,000 after
the $377,000 write-down. Outside counsel for Potters has advised it that there
is no certainty at this time as to the exact duration of the case nor the
amount of funds which will ultimately be collected through the Trustee.
Item 2. Changes in Securities.
None.
-19-
<PAGE>
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 25, 1996. The matters presented to the Security Holders and the
votes cast were as follows:
1) Reelection of Directors of Potters Financial Corporation
Arthur T. Doak 353,114 FOR
-0- WITHHELD
Timothy M. O'Hara 353,114 FOR
-0- WITHHELD
Peter D. Visnic 353,114 FOR
-0- WITHHELD
2) Ratification of Crowe Chizek as Auditors
351,414 FOR
550 AGAINST
1,150 ABSTAIN
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits - none.
B. Reports on Form 8-K - none.
-20-
<PAGE>
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 5, 1996 By: /s/ Edward L. Baumgardner
--------------------------------------------
Edward L. Baumgardner
Duly Authorized Representative,
President and Chief Executive Officer
By: /s/ James F. Hoffman
--------------------------------------------
James F. Hoffman
Principal Financial Officer and
Principal Accounting Officer
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