<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the Fiscal Year Ended December 31, 1996
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ____________ to ____________
Commission file number: 0-27980
-------
POTTERS FINANCIAL CORPORATION
-----------------------------
(Name of small business issuer in its charter)
OHIO 34-1817924
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
519 Broadway, East Liverpool, Ohio 43920
----------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (330) 385-0770
----------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
----
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Shares, no par value
---------------------------
(Title of Class)
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 of the past 90
days. Yes X No .
--- ---
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB.[ ]
The issuer's revenues for the fiscal year ended December 31, 1996,
totaled $8,473,000.
Based upon information regarding the last sales price provided
by The Nasdaq Stock Market, the aggregate market value of the voting stock held
by non-affiliates of the Registrant on February 28, 1997, was $7,388,970.
As of February 28, 1997, 486,830 of the
issuer's common shares were issued and outstanding.
Index to Exhibits is on page 37
1
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DOCUMENTS INCORPORATED BY REFERENCE
The following sections of Potters Financial Corporation 1996
Shareholders' Annual Report (the "Annual Report"), are incorporated by reference
into Part II of this Form 10-KSB:
1. Common Shares;
2. Financial Review; and
3. Report of Independent Auditors and Consolidated Financial
Statements.
The following sections of the definitive Proxy Statement for the 1997
Annual Meeting of Shareholders of Potters Financial Corporation (the "Proxy
Statement") are incorporated by reference into Part III of this Form 10-KSB:
1. Board of Directors;
2. Executive Officers;
3. Compensation of Executive Officer and Directors;
4. Voting Securities and Ownership of Certain Beneficial Owners and
Management; and
5. Section 16(a) Beneficial Ownership Reporting Compliance
2
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Potters Financial Corporation ("PFC") is a unitary savings and loan holding
company incorporated under the laws of the State of Ohio. PFC is the sole
shareholder of The Potters Savings and Loan Company ("Potters" or the
"Company"), a savings and loan association incorporated in 1889 under the laws
of the State of Ohio. On March 11, 1996, PFC was formed through an internal
reorganization whereby each shareholder of Potters received one common share of
PFC for each common share of Potters owned. Both entities are headquartered at
519 Broadway in East Liverpool, Ohio.
PFC's activities have been limited primarily to holding the common shares of
Potters. Consequently, the following discussion focuses primarily on the
business of Potters.
As a savings and loan holding company, PFC is subject to regulation, supervision
and examination by the Office of Thrift Supervision of the United States
Department of the Treasury (the "OTS"). As a savings and loan association
incorporated under the laws of the State of Ohio, Potters is subject to
regulation, supervision and examination by the OTS, the Federal Deposit
Insurance Corporation (the "FDIC") and the Ohio Division of Financial
Institutions of the Ohio Department of Commerce. Deposits in Potters are insured
up to applicable limits by the FDIC. Potters is also a member of the Federal
Home Loan Bank ("FHLB") of Cincinnati.
Congress is considering legislation to eliminate the separate federal regulation
of savings and loan associations, and the Department of the Treasury is
preparing a report for Congress on the development of a common charter for all
financial institutions. As a result, PFC might become subject to a different
form of holding company regulation which may limit the activities in which it
may engage and subject it to other additional regulatory requirements, including
separate capital requirements. PFC cannot predict when or whether Congress may
actually pass such legislation or whether such legislation will actually change
the regulation and permissible activities of PFC. Although such legislation may
change the activities in which PFC may engage, it is not anticipated that its
current activities will be materially affected by those activity limits.
Potters provides financial products and services to the East Liverpool, Ohio
area through its four full-service branch offices. Potters completed its
conversion from a state chartered mutual savings and loan association to a state
chartered stock savings and loan association (the "Conversion") on December 30,
1993. Potters is principally engaged in the business of originating real estate
loans secured by first mortgages for the purchase, construction or improvement
of one-to-four family residences and accepting demand, savings and time
deposits. Potters also provides loans secured by multifamily and nonresidential
real estate, various types of consumer loans and, to a lesser extent, commercial
loans. In addition to originating loans, Potters also purchases one-to-four
family real estate loans within the State of Ohio and invests in U.S. government
and agency obligations, mortgage-backed securities, interest-bearing deposits in
other financial institutions and other investments permitted by applicable law.
See "-Lending Activities". Funds for lending and other investment activities are
obtained primarily from deposits, loan and security repayments, sales of
securities available for sale and FHLB advances. At December 31, 1996, Potters
employed a total of 53 individuals and had 36 full-time employees.
Congress may eliminate the OTS, and Potters would be regulated under federal law
as a bank or may be required to change its charter. Such change in regulation or
charter would likely change the range of activities in which Potters may engage
and would probably subject Potters to more regulation by the FDIC. Potters and
PFC cannot predict when or whether Congress may actually pass legislation
regarding Potters' regulatory requirements or charter. Although such legislation
may change the activities in which Potters may engage, it is not anticipated
that its current activities will be materially affected by those activity
limits.
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Potters' income is derived primarily from interest and fees earned in connection
with its lending activities, and its principal expenses are interest paid on
deposits and borrowings and operating expenses. The primary component of its net
income is its net interest income, which is the difference between interest
income from loans and securities and interest expense on deposits and
borrowings. The interest income and interest expense of Potters change as the
interest rates on mortgages, securities and other assets and on deposits and
other liabilities change. Interest rates may change because of general economic
conditions, the policies of various regulatory authorities and other factors
beyond Potters' control. The interest rates on specific assets and liabilities
of Potters will change or "reprice" in accordance with the contractual terms of
the asset or liability instrument and in accordance with customer reaction to
general economic trends. In a rising interest rate environment, loans tend to
prepay slowly and new loans at higher rates increase slowly, while interest paid
on deposits increases rapidly because the terms to maturity of deposits tend to
be shorter than the terms to maturity or prepayment of loans. Such differences
in the adjustment of interest rates on assets and liabilities may negatively
affect Potters' income. Moreover, rising interest rates tend to decrease loan
demand in general, negatively affecting Potters' income. Potters originates
adjustable-rate real estate loans ("ARMs") and purchases one-to-four family
adjustable-rate real estate loans in order to reduce the gap between the
effective maturities of its assets and liabilities. However, such efforts to
reduce this gap may not be successful if the interest rate environment changes
consumer demand for adjustable-rate loans. See "FINANCIAL REVIEW -
Asset/Liability Management" in the portions of the 1996 Annual Report to
Shareholders attached hereto as Exhibit 13 (the "Annual Report").
In addition to the historical financial information included herein, the
disclosures contain forward-looking statements that involve risks and
uncertainties. Economic circumstances, PFC's operations and its actual results
could differ significantly from those discussed in these forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and PFC's general market area. See Exhibit 99,
"Safe Harbor Under the Private Securities Litigation Reform Act of 1995," which
is incorporated herein by reference.
MARKET AREA
Headquartered in East Liverpool, Ohio, PFC, through Potters, conducts business
from four full-service branch offices, two of which are located in East
Liverpool, Ohio, one of which is located in Glenmoor, Ohio, and one of which is
located in Calcutta, Ohio. Potters' primary market area consists of the City of
East Liverpool, Ohio, and the contiguous areas of Columbiana and Jefferson
Counties, Ohio, and Hancock County, West Virginia.
Potters recently announced that, effective March 31, 1997, branch operations at
its East End Branch Office will be terminated. The East End Office has not been
profitable for several years, and despite the addition of new loan and deposit
products, and several attempts to increase lending operations at the branch, the
activity level and deposit base has continued to decline. Due to the physical
limitations of the building and the decline in activity, the Board of Directors
and management believe that Potters can better serve all of its customers by
consolidating its East End operations into its newly renovated Downtown Office.
Management has also selected a location for the installation of an automated
teller machine in the East End.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following table sets forth certain information concerning the financial
condition, earnings and other data regarding PFC at the dates and for the
periods indicated (1):
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ------------
(Dollars in thousands)
SELECTED FINANCIAL CONDITION
DATA:
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $ 114,172 $ 114,242 $ 110,910 $ 114,088 $ 114,922
Cash and cash equivalents 4,585 11,230 3,038 10,413 6,018
Securities available for sale 10,878 10,952 10,766 -- --
Securities held to maturity (2) 32,735 38,821 43,937 52,782 38,486
Loans receivable, net 62,450 49,889 50,078 47,392 64,509
Deposits 97,283 98,697 99,968 101,300 108,768
Foreclosed real estate
and real estate
held for investment -- 85 -- 804 2,500
Shareholders' equity
substantially restricted (3) 10,576 11,189 9,793 9,937 4,865
<FN>
- ----------
(1) Information prior to 1996 is that of Potters.
(2) Securities held to maturity include the Company's investment in stock in the FHLB and
interest-bearing deposits in other financial institutions.
(3) For 1992, shareholders' equity consisted solely of retained earnings, as Potters had no
outstanding common shares prior to the Conversion.
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest income $ 8,206 $ 8,065 $ 7,586 $ 7,985 $ 8,948
Interest expense 4,529 4,271 3,943 4,566 5,993
--------- --------- --------- --------- ---------
Net interest income 3,677 3,794 3,643 3,419 2,955
Provision for loan losses 249 245 377 235 (476)
--------- --------- --------- --------- ----------
Net interest income after
provision for loan losses 3,428 3,549 3,266 3,184 3,431
Noninterest income:
Gain (loss) on sales of loans
and securities -- 12 13 (82) 47
Other noninterest income 267 245 254 280 584
--------- --------- --------- --------- ---------
Total noninterest income 267 257 267 198 631
Total noninterest expense 3,688 2,977 2,868 3,238 3,815
--------- --------- --------- --------- ---------
Income before income taxes 7 829 665 144 247
Income tax expense (benefit) 68 -- -- (6) 62
--------- --------- --------- --------- ---------
Income (loss) before
cumulative change in
accounting for income taxes (61) 829 665 150 185
Cumulative effect of change
in accounting for income taxes -- -- -- 225 --
--------- --------- --------- --------- ---------
Net income (loss) $ (61) $ 829 $ 665 $ 375 $ 185
========= ========= ========= ========= =========
</TABLE>
5
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SELECTED FINANCIAL RATIOS
AND OTHER DATA (1):
<TABLE>
<CAPTION>
At or for the year ended December 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return (loss) on assets
(ratio of net income (loss)
to average total assets) (.05)% 0.74% 0.59% 0.34% 0.16%
Interest rate spread
information:
Average during period 3.05 3.28 3.18 3.37 2.99
End of period 3.58 2.97 3.50 2.96 4.11
Net interest margin (ratio of
net interest income to average
interest-earning assets) 3.30 3.55 3.41 3.31 2.76
Ratio of operating expense
to average total assets 3.15 2.65 2.55 2.90 3.24
Return (loss) on equity
(ratio of net income (loss)
to average equity) (.57) 7.88 6.74 7.17 3.88
Dividend payout ratio (ratio of
dividends declared per share to
net income per share) (208.33) 13.46 15.87 -- --
Asset quality ratios:
Nonperforming assets
to total assets at end
of period 1.51 2.21 2.37 3.38 6.10
Allowance for loan losses
to nonperforming loans 152.20 91.88 75.67 54.21 56.48
Allowance for loan losses
to total loans 4.04 4.30 3.77 3.97 3.90
Capital ratios: (2)
Shareholders' equity to total
assets at end of period 9.26 9.79 8.83 8.71 4.23
Average shareholders' equity
to average assets 9.27 9.36 8.78 4.68 4.06
Ratio of average interest-
earning assets to average
interest-bearing liabilities 105.96% 105.97% 105.31% 98.59% 96.09%
Number of full-service offices 4 4 5 5 5
<FN>
- ------------
(1) Information prior to 1996 is that of Potters.
(2) Shareholders' equity consisted entirely of retained earnings in 1992.
</TABLE>
6
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LENDING ACTIVITIES
GENERAL. Potters' lending activity is concentrated in the origination of
conventional real estate loans secured by one-to-four family homes located in
Potters' primary market area. Loans to individuals to finance the construction
of their primary residence and real estate loans on multifamily properties
containing five units or more and on nonresidential properties are also offered
by Potters. Potters does not originate loans insured by the Federal Housing
Authority or loans guaranteed by the Veterans Administration. In addition to
real estate lending, Potters originates commercial loans and consumer loans,
including automobile loans, loans secured by deposit accounts, home equity lines
of credit and a limited number of unsecured loans. At December 31, 1996,
Potters' loan portfolio included approximately $10.7 million, or 16.4% of total
loans, of purchased one-to-four family real estate loans, $8.0 million on
properties located in northwestern Ohio and $2.7 million on properties in
southwestern Ohio.
The economic environment of the East Liverpool, Ohio area has remained stable
over the last few years with some inflow of new business. Area efforts continue
in the revitalization of East Liverpool, and several new retail and service
sector businesses have opened their doors within the city limits in the recent
past, but no significant business or residential construction has taken place.
The local economic environment is expected to experience no significant change
in the near future and no significant regional economic factors are expected to
affect the operations of Potters. No assurances can be given that national or
local economic factors will not significantly change in the near future.
LOAN PORTFOLIO COMPOSITION. The following table presents certain information in
respect of the composition of Potters' loan portfolio at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1996 1995
---- ----
Percent Percent
of total of total
Amount loans Amount loans
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of loan and security (1):
Secured by real estate (2):
One-to-four family residences $ 49,086 75.00% $ 33,007 62.66%
Multifamily residential (over 4 units) 2,034 3.11 2,106 4.00
Nonresidential property 5,897 9.01 9,385 17.82
--------- ------- --------- -------
Total real estate loans 57,017 87.12 44,498 84.48
Consumer and other loans:
Home equity loans 3,859 5.90 3,314 6.29
Commercial loans and
unsecured lines of credit 1,316 2.01 1,563 2.97
Mobile home loans 906 1.38 1,280 2.43
Other 2,347 3.59 2,018 3.83
--------- ------- --------- -------
Total consumer and other loans 8,428 12.88 8,175 15.52
--------- ------- --------- -------
Total loans 65,445 100.00% 52,673 100.00%
======= =======
Less:
Loans in process (466) (477)
Net deferred loan fees, unearned
interest and unamortized
discounts and premiums 101 (67)
Allowance for loan losses (2,630) (2,240)
--------- ---------
Total loans receivable, net $ 62,450 $ 49,889
========= =========
<FN>
- ----------
(1) Does not include mortgage-backed securities which are detailed in "Mortgage-backed Securities".
(2) Includes construction loans secured by various types of real estate. The amount of
construction loans is not material.
</TABLE>
7
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LOAN MATURITY SCHEDULE. The following table sets forth certain information at
December 31, 1996 regarding the net dollar amount of loans maturing in Potters'
portfolio, based on contractual terms to maturity. Demand loans, loans having no
stated schedule of repayments and no stated maturity and overdrafts are reported
as due in one year or less:
<TABLE>
<CAPTION>
Real Estate Consumer and Other Total
-------------------------------------------------------------------- --------------------- -------------------
One-to-four family (1) Nonresidential Multifamily
---------------------- -------------- -----------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in thousands)
Due during
years ending
December 31,
- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $ 94 10.11% $ 11 9.50% $ -- -- $1,161 7.74% $ 1,266 7.93%
1998 through
2001 868 9.51 134 9.30 3 9.00% 2,457 13.28 3,462 12.18
2002 and
following 48,124 7.96 5,752 9.47 2,031 8.42 4,810 10.32 60,717 8.31
------- ------ ------ ------ -------
$49,086 $5,897 $2,034 $8,428 $65,445
======= ====== ====== ====== =======
<FN>
- ----------
(1) Includes Construction Loans
</TABLE>
The total amount of loans due after December 31, 1997 which have predetermined
interest rates is $35.7 million, while the total amount of loans due after such
date which have floating or adjustable rates is $28.5 million.
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The next table sets forth the composition of Potters' loan portfolio by
type of security and by predetermined interest rates and floating or adjustable
interest rates at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------
1996 1995
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed-rate loans (1):
Real estate (2):
One-to-four family $ 27,120 41.44% $ 24,975 47.41%
Multifamily (over 4 units) 452 0.69 483 0.92
Nonresidential 243 0.37 346 0.66
----------- -----------
Total real estate loans 27,815 42.50 25,804 48.99
Consumer and other loans 3,045 4.65 3,346 6.35
----------- -----------
Total fixed-rate loans 30,860 47.15 29,150 55.34
Adjustable-rate loans (1):
Real estate (2):
One-to-four family 21,966 33.56 8,032 15.25
Multifamily (over 4 units) 1,582 2.42 1,623 3.08
Nonresidential 5,654 8.64 9,039 17.16
----------- -----------
Total real estate loans 29,202 44.62 18,694 35.49
Consumer and other loans 5,383 8.23 4,829 9.17
----------- -----------
Total adjustable-rate loans 34,585 52.85 23,523 44.66
----------- -----------
Total loans receivable 65,445 100.00% 52,673 100.00%
====== ======
Less:
Loans in process (466) (477)
Deferred fees, discounts
and premiums 101 (67)
Allowance for loan losses (2,630) (2,240)
------------ -----------
Total loans receivable, net $ 62,450 $ 49,889
=========== ===========
<FN>
- ----------
(1) Does not include mortgage-backed securities which are detailed in
"Mortgage-backed Securities".
(2) Includes construction loans secured by various types of real estate. The
amount of construction loans is not material.
</TABLE>
LOANS SECURED BY ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE. The lending
activity of Potters is concentrated in the origination of permanent conventional
real estate loans secured by one-to-four family residences, primarily
single-family residences, located within Potters' primary market area. Potters
also originates loans to individuals to finance the construction of their
primary residences. Each loan is secured by a mortgage on the underlying real
estate and improvements thereon, if any. At December 31, 1996, Potters'
one-to-four family residential real estate loan portfolio was approximately
$49.1 million, or 75.0% of total gross loans.
During 1996, Potters purchased one-to-four family real estate loans to
supplement local loan originations. Loan purchases totaled $13.7 million during
1996 and consisted of $12.3 million of adjustable-rate real estate loans and
$1.4 million of fixed-rate real estate loans. A total of $2.9 million of such
loan purchases were comprised of nonconforming real estate loans.
OTS regulations limit the amount which Potters may lend in relationship to the
appraised value of the real estate and improvements at the time of loan
origination. In accordance with such regulations, Potters makes fixed-rate loans
on one-to-four family residences up to 95% of the value of the real estate and
improvements (the "Loan-to-Value Ratio" or "LTV"). The principal
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<PAGE> 10
amount of any loan which exceeds an 80% LTV at the time of origination is
usually covered by private mortgage insurance at the expense of the borrower.
As of December 31, 1996, approximately 55.3% of Potters' loans secured by
one-to-four family residences bore interest at a fixed rate. Fixed-rate loans
are offered by Potters for terms of up to 20 years.
Adjustable-rate residential real estate loans ("ARMs") are offered by Potters
for terms of up to 30 years. Potters originates one-year, three-year and
five-year ARMs, with interest rate adjustments tied to U.S. Treasury issues
adjusted to constant maturities. For a limited time during 1996, a seven-year
ARM product was offered. Interest rate adjustments on pre-1995 real estate
loans, however, are tied to an index of the FHLB. The maximum allowable
adjustment at each repricing date is from 1.5% to 2.0% for ARMs, with a maximum
adjustment on all products of 6% over the term of the loan. The initial interest
rate quoted on ARMs is often lower than the fully-indexed rate to make
adjustable-rate products more appealing to the Company's customers. The initial
rate on three-year and five-year ARMs is typically higher than the initial rate
on a one-year ARM to compensate for the reduced interest rate sensitivity.
Potters makes construction loans to individuals for the construction and
permanent financing of their primary residences. Such loans are offered with
both fixed and adjustable rates for terms of up to 20 years. During the first
year, while the residence is being constructed, the borrower is only required to
pay interest. Thereafter, the loans amortize over the remaining term.
Construction loans generally involve greater underwriting and default risks than
do loans secured by mortgages on existing properties due to the advance of loan
funds and the inherent uncertainties in estimating construction costs and loan
value prior to the completion of the project. In the event a default on a
construction loan occurs and foreclosure follows, Potters would have to take
control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project. The increased risks inherent
in construction lending are not significant to Potters because construction
loans, in the aggregate, comprise less than 1% of Potters' loan portfolio.
Potters also originates loans secured by land to be used in the eventual
construction of a borrowers' primary residence. Such loans are offered with
fixed interest rates for terms of up to 5 years and a maximum LTV of 70%.
Although land loans are subject to greater risks than residential real estate
loans, Potters attempts to mitigate such risks by basing the lending decision on
an evaluation of the past performance and credit history of the borrower and on
the market value of the underlying real estate.
LOANS SECURED BY MULTIFAMILY RESIDENTIAL REAL ESTATE. In addition to loans on
one-to-four family properties, Potters offers loans secured by multifamily
properties containing over four units. Multifamily loans are offered for terms
of up to 15 years and a maximum LTV of 75%. Such loans are currently offered
with adjustable interest rates tied to the composite prime rate of 75% of the 30
largest U.S. banks, as reported in THE WALL STREET JOURNAL (the "Wall Street
Journal prime").
Multifamily lending is generally considered to involve a higher degree of risk
than one-to-four family residential lending because the borrower typically
depends upon income generated by the apartment project to cover operating
expenses and debt service. The profitability of a project can be affected by
economic conditions, government policies and other factors beyond the control of
the borrower. Potters attempts to reduce the risk associated with multifamily
lending by evaluating the creditworthiness of the borrower and the projected
income from the project and by obtaining personal guarantees on loans made to
corporations and partnerships. Potters
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<PAGE> 11
requires that borrowers submit rent rolls and that all borrowers submit
financial statements annually to enable Potters to monitor the loan.
At December 31, 1996, loans secured by multifamily properties totaled
approximately $2.0 million, or 3.1% of total loans.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. At December 31, 1996, approximately
$5.9 million, or 9.0% of Potters' total loans, were secured by nonresidential
real estate properties, $4.5 million of which are located in the State of
Colorado. The majority of such loans have adjustable rates with terms of up to
15 years and amortize over a period of up to 30 years. Among the properties
securing nonresidential real estate loans in Colorado are office buildings,
retail centers, restaurants, warehouses and special purpose properties. All
nonresidential real estate loans currently originated by Potters bear adjustable
interest rates tied to the Wall Street Journal prime and are fully amortizing
with terms of up to 15 years.
Although loans secured by nonresidential real estate typically have higher
interest rates and shorter terms to maturity than one-to-four family residential
real estate loans, nonresidential real estate lending is generally considered to
involve a higher degree of risk than residential lending due to the relatively
larger loan amounts and the effects of general economic conditions on the
successful operation of income-producing properties. Potters has endeavored to
reduce such risk by evaluating the credit history and past performance of the
borrower, the location of the real estate, the quality of the borrower, the
quality and characteristics of the income stream generated by the property and
appraisals supporting the property's valuation. Nevertheless, at December 31,
1996, Potters' Colorado nonresidential loans included $1.1 million which had
been restructured by modification to the interest rates or terms. See
"--Delinquent Loans, Nonperforming Assets and Classified Assets."
Federal regulations limit the amount of nonresidential real estate loans which
an association may make to 400% of its total capital. At December 31, 1996,
Potters' nonresidential real estate loans totaled 55.8% of its total capital.
CONSUMER LOANS. Potters offers a wide range of secured and unsecured consumer
loan products to area borrowers. Secured loans include those made to depositors
on the security of their deposit accounts, automobile loans and home equity
lines of credit. Secured and unsecured personal loans to homeowners and
nonhomeowners, a homeowner loan program, a partially secured real estate loan
program, an unsecured home improvement loan program and an unsecured check
overdraft line of credit are available to accommodate the credit needs of the
Company's primary market area. A limited mobile home loan program was also
offered during 1996. Consumer loans, other than home equity lines of credit, are
made primarily at fixed rates of interest and for varying terms based on the
type of loan.
At December 31, 1996, Potters had approximately $7.5 million, or 11.5% of total
loans, invested in consumer loans.
Home equity lines of credit are secured by a first or second mortgage on the
borrowers' principal residence. Home equity lines of credit have a five- or
ten-year draw-down period followed by a corresponding five- or ten-year
repayment period and bear variable rates of interest. Potters offered a home
equity product for a limited time during 1996 in which the interest rate was
fixed for the first five years, followed by a variable-rate five-year repayment
period.
Potters currently has five unsecured line of credit consumer loans available to
certain customers. All of such loans bear interest based on the Wall Street
Journal prime and are callable at any time. One of such loans is a $222,000
unsecured line of credit loan available to Mr. Jackman S.
11
<PAGE> 12
Vodrey, a member of PFC's and Potters' Board of Directors, and another is a
$150,000 unsecured line of credit loan available to an aunt of Mr. Vodrey.
Consumer loans, particularly consumer loans which are unsecured or are secured
by assets such as automobiles or mobile homes, which depreciate at a faster rate
than real estate, may entail greater risk than do residential real estate loans.
Repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance. The risk of default on
consumer loans increases during periods of recession, high unemployment and
other adverse economic conditions.
COMMERCIAL LOANS. At December 31, 1996, Potters' loan portfolio included
approximately $518,000 in unsecured commercial lines of credit. All such loans
have been made to businesses in the local area. At December 31, 1996, Potters
had three commercial lines of credit outstanding. The maximum amount of
principal which Potters was committed to advance under such loans was $560,000
at December 31, 1996.
Also included in commercial loans at December 31, 1996 was $365,000, which
represented an investment in equipment lease credits with Bennett Funding. In
March 1996, Potters learned 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, Bennett Funding filed for
protection from creditors under Chapter 11 of the federal bankruptcy laws. For
more information on the Bennett Funding lease credits, see "FINANCIAL REVIEW --
Results of Operations and Allowance and Provision for Loan Losses" in the Annual
Report.
Commercial loans and lease credits have a high degree of risk because the
primary source of repayment is the borrower's income. The collateral pledged to
Potters to secure such loans, if any, is typically non-real estate collateral
for which there may be no established market. Potters attempts to limit the risk
of loss on commercial loans by limiting the number and aggregate dollar amount
of such loans.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from a number
of sources, including continuing business with depositors, other borrowers, real
estate brokers and developers, solicitations by Potters' lending staff,
advertising and walk-in customers.
Certain risks are involved in granting loans, primarily related to the
borrowers' ability and willingness to repay the loan. Before a real estate loan
is extended, such risks are assessed through a review of the borrowers' credit
report, verification of employment and other documentation. An appraisal of the
fair market value of the collateral used to secure the loan is prepared by a fee
appraiser approved by the Board of Directors. The application for a loan is then
reviewed in accordance with Potters' underwriting guidelines and approved or
denied. A tiered structure of credit authority levels based on loan amount has
been granted to the members of the Officers' Loan Committee with respect to loan
approval. The Officers' Loan Committee is comprised of all loan officers and two
members of senior management. Specific loans may be taken to the Loan Committee
of the Board of Directors which includes the Senior Lending Officer, the
President and Chief Executive Officer and three Board members. Any
nonresidential real estate or commercial loan must be reviewed and approved or
rejected by the President and Chief Executive Officer, the Senior Lending
Officer or the full Board of Directors.
If a real estate loan application is approved, either a title guaranty or an
attorney's opinion of title is obtained on the real estate which will secure the
mortgage loan. Borrowers are required to carry satisfactory fire and casualty
insurance and flood insurance, if applicable, and to name Potters as an insured
mortgagee.
12
<PAGE> 13
The procedure for approval of construction loans is the same as for residential
real estate loans, except that an appraiser evaluates the building plans,
construction specifications and estimates of construction costs. Potters also
evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit history
and an analysis of the borrower's income and expenses, ability to repay the loan
and the value of the collateral, if any. Potters may waive the verification of
employment requirement for certain existing customers.
LOANS TO ONE BORROWER. Federal regulations limit the amount of loans which an
association can make to any one borrower. Under current OTS regulations, the
aggregate amount of loans which Potters may make to any one borrower (including
related entities), with certain exceptions, is limited in general to 15% of
Potters' unimpaired capital and unimpaired surplus. See "REGULATION - OTS
Regulations--Lending Limits." Based on such limits, Potters was permitted to
lend approximately $1.6 million to any one borrower at December 31, 1996.
Potters had no outstanding loans in excess of such limits at December 31, 1996.
Potters has not made any loans in excess of such limits since the limits were
imposed.
LOAN ORIGINATION AND OTHER FEES. Potters realizes loan origination fee and other
fee income from its lending activities and also realizes income from late
payment charges, application fees and fees for other miscellaneous services.
Loan origination and other fees are a volatile source of income, varying with
the volume of lending, loan repayments and general economic conditions. All
nonrefundable loan origination fees and certain direct loan origination costs
are deferred and recognized in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 91 as an adjustment to yield over the life of the related
loan.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. A loan is
considered delinquent when a borrower fails to make a contractual payment on the
loan within 10 days of the payment due date and does not cure the delinquency
promptly. Potters' normal collection procedures involve contact with the
borrower in an effort to bring the loan to a current status. When loan payments
have not been made by the tenth day, late notices are sent. If payment is not
received by the thirtieth day, second notices and telephone calls are made to
the borrower. Each loan bears a late payment penalty which is assessed as soon
as such loan is more than ten days delinquent. The late penalty for ARMs and
consumer loans is 5% of the payment due. For fixed-rate loans, the late penalty
increases the fixed annual interest rate by 1% until the delinquency is cured.
Although collection procedures usually cure deficiencies in a timely manner,
Potters institutes additional measures to remedy the default if the delinquency
exceeds the 30- and 60- day categories. When any loan is delinquent 90 days,
Potters ceases to accrue interest. At that time, previously accrued but unpaid
interest is deducted from interest income.
When a loan secured by real estate becomes delinquent more than 90 days, Potters
initiates foreclosure action or the acceptance from the mortgagor of a voluntary
deed to the property in lieu of foreclosure. If a foreclosure action is
instituted and the loan is not reinstated, paid in full or refinanced, the
property is sold at a judicial sale and usually purchased by Potters. An
appraisal of the security is conducted when foreclosed real estate is acquired.
If the appraisal indicates that the value of the collateral is less than the
carrying value of the loan, a valuation allowance is established for such loan.
13
<PAGE> 14
When a consumer loan secured by an automobile or other collateral becomes more
than 90 days past due, an estimate is made of the value of the collateral. If
the estimate of value indicates that the value of the collateral is less than
the carrying value of the loan, a specific allowance for loss is established.
The following table reflects the amount of loans in a delinquent status as of
December 31, 1996:
<TABLE>
<CAPTION>
Percent of
Number Amount total loans
------ ------ -----------
(Dollars in thousands)
Loans delinquent for:
<S> <C> <C> <C>
30-59 days 58 $ 644 .98%
60-89 days 22 177 .27
90 days and over 21* 627 .96
------ ----
$1,448 2.21%
====== ====
<FN>
*Includes 2 accounts relating to Bennett Funding which consist of 120 individual
lease credits.
</TABLE>
SFAS Nos. 114, "Accounting by Creditors for Impairment of a Loan" and 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," were adopted by the Company on January 1, 1995, and require
recognition of loan impairment. See Notes 1 and 3 to the Consolidated Financial
Statements in the Annual Report for information on Potters' impaired loans.
Nonperforming assets include nonaccrual loans, accruing loans which are
delinquent 90 days or more, restructured loans, real estate acquired by
foreclosure or by deed-in-lieu thereof and repossessed assets. For a discussion
of nonperforming loans, see "FINANCIAL REVIEW--Asset Quality" in the Annual
Report.
For the year ended December 31, 1996, gross interest income which would have
been recorded had the nonaccruing and restructured loans been current in
accordance with their original terms amounts to $204,000. The amount that was
included in interest income on such loans was $151,000 for the year ended
December 31, 1996.
Real estate acquired by Potters as a result of foreclosure proceedings is
classified as foreclosed real estate until it is sold. When property is so
acquired, it is recorded by Potters at the estimated fair value of the real
estate at the date of acquisition and any write-down resulting therefrom is
charged to the allowance for loan losses. Interest accrual, if any, ceases no
later than the date of acquisition of the real estate, and all costs incurred
from such date in maintaining the property are expensed. Costs relating to the
development and improvement of the property are capitalized to the extent they
are realizable. Subsequent to acquisition, the property is carried at the lower
of the initial balance or estimated fair value less selling costs.
OTS regulations require that each thrift institution classify its own assets on
a regular basis. Problem assets are classified as "substandard," "doubtful" or
"loss". "Substandard" assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. "Doubtful" assets have
the same weaknesses as "substandard" assets, with the additional characteristics
that (i) the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable and (ii) there is a
high possibility of loss. An asset classified "loss" is considered uncollectible
and of such little value that its continuance as an asset of the institution is
not warranted. The regulations also contain a "special mention" category,
consisting of assets which do not currently expose an institution to a
sufficient degree of risk to warrant
14
<PAGE> 15
classification but which possess credit deficiencies or potential weaknesses
deserving management's close attention.
The aggregate amounts of Potters' classified assets at the dates indicated were
as follows:
<TABLE>
<CAPTION>
At December 31,
---------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Classified assets:
Substandard $ 756 $ 952
Doubtful 974 626
Loss
--------- ---------
Total classified assets $ 1,729 $ 1,578
========= =========
</TABLE>
Federal examiners are authorized to classify an association's assets. If an
association does not agree with an examiner's classification of an asset, it may
appeal this determination to the Regional Director of the OTS. Potters had no
material disagreements with the examiners regarding the classification of assets
at the time of the last examination.
OTS regulations require that Potters establish prudent general allowances for
loan losses for any loan classified as substandard or doubtful. If an asset, or
portion thereof, is classified as loss, the association must either establish
specific allowances for losses in the amount of 100% of the portion of the asset
classified loss, or charge-off such amount. For a discussion of Potters' loan
review and classification process, see "FINANCIAL REVIEW -- Asset Quality -
Allowance for Loan Losses" in the Annual Report. A limited amount of general
allowances may be included for purposes of calculating total risk-based capital.
See page 42 of "FINANCIAL REVIEW -- Asset Quality" in the Annual Report for a
discussion of potential problem assets at December 31, 1996. Potters had no
nonperforming or potential problem other interest-earning assets at such date
other than those discussed above and in the Annual Report.
ALLOWANCE FOR LOAN LOSSES. Senior management, with oversight by the Board,
reviews on a monthly basis the allowance for loan losses as it relates to a
number of relevant factors, including but not limited to, trends in the level of
nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience and possible losses
arising from specific problem assets. To a lesser extent, management also
considers loan concentrations to single borrowers and changes in the composition
of the loan portfolio. While management believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in adjustments, and net earnings could be
significantly affected if circumstances differ substantially from the
assumptions used in making the final determination.
15
<PAGE> 16
The following table sets forth an analysis of Potters' allowance for losses on
loans for the periods indicated:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 2,240 $ 1,963
Loans charged-off:
Residential real estate loans (15) (1)
Nonresidential real estate loans (100)
Consumer and other loans (423) (37)
---------- --------
Total charge-offs (538) (38)
Recoveries
Residential real estate loans 3 25
Nonresidential real estate loans 675 19
Consumer and other loans 1 26
--------- --------
Total recoveries 679 70
--------- --------
Net recoveries 141 32
Provision for loan losses 249 245
--------- --------
Balance at end of period $ 2,630 $ 2,240
========= ========
Ratio of net recoveries
to average loans 0.27% 0.06%
</TABLE>
The following table sets forth the allocation of Potters' allowance for loan
losses at the dates indicated:
<TABLE>
<CAPTION>
1996 1995
---- ----
Percent of Percent of
loans in each loans in each
category to category to
Amount total loans Amount total loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four family real estate loans $ 136 75.00% $ 65 62.66%
Nonresidential real estate loans 1,204 9.01 1,036 17.82
Consumer and other loans 45 15.99 162 19.52
Unallocated 1,245 977
--------- ------ --------- -----
Total $ 2,630 100.00% $ 2,240 100.00%
========= ====== ========= ======
</TABLE>
Potters' allowance for loan losses at December 31, 1996 represented 152.2% of
nonperforming loans. Because the loan loss allowance is based on estimates, it
is monitored monthly and adjusted as necessary to provide an adequate allowance.
Based on historical data, Potters anticipates residential real estate loan
charge-offs of approximately $100,000, nonresidential real estate loan
charge-offs of approximately $200,000 and consumer loan charge-offs of
approximately $100,000 during the twelve months ending December 31, 1997.
MORTGAGE-BACKED SECURITIES. Potters invests in mortgage-backed securities,
including Government National Mortgage Association ("GNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC") and Federal National Mortgage Association
("FNMA") pass-through certificates. The purchase of such certificates entitles
the holder to receive a portion of the cash flows from an identified pool of
mortgages. GNMA, FHLMC and FNMA securities are each guaranteed by their
respective agencies as to principal and interest.
16
<PAGE> 17
At December 31, 1996, mortgage-backed securities totaled approximately $24.0
million. All of Potters' mortgage-backed securities at December 31, 1996, were
designated as being held to maturity. In accordance with SFAS No. 115, those
mortgage-backed securities designated as being held to maturity are carried on
Potters' balance sheet at amortized cost. The market value of mortgage-backed
securities held to maturity at December 31, 1996 was $23.7 million.
The OTS has deemed certain collateralized mortgage obligations and other
mortgage derivative products to be "high-risk." Potters has no such investments
or other derivative products deemed "high risk".
Because mortgage-backed securities have a lower yield relative to current market
rates, retention of such investments could adversely affect Potters' earnings,
particularly in a rising interest rate environment. Potters has purchased
adjustable-rate mortgage-backed securities as part of its effort to reduce its
interest rate risk. In a period of declining interest rates, Potters is subject
to prepayment risk on such adjustable-rate mortgage-backed securities. Potters
attempts to mitigate this prepayment risk by purchasing mortgage-backed
securities at or near par. If interest rates rise in general, the interest rates
on the loans backing the mortgage-backed securities will also adjust upward,
subject to the interest rate caps in the underlying adjustable-rate mortgage
loans. However, Potters is still subject to interest rate risk on such
securities if interest rates rise faster than the 1% to 2% maximum annual
interest rate adjustments on the underlying loans.
At December 31, 1996, $8.2 million, or 34.3%, of Potters' mortgage-backed
securities had adjustable rates. Although adjustable-rate securities generally
have a lower yield at the time of origination than fixed-rate securities, the
interest rate risk associated with adjustable-rate securities is lower. See
"FINANCIAL REVIEW - Asset/Liability Management" in the Annual Report. The
following table sets forth certain information regarding Potters' investment in
mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
---------------
1996 1995
---- ----
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities
held to maturity $ 24,018 $ 23,735 $ 29,240 $ 29,041
======== ======== ========= =========
</TABLE>
The combined amortized cost of mortgage-backed securities designated as held to
maturity at December 31, 1996 and 1995, by contractual terms to maturity are
shown below. Actual maturities will differ from contractual maturities because
borrowers generally may prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
At December 31, 1996
--------------------
Weighted
Amortized Average
Cost Yield
---- -----
(Dollars in thousands)
<S> <C> <C>
Due within one year
Due after one year through three years $ 4 13.44%
Due after three years through five years 1,747 6.36
Due after five years through ten years 824 6.04
Due after ten years 21,443 6.65
-------- --------
Total $ 24,018 6.61%
======== ========
</TABLE>
17
<PAGE> 18
INVESTMENT ACTIVITIES
OTS regulations require that Potters maintain a minimum amount of liquid assets,
which may be invested in U.S. Treasury obligations, securities of various
federal agencies, certificates of deposit at insured banks, bankers' acceptances
and federal funds. Potters is also permitted to make investments in certain
commercial paper, corporate debt securities rated in one of the four highest
rating categories by one or more nationally recognized statistical rating
organizations, and mutual funds, as well as other investments permitted by
federal regulations. From January 1, 1996, through December 31, 1996, Potters
has maintained liquid assets on a monthly average basis in an amount between
15.6% and 27.1% of total assets. See "REGULATION."
No security or group of securities, with the exception of securities issued by
the U.S. government or its agencies, exceeded 10% of Potters' equity at December
31, 1996.
The following table sets forth the composition of Potters' investment portfolio
at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
---------------
1996 1995
---- ----
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and U.S.
Government agencies $ 9,988 $ 9,853 $ 10,994 $ 10,952
Mutual funds 1,034 1,025
--------- -------- --------- ---------
$ 11,022 $ 10,878 $ 10,994 $ 10,952
========= ======== ========= =========
Securities held to maturity:
U.S. Treasury and U.S.
Government agencies $ 6,854 $ 6,787 $ 7,666 $ 7,643
Obligations of states and
political subdivisions 175 182 178 215
Other securities 866 872 1,028 1,041
--------- -------- --------- ---------
$ 7,895 $ 7,841 $ 8,872 $ 8,899
========= ======== ========= =========
</TABLE>
18
<PAGE> 19
The maturities of debt securities are indicated in the following table (mutual
funds are excluded):
<TABLE>
<CAPTION>
At December 31, 1996
-------------------------------------------------------------------
Total debt securities
Estimated
Less than 1 to 5 5 to 10 Over Amortized Fair
1 year years years 10 years Cost Value
------ ----- ----- -------- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale (1):
U.S. Treasury and U.S
Government agencies $ 7,906 $ 1,947 $ 9,988 $ 9,853
--------- --------- -------- --------
$ 7,906 $ 1,947 $ 9,988 $ 9,853
========= ========= ======== ========
Weighted average yield 6.00% 6.30% 6.07%
Securities held to maturity (2):
U.S. Treasury and U.S.
Government agencies $ 4,121 $ 2,234 $ 499 $ 6,854 $ 6,787
Obligations of states and
political subdivisions $ 3 12 160 175 182
Other securities 19 847 866 872
--------- --------- --------- --------- -------- --------
$ 22 $ 4,133 $ 2,394 $ 1,346 $ 7,895 $ 7,841
========= ========= ========= ========= ======== ========
Weighted average yield 8.28% 5.52% 6.70% 7.08% 6.14%
<FN>
- ----------
(1) Amounts reflected for maturities of securities available for sale are based on the estimated
fair value while the yield is based on amortized cost.
(2) Amounts reflected for maturities of securities held to maturity are based on amortized cost.
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of Potters' funds
for use in lending and other investment activities. In addition to deposits,
Potters derives funds from interest payments and principal repayments on loans
and securities and income on earning assets. Loan payments are a relatively
stable source of funds, while deposit inflows and outflows fluctuate more in
response to general interest rates and money market conditions. Potters also
borrows funds from the FHLB.
DEPOSITS. Deposits are attracted principally from within Potters' primary market
area through the offering of a broad selection of deposit instruments, including
NOW and demand accounts, money market deposit accounts, regular passbook savings
accounts, statement savings accounts, holiday club accounts, term certificate
accounts and Individual Retirement Accounts. Interest rates paid, maturity
terms, service fees and withdrawal penalties for the various types of accounts
are established periodically by the management of Potters based on Potters'
liquidity requirements, growth goals and interest rates paid by competitors.
Potters does not use brokers to attract deposits. The amount of deposits from
outside Potters' primary market area is not significant.
19
<PAGE> 20
At December 31, 1996, Potters' certificates of deposit totaled $47.5 million, or
48.8% of total deposits. Of such amount, approximately $26.6 million in
certificates of deposit mature within one year. Based on past experience and
Potters' prevailing pricing strategies, management believes that a substantial
percentage of such certificates will renew with Potters at maturity. If there is
a significant deviation from historical experience, Potters can utilize
borrowings from the FHLB as an alternative to this source of funds.
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by Potters at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1996 1995
---- ----
Percent Percent
of total of total
Amount deposits Amount deposits
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
Demand, NOW, and Super NOW
accounts (1) $ 13,509 13.9% $ 11,752 11.9%
Passbook, statement savings
and club accounts (2) 34,345 35.3 35,126 35.6
Money market deposit
accounts (3) 1,978 2.0 2,439 2.5
--------- --- --------- ---
Total transaction accounts 49,832 51.2 49,317 50.0
Certificates of deposit (4) 47,451 48.8 49,380 50.0
--------- ---- --------- ----
Total deposits $97,283 100.0% $ 98,697 100.0%
========= ====== ========= =====
<FN>
- ----------
(1) Potters' weighted average interest rate paid on demand, NOW and Super NOW accounts
fluctuates with the general movement of interest rates. At December 31, 1996, the
weighted average rate on such accounts was 2.07%.
(2) The weighted average rate on passbook, statement savings and club accounts was 3.02%
at December 31, 1996.
(3) Potters' weighted average interest paid on money market accounts fluctuates with the
general movement of interest rates. At December 31, 1996, the weighted average rate on
such accounts was 2.99%.
(4) The weighted average rate on certificates of deposit at December 31, 1996 was 5.67%.
</TABLE>
See page 33 of "FINANCIAL REVIEW" in the Annual Report for information relating
to the average balance and the average rates paid on various deposit products
for the past three years.
20
<PAGE> 21
The following table presents the amount of Potters' certificates of deposit of
$100,000 or more and other certificates of deposit by the time remaining until
maturity as of December 31, 1996:
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------------------
3 months Over 3 to Over 6 to Over 12
or less 6 months 12 months months Total
-------- ---------- ---------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit
less than $100,000 $ 9,432 $ 7,318 $ 7,575 $ 18,837 $ 43,162
Certificates of deposit
$100,000 or more 621 603 894 1,950 4,068
Public funds (1) 107 5 6 103 221
-------- --------- --------- --------- ---------
Total certificates
of deposit $ 10,160 $ 7,926 $ 8,475 $ 20,890 $ 47,451
======== ========= ========= ========= =========
- ----------
(1) Includes deposits from governmental and other public entities.
</TABLE>
BORROWINGS. The FHLB System functions as a central reserve bank providing credit
for its member institutions and certain other financial institutions. See
"REGULATION -- Federal Home Loan Banks." As a member in good standing of the
FHLB of Cincinnati, Potters is authorized to apply for advances from the FHLB of
Cincinnati, provided certain standards of creditworthiness have been met. Under
current regulations, an association must meet certain qualifications to be
eligible for FHLB advances. The extent to which an association is eligible for
such advances will depend upon whether it meets the Qualified Thrift Lender Test
(the "QTL Test"). See "REGULATION - OTS Regulations -- Qualified Thrift Lender
Test." If an association meets the QTL Test, it will be eligible for 100% of the
advances it would otherwise be eligible to receive. If an association does not
meet the QTL Test, it will be eligible for such advances only to the extent it
holds specified QTL Test assets. At December 31, 1996, Potters was in compliance
with the QTL Test. During 1996, a total of $15.6 million was received in FHLB
advances, $13.5 million of which were repaid. At December 31, 1996, FHLB
advances totaled $5.1 million, which included $750,000 of advances received in
conjunction with the Company's participation in an Affordable Housing Program
conducted through the FHLB and the State of Ohio.
During 1996, FHLB advances were used to finance loan purchases and a short-term
growth strategy employed during the year. Fixed-rate securities available for
sale totaling $10.0 million were financed by variable-rate FHLB advances,
generating an average spread of 169 basis points over the period held. The
transactions were monitored on a quarterly basis at each quarterly interest rate
reset of the FHLB advances when the transaction could be terminated. Due to an
increase in interest rates during the fourth quarter, all of the transactions
were terminated, but the strategy added approximately $33,000 to net interest
income during 1996.
Additional disclosures regarding short-term borrowings are not required because
the average balance of such borrowings during 1996 did not exceed 30 percent of
shareholders' equity at the end of the year.
The average amounts of FHLB advances outstanding during the last three years and
the weighted average interest rate thereon are detailed on page 33 of "FINANCIAL
REVIEW -- Yields Earned and Rates Paid" in the Annual Report.
21
<PAGE> 22
SUBSIDIARY ACTIVITIES
Potters has one wholly-owned subsidiary, Potters Financial Services Corporation,
which owns a parking lot in East Liverpool with a net book value of $34,000.
COMPETITION
Potters competes for deposits with other savings associations, commercial banks
and credit unions and with the issuers of commercial paper and other securities,
such as shares in money market mutual funds. The primary factors in competing
for deposits are interest rates and convenience of office location. In making
loans, Potters competes with other savings associations, savings banks,
commercial banks, consumer finance companies, credit unions, leasing companies
and other lenders. Potters competes for loan originations primarily through the
interest rates and loan fees it charges and through the efficiency and quality
of services it provides to borrowers. Competition is intense and is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels and other factors which
are not readily predictable. Proposed expansion in the permissible activities of
bank holding companies and decreases in the deposit insurance assessment rates
for banks versus those for savings associations may increase this competition.
The number and size of financial institutions competing with Potters is likely
to increase as a result of changes in federal statutes and regulations
eliminating various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon
Potters.
REGULATION
GENERAL
As a savings and loan association incorporated under the laws of Ohio, Potters
is subject to regulation, examination and oversight by the Superintendent of the
Ohio Division of Financial Institutions of the Ohio Department of Commerce (the
"Ohio Superintendent"). Because Potters' deposits are insured by the FDIC,
Potters also is subject to regulation and examination by the OTS and to
regulatory oversight by the FDIC. Potters must file periodic reports with the
Ohio Superintendent and the OTS concerning its activities and financial
condition. Examinations are conducted periodically by federal and state
regulators to determine whether Potters is in compliance with various regulatory
requirements and is operating in a safe and sound manner. Because it accepts
federally insured deposits and offers transaction accounts, Potters is also
subject to certain regulations issued by the Board of Governors of the Federal
Reserve System ("FRB"). Potters is a member of the FHLB of Cincinnati.
PFC is an Ohio corporation and is subject to regulation, examination and
oversight by the OTS as the holding company of Potters and is required to submit
periodic reports to the OTS.
Congress is considering legislation to eliminate the federal savings and loan
charter and the separate federal regulation of savings and loan associations and
the Department of the Treasury is preparing a report for Congress on the
development of a common charter for all financial institutions. Pursuant to such
legislation, Congress may eliminate the OTS and Potters may be regulated under
federal law as a bank or may be required to change its charter. Such change in
regulation or charter would likely change the range of activities in which
Potters may engage and would probably subject Potters to more regulation by the
FDIC. In addition, PFC might become subject to a different form of holding
company regulation which may limit the activities in which PFC may engage and
subject PFC to other additional regulatory requirements, including
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separate capital requirements. PFC cannot predict when or whether Congress may
actually pass legislation regarding PFC's and Potters' regulatory requirements
or charter. Although such legislation may change the activities in which either
PFC and Potters may engage, it is not anticipated that the current activities of
either PFC or Potters will be materially affected by those activity limits.
DIVISION REGULATION
The Ohio Superintendent is responsible for the regulation and supervision of
Ohio savings and loan associations in accordance with the laws of the State of
Ohio and imposes assessments on Ohio associations based on the association's
asset size to cover the cost of supervision and examination. Ohio law prescribes
the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments in real estate, subsidiaries and corporate or government
securities that such associations may make. The ability of Ohio associations to
engage in these state-authorized investments is subject to oversight and
approval by the FDIC, if such investments or activities are not permissible for
a federally chartered savings association. See "-FDIC Regulations --
State-Chartered Association Activities." The Ohio Superintendent must approve
most mergers or acquisitions involving a change of control of Ohio savings and
loan associations. The Ohio Superintendent may initiate certain supervisory
measures of formal enforcement actions against Ohio associations. Ultimately, if
the grounds provided by law exist, the Ohio Superintendent may place an Ohio
association in conservatorship or receivership.
In addition to being governed by the laws of Ohio specifically governing savings
and loan associations, Potters is also governed by Ohio corporate law, to the
extent such law does not conflict with the laws specifically governing savings
and loan associations.
OTS REGULATIONS
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all savings associations, the
deposits of which are insured by the FDIC in the SAIF, and of all federally
chartered savings institutions. The OTS issues regulations governing the
operation of savings associations, regularly examines such associations and
imposes assessments on savings associations based on their asset size to cover
the cost of general supervision and examination. The OTS also may initiate
enforcement actions against savings associations and certain persons affiliated
with them for violations of laws or regulations or for engaging in unsafe or
unsound practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
Savings associations are subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosure, equal credit opportunity, fair credit reporting and
community reinvestment. Failure to abide by federal laws and regulations
governing community reinvestment could limit the ability of a state-chartered
savings association to open a new branch or engage in a merger transaction.
Community reinvestment regulations will evaluate how well and to what extent an
institution lends and invests in its designated service area, with particular
emphasis on low-to-moderate income communities and borrowers in such areas.
Potters has received a "satisfactory" examination rating under those
regulations.
REGULATORY CAPITAL REQUIREMENTS. Potters is required by OTS regulations to meet
certain minimum capital requirements. The following table sets forth the amount
and percentage level of regulatory capital of Potters at December 31, 1996, and
the amount by which it exceeds minimum requirements. Tangible and core capital
are reflected as a percentage of adjusted total
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assets. Total (or risk-based) capital, which consists of core and supplementary
capital, is reflected as a percentage of risk-weighted assets.
<TABLE>
<CAPTION>
At December 31, 1996
--------------------
Amount Percent
------ -------
(Dollars in
thousands)
<S> <C> <C>
Tangible capital $ 9,541 8.28%
Requirement 1,729 1.50
--------- ----
Excess $ 7,812 6.78%
========= ====
Core capital $ 9,541 8.28%
Requirement 3,457 3.00
--------- ----
Excess $ 6,084 5.28%
========= ====
Total risk-based capital $ 10,220 19.53%
Requirement 4,187 8.00
--------- ----
Excess $ 6,033 11.53%
========= =====
</TABLE>
For additional information concerning the regulatory capital of Potters at
December 31, 1996, see "FINANCIAL REVIEW -- Liquidity and Capital Resources" in
the Annual Report.
Current capital requirements call for tangible capital of 1.5% of adjusted total
assets, core capital of 3% of adjusted total assets, and risk-based capital of
8% of risk-weighted assets. In determining risk-weighted assets, each asset is
weighted at a percentage level ranging from 0% to 100% depending on its relative
risk. The OTS has proposed to amend the core capital requirement so that only
those associations with the highest examination rating and acceptable levels of
risk will be permitted to maintain only 3% core capital. All other associations
will be required to maintain core capital of 4% to 5%, depending on the
association's examination rating and overall risk. Potters does not anticipate
that it will be adversely affected if the core capital requirement regulation is
amended as proposed.
The OTS has adopted an interest rate risk component to the risk-based capital
requirement, though the implementation of that component has been delayed.
Pursuant to that requirement, a savings association would have to measure the
effect of an immediate 200 basis point change in interest rates on the value of
their portfolios, as determined under the methodology established by the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, the association will be required to deduct one-half of that excess
exposure from its total capital when determining its risk-based capital ratio.
The interest rate risk component for any quarter will be based on this
calculation as of the end of the third preceding quarter. In general,
associations with less than $300 million in assets and a risk-based capital
ratio of greater than 12% will not be subject to this requirement. Potters
currently qualifies for this exception. Pending implementation of the interest
rate risk component, the OTS may adjust the risk-based capital requirement on an
individualized basis to take into account risks due to concentrations of credit
and non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to resolve
the problems of capital deficient and otherwise troubled savings associations.
At each successively lower defined capital category, an institution is subject
to more restrictive and numerous mandatory or discretionary regulatory actions
or limits, and the OTS has less flexibility in determining how to resolve the
problems of the institution. In addition, the OTS can downgrade an association's
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designation notwithstanding its capital level, based on less than satisfactory
examination ratings in areas other than capital or, after notice and an
opportunity for hearing, if the institution is deemed to be in an unsafe or
unsound condition or to be engaging in an unsafe or unsound practice. Each
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such institution will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. A critically undercapitalized institution must be placed
in conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. Potters' capital at
December 31, 1996, met the standards for the highest defined capital level, a
well-capitalized association.
Federal law prohibits an insured institution from making a capital distribution
to anyone or paying management fees to any person having control of the
institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with the terms of an
OTS-approved capital plan until the institution has been adequately capitalized
on an average during each of four consecutive calendar quarters and must provide
adequate assurances of performance. The aggregate liability pursuant to such
guarantee is limited to the lesser of (a) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution at the time the
institution fails to comply with its capital restoration plan.
LIQUIDITY. OTS regulations require that savings associations maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified U.S. government, state or federal agency obligations)
equal to a monthly average of not less than 5% of its net withdrawable savings
deposits plus borrowings payable in one year or less. Federal regulations also
require each member institution to maintain an average daily balance of
short-term liquid assets of not less than 1% of the total of its net
withdrawable savings accounts and borrowings payable in one year or less.
Monetary penalties may be imposed upon member institutions failing to meet
liquidity requirements. The eligible liquidity of Potters, as computed under
current regulations, for December, 1996, was approximately $16.8 million, or
15.6%.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet the QTL
test. Prior to September 30, 1996, there was only one QTL test which required
savings associations to maintain a specified level of investments in assets that
are designated as qualifying thrift investments ("QTI"), which are generally
related to domestic residential real estate and manufactured housing and include
credit card, student and small business loans, stock issued by any FHLB, the
FHLMC or the FNMA. Under this test 65% of an institution's "portfolio assets"
(total assets less goodwill and other intangibles, property used to conduct
business and 20% of liquid assets) must consist of QTI on a monthly average
basis in 9 out of every 12 months. Congress created a second QTL test, effective
September 30, 1996, pursuant to which a savings association may also meet the
QTL test under the Internal Revenue Code of 1986, as amended (the "Code"), for
thrift institution status. According to the test under the Code, at least 60% of
the institution's assets (on a tax basis) must consist of specified assets
(generally loans secured by residential real estate or deposits, educational
loans, cash and certain governmental obligations). The OTS may grant exceptions
to the QTL test under certain circumstances. If a savings association fails to
meet the QTL test, the association and its holding company become subject to
certain operating and regulatory restrictions. A savings association that fails
to meet the QTL test will not be eligible for new FHLB advances. At December 31,
1996, Potters met the QTL test.
LENDING LIMITS. OTS regulations impose a lending limit on the aggregate amount
that a savings association can lend to one borrower (the "Lending Limit") to an
amount equal to 15% of
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the association's total capital for risk-based capital purposes plus any loan
reserves not already included in total capital (the "Lending Limit Capital"). A
savings association may loan to one borrower an additional amount not to exceed
10% of the association's Lending Limit Capital, if the additional amount is
fully secured by certain forms of "readily marketable collateral." Real estate
is not considered "readily marketable collateral." In applying this Lending
Limit, loans to certain related or affiliated borrowers are aggregated. An
exception to this Lending Limit permits loans of any type to one borrower of up
to $500,000. In addition, the OTS, under certain circumstances, may permit
exceptions to the Lending Limit on a case-by-case basis.
Based on the 15% Lending Limit, Potters was able to lend approximately $1.6
million to one borrower at December 31, 1996. Potters had no outstanding loans
in excess of such limit at December 31, 1996.
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limits and the total of such loans cannot exceed the association's
Unimpaired Capital. Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of the board of directors of the association with any "interested"
director not participating. All loans to directors, executive officers and
principal shareholders must be made on terms substantially the same as offered
in comparable transactions to the general public, or as offered to all employees
in a company-wide benefit program, and loans to executive officers are subject
to additional limitations. Potters was in compliance with such restrictions at
December 31, 1996.
All transactions between savings associations and their affiliates must comply
with Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings
association is any company or entity that controls, is controlled by or is under
common control with the savings association. PFC is an affiliate of Potters.
Generally, Section 23A and 23B of the FRA (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, (ii) limit the aggregate of all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and
(iii) require that all such transactions be on terms substantially the same, or
at least as favorable to the institution, as those provided in transactions with
a non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions. In addition to the limits in Sections 23A and 23B, a savings
association may not make any loan or other extension of credit to an affiliate
unless the affiliate is engaged only in activities permissible for a bank
holding company and may not purchase or invest in securities of any affiliate
except shares of a subsidiary. Potters was in compliance with these requirements
and restrictions at December 31, 1996.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS imposes various restrictions or
requirements on the ability of associations to make capital distributions,
including dividend payments. An association is prohibited from declaring or
paying dividends or from repurchasing any of its stock if, as a result, the net
worth of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its mutual
to stock conversion. OTS regulations also establish a system limiting capital
distributions according to ratings of associations based on their capital level
and supervisory condition.
The first rating category is Tier 1, consisting of associations that, before and
after the proposed distribution, meet their fully phased-in capital
requirements. Associations in this category may make capital distributions
during any calendar year equal to the greater of 100% of net income, current
year-to-date, plus 50% of the amount by which the lesser of the association's
tangible, core or risk-based capital exceeds its fully phased-in capital
requirement for such capital component, as measured at the beginning of the
calendar year, or the amount authorized for a
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<PAGE> 27
Tier 2 association. A Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association. Potters meets the requirements for a Tier 1 association and has not
been notified of any need for more than normal supervision. The second category,
Tier 2, consists of associations that before and after the proposed distribution
meet their current minimum, but not fully phased-in, capital requirements.
Associations in this category may make capital distributions of up to 75% of net
income over the most recent quarters. Tier 3 associations do not meet current
minimum capital requirements and must obtain OTS approval of any capital
distribution. Tier 2 associations that propose to make a capital distribution in
excess of the noted safe harbor level must also obtain OTS approval. Tier 2
associations proposing to make a capital distribution within the safe harbor
provisions and Tier 1 associations proposing to make any capital distribution
need only submit written notice to the OTS 30 days prior to such distribution.
In December 1994, the OTS issued a proposal to amend the capital distributions
limits. Under that proposal, associations not owned by a holding company with a
CAMEL examination rating of 1 or 2, could make a capital distribution without
notice to the OTS, if they remain adequately capitalized, as described above,
after the distribution is made. Any other association seeking to make a capital
distribution that would not cause the association to fall below the capital
levels to qualify as adequately capitalized or better, would have to provide
notice to the OTS. Except under limited circumstances and with OTS approval, no
capital distributions would be permitted if it caused the association to become
undercapitalized.
In addition, as a subsidiary of PFC, Potters is required to give the OTS
30-days' notice prior to declaring any dividend on its stock. The OTS may object
to the distribution during that 30-day period. Potters paid a total of $1.6
million in dividends to PFC during fiscal 1996.
HOLDING COMPANY REGULATION. PFC is a savings and loan holding company within the
meaning of the Home Owners' Loan Act (the "HOLA"). As such, PFC is registered
with the OTS and is subject to OTS regulations, examination, supervision and
reporting requirements. Congress is considering legislation that may require
that PFC become a bank holding company regulated by the FRB. Bank holding
companies with more than $150 million in assets are subject to capital
requirements similar to those imposed on Potters and have more extensive
interstate acquisition authority than savings and loan holding companies. Bank
holding companies are subject to more restrictive activity and investment limits
than savings and loan holding companies. No assurances can be given that such
legislation will be enacted, and PFC cannot be certain of the legislation's
impact on its operations until it is enacted.
The HOLA generally prohibits a savings and loan holding company from controlling
any other savings association or savings and loan holding company, without prior
approval of the OTS, or from acquiring or retaining more than 5% of the voting
shares of a savings association or holding company thereof, which is not a
subsidiary. Under certain circumstances, a savings and loan holding company is
permitted to acquire, with the approval of the OTS, up to 15% of the previously
unissued voting shares of an undercapitalized savings association for cash
without such savings association being deemed to be controlled by the holding
company. Except with the prior approval of the OTS, no director or officer of a
savings and loan holding company or person owning or controlling by proxy or
otherwise more than 25% of such company's stock may also acquire control of any
savings institution, other than a subsidiary institution, or any other savings
and loan holding company.
PFC is a unitary savings and loan holding company. There are generally no
restrictions on the activities of unitary savings and loan holding companies and
such companies are the only financial institution holding companies which may
engage in commercial activities and expanded securities and insurance
activities. The broad latitude to engage in activities under current law can be
restricted, if the OTS determines that there is reasonable cause to believe that
the
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<PAGE> 28
continuation by a savings and loan holding company of an activity constitutes a
serious risk to the financial safety, soundness or stability of its subsidiary
savings association. The OTS may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the savings
association, (ii) transactions between the savings association and its
affiliates, and (iii) any activities of the savings association that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings association. Notwithstanding the
foregoing rules as to permissible business activities of a unitary savings and
loan holding company, if the savings association subsidiary of a holding company
fails to meet the QTL Test, then such unitary holding company would become
subject to the activities restrictions applicable to multiple holding companies.
At December 31, 1996, Potters met the QTL Test.
If PFC were to acquire control of another savings institution, other than
through a merger or other business combination with Potters, PFC would become a
multiple savings and loan holding company. Unless the acquisition is an
emergency thrift acquisition and each subsidiary savings association meets the
QTL Test, the activities of PFC and any of its subsidiaries (other than Potters
or other subsidiary savings associations) would thereafter be subject to
activity restrictions. The HOLA provides that, among other things, no multiple
savings and loan holding company or subsidiary thereof that is not a savings
institution shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by federal regulation as of March 5, 1987, to be engaged in by
multiple holding companies, or (vii) those activities authorized by the FRB as
permissible for bank holding companies, unless the OTS by regulation prohibits
or limits such activities for savings and loan holding companies. Those
activities described in (vii) above must also be approved by the OTS prior to
being engaged in by a multiple holding company.
The OTS may approve acquisitions resulting in the formation of a multiple
savings and loan holding company that controls savings associations in more than
one state, only if the multiple savings and loan holding company involved
controls a savings association that operated a home or branch office in the
state of the association to be acquired as of March 5, 1987, or if the laws of
the state in which the institution to be acquired is located specifically permit
institutions to be acquired by state-chartered institutions or savings and loan
holding companies located in the state where the acquiring entity is located (or
by a holding company that controls such state-chartered savings institutions).
As under prior law, the OTS may approve an acquisition resulting in a multiple
savings and loan holding company controlling savings associations in more than
one state in the case of certain emergency thrift acquisitions.
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE AND ASSESSMENTS. The FDIC is an independent federal agency
that insures the deposits, up to prescribed statutory limits, of federally
insured banks and thrifts and safeguards the safety and soundness of the banking
and thrift industries. The FDIC administers two separate insurance funds, the
Bank Insurance Fund ("BIF") for commercial banks and state savings banks and the
SAIF for savings associations. The FDIC is required to maintain designated
levels of reserves in each fund. Prior to October 1, 1996, the reserves of the
SAIF were below the level required by law, because a significant portion of the
assessments paid into the fund have been and are being used to pay the cost of
prior thrift failures, while the reserves of the BIF met the level required by
law in May 1995. This has resulted in a significant disparity between BIF and
SAIF assessments during 1996.
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Potters is a member of the SAIF and its deposit accounts are insured by the
FDIC, up to the prescribed limits. The FDIC has examination authority over all
insured depository institutions, including Potters, and has authority to
initiate enforcement actions against federally insured savings associations, if
the FDIC does not believe the OTS has taken appropriate action to safeguard
safety and soundness and the deposit insurance fund.
The FDIC is authorized to establish separate annual assessment rates for deposit
insurance each for members of the BIF and the SAIF. The FDIC may increase
assessment rates for either fund if necessary to restore the fund's ratio of
reserves to insured deposits to its target level within a reasonable time and
may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
this system, assessments vary based on the risk the institution poses to its
deposit insurance fund. The risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the institution.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy savings associations were reduced significantly
below the level paid by healthy savings associations effective in mid-1995.
Assessments paid by healthy savings associations exceeded those paid by healthy
commercial banks by approximately $.19 per $100 in deposits in late 1995. Such
excess equaled approximately $.23 per $100 in deposits beginning in 1996. This
premium disparity had a negative competitive impact on Potters and other
institutions in the SAIF.
Federal legislation, which was effective September 30, 1996, provided for the
recapitalization of the SAIF by means of a special assessment of $.657 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 were required to
pay the same special assessment on 80% of deposits at March 31, 1995. In
addition, the cost of prior thrift failures will be shared by both the SAIF and
the BIF. As a result of such cost sharing, BIF assessments for healthy banks in
1997 will be $.013 per $100 in deposits and SAIF assessments for healthy
institutions in 1997 will be $.064 per $100 in deposits.
Potters had $97.9 million in deposits at March 31, 1995. Potters paid a special
assessment of $643,000 on November 27, 1996, which was recorded as of September
30, 1996. This assessment is tax-deductible, and has reduced net income by
$424,000 for the year ended December 31, 1996.
STATE-CHARTERED ASSOCIATION ACTIVITIES. The ability of state-chartered
associations to engage in any state-authorized activities or make any
state-authorized investments is limited if such activity is conducted or
investment is made in a manner different than that permitted for, or subject to
different terms and conditions than those imposed on, federally chartered
savings associations. Engaging as a principal in any such activity or investment
not permissible for a federal association is subject to approval by the FDIC.
Such approval will not be granted unless certain capital requirements are met
and there is not a significant risk to the FDIC insurance fund. All of Potters'
activities and investments at December 31, 1996, were permissible for a federal
association.
FRB RESERVE REQUIREMENTS. FRB regulations currently require savings associations
to maintain reserves of 3% of net transaction accounts (primarily NOW accounts)
up to $49.3 million of such accounts (subject to an exemption of up to $4.4
million), and of 10% of net transaction accounts in excess of $49.3 million. At
December 31, 1996, Potters was in compliance with this reserve requirement.
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<PAGE> 30
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances. Potters is a
member of the FHLB of Cincinnati and must maintain an investment in the capital
stock of the FHLB of Cincinnati in an amount equal to the greater of 1% of the
aggregate outstanding principal amount of Potters' residential real estate
loans, home purchase contracts and similar obligations at the beginning of each
year, or 5% of its advances from the FHLB. Potters is in compliance with this
requirement with an investment in FHLB of Cincinnati stock having a book value
of $822,000 at December 31, 1996.
Upon the origination or renewal of a loan or advance, the FHLB of Cincinnati is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully disbursed, whole first mortgage loans
on improved residential property or securities representing a whole interest in
such loans; securities issued, insured or guaranteed by the U.S. government or
an agency thereof; deposits in any FHLB; or other real estate related collateral
(up to 30% of the member association's capital) acceptable to the applicable
FHLB, if such collateral has a readily ascertainable value and the FHLB can
perfect its security interest in the collateral.
Each FHLB is required to establish standards of community investment or service
that its members must maintain for continued access to long-term advances from
the FHLBs. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by each FHLB must be made only to provide funds for
residential housing finance. The FHLBs have established an "Affordable Housing
Program" to subsidize the interest rate of advances to member associations
engaged in lending for long-term, low- and moderate-income, owner-occupied and
affordable rental housing at subsidized rates. The FHLB of Cincinnati reviews
and accepts proposals for subsidies under that program twice a year.
TAXATION
FEDERAL TAXATION
PFC and Potters are both subject to the federal tax laws and regulations which
apply to corporations generally. Prior to the enactment of the Small Business
Jobs Protection Act (the "Act"), which was signed into law on August 21, 1996,
certain thrift institutions, such as Potters, were allowed deductions for bad
debts under methods more favorable than those granted to other taxpayers.
Qualified thrift institutions could compute deductions for bad debts using
either the specific charge off method of Section 166 of the Code or the reserve
method of Section 593 of the Code.
Under Section 593, a thrift institution annually could elect to deduct bad debts
under either (i) the "percentage of taxable income" method applicable only to
thrift institutions, or (ii) the "experience" method that also was available to
small banks. Under the "percentage of taxable income" method, a thrift
institution generally was allowed a deduction for an addition to its bad debt
reserve equal to 8% of its taxable income (determined without regard to this
deduction and with additional adjustments). Under the experience method, a
thrift institution was generally allowed a deduction for an addition to its bad
debt reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax year 1995, Potters
used the percentage of taxable income method
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because such method provided a higher bad debt deduction than the experience
method. For tax years 1990 through 1994, Potters used the experience method.
Section 1616(a) of the Act repealed the Section 593 reserve method of accounting
for bad debts by thrift institutions, effective for taxable years beginning
after 1995. Thrift institutions that are treated as small banks are allowed to
utilize the experience method applicable to such institutions, while thrift
institutions that are treated as large banks are required to use only the
specific charge off method. The percentage of taxable income method of
accounting for bad debts is no longer available for any financial institution.
A thrift institution required to change its method of computing reserves for bad
debt will treat such change as a change in the method of accounting, initiated
by the taxpayer and having been made with the consent of the Secretary of the
Treasury. Section 481(a) of the Code requires certain amounts to be recaptured
with respect to such change. Generally, the amounts to be recaptured will be
determined solely with respect to the "applicable excess reserves" of the
taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that is treated as a large bank, the
amount of the institution's applicable excess reserves generally is the excess
of (i) the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that
is treated as a small bank, like Potters, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or (b) what the thrift's reserves would have been at the close of its
last year beginning before January 1, 1996, had the thrift always used the
experience method.
For taxable years that begin after December 31, 1995, and before January 1,
1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken into
account as a Code Section 481(a) adjustment for the year will be suspended. A
thrift meets the residential loan requirement if, for the tax year, the
principal amount of residential loans made by the thrift during the year is not
less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential or church property and certain mobile
homes), but only to the extent that the loan is made to the owner of the
property.
The balance of the pre-1988 reserves is subject to the provisions of Section
593(e), as modified by the Act, which requires recapture in the case of certain
excessive distributions to shareholders. The pre-1988 reserves may not be
utilized for payment of cash dividends or other distributions to a shareholder
(including distributions in dissolution or liquidation) or for any other purpose
(except to absorb bad debt losses). Distribution of a cash dividend by a thrift
institution to a shareholder is treated as made: first, out of the institution's
post-1951 accumulated earnings and profits; second, out of the pre-1988
reserves; and third, out of such other accounts as may be proper. To the extent
a distribution by Potters to the Company is deemed paid out of its pre-1988
reserves under these rules, the pre-1988 reserves would be reduced and Potters'
gross income for tax purposes would be increased by the amount which, when
reduced by the income
31
<PAGE> 32
tax, if any, attributable to the inclusion of such amount in its gross income,
equals the amount deemed paid out of the pre-1988 reserves. As of December 31,
1996, Potters' pre-1988 reserves for tax purposes totaled approximately $2.5
million. Potters believes it had approximately $3.5 million of accumulated
earnings and profits for tax purposes as of December 31, 1996, which would be
available for dividend distributions, provided regulatory restrictions
applicable to the payment of dividends are met. No representation can be made as
to whether Potters will have current or accumulated earnings and profits in
subsequent years.
In addition to the regular income tax, PFC and Potters are subject to a minimum
tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on
"alternative minimum taxable income" (which is the sum of a corporation's
regular taxable income, with certain adjustments, and tax preference items),
less any available exemption. Such tax preference items include interest on
certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" exceeds its
alternative minimum taxable income computed without regard to this preference
item and prior to reduction by net operating losses, is included in alternative
minimum taxable income. Net operating losses can offset no more than 90% of
alternative minimum taxable income. The alternative minimum tax is imposed to
the extent it exceeds the corporation's regular income tax. Payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. In addition, for taxable years after 1986 and before 1996, PFC
and Potters are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2.0 million.
The tax returns of Potters have been audited or closed without audit through
fiscal year 1992. In the opinion of management, any examination of open returns
would not result in a deficiency which could have a material adverse effect on
the financial condition of Potters.
OHIO TAXATION
PFC is subject to the Ohio corporation franchise tax, which, as applied to PFC,
is a tax measured by both net earnings and net worth. The rate of tax is the
greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and
8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% times
taxable net worth.
In computing its taxable net worth under the net worth method, PFC may exclude
100% of its investment in the capital stock of Potters, as reflected on the
balance sheet of PFC, as long as it owns at least 25% of the issued and
outstanding capital stock of Potters. The calculation of the exclusion from net
worth is based on the ratio of the excludable investment (net of any
appreciation or goodwill included in such investment) to total assets multiplied
by the net value of the stock. As a holding company, PFC may be entitled to
various other deductions in computing taxable net worth that are not generally
available to operating companies.
A special litter tax is also applicable to all corporations, including PFC,
subject to the Ohio corporation franchise tax other than "financial
institutions". If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Potters is a "financial institution" for State of Ohio tax purposes. As such, it
is subject to the Ohio corporate franchise tax on "financial institutions,"
which is imposed annually at a rate of 1.5% of Potters' book net worth
determined in accordance with generally accepted accounting principles. As a
"financial institution," Potters is not subject to any tax based upon net income
or net profits imposed by the State of Ohio.
32
<PAGE> 33
ITEM 2. PROPERTIES
The following table sets forth certain information at December 31,
1996, regarding the properties on which the main office and each branch office
of Potters is located:
<TABLE>
<CAPTION>
Owned Date acquired Net
Location or leased or leased book value
-------- --------- --------- ----------
CORPORATE OFFICE:
<S> <C> <C> <C>
519 Broadway (2) January 8, 1903
East Liverpool, Ohio 43920 Owned May 2, 1978 $69,000
BRANCH OFFICES:
530 Broadway
East Liverpool, Ohio 43920 Owned June 18, 1982 596,000
1032 Pennsylvania Avenue
East Liverpool, Ohio 43920 (3) Owned June 18, 1982 9,000
46635 Y&O Road
Glenmoor, Ohio 43920 Owned June 3, 1975 202,000
15575 State Rte. 170
Calcutta, Ohio 43920 (4) Leased February 1, 1983 206,000
<FN>
- ----------
(1) At December 31, 1996, Potters' office premises and equipment had a total net
book value of $1.7 million.
(2) Includes two parcels.
(3) Effective March 31, 1997, Potters will cease branch operations at its East
End Branch Office.
(4) The lease agreement with one of the directors of Potters expires on January
31, 2008, subject to five five-year renewal periods at Potters' option.
</TABLE>
33
<PAGE> 34
ITEM 3. LEGAL PROCEEDINGS.
Potters is not presently involved in any legal proceedings of a material nature.
From time to time, Potters is a party to legal proceedings incidental to its
business to enforce its security interest in collateral pledged to secure loans
made by Potters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended December 31, 1996, there were no submissions of matters
to the shareholders of PFC.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The information contained on page 3 of the Annual Report under the captions
"Common Shares" is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The information contained on pages 29 through 45 of the Annual Report under the
caption "Financial Review" is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements and the report of independent auditors thereon
contained on pages 5 through 28 of the Annual Report are incorporated herein by
reference.
ITEM 8. CHANGE IN ACCOUNTANTS.
No changes in or disagreements with the independent accountants have occurred.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information contained on pages 4 through 9 of the Proxy Statement under the
captions "Board of Directors", "Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information contained on page 7 of the Proxy Statement under the caption
"Compensation of Executive Officer and Directors" is incorporated herein by
reference.
ITEM 11. OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained on page 2 of the Proxy Statement under the caption
"Voting Securities and Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
34
<PAGE> 35
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not Applicable.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Item 2. Agreement and Plan of Reorganization
Item 3. Amended Articles of Incorporation and Code of
Regulations
Item 10. Material contracts
Item 11. Statement re: computation of per share earnings
Item 13. Portions of the 1996 Annual Report to
Shareholders
Item 20. Proxy Statement for 1997 Meeting of
Shareholders
Item 21. Subsidiaries of Registrant
Item 27. Financial Data Schedule
Item 99. Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
(b) No current report on Form 8-K was filed by PFC during the
fourth quarter of 1996.
35
<PAGE> 36
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Potters Financial Corporation
By /s/ Edward L. Baumgardner
-------------------------------
Edward L. Baumgardner
President, Chief Executive Officer
and Director
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By /s/ W. Gaylord Billingsley By /s/ Arthur T. Doak
------------------------------ -------------------------
W. Gaylord Billingsley Arthur T. Doak
Director Director
Date: March 24, 1997 Date: March 24, 1997
By /s/ William L. Miller By /s/ Timothy M. O'Hara
------------------------------ -------------------------
William L. Miller Timothy M. O'Hara
Director Director
Date: March 24, 1997 Date: March 24, 1997
By /s/ Peter D. Visnic By /s/
------------------------------ -------------------------
Peter D. Visnic Jackman S. Vodrey
Director Director
Date: March 24, 1997 Date: March 24, 1997
By /s/ Anne S. Myers
-------------------------------
Anne S. Myers
Vice President, Secretary,
Chief Operating Officer and
Chief Financial Officer
Date: March 24, 1997
36
<PAGE> 37
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization dated Incorporated by reference to the
December 14, 1995, by and among Potters Annual Report on Form 10-KSB
Financial Corporation, The Potters Savings and filed by PFC with the Securities
Loan Company and Potters Merger Corp. and Exchange Commission
("SEC") in December, 1995
(the "1995 10-KSB"), Exhibit 2.1
3.1 Articles of Incorporation of Potters Financial Incorporated by reference to the
Corporation Form 8-A filed with the SEC on
March 4, 1996 (the "8-A").
3.2 Code Regulations of Potters Financial Corporation Incorporated by reference to the 8-A.
10.1 The Potters Savings and Loan Company Incorporated by reference to the
Stock Option Plan 1995 10-KSB, Exhibit 10.1.
10.2 The Potters Savings and Loan Company Incorporated by reference to the
Recognition and Retention Plan and 1995 10-KSB, Exhibit 10.2.
Trust Agreement
10.3 Deferred Compensation Agreement dated Incorporated by reference to the
November 1, 1972, by and between The 1995 10-KSB, Exhibit 10.3.
Potters Savings and Loan Company and
Alwyn C. Purinton, Jr.
10.4 Lease dated February 1, 1983, by and Incorporated by reference to the
between Billingsley Incorporated and The 1995 10-KSB, Exhibit 10.5.
Potters Savings and Loan Company
10.5 Employment Contract with Edward L. Baumgardner Included herewith.
10.6 Employment Contract with Albert E. Sampson Included herewith.
11 Statement re: computation of per share earnings Incorporated by reference to
Note 1 to the Consolidated
Financial Statements
13 Portions of Potters Financial Corporation 1996 Included herewith.
Annual Report to Shareholders
20 Proxy Statement for the 1997 Annual Meeting Included herewith.
of Shareholders of Potters Financial Corporation
21 Subsidiaries of Registrant Incorporated by reference to
the 1995 10-KSB, Exhibit 21.
27 Financial Data Schedule Included herewith.
99 Safe Harbor Under the Private Securities Included herewith.
Litigation Reform Act of 1995
</TABLE>
37
<PAGE> 1
Exhibit 10.5
AGREEMENT
---------
THIS AGREEMENT, entered into this 27th day of February, 1997, by and
between Potters Financial Corporation, a savings and loan holding company
incorporated under Ohio law (hereinafter referred to as "PFC"); The Potters
Savings and Loan Company, a savings and loan association incorporated under Ohio
law and a wholly-owned subsidiary of PFC (hereinafter referred to as "PSL"); and
Edward L. Baumgardner, an individual (hereinafter referred to as the "ELB");
WITNESSETH:
WHEREAS, ELB is the President of PFC and PSL (hereinafter collectively
referred to as "POTTERS");
WHEREAS, the Boards of Directors of POTTERS desire to retain the
services of ELB as the President of POTTERS;
WHEREAS, ELB desires to continue to serve as the President of POTTERS;
and
WHEREAS, ELB and POTTERS desire to enter into this Agreement to set
forth the rights and obligations of ELB and POTTERS in the event of the
termination of ELB's employment under the circumstances set forth in this
Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, POTTERS and ELB hereby agree as follows:
Section l. TERMINATION OF EMPLOYMENT.
(a) In the event of the termination of the employment of ELB (i)
without ELB's prior written consent, (ii) for any reason other than JUST CAUSE
(hereafter defined) and (iii) in connection with or within one year of a CHANGE
OF CONTROL (hereinafter defined) of POTTERS, then the following shall occur:
(I) POTTERS shall pay to ELB or, in the event of the
death of ELB, to the estate of ELB, an amount equal to the
SEVERANCE PAYMENT, subject to standard withholding, within ten
(10) days after such termination;
<PAGE> 2
(II) To the extent permitted by the benefit plans of
POTTERS, ELB and his dependents shall continue to be covered
under all such plans at POTTERS' expense as if ELB were still
employed by POTTERS until the earliest of the expiration of
the TERM (hereinafter defined) or the date on which ELB is
included in another employer's benefit plans as a full-time
employee; and
(III) ELB shall not be required to mitigate the
amount of any payment provided for in this Agreement by
seeking other employment or otherwise, nor shall any amounts
received from other employment or otherwise by ELB offset in
any manner the obligations of POTTERS hereunder, except as
specifically stated in subparagraph (II).
In the event that payments pursuant to this Section 1(a) would result in the
imposition of a penalty tax pursuant to Section 280G(b) (3) of the Internal
Revenue Code of 1986, as amended, and the regulations promulgated thereunder,
such payments shall be reduced to the maximum amount which may be paid under
Section 280G without exceeding such limits.
(b) In the event of the occurrence of any of the following events (i)
without the prior written consent of ELB and (ii) within one year following a
CHANGE OF CONTROL of POTTERS, ELB may voluntarily terminate his employment with
POTTERS :
(i) The requirement that ELB move his personal
residence or perform his principal executive functions more
than thirty-five (35) miles from his primary office as of the
date of this Agreement;
(ii) A reduction in ELB's base compensation as in
effect on the date of this Agreement or as the same may have
been increased from time to time;
(iii) The failure by POTTERS to continue to provide
ELB with compensation and benefits substantially similar to
those provided to him under any of the employee benefit plans
in which ELB becomes a participant or the taking of any action
by POTTERS which would directly or indirectly reduce any of
such benefits or deprive ELB of any material fringe benefit
potentially enjoyed by him at the time of the CHANGE OF
CONTROL;
(iv) The assignment to ELB of material duties and
responsibilities other than those normally associated with his
position as referenced in the recitals above; or
(v) A material diminution or reduction in ELB's
responsibilities or authority (including reporting
responsibilities) in connection with his employment with
POTTERS.
-2-
<PAGE> 3
Within ten (10) days after the voluntary termination of ELB's employment in
accordance with this Section 1(b), POTTERS shall pay to ELB or, in the event of
the death of ELB, to the estate of ELB, an amount equal to the SEVERANCE
PAYMENT, subject to standard withholding.
(c) In the event the employment of ELB is terminated under
circumstances other than as set forth in paragraphs (a) and (b) of this Section
1, ELB shall not be entitled to any severance pay or benefits. Without limiting
the generality of the foregoing sentence, ELB acknowledges that this Agreement
is not a contract of employment; that ELB has no guaranteed term of employment;
and that ELB is an employee at will, subject to termination at any time, with or
without notice or cause.
Section 2. DEFINITIONS. (a) A "CHANGE OF CONTROL" shall be deemed to
have occurred in the event that, at any time during the TERM, either any person
or entity obtains "conclusive control" of POTTERS within the meaning of 12
C.F.R. ss.574.4(a), or any person or entity obtains "rebuttable control" of
POTTERS within the meaning of 12 C.F.R. ss.574.4(b) and has not rebutted control
in accordance with 12 C.F.R. ss.574.4(e).
(b) "JUST CAUSE" shall mean personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, failure or
refusal to perform the duties and responsibilities assigned by the Boards of
Directors of POTTERS, violation of any law, rule, regulation or final
cease-and-desist order (other than traffic violations or similar offenses),
conviction of a felony or for fraud or embezzlement, or material breach of any
provision of this Agreement.
(c) "SEVERANCE PAYMENT" shall mean the product of 1.2, multiplied by
the TOTAL REMUNERATION paid by POTTERS to ELB during the calendar year preceding
termination of employment.
(d) "TOTAL REMUNERATION" shall mean the sum of (i) base salary, (ii)
bonuses, (iii) incentives, (iv) commissions and (v) other benefits, including,
but not limited to, health and life insurance, club dues, contributions made by
POTTERS to the 401-K plan and the Employee Stock Ownership Plan and the taxable
value of an employer-provided automobile, if any.
Section 3. TERM. The term of this Agreement shall commence on the date
first above written and shall continue for a period of three (3) years
thereafter (herein referred to as the "TERM"); provided, however, that in the
event of a CHANGE OF CONTROL during the third year of the TERM, the TERM shall,
automatically and without further act, be extended for a period of fifteen (15)
months following such CHANGE OF CONTROL.
Section 4. SPECIAL REGULATORY EVENTS. Notwithstanding Section 1 of this
Agreement, the obligations of POTTERS to ELB shall be as follows in the event of
the following circumstances:
-3-
<PAGE> 4
(a) If ELB is suspended and/or temporarily prohibited from
participating in the conduct of the POTTERS' affairs by a notice served under
section 8(e) (3) or (g) (1) of the Federal Deposit Insurance Act (hereinafter
referred to as the "FDIA"), POTTERS' obligations under this Agreement shall be
suspended as of the date of service of such notice, unless stayed by appropriate
proceedings.
(b) If ELB is removed and/or permanently prohibited from participating
in the conduct of POTTERS' affairs by an order issued under Section 8(e) (4) or
(g) (l) of the FDIA, all obligations of POTTERS under this Agreement shall
terminate as of the effective date of such order; provided, however, that vested
rights of ELB shall not be affected by such termination.
(c) If POTTERS is in default, as defined in section 3(x) (1) of the
FDIA, all obligations under this Agreement shall terminate as of the date of
default; provided, however, that vested rights of ELB shall not be affected.
(d) All obligations under this Agreement shall be terminated, except to
the extent of a determination that the continuation of this Agreement is
necessary for the continued operation of POTTERS, (i) by the Director of the
Office of Thrift Supervision (hereinafter referred to as the "OTS"), or his or
her designee at the time that the Federal Deposit Insurance Corporation enters
into an agreement to provide assistance to or on behalf of POTTERS under the
authority contained in Section 13(c) of the FDIA or (ii) by the Director of the
OTS, or his or her designee, at any time the Director of the OTS, or his or her
designee, approves a supervisory merger to resolve problems related to the
operation of POTTERS or when POTTERS is determined by the Director of the OTS to
be in an unsafe or unsound condition. No vested rights of ELB shall be affected
by any such action.
Section 5. NONASSIGNABILITY. Neither this Agreement nor any right or
interest hereunder shall be assignable by ELB without POTTERS' prior written
consent; provided, however, that nothing in this Section 5 shall preclude ELB
from designating a beneficiary to receive any benefits payable hereunder upon
his death.
Section 6. NO ATTACHMENT. Except as required by law, no right to
receive payment under this Agreement shall be subject to anticipation,
commutation, alienation, sale, assignment, encumbrance, charge, pledge or
hypothecation or to execution, attachment, levy, or similar process of
assignment by operation of law, and any attempt, voluntary or involuntary, to
effect any such action shall be null, void and of no effect.
Section 7. BINDING AGREEMENT. This Agreement shall be binding upon, and
inure to the benefit of, ELB and POTTERS.
Section 8. WAIVER. No term or condition of this Agreement shall be
deemed to have been waived, nor shall there be an estoppel against the
enforcement of any provision of this Agreement, except by written instrument of
the party charged with such waiver or estoppel. No such written waiver shall be
deemed a continuing waiver, unless specifically stated therein, and each waiver
shall operate only as to the specific term or condition waived and shall not
constitute
-4-
<PAGE> 5
a waiver of such term or condition for the future or as to any act other than
the act specifically waived.
Section 9. SEVERABILITY. If, for any reason, any provision of this
Agreement is held invalid, such invalidity shall not affect the other provisions
of this Agreement not held so invalid, and each such other provision shall, to
the full extent consistent with applicable law, continue in full force and
effect. If this Agreement is held invalid or cannot be enforced, then any prior
Agreement between POTTERS (or any predecessor thereof) and ELB shall be deemed
reinstated to the full extent permitted by law, as if this Agreement had not
been executed.
Section 10. HEADINGS. The headings of the paragraphs herein are
included solely for convenience of reference and shall not control the meaning
or interpretation of any of the provisions of this Agreement.
Section 11. GOVERNING LAW. This Agreement has been executed and
delivered in the State of Ohio and its validity, interpretation, performance,
and enforcement shall be governed by the laws of the State of Ohio, except to
the extent that federal law is governing.
Section 12. EFFECT OF PRIOR AGREEMENTS. This Agreement contains the
entire understanding between the parties hereto and supersedes any prior
employment agreement between POTTERS and ELB, each of which is hereby terminated
and is of no further force or effect.
Section 13. NOTICES. Any notice or other communication required or
permitted pursuant to this Agreement shall be deemed delivered if such notice or
communication is in writing and is delivered personally or by facsimile
transmission or is deposited in the United States mail, postage prepaid,
addressed as follows:
If to Potters Financial Corporation and/or The Potters Savings and Loan
Company:
Potters Financial Corporation
------------------------------
------------------------------
With copies to:
John C. Vorys, Esq.
Vorys, Sater, Seymour and Pease
Atrium Two, Suite 2100
221 East Fourth Street
Cincinnati, Ohio 45201-0236
If to ELB to:
-5-
<PAGE> 6
Edward L. Baumgardner
------------------------------
------------------------------
IN WITNESS WHEREOF, Potters Financial Corporation and The
Potters Savings and Loan Company have caused this Agreement to be executed by
their duly authorized officers, and ELB has signed this Agreement, each as of
the day and year first above written.
Attest: POTTERS FINANCIAL CORPORATION
Beverly J. Neer By William L. Miller
- ---------------- ---------------------------
---------------------------
its Chairman
---------------------------
Attest: THE POTTERS SAVINGS AND LOAN
COMPANY
Beverly J. Neer By William L. Miller
- ----------------- ----------------------------
----------------------------
its Chairman
----------------------------
Attest:
Beverly J. Neer Edward L. Baumgardner
- ----------------- -------------------------------
Edward L. Baumgardner
-6-
<PAGE> 1
Exhibit 10.6
AGREEMENT
---------
THIS AGREEMENT, entered into this 27th day of February, 1997, by and
between Potters Financial Corporation, a savings and loan holding company
incorporated under Ohio law (hereinafter referred to as "PFC"); The Potters
Savings and Loan Company, a savings and loan association incorporated under Ohio
law and a wholly-owned subsidiary of PFC (hereinafter referred to as "PSL"); and
Albert E. Sampson, an individual (hereinafter referred to as the "AES");
WITNESSETH:
WHEREAS, AES is an officer of PFC and PSL (hereinafter collectively
referred to as "POTTERS");
WHEREAS, the Boards of Directors of POTTERS desire to retain the
services of AES as an officer of POTTERS;
WHEREAS, AES desires to continue to serve as an officer of POTTERS; and
WHEREAS, AES and POTTERS desire to enter into this Agreement to set
forth the rights and obligations of AES and POTTERS in the event of the
termination of AES's employment under the circumstances set forth in this
Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, POTTERS and AES hereby agree as follows:
Section l. TERMINATION OF EMPLOYMENT.
(a) In the event of the termination of the employment of AES (i)
without AES's prior written consent, (ii) for any reason other than JUST CAUSE
(hereafter defined) and (iii) in connection with or within one year of a CHANGE
OF CONTROL (hereinafter defined) of POTTERS, then the following shall occur:
(I) POTTERS shall pay to AES or, in the event of the
death of AES, to the estate of AES, an amount equal to the
SEVERANCE PAYMENT, subject to standard withholding, within ten
(10) days after such termination;
-7-
<PAGE> 2
(II) To the extent permitted by the benefit plans of
POTTERS, AES and his dependents shall continue to be covered
under all such plans at POTTERS' expense as if AES were still
employed by POTTERS until the earliest of the expiration of
the TERM (hereinafter defined) or the date on which AES is
included in another employer's benefit plans as a full-time
employee; and
(III) AES shall not be required to mitigate the
amount of any payment provided for in this Agreement by
seeking other employment or otherwise, nor shall any amounts
received from other employment or otherwise by AES offset in
any manner the obligations of POTTERS hereunder, except as
specifically stated in subparagraph (II).
In the event that payments pursuant to this Section 1(a) would result in the
imposition of a penalty tax pursuant to Section 280G(b) (3) of the Internal
Revenue Code of 1986, as amended, and the regulations promulgated thereunder,
such payments shall be reduced to the maximum amount which may be paid under
Section 280G without exceeding such limits.
(b) In the event of the occurrence of any of the following events (i)
without the prior written consent of AES and (ii) within one year following a
CHANGE OF CONTROL of POTTERS, AES may voluntarily terminate his employment with
POTTERS:
(i) The requirement that AES move his personal
residence or perform his principal executive functions more
than thirty-five (35) miles from his primary office as of the
date of this Agreement;
(ii) A reduction in AES's base compensation as in
effect on the date of this Agreement or as the same may have
been increased from time to time;
(iii) The failure by POTTERS to continue to provide
AES with compensation and benefits substantially similar to
those provided to him under any of the employee benefit plans
in which AES becomes a participant or the taking of any action
by POTTERS which would directly or indirectly reduce any of
such benefits or deprive AES of any material fringe benefit
potentially enjoyed by him at the time of the CHANGE OF
CONTROL;
(iv) The assignment to AES of material duties and
responsibilities other than those normally associated with his
position as referenced in the recitals above; or
(v) A material diminution or reduction in AES's
responsibilities or authority (including reporting
responsibilities) in connection with his employment with
POTTERS.
-8-
<PAGE> 3
Within ten (10) days after the voluntary termination of AES's employment in
accordance with this Section 1(b), POTTERS shall pay to AES or, in the event of
the death of AES, to the estate of AES, an amount equal to the SEVERANCE
PAYMENT, subject to standard withholding.
(c) In the event the employment of AES is terminated under
circumstances other than as set forth in paragraphs (a) and (b) of this Section
1, AES shall not be entitled to any severance pay or benefits. Without limiting
the generality of the foregoing sentence, AES acknowledges that this Agreement
is not a contract of employment; that AES has no guaranteed term of employment;
and that AES is an employee at will, subject to termination at any time, with or
without notice or cause.
Section 2. DEFINITIONS. (a) A "CHANGE OF CONTROL" shall be deemed to
have occurred in the event that, at any time during the TERM, either any person
or entity obtains "conclusive control" of POTTERS within the meaning of 12
C.F.R. ss.574.4(a), or any person or entity obtains "rebuttable control" of
POTTERS within the meaning of 12 C.F.R. ss.574.4(b) and has not rebutted control
in accordance with 12 C.F.R. ss.574.4(e).
(b) "JUST CAUSE" shall mean personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, failure or
refusal to perform the duties and responsibilities assigned by the Boards of
Directors of POTTERS, violation of any law, rule, regulation or final
cease-and-desist order (other than traffic violations or similar offenses),
conviction of a felony or for fraud or embezzlement, or material breach of any
provision of this Agreement.
(c) "SEVERANCE PAYMENT" shall mean the TOTAL REMUNERATION paid by
POTTERS to AES for the calendar year preceding termination of employment.
(d) "TOTAL REMUNERATION" shall mean the sum of (i) base salary, (ii)
bonuses, (iii) incentives, (iv) commissions and (v) other benefits, including,
but not limited to, health and life insurance, club dues, contributions made by
POTTERS to the 401-K plan and the Employee Stock Ownership Plan and the taxable
value of an employer-provided automobile, if any.
Section 3. TERM. The term of this Agreement shall commence on the date
first above written and shall continue for a period of three (3) years
thereafter (herein referred to as the "TERM"); provided, however, that in the
event of a CHANGE OF CONTROL during the third year of the TERM, the TERM shall,
automatically and without further act, be extended for a period of fifteen (15)
months following such CHANGE OF CONTROL.
Section 4. SPECIAL REGULATORY EVENTS. Notwithstanding Section 1 of this
Agreement, the obligations of POTTERS to AES shall be as follows in the event of
the following circumstances:
(a) If AES is suspended and/or temporarily prohibited from
participating in the conduct of the POTTERS' affairs by a notice served under
section 8(e) (3) or (g) (1) of the
-9-
<PAGE> 4
Federal Deposit Insurance Act (hereinafter referred to as the "FDIA"), POTTERS'
obligations under this Agreement shall be suspended as of the date of service of
such notice, unless stayed by appropriate proceedings.
(b) If AES is removed and/or permanently prohibited from participating
in the conduct of POTTERS' affairs by an order issued under Section 8(e) (4) or
(g) (l) of the FDIA, all obligations of POTTERS under this Agreement shall
terminate as of the effective date of such order; provided, however, that vested
rights of AES shall not be affected by such termination.
(c) If POTTERS is in default, as defined in section 3(x) (1) of the
FDIA, all obligations under this Agreement shall terminate as of the date of
default; provided, however, that vested rights of AES shall not be affected.
(d) All obligations under this Agreement shall be terminated, except to
the extent of a determination that the continuation of this Agreement is
necessary for the continued operation of POTTERS, (i) by the Director of the
Office of Thrift Supervision (hereinafter referred to as the "OTS"), or his or
her designee at the time that the Federal Deposit Insurance Corporation enters
into an agreement to provide assistance to or on behalf of POTTERS under the
authority contained in Section 13(c) of the FDIA or (ii) by the Director of the
OTS, or his or her designee, at any time the Director of the OTS, or his or her
designee, approves a supervisory merger to resolve problems related to the
operation of POTTERS or when POTTERS is determined by the Director of the OTS to
be in an unsafe or unsound condition. No vested rights of AES shall be affected
by any such action.
Section 5. NONASSIGNABILITY. Neither this Agreement nor any right or
interest hereunder shall be assignable by AES without POTTERS' prior written
consent; provided, however, that nothing in this Section 5 shall preclude AES
from designating a beneficiary to receive any benefits payable hereunder upon
his death.
Section 6. NO ATTACHMENT. Except as required by law, no right to
receive payment under this Agreement shall be subject to anticipation,
commutation, alienation, sale, assignment, encumbrance, charge, pledge or
hypothecation or to execution, attachment, levy, or similar process of
assignment by operation of law, and any attempt, voluntary or involuntary, to
effect any such action shall be null, void and of no effect.
Section 7. BINDING AGREEMENT. This Agreement shall be binding upon, and
inure to the benefit of, AES and POTTERS.
Section 8. WAIVER. No term or condition of this Agreement shall be
deemed to have been waived, nor shall there be an estoppel against the
enforcement of any provision of this Agreement, except by written instrument of
the party charged with such waiver or estoppel. No such written waiver shall be
deemed a continuing waiver, unless specifically stated therein, and each waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than the act specifically waived.
-10-
<PAGE> 5
Section 9. SEVERABILITY. If, for any reason, any provision of this
Agreement is held invalid, such invalidity shall not affect the other provisions
of this Agreement not held so invalid, and each such other provision shall, to
the full extent consistent with applicable law, continue in full force and
effect. If this Agreement is held invalid or cannot be enforced, then any prior
Agreement between POTTERS (or any predecessor thereof) and AES shall be deemed
reinstated to the full extent permitted by law, as if this Agreement had not
been executed.
Section 10. HEADINGS. The headings of the paragraphs herein are
included solely for convenience of reference and shall not control the meaning
or interpretation of any of the provisions of this Agreement.
Section 11. GOVERNING LAW. This Agreement has been executed and
delivered in the State of Ohio and its validity, interpretation, performance,
and enforcement shall be governed by the laws of the State of Ohio, except to
the extent that federal law is governing.
Section 12. EFFECT OF PRIOR AGREEMENTS. This Agreement contains the
entire understanding between the parties hereto and supersedes any prior
employment agreement between POTTERS and AES, each of which is hereby terminated
and is of no further force or effect.
Section 13. NOTICES. Any notice or other communication required or
permitted pursuant to this Agreement shall be deemed delivered if such notice or
communication is in writing and is delivered personally or by facsimile
transmission or is deposited in the United States mail, postage prepaid,
addressed as follows:
If to Potters Financial Corporation and/or The Potters Savings and Loan
Company:
Potters Financial Corporation
-----------------------------
-----------------------------
With copies to:
John C. Vorys, Esq.
Vorys, Sater, Seymour and Pease
Atrium Two, Suite 2100
221 East Fourth Street
Cincinnati, Ohio 45201-0236
If to AES to:
Albert E. Sampson
-----------------------------
-----------------------------
-11-
<PAGE> 6
IN WITNESS WHEREOF, Potters Financial Corporation and The Potters
Savings and Loan Company have caused this Agreement to be executed by their duly
authorized officers, and AES has signed this Agreement, each as of the day and
year first above written.
Attest: POTTERS FINANCIAL CORPORATION
Beverly J. Neer By William L. Miller
- ---------------- ---------------------------
---------------------------
its Chairman
---------------------------
Attest: THE POTTERS SAVINGS AND LOAN
COMPANY
Beverly J. Neer By William L. Miller
- ----------------- ----------------------------
----------------------------
its Chairman
----------------------------
Attest:
Beverly J. Neer Albert E. Sampson
- ----------------- -------------------------------
Albert E. Sampson
-12-
<PAGE> 1
EXHIBIT 13
BUSINESS OF POTTERS FINANCIAL CORPORATION
Potters Financial Corporation, a unitary savings and loan holding company
incorporated under the laws of the State of Ohio ("PFC"), owns all of the issued
and outstanding common shares of The Potters Savings and Loan Company ("Potters"
or the "Company"), a savings and loan association incorporated under the laws of
the State of Ohio. On March 11, 1996, PFC acquired all of the common shares of
Potters in a holding company reorganization. PFC's activities have been limited
primarily to holding the common shares of Potters.
Serving the East Liverpool, Ohio, area since 1889 and headquartered at 519
Broadway in East Liverpool, PFC, through Potters, conducts business from its
four full-service branch offices located in the City of East Liverpool and the
nearby neighborhoods of Glenmoor and Calcutta. Potters is principally engaged in
the business of originating real estate loans secured by first mortgages for the
purchase, construction or improvement of one-to-four family residences located
in Potters' primary market area. Potters also originates loans secured by
multifamily and nonresidential real estate, various types of consumer loans and,
to a lesser extent, commercial loans. In addition to originating loans, Potters
also purchases one-to-four family real estate loans within the State of Ohio and
invests in U.S. Government and agency obligations, interest-bearing deposits in
other financial institutions, mortgage-backed securities and other investments
permitted by applicable law. Funds for lending and other investment activities
are obtained primarily from savings deposits, loans and security repayments and
maturities and Federal Home Loan Bank advances.
As a savings and loan holding company, PFC is subject to regulation, supervision
and examination by the Office of Thrift Supervision of the United States
Department of the Treasury (the "OTS"). As a savings and loan association
incorporated under the laws of the State of Ohio, Potters is subject to
regulation, supervision and examination by the OTS, the Federal Deposit
Insurance Corporation (the "FDIC") and the Ohio Division of Financial
Institutions of the Ohio Department of Commerce. Deposits in Potters are insured
up to applicable limits by the FDIC. Potters is also a member of the Federal
Home Loan Bank of Cincinnati (the "FHLB").
COMMON SHARES
As of March 10, 1997, there were 486,830 common shares of PFC outstanding and
held by approximately 335 shareholders. Prices for PFC's common shares are
quoted on The Nasdaq Small Cap Market ("Nasdaq") under the symbol PTRS. Five
brokerage firms currently serve as market makers for PFC's common shares: F.J.
Morrissey & Co., Inc., Howe Barnes Investments, Inc., Herzog, Heine, Geduld,
Inc., The Ohio Company and H.C. Wainwright & Co.
PRICE RANGE OF COMMON SHARES
The table below shows the range of high and low sales prices for the common
shares of PFC as quoted by Nasdaq. Such prices do not represent actual
transactions and do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
1996 1995
---- Dividends ---- Dividends
Quarter Ended High Low Per Share High Low Per Share
---- --- ---------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C>
March 31 $ 18.50 $ 17.00 $ -- $ 13.75 $ 12.25 $ --
June 30 17.75 16.00 0.12 16.25 14.00 0.10
September 30 16.25 15.50 0.06 16.75 16.00 --
December 31 20.00 15.75 0.07 17.00 16.75 0.11
</TABLE>
3
<PAGE> 2
POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 13) $ 4,376 $ 3,076
Interest-bearing deposits with Federal Home Loan Bank 51 2,675
Federal funds sold and cash management account 158 5,479
--------- ---------
Cash and cash equivalents 4,585 11,230
Securities available for sale,
at estimated fair value (Note 2) 10,878 10,952
Securities held to maturity (estimated
fair value: December 31, 1996 - $31,576;
December 31, 1995 - $37,940) (Note 2) 31,913 38,112
Federal Home Loan Bank stock (Note 7) 822 709
Loans receivable, net (Notes 3 and 7) 62,450 49,889
Accrued interest receivable (Note 4) 778 784
Premises and equipment, net (Note 5) 1,738 1,585
Other assets 1,008 981
--------- ---------
Total assets $ 114,172 $ 114,242
========= =========
LIABILITIES
Deposits (Note 6) $ 97,283 $ 98,697
Federal Home Loan Bank advances (Note 7) 5,085 3,018
Accrued expenses and other liabilities 1,228 1,338
--------- ---------
Total liabilities 103,596 103,053
--------- ---------
Commitments and contingencies (Note 13)
SHAREHOLDERS' EQUITY (Note 16)
Common shares, no par value at December 31, 1996;
$1.00 par value at December 31, 1995
Authorized: 10,000,000 shares
Issued: 538,470 shares in 1996 and
532,809 shares in 1995 533
Paid-in capital 4,880 4,280
Treasury shares, 26,640 at cost (436)
Unearned compensation on
recognition and retention plan (Note 10) (100) (118)
Unrealized loss on securities
available for sale, net of tax (94) (23)
Retained earnings, substantially restricted 6,326 6,517
--------- ---------
Total shareholders' equity 10,576 11,189
--------- ---------
Total liabilities and shareholders' equity $ 114,172 $ 114,242
========= =========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 3
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three years ended December 31, 1996
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 4,534 $4,441 $4,318
Securities 3,491 3,436 3,199
Other interest income 181 188 69
------- ------ ------
Total interest income 8,206 8,065 7,586
------- ------ ------
INTEREST EXPENSE
Interest on deposits 4,189 4,156 3,911
Other interest expense 340 115 32
------- ------ ------
Total interest expense 4,529 4,271 3,943
------- ------ ------
NET INTEREST INCOME 3,677 3,794 3,643
Provision for loan losses (Note 3) 249 245 377
------- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,428 3,549 3,266
Noninterest income (Note 14) 267 257 267
Noninterest expense (Note 14) 3,688 2,977 2,868
------- ------ ------
INCOME BEFORE INCOME TAX 7 829 665
Income tax (Note 12) 68
------- ------ ------
NET INCOME (LOSS) $ (61) $ 829 $ 665
======= ====== ======
Earnings (loss) per common share
(Note 1) $ (0.12) $ 1.56 $ 1.26
======= ====== ======
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 4
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three years ended December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Recognition
Common Paid-in Treasury and
Shares Capital shares Retention Plan
------ ------- ------ --------------
<S> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1994 $ 529 $4,295 $ (127)
Net income for the year ended December 31, 1994
Issuance of 809 common shares for the
exercise of stock options 1 7
Conversion costs (49)
Purchase of 3,135 common shares for the
recognition and retention plan (35)
Cash dividends declared ($.20 per common share)
Recognition and retention plan shares earned 22
Change in unrealized loss on securities
available for sale
-------- ------ --------- -------
BALANCE - DECEMBER 31, 1994 530 4,253 (140)
Net income for the year ended December 31, 1995
Issuance of 3,000 common shares for the
exercise of stock options 3 27
Cash dividends declared ($.21 per common share)
Recognition and retention plan shares earned 22
Change in unrealized loss on securities
available for sale
-------- ------ --------- -------
BALANCE - DECEMBER 31, 1995 533 4,280 (118)
Net loss for the year ended December 31, 1996
Holding company formation (533) 533
Issuance of 5,661 common shares for the exercise
of stock options 57
Purchase of 26,640 treasury shares $ (436)
Cash dividends declared ($.25 per common share)
Recognition and retention plan shares earned 18
Tax benefit arising from stock option and
recognition and retention plan shares 10
Change in unrealized loss on securities
available for sale
-------- ------ --------- -------
BALANCE - DECEMBER 31, 1996 $ 0 $4,880 $ (436) $ (100)
======== ====== ========= =======
</TABLE>
<TABLE>
<CAPTION>
Unrealized gain
(loss) on securities Retained
available for sale earnings Total
------------------ -------- -----
<S> <C> <C> <C>
BALANCE - JANUARY 1, 1994 $ 27 $ 5,240 $ 9,964
Net income for the year ended December 31, 1994 665 665
Issuance of 809 common shares for the
exercise of stock options 8
Conversion costs (49)
Purchase of 3,135 common shares for the
recognition and retention plan (35)
Cash dividends declared ($.20 per common share) (106) (106)
Recognition and retention plan shares earned 22
Change in unrealized loss on securities
available for sale (676) (676)
-------- ------ -------
BALANCE - DECEMBER 31, 1994 (649) 5,799 9,793
Net income for the year ended December 31, 1995 829 829
Issuance of 3,000 common shares for the
exercise of stock options 30
Cash dividends declared ($.21 per common share) (111) (111)
Recognition and retention plan shares earned 22
Change in unrealized loss on securities
available for sale 626 626
-------- ------ -------
BALANCE - DECEMBER 31, 1995 (23) 6,517 11,189
Net loss for the year ended December 31, 1996 (61) (61)
Holding company formation
Issuance of 5,661 common shares for the exercise
of stock options 57
Purchase of 26,640 treasury shares (436)
Cash dividends declared ($.25 per common share) (130) (130)
Recognition and retention plan shares earned 18
Tax benefit arising from stock option and
recognition and retention plan shares 10
Change in unrealized loss on securities
available for sale (71) (71)
-------- ------ --------
BALANCE - DECEMBER 31, 1996 $ (94) $6,326 $ 10,576
======== ====== ========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 5
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three years ended December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (61) $ 829 $ 665
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 154 130 177
Provision for losses 249 245 379
Net investment amortization 61 96 180
Net (gain) loss on:
Investment and mortgage-backed securities 1 (3) (1)
Sale of loans (1) (9) (12)
Sale of foreclosed real estate and
repossessed assets (39) 2 (140)
Sale of real estate held for investment (9)
Sale of other assets (2)
Stock dividend on FHLB stock (51) (48) (36)
Change in
Deferred taxes (243) (190)
Other assets and liabilities 230 19 (101)
-------- ------- --------
Net cash from operating activities 541 1,018 912
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing balances with banks 100 100
Securities available for sale
Proceeds from sales 13,225 3,385 7,666
Proceeds from calls and maturities 10,596 2,250
Purchases (23,856) (4,328) (3,228)
Securities held to maturity
Proceeds from repayments, calls and maturities 7,120 7,664 7,250
Purchases (984) (3,253) (14,808)
Purchase of FHLB stock (62) (16)
Redemption of FHLB stock 24
Net (increase) decrease in loans 329 (1,757) (4,168)
Loans purchased (13,678)
Proceeds from sale of loans held for sale 513 1,618 1,038
Proceeds from sale of foreclosed real estate
and repossessed assets 155 40 951
Proceeds from sale of real estate held
for investment 96
Property and equipment expenditures (304) (323) (100)
-------- ------- --------
Net cash from investing activities (6,946) 5,404 (5,203)
-------- ------- --------
</TABLE>
(Continued)
8
<PAGE> 6
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the three years ended December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (1,414) (1,271) (1,332)
Proceeds from FHLB advances 15,580 4,100 6,750
Repayments of FHLB advances (13,513) (1,082) (6,750)
Net change in official checks (413) 88 (1,602)
Net increase in advances from
borrowers for taxes and insurance 29 16 32
Purchase of treasury shares (436)
Issuance of common shares for
exercise of stock options 57 30 8
Conversion costs (49)
Contribution to recognition and retention plan (35)
Cash dividends paid (130) (111) (106)
---- ---- ----
Net cash from financing activities (240) 1,770 (3,084)
---- ----- ------
Net change in cash and cash equivalents (6,645) 8,192 (7,375)
Cash and cash equivalents at beginning of year 11,230 3,038 10,413
------ ----- ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,585 $ 11,230 $ 3,038
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 4,519 $ 4,256 $ 3,949
Income taxes 116 258 272
Noncash transactions
Transfer from loans to foreclosed real estate and
repossessed assets 23 97 448
Transfer of investment and mortgage-backed
securities to available for sale at adoption of
new accounting pronouncement 8,582
Transfer from investment securities available for sale
to investment securities held to maturity (Note 2) 1,000
Transfer from investment securities held to maturity
to investment securities available for sale (Note 2) 1,501
Recognition and retention plan shares earned 18 22 22
Sale of land financed by the Company 130
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 7
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Potters Financial Corporation ("PFC" or the
"Corporation") 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" or the "Company"), also headquartered in East Liverpool,
Ohio. On March 11, 1996, PFC was formed through an internal reorganization in
which each shareholder of Potters received one common share of PFC for each
common share of Potters owned. In an internal reorganization, the historical
cost basis of assets and liabilities is carried forward.
Potters provides financial products and services through its four full-service
branch offices, two of which are located in East Liverpool, Ohio, one of which
is located in Glenmoor, Ohio and one of which is located in Calcutta, Ohio.
Potters' primary market area consists of the City of East Liverpool, Ohio, and
the contiguous areas of Columbiana and Jefferson Counties, Ohio and Hancock
County, West Virginia. Potters is principally engaged in the business of
originating real estate loans secured by first mortgages for the purchase,
construction or improvement of one-to-four family residences and accepting
demand, savings and time deposits. Potters also provides loans secured by
multifamily and nonresidential real estate, various types of consumer loans and,
to a lesser extent, commercial loans. In addition to originating loans, Potters
also purchases one-to-four family real estate loans within the State of Ohio and
invests in U.S. government and agency obligations, mortgage-backed securities,
interest-bearing deposits in other financial institutions and other investment
securities. The primary source of income for the Company is interest on loans
and securities.
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of PFC and Potters. All significant intercompany
transactions and balances have been eliminated in consolidation.
Securities: Potters classifies debt and marketable equity securities as held to
maturity, trading or available for sale. Securities held to maturity are those
that management has the positive intent and ability to hold to maturity, and are
carried at amortized cost. Securities classified as available for sale are those
that may be sold before maturity, and are carried at fair value with unrealized
gains and losses included as a separate component of shareholders' equity, net
of tax. The Company held no trading securities during any period presented.
Realized gains or losses on dispositions are based on net proceeds and the
adjusted carrying amount of securities sold, using the specific identification
method. Income on securities consists of interest on such securities, adjusted
for amortization and accretion of purchased premiums and discounts using the
level yield method.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for losses on loans is maintained. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the risk
of the loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations including their financial position and collateral values, and other
factors and estimates which are subject to change over time. While management
may periodically allocate portions of the allowance for specific problem loan
situations, the whole allowance is available for any loan charge-offs that
occur. A loan is charged-off against the allowance by management when deemed
uncollectible, although collection efforts continue and future recoveries may
occur.
(Continued)
10
<PAGE> 8
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statement of Financial Accounting Standards ("SFAS") Nos. 114, "Accounting by
Creditors for Impairment of a Loan" and 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," were adopted on
January 1, 1995, and require recognition of loan impairment. A loan is
considered impaired when it is anticipated that all principal and interest
amounts will not be collected according to the terms of the loan contract.
Impaired loans are carried at the present value of expected future cash flows,
discounted using the loan's effective interest rate, or at the fair value of
collateral if the loan is collateral dependent. A portion of the allowance for
loan losses is allocated to such loans. The adoption of SFAS Nos. 114 and 118
also eliminated the in-substance foreclosure designation. The impact to the
Company of adopting the accounting standards was the reclassification of two
loans totaling $363,000, previously designated as in-substance foreclosures, and
reported in foreclosed real estate, to loans. However, no allocation of existing
allowances or additional allowance was needed because such loans have been
reported at the fair value of the underlying collateral less estimated costs to
sell.
The carrying values of impaired loans are periodically adjusted to reflect cash
payments, revised estimates of future cash flows and increases in the present
value of expected cash flows due to the passage of time. Interest payments on
performing impaired loans are reported as interest income on a cash basis. All
other cash payments are recorded as reductions in the carrying value, while
increases or decreases due to changes in estimates of future payments and due to
the passage of time are reported as an increase or decrease in the provision for
loan losses.
Smaller-balance loans with similar characteristics are evaluated for impairment
in the aggregate. Such loans include residential real estate loans secured by
first mortgages on one-to-four family residences, residential construction
loans, and automobile, home equity and second mortgage loans. Commercial loans
and real estate loans secured by other properties are evaluated individually for
impairment. The Company's loan review system includes periodic analysis of
borrower operating results and financial condition. A loan is evaluated for
impairment when any delay or shortfall in payments occurs or when operating
results indicate cash flows inadequate to meet debt service requirements. Loans
are generally moved to nonaccrual status when 90 days or more past due. Such
delinquent loans are often also considered impaired. Impaired loans, or portions
thereof, are charged off when deemed uncollectible.
Loan Origination Fees and Costs: Loan origination fees and direct loan
origination costs are deferred and recognized over the contractual life of the
loans as a yield adjustment, using the level yield method. The net amount
deferred is reported as a reduction of loans.
Interest Income on Loans: Interest on loans is accrued over the term of the
loans based upon the principal outstanding. The accrual of interest is
discontinued when serious doubt exists as to the collectibility of the loan,
generally no later than when the loan becomes 90 days past due.
Mortgage Servicing Rights: Effective January 1, 1996, SFAS No. 122, "Accounting
for Mortgage Servicing Rights," was adopted. This statement requires companies
that engage in mortgage banking activities to recognize as separate assets
rights to service mortgage loans for others. Since no mortgage loans were sold
in 1996, the adoption of this statement did not impact 1996 financial
statements.
Foreclosed Real Estate: Real estate acquired through foreclosure or
deed-in-lieu-of-foreclosure is recorded at fair value less estimated costs to
sell. Upon foreclosure, the asset is transferred from loans to foreclosed real
estate at fair value, with any reduction in the carrying value reflected as a
loan loss. Estimated costs to sell are recorded through a valuation account with
a corresponding charge to income. Any subsequent reduction in the property's
value is recorded in the valuation account with a corresponding charge to
income.
(Continued)
11
<PAGE> 9
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Land is stated at cost. Buildings, furniture, fixtures
and equipment are stated at cost less accumulated depreciation. Depreciation is
computed based on the straight-line method over the estimated useful lives of
the respective properties and equipment. Premises and equipment are reviewed for
impairment when events indicate the carrying value may not be recoverable.
Maintenance and repairs are charged to expense as incurred and improvements are
capitalized.
Income Taxes: Deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The Corporation evaluates the collectibility of deferred
tax assets and provides a valuation allowance for the portion of such assets not
considered realizable.
Statement of Cash Flows: For purposes of this statement, cash and cash
equivalents include the Corporation's cash on hand, due from banks,
interest-bearing deposits with the Federal Home Loan Bank, federal funds sold
and cash management accounts. The Corporation reports net cash flows for
customer loan and deposit accounts, as well as deposits made with other
financial institutions.
Earnings per share: The weighted average number of shares outstanding for the
calculation of earnings per share was 518,922 in 1996, 529,924 in 1995 and
529,253 in 1994. The effect of exercising outstanding stock options discussed in
Note 9 would result in less than 3% dilution in earnings per common share, and
accordingly has not been included in the calculation.
Financial Statement Presentation: Certain items in the 1995 and 1994 financial
statements have been reclassified to correspond with the 1996 presentation.
Use of Estimates in Preparation of Financial Statements: Management must make
estimates and assumptions in preparing financial statements that affect the
amount reported therein and the disclosures provided. Such estimates and
assumptions may change in the future and future results could differ.
Areas involving the use of management's estimates and assumptions include, but
are not limited to, the allowance for loan losses, the realization of deferred
tax assets, fair values of certain securities, the determination and carrying
value of impaired loans, the carrying value of loans held for sale, the carrying
value of foreclosed real estate, the accrued liability for deferred
compensation, recognition and measurement of loss contingencies, depreciation of
premises and equipment, the actuarial present value of pension benefit
obligation, net periodic pension expense and prepaid pension costs recognized in
the Corporation's financial statements.
NOTE 2 - SECURITIES
At December 31, 1996, the amortized cost and estimated fair value of securities
are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities available for sale: (Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies $ 9,988 $ (135) $ 9,853
Mutual funds 1,034 (9) 1,025
-------- ------- --------
$ 11,022 $ (144) $ 10,878
======== ======= ========
</TABLE>
(Continued)
12
<PAGE> 10
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars in thousands)
Securities held to maturity:
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies $ 6,854 $ 7 $ (74) $ 6,787
Obligations of states and
political subdivisions 175 7 182
Other securities 866 6 872
Agency issued mortgage-
backed securities 24,018 82 (365) 23,735
--------- ------- ------- --------
$ 31,913 $ 102 $ (439) $ 31,576
========= ======= ======= ========
</TABLE>
The amortized cost and estimated fair value of debt securities at December 31,
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>
<CAPTION>
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 $ 22 $ 22
Due after one year through five years $ 7,995 $7,906 4,133 4,103
Due after five years through ten years 1,993 1,947 2,394 2,404
Due after ten years 1,346 1,312
Agency issued mortgage-
backed securities 24,018 23,735
------- ------ ------- -------
$ 9,988 $9,853 $31,913 $31,576
======= ====== ======= =======
</TABLE>
Proceeds from sales of securities available for sale during 1996 totaled $13.2
million and resulted in gross gains of $8,000 and gross losses of $12,000. Under
the provisions of SFAS No. 115, mortgage-backed securities held to maturity sold
after the security has paid down to 15% of the purchased principal balance are
reported as maturities. Mortgage-backed securities held to maturity meeting such
criteria totaling $1.4 million were sold with gross gains of $15,000 and gross
losses of $12,000.
The carrying value of securities pledged as collateral for public funds amounted
to $2.0 million at December 31, 1996.
(Continued)
13
<PAGE> 11
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated fair value of securities are as follows at
December 31, 1995:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- ---------
(Dollars in thousands)
Securities available for sale:
<S> <C> <C> <C> <C>
U. S. Government agencies $10,994 $ 8 $ (50) $ 10,952
------- ------- ------- ---------
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
Agency issued mortgage-
backed securities 29,240 120 (319) 29,041
------- ------- ------- ---------
$38,112 $ 188 $ (360) $ 37,940
------- ------- ------- ---------
</TABLE>
Proceeds from sales of securities available for sale during 1995 totaled $3.4
million and resulted in $3,000 of gross gains. Proceeds from sales of securities
available for sale totaled $7.7 million during 1994, resulting in no gain or
loss, while $800,000 of securities were called during the year, resulting in
gross gains of $1,000.
Two agency securities totaling $1.0 million were transferred from the "available
for sale" category to "held to maturity" during 1995. The transfers into "held
to maturity" occurred at the fair value of the securities on the date of the
transfer. The gain or loss on the securities at the date of the transfer is
amortized to shareholders' equity over the remaining lives of the securities.
Such amortization produced a net increase of $5,000 in shareholders' equity
during 1995.
To provide additional flexibility to meet liquidity and asset/liability
management needs, certain securities were reclassified from held to maturity to
available for sale. The securities, with an amortized cost of $1.5 million, were
transferred on December 22, 1995, as allowed by the SFAS No. 115 Implementation
Guide issued by the Financial Accounting Standards Board in November 1995. The
related unrealized gain of $4,000 is reflected net of tax as an increase to
shareholders' equity.
(Continued)
14
<PAGE> 12
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized below at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(Dollars in thousands)
<S> <C> <C>
Real estate mortgage loans
One-to-four family residences $ 49,086 $ 33,007
Nonresidential property 5,897 9,385
Multifamily and other 2,034 2,106
-------- --------
57,017 44,498
Consumer and other loans
Home equity loans 3,859 3,314
Commercial loans and unsecured lines of credit 1,316 1,563
Mobile home loans 906 1,280
Other 2,347 2,018
-------- --------
8,428 8,175
-------- --------
Total loan principal balances 65,445 52,673
Loans in process (466) (477)
Unearned interest (23) (49)
Premiums on purchased loans 147
Net deferred loan fees (23) (18)
Allowance for loan losses (2,630) (2,240)
-------- --------
$ 62,450 $ 49,889
======== ========
</TABLE>
Activity in the allowance for loan losses is as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 2,240 $ 1,963 $ 1,886
Provision for loan losses 249 245 377
Recoveries 679 70 11
Charge-offs (538) (38) (311)
------- ------- -------
Balance at end of year $ 2,630 $ 2,240 $ 1,963
======= ======= =======
</TABLE>
Nonaccrual and renegotiated loans totaled $1,728,000 and $2,438,000 at December
31, 1996 and 1995, respectively. Interest income that would have been recorded
on such loans under their original terms totaled approximately $204,000 and
$331,000 for the years ended December 31, 1996 and 1995, respectively. The
amounts included in interest income for such loans totaled approximately
$151,000 during 1996 and $225,000 during 1995. The Company is not committed to
lend additional funds to debtors whose loans have been modified.
(Continued)
15
<PAGE> 13
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 3 - LOANS RECEIVABLE (Continued)
Information regarding impaired loans is as follows for the years ended December
31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Average investment in impaired loans $403 $313
==== ====
Interest income recognized on impaired loans
including interest income recognized on a cash basis $ 23 $ 0
==== ====
Interest income recognized on impaired loans
on a cash basis $ 23 $ 0
==== ====
</TABLE>
Information regarding impaired loans, which are included in nonaccrual and
renegotiated loans disclosed above, at December 31, is as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
(Dollars in thousands)
<S> <C> <C>
Balance of impaired loans $ 365 $ 193
Less portion for which no allowance for
loan losses is allocated (365) (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
===== =====
</TABLE>
The Company has granted loans to certain of its executive officers and directors
and their related business interests. A summary of activity during 1996 on
related party loans aggregating $60,000 or more to any one related party is as
follows:
<TABLE>
<CAPTION>
1996
----
(Dollars in thousands)
<S> <C>
Balance at beginning of year $ 463
New loans and advances 388
Repayments (428)
---------
Balance at end of year $ 423
=========
</TABLE>
NOTE 4 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Loans $329 $232
Investment securities 308 348
Mortgage-backed securities 141 204
---- ----
$778 $784
==== ====
</TABLE>
(continued)
16
<PAGE> 14
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------ ------
(Dollars in thousands)
<S> <C> <C>
Land $ 190 $ 190
Buildings and improvements 2,440 2,499
Furniture and equipment 1,403 1,036
------ ------
Total cost 4,033 3,725
Accumulated depreciation 2,295 2,140
------ ------
$1,738 $1,585
====== ======
</TABLE>
NOTE 6 - DEPOSITS
Deposits are summarized as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand, NOW, and Super NOW
accounts, including noninterest
bearing deposits: December 31,
1996 - $556; December 31,
1995 - $219 $13,509 13.9% $11,752 11.9%
Passbook savings, statement
savings and club accounts 34,345 35.3 35,126 35.6
Money market demand accounts 1,978 2.0 2,439 2.5
Certificates of deposit 47,451 48.8 49,380 50.0
------- ------- ------- -------
$97,283 100.0% $98,697 100.0%
======= ======= ======= =======
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $4,278,000 and $4,391,000 at December 31, 1996 and
1995, respectively.
At December 31, 1996, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Maturities
----------
(Dollars in thousands)
<S> <C>
1997 $ 26,561
1998 8,076
1999 3,550
2000 6,369
2001 and thereafter 2,895
-----------
$ 47,451
===========
</TABLE>
(continued)
17
<PAGE> 15
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances as of December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Fixed-rate advances with monthly interest payments:
6.75% advance due March 8, 1996 $ 1,500
5.80% advance due May 28, 1997 $ 3,830
5.67% advance due November 27, 1998 750 750
Fixed-rate advances with monthly principal and interest payments:
6.05% advance due August 14, 1998 333 534
5.85% advance due September 1, 1999 172 234
---------- ----------
$ 5,085 $ 3,018
========== ==========
</TABLE>
FHLB advances obtained through the Community Investment Program are amortizing
loans requiring monthly principal payments. As of December 31, 1996, the
aggregate future minimum annual principal payments on FHLB advances are
$4,092,000 in 1997, $945,000 in 1998 and $48,000 in 1999. As of December 31,
1996, the Company was approved to borrow a total of $5.5 million in cash
management advances. FHLB advances are collateralized by all shares of FHLB
stock owned by Potters and by 100% of the Company's qualified real estate loan
portfolio.
NOTE 8 - EMPLOYEE BENEFITS PLANS
In December 1996, the Company's Board of Directors approved a resolution
terminating the Company's defined benefit pension plan. In October 1995, the
Board of Directors approved ceasing the accumulation of future benefits to plan
participants. As a result of these actions, a termination loss of $67,000 was
included in 1996 noninterest expense and a curtailment loss of $74,000 was
included in 1995 noninterest expense. The settlement of vested plan benefits is
expected to be completed in 1997. Participants may choose a lump sum payment,
the purchase of a nontransferrable deferred annuity contract or a transfer to
the 401(k) plan discussed below.
The pension plan was a qualified, noncontributory defined benefit retirement
plan covering substantially all of its qualified employees. Benefits were based
on each employee's years of service up to a maximum of 44 years, and the average
of the highest five consecutive annual salaries of the ten years prior to
retirement. Benefits were reduced by a specified percentage of the employee's
social security benefit. An employee became fully vested upon completion of 5
years of qualifying service. It was the policy of the Company to fund the
maximum amount that could be deducted for Federal income tax purposes using a
different actuarial cost method and different assumptions from those used for
financial reporting. Net periodic pension expense was $(11,000) in 1996, $63,000
in 1995 and $78,000 in 1994.
The Company adopted a 401(k) plan during 1996 covering substantially all its
employees. Eligible employees may contribute up to 15% of their compensation
subject to a maximum statutory limitation. The Company may make a partial
matching of employee contributions up to 3% of compensation and a discretionary
contribution to all participating employees. During 1996, the Company
contributed up to 3% of a participant's compensation in a matching contribution
and a discretionary contribution to all qualified participants of 3% of employee
compensation. Employee contributions are vested at all times. The Company's
matching cash contribution and related expense included in compensation and
employee benefits was approximately $36,000 during 1996. PFC common shares are
available as an investing option within the 401(k) to all participants. During
1996, the 401(k) plan purchased 132 common shares for participants. The Company
has received a determination letter from the Commissioner of the Internal
Revenue Service (the "Commissioner") approving the tax-qualified status of the
401(k) plan and its purchase of common shares of PFC.
(continued)
18
<PAGE> 16
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 9 - STOCK OPTION PLAN
On April 28, 1994, shareholders approved the Company's Stock Option Plan, under
which options to purchase the Company's common shares are granted to certain
directors, officers and other key employees of Potters. The Stock Option Plan is
administered by a committee of directors of the Company who select recipients
and establish awards pursuant to the Plan. The option exercise price is
determined by the Stock Option Committee at the time of grant but the purchase
price must be at least equal to the market price of the stock at the date of
grant. All options have a term of 10 years from the date of the grant.
A summary of the Company's stock options activity and related information is as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Outstanding - beginning
of year 47,149 $ 9.21 44,149 $ 10.00
Granted 1,400 15.50 6,000 16.75
Exercised (5,661) 10.00 (3,000) 10.00
------- ------
Outstanding - end of year 42,888 11.12 47,149 10.86
======= ======
Weighted average fair value
of options granted during
the year $ 4.74 $ 4.80
======= ======
</TABLE>
All options outstanding at December 31, 1996 and 1995 are exercisable. Options
available for grants totaled 542 shares at December 31, 1996.
SFAS No. 123 "Accounting for Stock-Based Compensation," effective for the
Company in 1996, encourages the use of a fair value-based method to account for
stock-based compensation plans such as the Company's stock option plan. As
allowed by SFAS No. 123, however, the Company has elected to continue to follow
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 as if the Company had accounted for its stock options under the
fair value method of that Statement. The fair value for options granted in 1995
and 1996 and the related pro forma effect on net income and earnings per share
was not material.
(Continued)
19
<PAGE> 17
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 10 - RECOGNITION AND RETENTION PLAN
In connection with the conversion of Potters from the mutual to stock form of
ownership (the "Conversion"), the Board of Directors adopted a Recognition and
Retention Plan ("RRP") as a means of providing directors and certain key
employees with an ownership interest in Potters, and now in PFC, in a manner
designed to reward and retain these individuals. One-fifth of the shares awarded
to each individual are earned and vested on each of the first five anniversaries
of the effective date of the RRP, which was December 30, 1993.
The Company contributed $162,000 to the RRP for the purpose of purchasing common
shares. On December 30, 1993, the RRP purchased 12,735 shares of common stock at
$10.00 per share. An additional 3,135 shares were purchased on January 7, 1994
at $11.00 per common share. RRP expense totaled $7,000, $28,000 and $50,000 for
1996, 1995 and 1994, respectively.
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN
At the time of the Conversion, Potters established an Employee Stock Ownership
Plan ("ESOP") for the benefit of substantially all of its employees. The Company
received a determination letter from the Commissioner approving the
tax-qualified status of the ESOP and its purchase of common shares of PFC.
Contributions to the ESOP are made at the Company's discretion and the Plan is
administered by a committee of directors of the Company. The Trustees vote all
shares owned by the ESOP, except in certain matters involving mergers and other
changes in corporate structure, when shares are voted by employees. ESOP expense
consists of the Company's contribution to the ESOP. ESOP shares are included in
weighted average shares outstanding for purposes of calculating earnings per
common share. Dividends on ESOP shares are recorded as a reduction of retained
earnings. Upon termination of employment, each participant may choose to receive
distributions in shares or cash. The ESOP contribution totaled $27,000, $40,000
and $20,000 for 1996, 1995 and 1994, respectively, and is reflected in
compensation and benefits expense. At year-end 1996 and 1995, the ESOP owned
3,400 and 2,000 shares of the Company's common stock, respectively, all of which
shares are to be allocated to employee accounts. At year-end 1996, the estimated
fair value of shares subject to the cash distribution option, based on the last
sales price quoted in 1996 on the Nasdaq Small Cap Market, totaled approximately
$68,000.
NOTE 12 - INCOME TAXES
An analysis of the provision for income tax is as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- ----
(Dollars in thousands)
<S> <C> <C> <C>
Current $ 137 $ 243 $190
Deferred (69) (16) 52
Change in valuation allowance (227) (242)
----- ----- ----
$ 68 $ 0 $ 0
===== ===== ====
</TABLE>
(Continued)
20
<PAGE> 18
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 12 - INCOME TAXES (Continued)
The components of the deferred tax assets and liabilities consist of the
following at December 31:
<TABLE>
<CAPTION>
1996 1995
----- -----
(Dollars in thousands)
<S> <C> <C>
Items giving rise to deferred tax assets:
Allowance for loan losses in excess of post-1987
tax bad debt reserve $ 785 $ 720
Depreciation 57 73
Capital loss carryforward 55 55
Nonaccrual loan interest 4 4
Unrealized loss on securities available for sale 50 14
Other 34 45
----- -----
985 911
----- -----
Items giving rise to deferred tax liabilities:
FHLB stock dividends (152) (134)
Other (10) (59)
----- -----
(162) (193)
----- -----
Net deferred tax asset $ 823 $ 718
===== =====
</TABLE>
The valuation allowance against deferred tax assets was eliminated in 1995 based
on the existence of adequate taxable income in prior years, future reversals of
existing taxable temporary differences and anticipated future taxable income.
No deferred tax liability is recognized for tax bad debt reserves arising before
December 31, 1987 for qualified thrift lenders unless it is apparent that the
difference will reverse in the foreseeable future. The Company's tax bad debt
reserves that arose prior to December 31, 1987 were approximately $2,480,000.
Unrecognized deferred taxes on these reserves totaled $843,000 at December 31,
1996.
The provision for income tax differs from amounts computed by using the
statutory federal income tax rate. The reconciled difference between the
financial statement provision and amounts computed by using the statutory rate
of 34% is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C>
Income tax computed at the statutory rate $ 2 $ 282 $ 226
Tax effect of
Tax exempt income (5) (5) (5)
Change in valuation allowance (227) (242)
Other 71 (50) 21
----- ----- -----
$ 68 $ 0 $ 0
===== ===== =====
</TABLE>
(Continued)
21
<PAGE> 19
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. These include the Company 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 the Company.
Lease Commitments: As of December 31, 1996, the Company is obligated to a
corporation owned by a director of the Company under an operating lease for
land. Net rent expense under this lease, included in occupancy and equipment
expense, was approximately $34,000 for each of the years ended December 31,
1996, 1995 and 1994. The lease term ends on January 31, 2008, and the Company
has the option of renewing the lease for up to five successive five-year periods
beyond that date.
The projected minimum rental payments under the terms of the lease at December
31, 1996, are as follows:
<TABLE>
<CAPTION>
Years ending
December 31, Amount
------------ ------
(Dollars in thousands)
<S> <C>
1997 $ 34
1998 34
1999 34
2000 34
2001 34
2002 and thereafter 202
--------
$ 372
========
</TABLE>
Loan Commitments: As of December 31, 1996, the Company had commitments to make
loans (at market rates) and unused lines of credit approximating $4,201,000, of
which $155,000 carry fixed rates, ranging from 7.75% to 9.50%, and $4,046,000
carry adjustable rates. At December 31, 1995, the Company's loan commitments and
unused lines of credit totaled approximately $3,439,000, of which $90,000
carried fixed rates and $3,349,000 carried adjustable rates. Since loan
commitments may expire without being used, the amounts do not necessarily
represent future cash commitments.
The exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to make loans and lines and letters of
credit is represented by the contractual amount of those instruments. The
Company follows the same credit policy to make such commitments as is followed
for those loans recorded in the financial statements. In management's opinion,
these commitments represent normal banking transactions and no material losses
are expected to result therefrom. Collateral obtained upon exercise of the
commitments is determined using management's credit evaluations of the borrower
and is primarily real estate.
Cash Reserve Requirements: The Company is required to have approximately
$447,000 of cash on hand or on deposit with the Federal Reserve Bank to meet
regulatory reserve requirements at December 31, 1996. These balances do not earn
interest.
(Continued)
22
<PAGE> 20
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Liquidation Account: In conjunction with the Conversion, the Company established
a liquidation account of $4,748,000, which was equal to its total net worth as
of the date of the latest balance sheet appearing in the final prospectus for
its stock offering. The liquidation account will be maintained for the benefit
of eligible depositors who continue to maintain their accounts at the Company
after the conversion. The liquidation account will be reduced annually to the
extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balance
for accounts then held.
NOTE 14 - NONINTEREST INCOME AND EXPENSE
Noninterest income and expense amounts include the following major categories
for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Noninterest income
Security gains (losses), net $ (1) $ 3 $ 1
Gain on sale of loans 1 9 12
Gain on sale of other assets 2
Service charges on deposits 152 137 134
Income (expense) on real
estate operations, net (22) (3) (60)
Other 135 111 180
------- ------- -------
Total $ 267 $ 257 $ 267
======= ======= =======
1996 1995 1994
------- ------- -------
Noninterest expense
Compensation and benefits $ 1,360 $ 1,388 $ 1,213
Occupancy and equipment 360 334 341
Deposit insurance premiums 874 257 280
Data processing expense 164 151 136
Goodwill amortization 57
Legal, professional and
consulting fees 146 145 253
Loss (gain) on foreclosed
and repossessed property (39) 2 (140)
Other 823 700 728
------- ------- -------
Total $ 3,688 $ 2,977 $ 2,868
======= ======= =======
</TABLE>
On September 30, 1996, legislation was passed to recapitalize the Savings
Association Insurance Fund ("SAIF"). As a result, all savings and loan
institutions paid a one-time assessment of $.657 per $100 in deposits held as of
March 31, 1995. Consequently, the Company recognized a $643,000 expense included
in "Deposit insurance premiums" above.
(Continued)
23
<PAGE> 21
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 15 - CONCENTRATIONS OF CREDIT RISK
Most of the Company's 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 December 31, 1996, Potters' loan portfolio included approximately
$10.7 million of purchased one-to-four family real estate loans, $8.0 million on
properties located in northwestern Ohio and $2.7 million on properties in
southwestern Ohio. As of December 31, 1996, the Company's loan portfolio also
included approximately $4.5 million in nonresidential real estate loans secured
by property located primarily in the State of Colorado.
NOTE 16 - REGULATORY MATTERS
Potters is subject to regulatory capital requirements administered by federal
regulatory agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Capital to risk-
weighted assets Core capital to
Total Core adjusted total assets
----- ---- ---------------------
<S> <C> <C> <C>
Well-capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
At year-end 1996, actual capital levels and minimum required levels were:
<TABLE>
<CAPTION>
Minimum Required
Minimum Required to be Well-Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk-
weighted assets $ 10,220 19.5% $ 4,187 8.0% $ 5,234 10.0%
Core capital to risk-
weighted assets 9,541 17.6 2,171 4.0 3,257 6.0
Core capital to
adjusted total assets 9,541 8.3 3,457 3.0 5,762 5.0
Tangible capital to
adjusted total assets 9,541 8.3 1,729 1.5 N/A
</TABLE>
Potters was categorized as well-capitalized at year-end 1996.
(Continued) 24
<PAGE> 22
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 16 - REGULATORY MATTERS (Continued)
Dividends paid by the Company are the primary source of funds available to PFC
for payment of dividends to shareholders and for other working capital needs.
Under Office of Thrift Supervision ("OTS") regulations, limitations have been
imposed on all "capital distributions", including cash dividends, by savings
institutions. The regulation established a three-tiered system of restrictions,
with the greatest flexibility afforded to thrifts which are both
well-capitalized and given favorable qualitative examination ratings by the OTS.
A Tier 1 association may make capital distributions up to 100% of its earnings
to date during the calendar year in which the distribution is made, plus the
amount that would reduce by one-half its "surplus capital ratio" at the
beginning of the calendar year. The Company is currently a Tier 1 institution.
Other thrifts would be subject to more stringent procedural and substantive
requirements, the most restrictive being prior OTS approval of any capital
distributions.
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows carrying values and the related estimated fair values
of financial instruments at December 31. Items which are not financial
instruments are not included.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,585 $ 4,585 $ 11,230 $ 11,230
Securities available for sale 10,878 10,878 10,952 10,952
Securities held to maturity 31,913 31,576 38,112 37,940
Loans receivable, net 62,450 61,755 49,889 50,085
Accrued interest receivable 778 778 784 784
---------- ---------- ---------- ----------
Total financial assets $ 110,604 $ 109,572 $ 110,967 $ 110,991
========== ========== ========== ==========
Financial liabilities:
Deposits $ (97,283) $ (97,398) $ (98,697) $ (98,919)
FHLB advances (5,085) (5,085) (3,018) (3,065)
Accrued interest payable (52) (52) (42) (42)
---------- ---------- ----------- ----------
Total financial liabilities $ (102,420) $ (102,535) $ (101,757) $ (102,026)
=========== =========== ========== ==========
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate such
value:
Cash and cash equivalents and interest-bearing deposits: For such short-term
instruments, the carrying amount approximates fair value.
Securities: The fair values of securities available for sale and held to
maturity are based on quoted market prices or dealer quotes. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar instruments.
(Continued) 25
<PAGE> 23
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Loans, net: For certain similar categories of variable rate loans, the
outstanding balance at the reporting date approximates fair value. The fair
value of other types of loans is estimated by discounting future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities at December 31,
1996 and 1995. The fair value of unrecorded commitments was not material at
December 31, 1996 or 1995.
Accrued interest receivable and payable: For such short-term receivables and
payables, the carrying amount approximates fair value.
Deposits and FHLB advances: The fair value of demand deposits, savings accounts
and certain money market deposits is the amount payable on demand at December
31, 1996 and 1995. The fair value of fixed maturity certificates of deposits and
FHLB advances is estimated using the rates offered at December 31, 1996 and 1995
for deposits of similar remaining maturities.
While the estimates used in determining the fair value of financial assets and
liabilities are based on management's judgment of the appropriate valuation
factors, there is no assurance that, were the Company to have liquidated such
items, the estimated fair values would necessarily have been realized. The
estimated fair values should not be considered to apply at subsequent dates.
Other assets and liabilities of the Company that are not defined as financial
instruments are not included in the above disclosures. Such assets and
liabilities would include, among others, property and equipment, financing
leases and the intangible value of the Company's customer base and profit
potential.
NOTE 18 - CONDENSED PARENT-ONLY FINANCIAL STATEMENTS
Balance Sheet for PFC as of December 31:
<TABLE>
<CAPTION>
1996
ASSETS (Dollars in thousands)
<S> <C>
Cash and cash equivalents $ 66
Investment in subsidiary 9,446
Loan receivable from subsidiary 1,000
Other assets 66
--------
Total assets $ 10,578
========
LIABILITIES
Other liabilities $ 2
--------
Total liabilities 2
--------
SHAREHOLDERS' EQUITY
Common shares, no par value
Authorized: 10,000,000 shares
Issued: 538,470 shares
Paid-in capital 4,880
Treasury shares, 26,640 at cost (436)
Unearned compensation on
recognition and retention plan (100)
Unrealized loss on securities
available for sale, net of tax (94)
Retained earnings 6,326
--------
Total shareholders' equity 10,576
--------
Total liabilities and shareholders' equity $ 10,578
========
</TABLE>
(Continued) 26
<PAGE> 24
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 18 - CONDENSED PARENT ONLY FINANCIAL STATEMENTS (Continued)
Income Statement for PFC for the year ended December 31:
<TABLE>
<CAPTION>
1996
----
(Dollars in thousands)
INCOME
<S> <C>
Dividends from subsidiary $ 1,650
Interest income 8
-------
1,658
EXPENSE
Other operating expense 22
-------
INCOME BEFORE INCOME TAXES AND DISTRIBUTIONS
IN EXCESS OF SUBSIDIARY EARNINGS 1,636
Income tax benefit (3)
-------
INCOME BEFORE DISTRIBUTIONS IN EXCESS
OF SUBSIDIARY EARNINGS 1,639
Distributions in excess of
subsidiary earnings (1,700)
-------
NET LOSS $ (61)
=======
</TABLE>
Statement of Cash Flows for PFC for the year ended December 31:
<TABLE>
<CAPTION>
1996
----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net income $ (61)
Adjustments to reconcile net income to
net cash from operating activities
Distributions in excess of subsidiary earnings 1,700
Change in other assets and other liabilities (64)
-------
Net cash from operating activities 1,575
CASH FLOWS FROM INVESTING ACTIVITIES
Loans to subsidiary (1,000)
-------
Net cash from investing activities (1,000)
-------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury shares (436)
Proceeds from exercise of stock options 57
Cash dividends paid (130)
-------
Net cash from financing activities (509)
-------
Net change in cash and cash equivalents 66
Cash and cash equivalents at beginning of year
-------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 66
=======
</TABLE>
27
<PAGE> 25
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Potters Financial Corporation
East Liverpool, Ohio
We have audited the accompanying consolidated balance sheets of Potters
Financial Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Potters
Financial Corporation as of December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1, the Corporation changed its method of accounting for
impaired loans in 1995 to conform with new accounting guidance.
Crowe, Chizek and Company LLP
Columbus, Ohio
February 6, 1997
28
<PAGE> 26
POTTERS FINANCIAL CORPORATION
Financial Review
December 31, 1996
GENERAL
On March 11, 1996, shareholders of The Potters Savings and Loan Company
("Potters" or the "Company") approved the reorganization of Potters into the
holding company structure of ownership. 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.
A net loss of $61,000, or $.12 per common share, was recorded for the twelve
months ended December 31, 1996, compared to net income of $829,000, or $1.56 per
share, for the comparable period in 1995. The loss during 1996 was primarily due
to a one-time special assessment by the Federal Deposit Insurance Corporation
("FDIC") on all financial institutions whose deposits are insured by the Savings
Association Insurance Fund ("SAIF"). Also contributing to the decline in net
income during 1996 compared to 1995 was a decline in net interest income and an
additional provision for loan losses of $188,500 during the first quarter of
1996 relating to the Bennett Funding Group, Inc. (the "Bennett Group") equipment
lease credits upon learning of its bankruptcy filing and investigation by the
Securities and Exchange Commission. Potters also began recording income tax
expense during the year due to the elimination of the valuation allowance
against deferred tax assets in 1995, which reduced 1996 net income by $68,000.
Consistent with Potters' long-term goals to increase interest income and the
interest rate spread, significant progress was made during 1996 in restructuring
its asset mix. Funds invested in short-term instruments at December 31, 1995,
along with repayments, maturities and calls on securities held to maturity, were
channeled into local loan originations and purchases of one-to-four family real
estate loans in northwestern and southwestern Ohio. As a result, one-to-four
family real estate loans increased $16.1 million, or 48.7%, during 1996 and net
loans receivable increased $12.6 million, or 25.2%. Asset quality improved
despite the addition of the Bennett Group equipment lease credits to
nonperforming loans during 1996, with a 29.1% decline in nonperforming loans and
a net increase of $390,000, or 17.4%, in the allowance for loan losses. At
December 31, 1996, the allowance for loan losses totaled $2.6 million,
representing 152.2% of nonperforming loans.
Dividends of $130,000, or $.25 per common share, were paid during 1996, compared
to $111,000, or $.21 per share, during 1995, representing an increase of 19.0%.
PFC successfully completed the repurchase of 5% of its 532,809 outstanding
common shares on June 12, 1996. The stock repurchase program, announced on June
7, 1996, resulted in the repurchase of 26,640 shares at an average price of
$16.375 per common share. PFC began a second stock repurchase plan on October
10, 1996, in which up to 10% of its outstanding common shares may be purchased
during the subsequent twelve months. In January 1997, 10,000 shares were
purchased at $19.25 per share and in February 1997, 15,000 shares were purchased
at a price of $19.625. The second stock repurchase represents a continuation of
PFC's commitment to enhance shareholder value.
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.
In the following pages, management presents an analysis of Potters Financial's
financial condition as of December 31, 1996, and the results of operations for
fiscal 1996, as compared to prior years. In addition to this historical
information, the following discussion contains forward-looking statements that
involve risks and uncertainties. Economic circumstances, Potters Financial's
operations and Potters Financial's actual results could differ significantly
from those discussed in the forward-looking statements. Some of
29
<PAGE> 27
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 Financial's general market area.
Without limiting the foregoing, some of the forward-looking statements included
herein are the statements under the following headings and regarding the
following matters:
1. Federal Deposit Insurance Corporation Assessment - Management's
belief that charter unification legislative changes, which may
change the regulatory requirements of Potters Financial and
Potters, will not have a material effect on either entity's
financial condition or operations.
2. Allowance and Provision for Loan Losses - Management's belief that
the Court in the Bennett Group bankruptcy matter will decide in
favor of Potters' motion for relief from bankruptcy stay by
mid-1997, that the final settlement documents will be approved and
that no additional losses will be incurred.
Management's statements regarding the amount and adequacy of the
allowance for loan losses.
3. Noninterest Expense - Management's belief that Potters can more
effectively service its East End customers through its Downtown
Branch Office.
Management's belief that the Employee Stock Ownership Plan and the
401(k) plan can more adequately serve the retirement needs of
Potters' employees at less cost than the defined benefit plan.
4. Financial Condition - Statements regarding the strategic focus and
long-term goals of Potters.
5. Asset/Liability Management - Management's expectation that its
asset/liability management efforts will reduce Potters' overall
vulnerability to interest rate risk, and that Potters' results of
operations are sensitive to general changes in interest rates,
because its interest-rate-sensitive liabilities exceed its
interest-rate-sensitive assets.
6. Asset Quality - Allowance for Loan Losses - Statements regarding
the amount and adequacy of the provision for loan losses.
7. Liquidity and Capital Resources - Management's belief that
Potters' liquidity and capital position are adequate to fund its
outstanding short- and long-term needs.
Management's expectation that Potters has sufficient cash flow and
borrowing capacity to fund all outstanding commitments and
maintain desired levels of liquidity.
8. Bad Debt Reserve Recapture - Management's expectation that the bad
debt reserve recapture legislation will not impact the future
income of Potters.
9. Effect of Recent Accounting Pronouncements - Management's
expectation that SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities"
will not have a material impact on Potters' financial statements
FEDERAL DEPOSIT INSURANCE CORPORATION ASSESSMENT
The deposit accounts of Potters and other savings associations are insured by
the FDIC through the 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 were below the level required by law. The
deposit accounts of commercial banks are insured by the FDIC through 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 in mid-1995
significantly below
30
<PAGE> 28
the level paid by healthy savings associations. In 1996, no BIF assessments were
required for healthy commercial banks, except a $2,000 minimum fee, while SAIF
assessments continued at $.23 per $100 of deposits.
In 1996, Congress passed legislation to recapitalize the SAIF and to eliminate
the significant premium disparity. The recapitalization plan, enacted on
September 30, 1996, provided for, among other things, a special assessment of
$.657 per $100 of SAIF deposits held at March 31, 1995, in order to increase
SAIF reserves to the level required by law. Potters had a deposit base of $97.9
million at March 31, 1995. Potters' special assessment totaled $643,000 and had
a $424,000, or $.82 per common share, after tax negative impact on 1996 net
income. Pro rata sharing of the Financing Corporation obligation between BIF and
SAIF members will begin by January 1, 2000. Until that time, partial sharing
will occur, with SAIF deposits assessed at $.0644 per $100 in deposits and BIF
deposits at $.0129 per $100 in deposits. Through December 31, 1998, SAIF
assessments for healthy institutions can never be reduced below the level set
for healthy BIF institutions.
The recapitalization plan also provides for the merger of the SAIF and BIF
insurance funds on January 1, 1999, if there are no savings associations under
federal law. Pending legislation introduced in early 1997 proposes the
elimination of the federal thrift charter and of the separate federal regulation
of thrifts prior to the merger of the deposit insurance funds. The Treasury
Department has been directed to report to Congress by March 31, 1997 with its
recommendation regarding a common charter for banks and federal savings
institutions. If this pending legislation is enacted as proposed, Potters would
be regulated as a bank under federal law. As a result, Potters would become
subject to the more restrictive activity limits imposed on national banks. In
addition, if required to become a bank holding company, PFC would be subject to
more restrictive activity limits and to capital requirements similar to those
imposed on Potters. It is not expected that such new activity limits will have a
material effect on the financial condition or operations of PFC and Potters. No
assurances may be given whether such legislation will be enacted or if so
whether it might contain different provisions than as currently proposed.
RESULTS OF OPERATIONS
PFC recorded a net loss of $61,000, or $.12 per common share, for the year ended
December 31, 1996, compared to net income of $829,000, or $1.56 per share, and
$665,000, or $1.26 per share, for 1995 and 1994, respectively. The principal
source of earnings is net interest income which represents the amount by which
income generated on interest-earning assets, including loans and securities,
exceeds expense incurred on interest-bearing liabilities such as deposits and
borrowings. Net income is also impacted by provisions for losses, fee and other
noninterest income and noninterest expense.
The decline in net income during 1996 compared to the prior year was primarily
the result of the one-time FDIC assessment included in noninterest expense and a
decline in net interest income. Also contributing to the decline in net income
during 1996 was a write-down of the Bennett Group equipment lease credits by
$377,000 upon learning of its bankruptcy filing and the related investigation by
the Securities and Exchange Commission.
Potters began recording income tax expense during 1996 due to the elimination of
the valuation allowance against deferred tax assets in 1995. Income tax expense
during 1996 was $68,000, primarily the result of the early termination of a life
insurance policy during the year. The primary components of the $164,000, or
24.7%, increase in net income during 1995 compared to 1994 were lower provisions
for loan losses and improving net interest income despite rising deposit costs,
somewhat offset by higher noninterest expenses.
The decrease in PFC's net income resulted in returns on average assets and
average shareholders' equity of (.05)% and (.57)%, respectively for the year
ended December 31, 1996, compared to .74% and 7.88% , respectively, in 1995. Net
income for 1994 represented a return on average assets of .59%, and a return on
average shareholders' equity of 6.74%.
31
<PAGE> 29
YIELDS EARNED AND RATES PAID
PFC's net interest income consists of the difference between income generated on
loans and securities and interest expense on deposits and borrowings. Net
interest income is primarily affected by volumes, interest rates and the
composition of interest-earning assets and interest-bearing liabilities. The
interest rate spread decreased to 3.05% for the twelve months ended December 31,
1996 from 3.28% for the twelve months ended December 31, 1995. The yield on
interest-earning assets declined to 7.36% during 1996 from 7.52% in 1995. The
cost of funds increased from 4.24% for the year ended December 31, 1995 to 4.31%
during 1996 due primarily to the increased use of Federal Home Loan Bank
("FHLB") advances to finance loan purchases and a short-term growth strategy
employed primarily during the third quarter of 1996.
The following table sets forth the weighted average yields on Potters'
interest-earning assets, the weighted average interest rates on interest-bearing
liabilities and the interest rate spread between the weighted average yields and
rates at the dates indicated. Nonaccruing loans have been included in the table
as having a yield of zero.
<TABLE>
<CAPTION>
...............At December 31,...........
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable 8.91% 9.15% 9.05%
Securities (1) 6.39 5.84 6.08
Other interest-earning assets 6.70 5.50 6.36
Combined weighted average yield
on interest-earning assets 7.87 7.36 7.49
Weighted average rate paid on:
Certificates of deposits 5.67 5.81 5.22
Savings deposits 3.02 3.05 3.05
NOW accounts 2.07 2.25 2.22
Money market accounts 2.99 2.86 2.75
FHLB advances 6.51 6.29
Combined weighted average
rate paid on interest-
bearing liabilities 4.29 4.39 3.99
Interest rate spread 3.58 2.97 3.50
</TABLE>
(1) Includes FHLB Stock
The following table sets forth certain information relating to PFC's average
balance sheet and reflects the average yield on interest-earning assets and the
average cost of interest-bearing liabilities for the periods presented. Average
balances are derived from average daily balances for all periods presented, and
include nonaccruing loans in the loan portfolio, net of the allowance for loan
losses. Average balances of securities available for sale are based on the
carrying value while the yield is based on the amortized cost.
32
<PAGE> 30
<TABLE>
<CAPTION>
(Dollars in thousands) ..........................Years ended December 31,....................
-----------------------
1996 1995
---- ----
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
-------- -------- ------- --------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable $ 52,880 $ 4,534 8.57% $ 49,945 $ 4,441 8.89%
Securities (1) 55,055 3,491 6.32 53,530 3,436 6.36
Other 3,409 181 5.32 3,341 188 5.63
-------- -------- --------- --------
Total interest-earning assets (2) 111,344 8,206 7.36 106,816 8,065 7.52
Noninterest earning assets:
Cash and cash equivalents 2,350 2,319
Premises and equipment 1,700 1,404
Other nonearning assets 1,790 1,772
-------- ---------
Total assets $117,184 $ 112,311
======== =========
Interest-bearing liabilities:
Certificates of deposit $ 48,665 2,769 5.69 $ 48,995 2,743 5.60
Passbook, statement savings
and club accounts 35,389 1,075 3.04 35,450 1,077 3.04
Demand, NOW and Super NOW
accounts 12,671 267 2.10 11,844 260 2.20
Money market accounts 2,512 78 3.09 2,743 76 2.77
Borrowings 5,843 340 5.83 1,765 115 6.52
-------- -------- --------- --------
Total interest-bearing liabilities 105,080 4,529 4.31 100,797 4,271 4.24
-------- --------
Noninterest-bearing liabilities:
Other liabilities 1,239 998
Shareholders' equity 10,865 10,516
-------- ---------
Total liabilities and equity $117,184 $ 112,311
======== =========
Net interest income $ 3,677 $ 3,794
======== ========
Interest rate spread 3.05% 3.28%
==== ====
Net interest-earning assets $ 6,264 $ 6,019
======== =========
Net yield on average interest-
earning assets 3.30% 3.55%
==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 105.96% 105.97%
======== ========
</TABLE>
- ------------------
<TABLE>
<CAPTION>
1994
----
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
-------- -------- ------
<S> <C> <C> <C>
Interest-earnings assets:
Loans receivable $ 49,279 $ 4,318 8.76%
Securities (1) 55,693 3,199 5.69
Other 1,811 69 3.81
--------- -------
Total interest-earning assets (2) 106,783 7,586 7.07
Noninterest earning assets:
Cash and cash equivalents 2,516
Premises and equipment 1,431
Other nonearning assets 1,534
---------
Total assets $ 112,264
=========
Interest-bearing liabilities:
Certificates of deposit $ 45,840 2,344 5.11
Passbook, statement savings
and club accounts 39,425 1,204 3.05
Demand, NOW and Super NOW
accounts 11,742 259 2.21
Money market accounts 3,697 104 2.81
Borrowings 695 32 4.60
--------- -------
Total interest-bearing liabilities 101,399 3,943 3.89
-------
Noninterest-bearing liabilities:
Other liabilities 1,011
Shareholders' equity 9,854
---------
Total liabilities and equity $ 112,264
=========
Net interest income $ 3,643
=======
Interest rate spread 3.18%
====
Net interest-earning assets $ 5,834
=========
Net yield on average interest-
earning assets 3.41%
====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 105.31%
========
</TABLE>
- ------------------
(1) Includes FHLB Stock.
(2) Net of deferred loan fees, loan premiums and discounts, loans in process
and allowance for loan losses.
33
<PAGE> 31
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category, information is provided on
changes attributable to changes in volume and changes in rate. For purposes of
this table, changes attributable to both rate and volume which cannot be
segregated have been allocated proportionately based on the absolute value of
the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
------------- -------------
Increase Increase
(decrease) (decrease)
due to due to
---------- ----------
(Dollars in thousands)
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $ 255 $ (162) $ 93 $ 59 $ 64 $ 123
Securities 79 (24) 55 (131) 368 237
Other 4 (11) (7) 76 43 119
------ ------ ------ ------- ------ -------
Total interest-earning assets $ 338 $ (197) 141 $ 4 $ 475 479
------ ------ ------ ------- ------ -------
Interest-bearing liabilities:
Certificates of deposits (18) 44 26 168 231 399
Savings deposits (2) (2) (121) (6) (127)
Demand, NOW and Super NOW
accounts 18 (11) 7 2 (1) 1
Money market accounts (7) 9 2 (26) (2) (28)
Borrowed funds 238 (13) 225 66 17 83
------ ------ ------ ------- ------ -------
Total interest-bearing liabilities $ 229 $ 29 258 $ 89 $ 239 328
====== ====== ====== ======= ====== =======
Net interest income $ (117) $ 151
======= =======
</TABLE>
NET INTEREST INCOME
Net interest income is the largest component of Potters' net income and is
affected by the interest rate environment and the volume and composition of
interest sensitive assets and liabilities. Net interest income decreased
$117,000, or 3.1%, during 1996 compared to 1995, due primarily to the increased
use of FHLB advances in 1996, which generally bear higher interest rates than
deposits, to finance loan purchases and a short-term growth strategy discussed
in "Financial Condition". Also contributing to the decline in 1996 net interest
income was a decline in the average yield of interest-earning assets somewhat
offset by increasing average balances of loans and securities. Net interest
income increased $151,000, or 4.1%, during 1995 compared to 1994. Increases in
the average yields on loans, securities and short-term investments exceeded the
increase in the cost of funds during 1995 and were largely responsible for the
increase in net interest income.
Interest on loans receivable totaled $4.5 million for the twelve months ended
December 31, 1996, compared to $4.4 million and $4.3 million for the comparable
periods in 1995 and 1994, respectively. The $93,000 increase in loan interest
income during 1996 resulted primarily from increased loan volume through
originations and purchases, somewhat offset by a decline in the average yield.
Payoffs of $3.4 million on nonresidential real estate loans located in Colorado,
with a weighted average yield of 8.32%, negatively affected the yield on loans,
but were consistent with management's strategy of reducing credit risk from
out-of-state properties. The average balance of loans increased $2.9 million, to
$52.9 million, during 1996, while the average yield decreased from 8.89% during
1995 to 8.57% during 1996. The $123,000 increase in loan interest income during
1995 compared to 1994 was attributable to increases in both the average balance
of and average yield on loans.
34
<PAGE> 32
Interest and dividends on securities and FHLB stock totaled $3.5 million for the
twelve months ended December 31, 1996 compared to $3.4 million and $3.2 million
for the comparable periods in 1995 and 1994, respectively. The $55,000 increase
during 1996 compared to 1995 resulted primarily from significant purchases of
agency securities available for sale during 1996 which increased the average
balance by $1.5 million. The purchase of $10.0 million of such securities was
part of the Company's short-term growth strategy employed during 1996. The yield
on securities decreased to 6.32% during 1996 from 6.36% during 1995. The
increase in securities income during 1995 compared to 1994 was due primarily to
an increase in the average yield, from 5.69% during 1994 to 6.36% in 1995.
Security yields increased during 1995 due to the maturity or sale of lower
yielding securities and the subsequent purchase of higher yielding securities
combined with the upward repricing of adjustable-rate mortgage-backed
securities.
Interest on short-term investments declined $7,000 during 1996 compared to 1995,
but increased $119,000 during 1995 compared to 1994. The average balance of
short-term investments increased marginally during 1996 while the average yield
decreased from 5.63% during 1995 to 5.32% during 1996. The average balance of
other investments increased to $3.3 million during 1995, and average yields
increased from 3.81% during 1994. The increase in the yield during 1995 was the
result of the flattening of the yield curve which narrowed the spreads between
short- and long-term investment instruments and increased short-term rates.
Interest paid on deposits for the years ended December 31, 1996 and 1995 totaled
$4.2 million in each year, compared to $3.9 million in 1994. The marginal
increase in deposit costs during 1996 compared to 1995 was primarily
attributable to increased rates on certificates of deposit and an $827,000
increase in the average balance of demand and NOW accounts. The increase in 1995
compared to 1994 was a reflection of the interest rate environment and strong
local competition for time deposits. The Company introduced a tiered interest
rate pricing structure on certificates and selected checking and statement
savings products during 1995 in order to reduce the impact of paying higher
deposit rates and continued the pricing strategy during 1996. The average rate
on deposits was 4.22% during 1996, compared to 4.20% during 1995 and 3.89% in
1994.
Interest on borrowings increased $225,000, to $340,000 for the year ended
December 31, 1996, compared to $115,000 and $32,000 during 1995 and 1994,
respectively. The increase during 1996 compared to 1995 was due primarily to a
$4.1 million increase in the average balance of FHLB advances which were used to
fund loan purchases and a short-term growth strategy employed during the year.
Somewhat offsetting the increased expense due to volume was a decline in the
average rate on FHLB advances to 5.83% during 1996 from 6.52% during 1995. The
increase in interest expense on borrowed funds during 1995 compared to 1994 was
due to the Company's use of certain borrowings to purchase investments, locking
in positive spreads, and its participation in Community Investment and
Affordable Housing Programs with the FHLB. Interest expense during 1995 was also
impacted, to a lesser extent, by an increase in the average yield paid on FHLB
advances, from 4.60% during 1994 to 6.52% in 1995.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The provision for loan losses was $249,000 during 1996, compared to $245,000 and
$377,000 during 1995 and 1994, respectively. The marginally higher provision
during 1996 compared to 1995 related to the extension of credit by Potters for
an investment in equipment leases with 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 had 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 credits were charged off in the
first quarter of 1996. An additional provision for loan losses of $188,500 was
recorded in the first quarter of 1996. Potters ceased the accrual of interest on
the remaining investment in March 1996. At December 31, 1996, the Bennett Group
equipment lease credits totaled $365,000 and were included in nonperforming and
impaired loans. A trustee appointed by the bankruptcy court continues the
investigation into the activities of the Bennett
35
<PAGE> 33
Group, and Potters' legal counsel has worked actively with the trustee. No
payments have been received since the announcement of the bankruptcy.
The Court has ruled that the manner in which the Bennett Group equipment lease
credits were documented and recorded was sufficient to perfect Potters' position
in the loans as a secured creditor. It is anticipated that the Court will decide
the Company's motion for relief from bankruptcy stay by mid- 1997, which if
resolved in Potters' favor, would result in the resumption of lease payments. In
January 1997, the trustee extended various settlement options to all financial
institutions involved in the case. Because of the legal expenses involved in
continuing with litigation and the expected length of the case, Potters' Board
of Directors decided to accept one of the settlement options. The motions for
settlement were heard and approved by the Court on February 27, 1997 subject to
the approval of final settlement documents. At this time, no additional losses
are anticipated on the Bennett Group equipment lease credits. However, no
assurances can be given that additional losses will not be incurred or that
additional provisions will not be required.
Potters has experienced continued improvement in asset quality over the last
two years despite the addition of the Bennett Group equipment lease credits to
nonperforming loans in 1996, with declining balances of nonperforming loans and
net increases in the allowance for loan losses. The allowance for loan losses
increased $390,000, or 17.4%, during 1996 due to provisions of $249,000 and net
recoveries of $141,000. Charge-offs of $538,000 related primarily to the Bennett
Group equipment leases and payoff discounts offered to two Colorado
nonresidential borrowers. Recoveries of $679,000 were recorded during 1996,
$647,000 of which involved the payoff of Colorado property loans which had
previously been written down. The allowance increased $277,000, or 14.1%, during
1995 due to provisions of $245,000 and net recoveries of $32,000. During 1994,
the allowance for loan losses increased $77,000, with provisions of $377,000 and
net loan charge-offs of $300,000. Charge-offs during 1995 and 1994 related
primarily to nonresidential real estate loans located in Colorado and mobile
home loans.
As discussed in Note 1 to the consolidated financial statements, Potters adopted
the provisions of SFAS Nos. 114, "Accounting by Creditors for Impairment of a
Loan" and 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures," which require recognition of loan impairment. At
December 31, 1996, impaired loans totaled $365,000 and consisted solely of the
Bennett Group lease credits. The $193,000 impaired loan reported at December 31,
1995 was paid off during 1996. Management has incorporated the provisions of
SFAS Nos. 114 and 118 into its analysis of the Company's allowance for loan
losses. See "Asset Quality - Nonperforming Assets and Loan Loss Allowances".
NONINTEREST INCOME
Noninterest income increased $10,000, to $267,000 during 1996. As a result of an
analysis of the existing fee structure on deposit and loan products and the
implementation of several changes, deposit account fee income and other income
have increased 11.0% and 22.7%, respectively, during 1996 compared to 1995.
Somewhat offsetting the increase in 1996 was a net loss of $22,000 on foreclosed
real estate operations due primarily to the payment of real estate taxes on
foreclosed real estate which was sold during the year at a gain of $55,000. Also
included in 1996 noninterest income were gains and losses on sales of loans and
securities netting to zero during the year compared to $12,000 of gains on such
sales during 1995. Noninterest income decreased $10,000, to $257,000, during
1995 compared to 1994 due primarily to an initial cash payment received by the
Company during 1994 from the settlement of a lawsuit against a mobile home loan
broker and servicing company somewhat offset by a net loss on foreclosed real
estate operations of $3,000 during 1995 compared to a net loss of $60,000 during
1994.
NONINTEREST EXPENSE
Noninterest expense increased $711,000, to $3.7 million during 1996 compared to
$3.0 million during 1995. The primary reason for the increase during 1996
compared to 1995 was the one-time $643,000 special assessment required by the
FDIC to recapitalize the SAIF fund. As discussed above, this charge in 1996 will
result in the reduction of future deposit insurance premiums. Exclusive of the
special SAIF assessment, noninterest expense increased $68,000, or 2.3%, in 1996
compared to 1995.
36
<PAGE> 34
Office occupancy expense increased $26,000 during 1996 due to increased
depreciation expense from the new loan and deposit operations equipment and
software installed in late 1995 and mid-1996, respectively, and increased
expenses for maintenance of and improvements to Potters' offices. Other
noninterest expense increased $123,000 as Potters worked toward its strategic
commitments to invest in employee training and development, plus new product
development. Included in other noninterest expense during 1996 were increased
employee education expenses, higher automated teller machine ("ATM") expenses
due to the installation of Potters' second ATM machine in late 1995 and set up
costs relating to Potters' VISA Check Card program which will be initiated
during 1997. Also increasing during 1996 compared to 1995 were advertising
expense, franchise tax and data processing costs. Compensation and benefits
expense decreased $28,000 during 1996 due primarily to larger deferrals of
compensation costs related to increased loan originations during 1996, somewhat
offset by normal salary adjustments. Included in 1996 noninterest expense was a
net gain on the sale of foreclosed and repossessed property of $39,000 versus a
net loss of $2,000 on such sales during 1995.
As part of management's ongoing process to contain costs, Potters recently
announced that, effective March 31, 1997, branch operations at its East End
Branch Office will be terminated. The East End Office has not been profitable
for several years, and despite the addition of new loan and deposit products,
and several attempts to increase lending operations at the branch, the activity
level and deposit base has continued to decline. Due to the physical limitations
of the building and the decline in activity, the Board of Directors and
management believe that Potters can better serve all of its customers by
consolidating its East End operations into its newly renovated Downtown Office.
Management has also selected a location for the installation of an ATM in the
East End.
In December 1996, the Company's Board of Directors approved a resolution
terminating the Company's defined benefit pension plan. In October 1995, the
Board of Directors approved ceasing the accumulation of future benefits to
participants in the Company's defined benefit pension plan and pursuing the
implementation of a 401(k) profit sharing plan in 1996. The termination decision
required Potters to expense $67,000 in 1996, which represented the remaining
prepaid pension costs which had been included in other assets. Ceasing the
accumulation of future benefits during 1995 was considered a curtailment of the
plan, resulting in a net loss of $74,000 in noninterest expense. Management and
the Board of Directors of Potters believe that the combination of the Employee
Stock Ownership Plan initiated in 1994, and a 401(k) plan implemented during
1996 will provide more competitive retirement benefits to its employees at a
lower cost than the defined benefit plan. Nonrecurring professional fees are
expected to be incurred upon terminating the pension plan in 1997.
Excluding $140,000 of gains on sales of foreclosed and repossessed assets during
1994 and $2,000 of losses on such sales for 1995, noninterest expenses declined
$33,000 during 1995 compared to 1994. The reduction occurred despite increased
expenses to support Potters' strategic priorities, which include upgraded
technology, employee development and training, expanded product offerings and
emphasis on the development of a stronger sales culture with improved customer
service levels. Potters acquired an automated loan documentation and tracking
system during 1995 and consolidated its downtown East Liverpool branch offices
into one newly remodeled, full-service facility that is more efficient and
convenient for the Company's customers. As a result of the Company's priorities,
compensation and benefits, advertising and data processing expense increased,
but were more than offset by a $108,000, or 42.7%, reduction in legal,
professional and consulting fees and lower FDIC deposit insurance premiums
during 1995 compared to 1994. Also contributing to the decrease in noninterest
expense during 1995 was the absence of goodwill amortization, which arose from
the 1982 acquisition of a thrift institution and which was completely amortized
in mid-1994.
INCOME TAXES
The absence of a tax provision in 1995 and 1994 on income before tax of $829,000
and $665,000 in 1995 and 1994, respectively, resulted primarily from the
reduction during such years, of the valuation allowance against deferred tax
assets. The valuation allowance was reduced as it became more likely to be
realized as the Company paid taxes and established a history of generating
taxable income. As a result of the elimination of the valuation allowance as of
December 31, 1995, Potters began to recognize
37
<PAGE> 35
income tax expense in 1996. Income tax expense during 1996 was $68,000,
resulting primarily from the early termination of a life insurance policy during
the year.
Legislation enacted in 1996 requires the recapture, over time, of a portion of
the bad debt reserve previously deducted by Potters for income tax reporting
purposes. Since deferred taxes have been recorded on those bad debt reserves,
this recapture will not affect net income.
FINANCIAL CONDITION
Potters' total assets remained constant at $114.2 million at December 31, 1996
and 1995. The Company began to restructure its balance sheet during 1996 in
accordance with its strategic focus and long-term goals of increasing interest
income and the interest rate spread. Funds from loan repayments, the reduction
in the held to maturity security portfolio, sales of securities available for
sale and FHLB advances were used to originate loans, purchase one-to-four family
real estate loans and fund deposit outflows.
Cash and cash equivalents decreased $6.6 million, from $11.2 million at December
31, 1995 to $4.6 million at December 31, 1996. Funds invested in short-term
investment instruments at December 31, 1995, along with other sources, were used
to purchase $13.7 million one-to-four family real estate loans located in
northwestern and southwestern Ohio and increase local loan originations.
Securities available for sale remained virtually the same, totaling $10.9
million at December 31, 1996 compared to $11.0 million at December 31, 1995.
Securities designated as available for sale are carried at their fair values,
with resulting unrealized gains or losses added to or deducted from
shareholders' equity, net of tax. The unrealized loss on securities available
for sale increased from $42,000 at year-end 1995 to $144,000 at year-end 1996
due to a general rise in interest rates during 1996. The equity component,
representing unrealized losses, net of tax, on securities available for sale
increased from $23,000 at December 31, 1995, to $94,000 at December 31, 1996.
During 1996, purchases of $23.9 million in securities available for sale were
offset by $13.2 million in sales and $10.6 million in calls and maturities.
Purchases of fixed-rate securities totaling $10.0 million were part of a
short-term leveraged growth strategy employed during 1996 financed by
variable-rate FHLB advances. The growth strategy generated an average spread of
169 basis points over the period held, and was monitored at each quarterly
interest rate reset of the FHLB advances when the transaction could be
terminated. Due to an increase in interest rates during the fourth quarter, all
of the transactions were terminated. The strategy added approximately $33,000 to
net interest income during 1996.
At December 31, 1996, the Company's held-to-maturity securities portfolio
totaled $31.9 million, a decrease of $6.2 million from $38.1 million at December
31, 1995. Held-to-maturity securities at December 31, 1996 consisted of $24.0
million of mortgage-backed securities and $7.9 million of other securities,
primarily U.S. Government agencies. Purchases of $984,000 were offset by
repayments, calls and maturities of $5.7 million. The provisions of SFAS No. 115
allow the sale of securities held to maturity if the security has paid down to
15% of the purchased principal balance. Mortgage-backed securities held to
maturity meeting this criteria totaling $1.4 million were sold at a net gain of
$2,000. These transactions are reported as maturities and facilitated the
purchase of real estate loans.
Net loans receivable increased $12.6 million, from $49.9 million at December 31,
1995, to $62.5 million at December 31, 1996. Local loan originations and loan
purchases during 1996 resulted in a net increase of $16.1 million, or 48.7%, in
one-to-four family real estate loans. Loan purchases totaled $13.7 million and
consisted of $12.3 million of adjustable-rate real estate loans and $1.4 million
of fixed-rate real estate loans. A total of $2.9 million of such loan purchases
were comprised of nonconforming real estate loans. The adjustable rate features
of the majority of the loan purchases continued management's asset/liability
strategy of controlling the Company's exposure to interest rate risk. Real
estate loans secured by nonresidential property decreased $3.5 million, or
37.2%, during 1996 due primarily to payoffs of $3.4 million of nonresidential
real estate loans located in Colorado. Consumer and other loans increased
$253,000 during 1996 due primarily to increased home equity lines of credit and
other consumer loans somewhat offset by the write-down of the Bennett Group
lease credits and the continued
38
<PAGE> 36
paydown of the mobile home loan portfolio. Increased loan originations and
purchases were part of the Company's focus on its strategic goals, and resulted
in an increase in the ratio of loans-to-deposits from 50.5% at December 31,
1995, to 64.2% at December 31, 1996.
Total deposits decreased $1.4 million, or 1.4%, from $98.7 million at December
31, 1995, to $97.3 million at December 31, 1996. Net outflows of $1.2 million
occurred in passbook and money market deposit products, and $1.9 million in
certificates of deposit. Potters developed a full line of commercial checking
account products in mid-1996 and a packaged checking account product for
customers over 50 years of age in September 1996 which resulted in a net inflow
of $1.8 million in demand, NOW and super NOW accounts. Strong competition for
certificates of deposit in the local area continued to affect the cost of funds.
The Asset and Liability Management Committee ("ALCO") continues to focus on
strategies for reduced interest rate risk and responsible deposit management.
The Company introduced tiered pricing during 1995, on the basis of amount of
deposit, on its certificates and other selected products in order to mitigate
somewhat the effect of rising deposit costs.
In accordance with its asset/liability policy, Potters does not match the
highest rates offered on deposits by competitors. The Company continues to
emphasize deposits from retail sources and, as a matter of policy, has no
brokered deposit accounts.
Potters funded the change in its asset mix and deposit outflows during 1996 with
loan and security maturities, calls and repayments, sales of securities
available for sale, and with FHLB advances. At December 31, 1996, FHLB advances
totaled $5.1 million compared to $3.0 million at December 31, 1995. During 1996,
advances were used to finance loan purchases, the short-term growth strategy and
cash management needs. A total of $15.6 million in FHLB advances was received
during 1996, while repayments totaled $13.5 million.
Shareholders' equity decreased $613,000 during 1996 due primarily to a net loss
of $61,000 for 1996, the purchase of 26,640 outstanding shares for $436,000, an
increase of $71,000 in the unrealized loss, net of income tax, on securities
available for sale and dividends paid of $130,000, or $.25 per share. A total of
5,661 common shares were issued during 1996 relating to the exercise of stock
options, resulting in a $57,000 increase in shareholders' equity.
ASSET/LIABILITY MANAGEMENT
Asset/liability management is the process by which a company manages its
exposure to changes in interest rates. The Company's goal in managing interest
rate sensitivity is to maintain an appropriate balance between interest
sensitive assets and liabilities in order to minimize the impact of volatility
in market interest rates. The process is carried out through weekly meetings of
the ALCO. The ALCO utilizes gap analysis, the net portfolio value ("NPV")
approach and simulation modeling to aid in making decisions relating to pricing
and the relative mix of interest rate sensitive assets and liabilities.
The measure of the difference between interest rate sensitive assets and
liabilities that mature or reprice within a certain period of time is the
Company's gap. Potters' one year interest rate sensitivity gap at December 31,
1996 was a negative 49.7% of interest-earning assets. A negative gap indicates
that the Company's interest-bearing liabilities which reprice or mature within a
given time period exceed the amount of interest-earning assets maturing or
repricing within the same period. In a rising interest rate environment, an
institution with a negative interest rate sensitivity gap, such as Potters, will
experience greater increases in the cost of its liabilities than in the yield on
its assets. Conversely, in an environment of falling rates, the Company's cost
of funds will generally decrease more rapidly than the yield on its assets.
Changes in interest rates generally will have the opposite effect on an
institution with a positive interest rate sensitivity gap.
The Company's negative one year gap increased to a negative 49.7% at December
31, 1996 from a negative 33.3% of interest-earning assets at December 31, 1995.
The change in the Company's gap position during 1996 was due primarily to the
decline in short-term investments and the deployment of those funds into loans.
Significant increases occurred in both fixed- and adjustable-rate loans. The
39
<PAGE> 37
increase in transaction accounts and FHLB advances due within one year also
contributed to the increase in the negative gap position.
The following table summarizes the Company's interest rate sensitive assets and
liabilities at December 31, 1996. Except as stated below, the amount of assets
and liabilities shown which reprice or mature in a period were determined in
accordance with the contractual terms of the asset or liability. No estimate was
made of fixed-rate loan or mortgage-backed security amortization or prepayments.
This table does not necessarily indicate the impact of general interest rate
movements on Potters' net interest income because the repricing of certain
categories of assets and liabilities is subject to the interest rate
environment, competition and other factors beyond Potters' control. As a result,
certain assets and liabilities may in fact mature or reprice at different times
and in different volumes than indicated.
<TABLE>
<CAPTION>
Within Over Over Over
One Year 1-3 Years 3-5 Years 5 Years Total
--------- -------- -------- -------- --------
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C>
Fixed-rate real estate loans $ 520 $ 361 $ 500 $ 26,434 $ 27,815
Variable-rate real estate loans 13,775 8,800 2,981 3,646 29,202
--------- -------- -------- -------- --------
Total real estate loans 14,295 9,161 3,481 30,080 57,017
--------- -------- -------- -------- --------
Commercial loans and
unsecured lines of credit 943 288 85 1,316
Consumer and other loans 3,637 701 1,671 1,103 7,112
Securities available for sale 1,524 1,288 6,118 1,948 10,878
Securities held to maturity 8,707 5,381 1,045 16,780 31,913
Other (1) 209 209
--------- -------- -------- -------- --------
Total interest-earning assets 29,316 16,819 12,400 49,910 108,445
--------- -------- -------- -------- --------
Interest-bearing liabilities:
Savings deposits and
Christmas clubs (2) 34,345 34,345
Demand, NOW and Super NOW 13,509 13,509
Money market demand accounts 1,978 1,978
Certificates 26,561 11,626 9,264 47,451
FHLB advances 3,830 1,255 5,085
--------- -------- -------- -------- --------
Total interest-bearing liabilities 80,223 12,881 9,264 102,368
--------- -------- -------- -------- --------
Interest-earning assets less
interest-bearing liabilities $ (50,907) $ 3,938 $ 3,136 $ 49,910 $ 6,077
========= ======== ======== ======== ========
Cumulative interest-rate
sensitivity gap $ (50,907) $(46,969) $(43,833) $ 6,077
Cumulative interest-rate gap
as a percentage of interest-
earning assets (49.73)% (45.88)% (42.82)% 5.94%
</TABLE>
- -----------------------------------
(1) Includes interest-bearing deposits, federal funds sold and cash management
accounts.
(2) While management may reprice savings accounts at its discretion and such
accounts are therefore included in the amount to be repriced within one
year, these accounts generally reprice in lesser increments than do other
interest-earning assets and interest-bearing liabilities.
40
<PAGE> 38
Interest rate risk is also monitored through the NPV approach, which is the
difference between the present value of expected cash flows from assets, and the
present value of expected cash flows from liabilities and off-balance sheet
contracts under various interest rate scenarios. Office of Thrift Supervision
("OTS") regulations define a normal level of interest rate risk, based on a 200
basis point change (100 basis points equals 1%) in interest rates, as a decrease
in the NPV of no more than two percent of the present value of its assets.
Presented below, as of December 31, 1996 and 1995, is an analysis of Potters'
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts in yield curve in 100 basis point increments up and down 400
basis points and compared to current policy limits of the Board of Directors. As
illustrated in the table, NPV is more sensitive to rising rates than declining
rates. In a rising rate environment, fixed-rate loans decline in market value
because of the rise in rate and slowing prepayments. The Company does not
experience a rise in market value for such loans in a declining rate environment
because borrowers will prepay at relatively faster rates. OTS assumptions are
used in calculating the amounts in this table.
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
Change in -------------------- --------------------
Interest Rate Board Limit $ change % change $ change % change
(Basis Points) % Change in NPV in NPV in NPV in NPV
- -------------- -------- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 (40)% $ (3,979) (30)% $ (1,901) (14)%
+300 (30) (2,787) (21) (1,237) (9)
+200 (20) (1,667) (13) (657) (5)
+100 (10) (702) (5) (221) (2)
0 0 0 0 0 0
-100 (10) 381 3 436 3
-200 (20) 695 5 937 7
-300 (30) 1,132 9 1,534 12
-400 (40) 1,898 14 2,413 18
</TABLE>
At December 31, 1996, Potters' base case NPV ratio was 11.17% compared to 11.36%
at December 31, 1995. After an assumed 200 basis point increase in interest
rates, the December 31, 1996 NPV ratio declined to 10.01% compared to 10.99% at
December 31, 1995. The Company's change in NPV as a percentage of the present
value of its assets increased from (.56)% at December 31, 1995 to (1.41)% at
December 31, 1996. The increase which has occurred in the Company's exposure to
interest rate risk was caused primarily from shifting short-term investment
instruments to loans during 1996.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. Certain assets and liabilities with similar
characteristics may react in different degrees to changes in market interest
rates. In addition, the interest rates on certain assets and liabilities may
fluctuate in advance, or lag behind, changes in market interest rates. A change
in interest rates can also invalidate the prepayment and other assumptions used
in NPV calculations.
OTS regulations specifying an interest rate risk component to the calculation of
risk-based capital required financial institutions exceeding the normal interest
rate exposure as defined by the OTS to take a deduction from the total capital
available to meet the risk-based capital requirement. The effective date of this
regulation has been indefinitely delayed. If and when the regulation is enacted,
Potters' asset and risk-based capital levels make the OTS regulation not
applicable to the Company.
Net interest income is analyzed under various interest rate scenarios using
simulation modeling and limits set for maximum allowable percentage changes in
net interest income under each scenario. The Board of Directors approves and
monitors the Company's compliance with its interest rate risk management policy
on a quarterly basis.
41
<PAGE> 39
ASSET QUALITY
Nonperforming Assets and Loan Loss Allowances: Nonperforming assets are loans
and other assets on which the recognition or receipt of income has been
restricted or suspended. Nonperforming assets consist of nonaccrual loans,
accruing loans which are delinquent 90 days or more, restructured loans, real
estate acquired by foreclosure or deed-in-lieu thereof and repossessed assets.
The following table sets forth the amounts and categories of Potters'
nonperforming assets. Loans are placed on nonaccrual status when the collection
of principal and/or interest becomes doubtful. Foreclosed assets include assets
acquired in settlement of loans and in-substance foreclosures.
<TABLE>
<CAPTION>
..............December 31,............
1996 1995 1994
(Dollars in thousands)
Nonaccrual loans:
<S> <C> <C> <C>
One-to-four family real estate $ 127 $ 126 $ 35
Nonresidential real estate 193 363
Consumer and other 500 53 80
-------- -------- --------
Total 627 372 478
Restructured loans:
Nonresidential real estate 1,101 2,066 2,116
-------- -------- --------
Total nonperforming loans 1,728 2,438 2,594
Foreclosed and repossessed assets:
Nonresidential real estate 85
Consumer and other 31
-------- -------- --------
Total 85 31
-------- -------- --------
Total nonperforming assets $ 1,728 $ 2,523 $ 2,625
======== ======== ========
Total assets $114,172 $114,242 $110,910
Total nonperforming assets as
a percent of total assets 1.51% 2.21% 2.37%
Allowance for loan losses $ 2,630 $ 2,240 $ 1,963
Allowance as a percentage of
nonperforming loans 152.20% 91.88% 75.67%
</TABLE>
Nonaccrual Loans: A loan is generally placed on nonaccrual status when it is 90
days past due. At that time, previously accrued but unpaid interest is deducted
from interest income. Nonaccrual loans increased $255,000 during 1996, primarily
from the inclusion of the Bennett Group equipment lease credits, but declined
$106,000 during 1995. At December 31, 1996, 1995 and 1994, nonaccrual loans as a
percentage of gross loans totaled .96%, .71% and .91%, respectively. Nonaccrual
loans include impaired loans. A loan is considered impaired when it is probable
that all principal and interest will not be collected according to the terms of
the loan contract. Included in consumer and other nonaccrual loans at December
31, 1996 were impaired loans totaling $365,000 which consisted of the Bennett
Group equipment lease credits.
Restructured Loans: Restructured loans are those which have been renegotiated at
concessionary terms as a result of the borrowers' financial condition. At
year-end 1995 and 1994, restructured loans were comprised of four nonresidential
real estate loans located in the State of Colorado. During 1996, one of the
loans was repaid and another was removed from the restructured category due to
the collateral value, interest rate and the history of repayment on the loan. As
a result, restructured loans declined $965,000 during 1996 and totaled $1.1
million at December 31, 1996. As of December 31, 1996, both of
42
<PAGE> 40
the remaining restructured loans had reverted back to the terms and conditions
of the original loan contract.
Foreclosed and Repossessed Assets: Foreclosed and repossessed assets totaled
$85,000 at December 31, 1995. The $85,000 asset was sold during 1996 at a gain
of $55,000, while mobile home loan repossessions and sales during 1996 resulted
in losses of $16,000. As of December 31, 1996, Potters had no foreclosed or
repossessed assets.
Allowance for Loan Losses: Potters maintains an allowance for loan losses in an
amount which, in management's judgment, is adequate to absorb reasonably
foreseeable future losses inherent in the loan portfolio. The allowance is
available to absorb credit losses from any loans, including nonperforming loans,
and a portion of the allowance is allocated to each major loan type. Management
determines the adequacy of the allowance for credit losses by reviewing the
changes in the financial condition or operating results of borrowers, economic
conditions and business trends. While management utilizes its best judgment and
information available, the ultimate adequacy of the allowance is dependent upon
a variety of factors, including future economic, regulatory and other conditions
beyond Potters' control. The provision for loan losses is the amount
periodically charged to earnings and added to the allowance for loan losses. The
amount of the provision is based on management's regular review of the loan
portfolio considering such factors as historical loss experience, the amount of
nonperforming and delinquent loans, changes in the size and composition of the
loan portfolio, and specific borrower considerations such as the ability of the
borrower to repay the loan and the estimated value of the underlying collateral.
See Note 3 to Consolidated Financial Statements for activity with respect to the
allowance for loan losses.
Potential Problem Assets: Potters has identified $237,000 of real estate loans
at December 31, 1996, which do not meet the criteria of nonperforming loans but
where information about credit or other problems creates doubts as to the
ultimate collectibility of the loan. The loans included in the above figure are
generally current as to contractually required payments but information exists
regarding possible credit or other problems of borrowers which causes management
concerns as to the ability of such borrowers to comply with the present loan
repayment terms.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability of Potters to generate sufficient cash to fund
current loan demand, meet deposit withdrawals and pay operating expenses.
Liquidity is influenced by financial market conditions, fluctuations in interest
rates, general economic conditions and regulatory requirements. Potters' liquid
assets, primarily represented by cash equivalents and interest-bearing deposits
in other financial institutions, are a result of operating, investing and
financing activities. These activities are summarized below for the years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Net income $ (61) $ 829
Adjustments to reconcile net income
to net cash from operating activities 602 189
-------- -------
Net cash from operating activities 541 1,018
Net cash from investing activities (6,946) 5,404
Net cash from financing activities (240) 1,770
-------- -------
Net change in cash and cash equivalents (6,645) 8,192
Cash and cash equivalents at the
beginning of the year 11,230 3,038
-------- -------
Cash and cash equivalents at the end of
the year $ 4,585 $11,230
======== =======
</TABLE>
43
<PAGE> 41
The adjustments to reconcile net income to net cash from operating activities
consists mainly of the provisions for losses, depreciation and amortization and
changes in accrued income and expense. Significant components of cash flows from
investment activities during 1996 were $23.9 million of purchases, $13.2 million
in sales of securities available for sale and calls and maturities totaling
$10.6 million. In addition, during 1996, there were $13.7 million in real estate
loan purchases and sales, repayments and calls of securities held to maturity of
$7.1 million. During 1995, investment activities included purchases of $4.3
million of securities available for sale and $3.3 million of securities held to
maturity which were offset by $3.4 million in sales and $9.9 million in calls
and maturities of such securities.
Financing activity included net outflows in deposits of $1.4 million during 1996
compared to $1.3 million during 1995. During 1996, proceeds from FHLB advances
totaled $15.6 million while repayments of such advances totaled $13.5 million.
During 1995, $4.1 million of FHLB advances were received, $1.1 million of which
were repaid.
Potters' normal, recurring sources of funds are primarily customer deposits,
investment 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. Potters maintains investments in liquid assets
based upon management's assessment of the need for funds, expected deposit
flows, the yields available on short-term liquid assets, and the objectives of
Potters' asset/liability management program. Potters is required under federal
regulation to maintain an average daily balance of liquid assets (generally
including cash, deposits in other financial institutions, and qualifying U.S.
government securities) at a minimum of 5% of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. During December 1996, Potters' average regulatory liquidity ratio was
15.58%. At that date, Potters had commitments to originate loans and unused
credit lines totaling $4.2 million. Management considers Potters' liquidity and
capital reserves sufficient to fund its outstanding short- and long-term needs
on a timely basis. Potters has sufficient cash flow and borrowing capacity to
fund all outstanding commitments and to maintain desired levels of liquidity.
At December 31, 1996, Potters capital was in excess of all capital requirements
set forth by regulation for all federally insured savings institutions. Note 16
of the consolidated financial statements sets forth information with respect to
Potters' regulatory capital and the corresponding regulatory capital
requirements applicable to thrift institutions.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company disclosed the estimated fair values and related carrying values of
its financial instruments at December 31, 1996 and 1995 in Note 17 of the
consolidated financial statements. The difference between the carrying values
and the estimated fair values of the Company's financial instruments is
primarily a function of the interest rate environment and the characteristics of
the financial instruments.
The estimated fair value of loans receivable represented 98.9% and 100.4% of the
carrying values at December 31, 1996 and 1995, respectively, while the fair
value of securities represented 98.9% and 99.5% of the carrying values at the
same date. At December 31, 1996 and 1995, the estimated fair value of deposits
was 100.1% and 100.2%, respectively, of its carrying value.
BAD DEBT RESERVE RECAPTURE
On August 20, 1996, President Clinton signed into law the Small Business Jobs
Protection Act of 1996. The new law eliminates the percent-of-taxable-income
method for computing additions to the tax bad debt reserves for all thrifts for
tax years beginning after December 31, 1995. The new rules also require that
thrift institutions recapture all or a portion of their tax bad debt reserves
added since their base year (the last taxable year beginning before January 1,
1998). Because Potters has average total assets of less than $500 million, it is
considered a small bank and is permitted to maintain the greater of the reserves
for bad debts as of the base year or the 1995 reserve balance for bad debts
allowable under the experience method. Any excess of the 1995 reserve balances
over the greater of the reserve balances
44
<PAGE> 42
must be recaptured into income ratably over six years, although a two-year delay
may be permitted for institutions meeting a residential mortgage loan
origination test. Prospectively, small institutions such as Potters will use the
experience method for deducting bad debts for tax purposes. The unrecaptured
base year reserves will not be subject to recapture as long as the institution
continues to carry on the business of banking. Likewise, if an institution is
acquired via a merger by another financial institution, no recapture of base
year reserves will result as long as the acquiring institution continues with
the business of banking. However, if an institution ceases to qualify as a bank
or converts to a credit union, the base year reserves must be recaptured in
accordance with previous law. This recapture would not be material for Potters,
because it has used the experience method of calculating its bad debt deductions
in recent years, which is the same method used by banks. In 1995 and 1996,
Potters' bad debt deduction was based on a percentage of taxable income, for
which a deferred tax liability has been recognized. As a result, the recapture
of the bad debt reserve will not impact future net income.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles ("GAAP"), which require
the measurement of financial position and results of operations primarily in
terms of historical dollars without considering changes in the relative
purchasing power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
Potters are monetary in nature. As a result, interest rates have a more
significant impact on Potters' performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, was issued by the Financial Accounting Standards
Board in 1996. It revises the accounting for transfers of financial assets, such
as loans and securities, and for distinguishing between sales and secured
borrowings. It is effective for some transactions in 1997 and others in 1998.
Management does not anticipate that it will have a material impact on Potters'
financial statements.
45
<PAGE> 1
Exhibit 20
Proxy Statement for the 1997 Annual Meeting
of Shareholders of Potters Financial Corporation
<PAGE> 2
POTTERS FINANCIAL CORPORATION
519 BROADWAY
EAST LIVERPOOL, OHIO 43920
(330) 385-0770
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the 1997 Annual Meeting of the Shareholders
of Potters Financial Corporation ("PFC") will be held at the East Liverpool High
School Alumni Association Clock Tower and Museum, 216 East Fourth Street, East
Liverpool, Ohio, on April 24, 1997, at 10:00 a.m. (the "Annual Meeting"), for
the following purposes, all of which are more completely set forth in the
accompanying Proxy Statement:
1. To elect four directors of PFC for terms expiring in 1999;
2. To ratify the selection of Crowe, Chizek and Company LLP as the auditors of
PFC for the current fiscal year; and
3. To transact such other business as may properly come before the Annual
Meeting or any adjournments thereof.
Only shareholders of PFC of record at the close of business on March
10, 1997, will be entitled to receive notice of and to vote at the Annual
Meeting and at any adjournments thereof. Whether or not you expect to attend the
Annual Meeting, we urge you to consider the accompanying Proxy Statement
carefully and to SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY SO THAT YOUR
SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF A QUORUM
MAY BE ASSURED. The giving of a Proxy does not affect your right to revoke your
Proxy and vote in person in the event you attend the Annual Meeting.
By Order of the Board of Directors
East Liverpool, Ohio Anne S. Myers, Secretary
March 24, 1997
<PAGE> 3
POTTERS FINANCIAL CORPORATION
519 BROADWAY
EAST LIVERPOOL, OHIO 43920
(330) 385-0770
PROXY STATEMENT
PROXIES
The enclosed Proxy is being solicited by the Board of Directors of
Potters Financial Corporation, an Ohio corporation ("PFC"), for use at the 1997
Annual Meeting of the Shareholders of PFC to be held at the East Liverpool High
School Alumni Association Clock Tower and Museum, 216 East Fourth Street, East
Liverpool, Ohio, on April 24, 1997, at 10:00 a.m., and at any adjournments
thereof (the "Annual Meeting"). Without affecting any vote previously taken, the
Proxy may be revoked by a shareholder executing a later-dated proxy which is
received by PFC before the Proxy is exercised or by giving notice of revocation
to PFC in writing or in open meeting before the Proxy is exercised. Any such
later-dated Proxy or written notice of revocation shall be delivered to Potters
Financial Corporation, 519 Broadway, East Liverpool, Ohio 43920, Attention: Anne
S. Myers, Secretary. Attendance at the Annual Meeting, will not, of itself,
revoke a Proxy.
Each properly executed Proxy received prior to the Annual Meeting and
not revoked will be voted as specified thereon or, in the absence of specific
instructions to the contrary, will be voted:
FOR the election of William L. Miller, Edward L. Baumgardner, Wm. Gaylord
Billingsley and Suzanne B. Fitzgerald as directors of PFC for terms
expiring in 1999; and
FOR the ratification of the selection of Crowe, Chizek and Company LLP
("Crowe Chizek") as the auditors of PFC for the current fiscal year.
Proxies may be solicited by the directors, officers and employees of
PFC and The Potters Savings and Loan Company, the wholly owned subsidiary of PFC
("Potters"), in person or by telephone, telecopy, telegraph or mail only for use
at the Annual Meeting. Such Proxies will not be used for any other meeting. The
cost of soliciting proxies will be borne by PFC.
Only shareholders of record as of the close of business on March 10,
1997 (the "Record Date"), are eligible to attend and to vote at the Annual
Meeting and will be entitled to cast one vote for each common share owned. PFC's
records disclose that, as of the Record Date, there were 486,830 common shares
of PFC outstanding and entitled to be cast at the Annual Meeting.
This Proxy Statement is first being mailed to shareholders of PFC on or
about March 24, 1997.
<PAGE> 4
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and PFC's Code of Regulations (the "Regulations"), the
four nominees receiving the greatest number of votes will be elected as
directors. Shares as to which the authority to vote is withheld and shares held
by a nominee for a beneficial owner which are present in person or by proxy, but
are not voted with respect to the election of directors ("Non-votes"), are not
counted toward the election of directors or toward the election of the
individual nominees specified on the Proxy. If the accompanying Proxy is signed
and dated by the shareholder, but no vote is specified thereon, the shares held
by such shareholder will be voted FOR the election of the four nominees.
RATIFICATION OF SELECTION OF AUDITORS
The affirmative vote of the holders of a majority of the shares
represented in person or by proxy at the Annual Meeting is necessary to ratify
the selection of Crowe Chizek as the auditors of PFC for the current fiscal
year. The effect of an abstention or Non-vote is the same as a vote against
ratification. If the accompanying Proxy is signed and dated by the shareholder,
but no vote is specified thereon, the shares held by such shareholder will be
voted FOR the ratification of the selection of Crowe Chizek as auditors.
VOTING SECURITIES AND OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
persons known to PFC to own beneficially more than five percent of the
outstanding common shares of PFC as of March 10, 1997:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address Beneficial Ownership Shares Outstanding
- ---------------- -------------------- ------------------
<S> <C> <C>
Towle & Co. 37,800(1) 7.76%
1714 Deer Tracks Trail
St. Louis MO 63131
Financial Focus, L.P.(2) 44,100(3) 9.06%
171 Church Street, Suite 300
Charleston, SC 29401
John Hancock Advisers, Inc. 41,000(4) 8.42%
101 Huntington Avenue
Boston, MA 02199
Wm. Gaylord Billingsley 25,345(5) 5.16%
P.O. Box 2108
1110 Dairy Lane
East Liverpool, Ohio 43920
Jackman S. Vodrey 25,301(6) 5.15%
P.O. Box 60
East Liverpool, Ohio 43920
</TABLE>
- ----------
(Footnotes on next page)
2
<PAGE> 5
(1) Consists of 13,800 shares over which Towle & Co. has sole voting and
dispositive power and 24,000 shares over which Towle & Co. has shared
dispositive power.
(2) The general partner of Financial Focus, L.P. ("FFL"), which is a limited
partnership, is Polaris Investment Partners, Inc., the Senior Vice
President of which is Stephen H. Hersch.
(3) FFL has sole voting and dispositive investment power with respect to all
44,100 shares.
(4) John Hancock Advisers, Inc. has sole voting and dispositive power with
respect to all 41,000 shares.
(5) Includes 19,509 shares with respect to which Mr. Billingsley has sole
voting and dispositive power; 340 shares awarded, but not yet earned, under
The Potters Savings and Loan Company Recognition and Retention Plan and
Trust (the "RRP") with respect to which he has shared voted power; 4,496
shares which may be acquired pursuant to options granted under The Potters
Savings and Loan Company Stock Option Plan ("Stock Option Plan"); and 1,000
shares over which Mr. Billingsley has shared voting and investment power
with his wife.
(6) Includes 3,509 shares with respect to which Mr. Vodrey has sole voting and
dispositive power; 340 shares awarded under the RRP with respect to which
he has shared voted power; 4,496 shares which may be acquired pursuant to
options granted under the Stock Option Plan; 6,956 shares awarded, but not
yet earned, under the RRP over which Mr. Vodrey, as co-trustee of the RRP,
has shared voting power; and 10,000 shares over which Mr. Vodrey has shared
voting and investment power with his wife.
The following table sets forth certain information with respect to the
number of common shares of PFC beneficially owned by each director of PFC and by
all directors and executive officers of PFC as a group as of March 10, 1997:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address(1) Beneficial Ownership(2) Shares Outstanding
- ------------------- ----------------------- ------------------
<S> <C> <C>
Edward L. Baumgardner 6,293(3) 1.28%
Wm. Gaylord Billingsley 25,345(4) 5.16%
Arthur T. Doak 9,345(5) 1.90%
William L. Miller 15,345(5) 3.12%
Timothy M. O'Hara 7,345(5) 1.49%
Peter D. Visnic 20,325(6) 4.17%
Jackman S. Vodrey 25,301(7) 5.15%
All directors and executive officers
as a group (9 persons) 110,322(8) 21.19%
</TABLE>
- -------------------------------
(1) Each of the persons listed in this table may be contacted at the address of
PFC, 519 Broadway, East Liverpool, Ohio 43920.
(Footnotes continued on next page)
3
<PAGE> 6
(2) Each person has sole voting power and dispositive power unless otherwise
indicated. Each director's number of shares, except Mr. Baumgardner's,
includes 340 shares awarded, but not yet earned, under the RRP with respect
to which each director has shared voting power with the trustees of the
RRP, who are also directors. The 340 shares are NOT counted twice for those
two directors serving as trustees of the RRP.
(3) Includes 6,000 shares which may be acquired pursuant to options granted
under the Stock Option Plan and 293 shares over which Mr. Baumgardner has
shared voting power as a co-trustee of The Potters Savings and Loan Company
401(k) Retirement Savings Plan.
(4) Includes 4,496 shares which may be acquired pursuant to options granted
under the Stock Option Plan and 1,000 shares over which Mr. Billingsley has
shared voting and investment power with his wife.
(5) Includes 4,496 shares which may be acquired pursuant to options granted
under the Stock Option Plan.
(6) Includes 6,956 shares awarded, but not yet earned, under the RRP, over
which Mr. Visnic, as co-trustee of the RRP, has shared voting power.
(7) Includes 4,496 shares which may be acquired pursuant to options granted
under the Stock Option Plan; 6,956 shares awarded, but not yet earned,
under the RRP over which Mr. Vodrey, as co-trustee of the RRP, has shared
voting power; and 10,000 shares over which Mr. Vodrey has shared voting and
investment power with his wife.
(8) Includes 33,836 shares which may be acquired pursuant to options granted
under the Stock Option Plan. Includes shares in various benefit plans over
which directors and officers have sole or shared voting power as trustees
or as participants.
BOARD OF DIRECTORS
ELECTION OF DIRECTORS
The Regulations provide for a Board of Directors consisting of seven
persons divided into two classes. Each of the directors of PFC is also a
director of Potters.
In accordance with Section 2.03 of the Regulations, nominees for
election as directors may be proposed only by directors or by any shareholder
entitled to vote for the election of directors if such shareholder has submitted
a written nomination to the Secretary of PFC by the close of business on the
fourteenth calendar day preceding the annual meeting of shareholders. Each such
director nomination must state the name, age, business or residence address of
the nominee, the principal occupation or employment of the nominee, the number
of common shares of PFC owned either beneficially or of record by each such
nominee and the length of time such shares have been so owned.
Jackman S. Vodrey, who has served as a director of Potters since 1992
and of PFC since 1995, decided to retire as a member of the Board of Directors
effective with the election of directors at the 1997 Annual Meeting. The Board
of Directors has nominated Suzanne B. Fitzgerald to replace Mr. Vodrey.
4
<PAGE> 7
The Board of Directors proposes the election of the following persons
to terms which will expire in 1999:
<TABLE>
<CAPTION>
Director Director of
Name Age(1) Position(s) Held Since Potters Since
- ---- ------ ---------------- ----- -------------
<S> <C> <C> <C> <C>
Edward L. Baumgardner 53 Chief Executive Officer, 1995(2) 1995
President and Director
William L. Miller 56 Chairman of the Board 1995(2) 1982
and Director
Wm. Gaylord Billingsley 66 Director 1995(2) 1972
Suzanne B. Fitzgerald 58 -- -- --
</TABLE>
- ----------
(1) As of March 10, 1997.
(2) Messrs. Miller, Baumgardner and Billingsley became directors of PFC in
connection with the 1996 reorganization of Potters into a wholly owned
subsidiary of PFC and the extinguishment and cancellation of Potters common
shares in exchange for PFC common shares (the "Reorganization").
The following directors will continue to serve as directors after the
Annual Meeting for the terms indicated:
<TABLE>
<CAPTION>
Director Director of Term
Name Age(1) Position(s) Held Since(2) Potters Since Expires
- ---- ------ ---------------- -------- ------------- -------
<S> <C> <C> <C> <C> <C>
Arthur T. Doak 48 Director 1995 1990 1998
Timothy M. O'Hara 47 Director 1995 1988 1998
Peter D. Visnic 50 Director 1995 1992 1998
</TABLE>
- ----------
(1) As of March 10, 1997.
(2) Each director became a director of PFC in connection with the
Reorganization.
Mr. Baumgardner has been the Chief Executive Officer, President and a
Director of Potters since February 1995. From August 1984 to October 1992, Mr.
Baumgardner was the President of Citizens Loan & Building Company of Lima, Ohio
("Citizens"). After Citizens merged into American Community Bank, N.A.
("AmeriCom"), Mr. Baumgardner served as the President of AmeriCom, from November
1992 to January 31, 1995.
Mr. Billingsley is retired from Billingsley, Inc., an Ohio corporation
which operated a supermarket in East Liverpool from 1955 to 1991.
Since 1985, Mr. Doak has been President of The Milligan Hardware &
Supply Company in East Liverpool.
Mr. Miller has served as the Chairman of the Board of Potters since
September 1991. Since 1983, Mr. Miller has been the President and Chairman of
the Board of MVP Enterprises, Inc., a nursing home provider in East Liverpool.
In addition, Mr. Miller has been a Partner in Miller & Stacey, an independent
public accounting firm, since 1977.
5
<PAGE> 8
Since 1975, Mr. O'Hara has been the Vice President of Operations of
W.C. Bunting Co., Inc., a supplier of decorative pottery in East Liverpool.
Since 1983, Mr. Visnic has been the Vice President, the Licensed
Administrator and a director of MVP Enterprises, Inc. From 1977 through 1992,
Mr. Visnic was a former partner in Crable, Miller & Visnic, the predecessor of
Miller & Stacey.
Suzanne B. Fitzgerald, the nominee for election to the director
position held by Mr. Vodrey, is a registered nurse. Since 1987, Ms. Fitzgerald
has served as Dean of the East Liverpool Campus of Kent State University. Prior
to 1987, Ms. Fitzgerald had served three years as Director of the Nursing
Program at that Campus.
MEETING OF DIRECTORS
PFC was incorporated under Ohio law in August 1995. The Board of
Directors of PFC met 9 times for regularly scheduled and special meetings during
the fiscal year ended December 31, 1996, and took action in writing without a
meeting 7 times. Each director attended at least 75% of the aggregate of such
meetings and all meetings of committees of the Board of Directors of which such
director was a member.
Each director of PFC is also a director of Potters. The Board of
Directors of Potters met 15 times for regularly scheduled and special meetings
during the fiscal year ended December 31, 1996, and took action in writing
without a meeting 4 times. Each director attended at least 75% of the aggregate
of such meetings and all meetings of committees of the Board of Directors of
which such director was a member.
COMMITTEES OF DIRECTORS
The Board of Directors of PFC has an Audit Committee, an ESOP Committee
and a Stock Option Committee.
The Audit Committee, which was created in March 1996 and consists of
Messrs. Visnic, O'Hara and Vodrey, is responsible for reviewing PFC's financial
statements. There were no meetings held during 1996.
The ESOP Committee is comprised of Messrs. Miller, Billingsley and
Vodrey. There were no meetings held during 1996.
The Stock Option Committee is comprised of Messrs. Miller, Doak and
O'Hara. The Stock Option Committee met two times during 1996.
EXECUTIVE OFFICERS
In addition to Mr. Baumgardner, the following persons are executive
officers of PFC and Potters and hold the designated positions:
<TABLE>
<CAPTION>
Name Age(1) Position(s) Held
- ---- ------ ----------------
<S> <C> <C>
Anne S. Myers 44 Vice President, Secretary, Chief
Operating Officer and Chief Financial
Officer of PFC and Potters
Albert E. Sampson 52 Vice President PFC and Potters and Chief
Lending Officer of Potters
</TABLE>
- --------------------
(1) As of March 10, 1997
6
<PAGE> 9
Ms. Myers has served as Vice President and Chief Operating Officer of
Potters since July 1992 and as Secretary of PFC and Potters since October 1996.
Ms. Myers became Vice President and Chief Operating Officer of PFC in connection
with the Reorganization. In March 1997, Ms. Myers was named Chief Financial
Officer of PFC and Potters. From 1977 through June 1992, Ms. Myers served in
various positions, including Associate Vice President and Accounting Manager of
a $1.5 billion publicly held financial institution in Pittsburgh.
Mr. Sampson has served as Vice President of PFC and Potters and Chief
Lending Officer of Potters since July 1996. From 1992 through July 1996, Mr.
Sampson served as Vice President of Lending of Home Federal Bank in Hamilton,
Ohio.
COMPENSATION OF EXECUTIVE OFFICER AND DIRECTORS
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to Edward L.
Baumgardner, the President and Chief Executive Officer of both PFC and Potters,
for the fiscal year ended December 31, 1996. No other executive officer of PFC
earned salary and bonus in excess of $100,000 during such period.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation Long Term Compensation
------------------------ ---------------------------
Awards
Name and Principal Year Salary($) Bonus($) Restricted Securities
Position Stock Awards Underlying
Options/
SARs(#)
<S> <C> <C> <C> <C> <C>
Edward L. Baumgardner 1996 $110,500 $ 50 -- --
President, Chief
Executive Officer(1)
</TABLE>
(1) Amounts reported do not include amounts attributable to other miscellaneous
compensation received. The cost of such benefits was less than 10% of Mr.
Baumgardner's salary and bonus.
7
<PAGE> 10
No options were granted to Mr. Baumgardner during 1996. The following
table sets forth information regarding the number and value of unexercised
options held by Mr. Baumgardner at December 31, 1996. No stock appreciation
rights have been granted under the Stock Option Plan.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and 12/31/96 Option/SAR Values
- -------------------------------------------------------------------------------------------------------
Number of Value of
Securities Unexercised
Underlying In-the-Money
Options/SARs at Options/SARs at
12/31/96(#) 12/31/96($)(1)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward L. Baumgardner -0- N/A 6,000/-0- $19,500/-0-
</TABLE>
- ------------------------
(1) An option is "in-the-money" if the fair market value of the underlying
stock exceeds the exercise price of the option. The figure represents the
value of such options determined by multiplying the number of shares
subject to unexercised options by the difference between the $16.75
exercise price and the fair market value of the common shares, which was
$20.00 per share on December 31, 1996, based upon the closing bid price
reported by The Nasdaq Stock Market.
DIRECTOR COMPENSATION
PFC does not pay fees to directors. Each non-employee director of
Potters receives a fee of $7,500 per year for service as a director of Potters
and an additional $175 for each committee meeting or special meeting attended by
the director. The Chairman of the Board receives an additional annual fee of
$7,500 but receives no fees for his attendance at committee meetings.
EMPLOYMENT AGREEMENT
On February 28, 1997, PFC and Potters entered into a three-year
severance agreement with Mr. Baumgardner, President of PFC and Potters. The
agreement provides that if the employment of Mr. Baumgardner is terminated at
any time during such three-year term for any reason other than "just cause" (as
defined in the agreement), Mr. Baumgardner will be entitled to receive, within
10 days of such termination, a payment equal to 1.2 times his annual
compensation for the prior year plus, if permissible under the benefit plans,
continued health insurance and other benefits for the remainder of the
three-year term of the agreement. If such employment is terminated, or if the
position or responsibilities of Mr. Baumgardner are changed, in connection with
or within one year of a change-in-control of PFC or Potters, Mr. Baumgardner
will be entitled to the same relief. If the change-in-control occurs during the
last year of the term of the agreement, the term of the agreement will be
extended to fifteen months from the date of the change in control. Any payment
under the agreement will be subject to reduction, to the extent necessary, to
comply with certain provisions of the Internal Revenue Code of 1986, as amended.
Assuming employment termination for other than "just cause" or in connection
with such a change in control, Mr. Baumgardner would receive $132,660, based on
his salary and bonus levels for fiscal 1996, plus other eligible benefits.
8
<PAGE> 11
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the federal securities laws, PFC's directors and executive
officers and all persons holding more than 10% of the common shares of PFC are
required to report their ownership of common shares of PFC and changes on such
ownership to the Securities and Exchange Commission (the "SEC") and to PFC. SEC
regulations establish specific due dates for the filing of such reports from the
time of the transaction requiring the filing of a report. Based upon a review of
the reports submitted, PFC must disclose any failures to file such reports
timely in this Proxy Statement for the Annual Meeting. Mr. Visnic filed one
beneficial ownership report on Form 4 in report of a December 1996 stock option
exercise five days late.
SELECTION OF AUDITORS
The Board of Directors has selected Crowe Chizek as the auditors of PFC
for the current fiscal year and recommends that the shareholders ratify the
selection. Management expects that a representative of Crowe Chizek will be
present at the Annual Meeting, will have the opportunity to make a statement if
he or she so desires and will be available to respond to appropriate questions.
PROPOSALS OF SHAREHOLDERS AND OTHER MATTERS
Any proposals of shareholders intended to be included in the proxy
statement for the 1998 Annual Meeting of the Shareholders should be sent to PFC
by certified mail and must be received by PFC not later than November 24, 1997.
Management knows of no other business which may be brought before the
Annual Meeting. It is the intention of the persons named in the enclosed Proxy
to vote such Proxy in accordance with their best judgment on any other matters
which may be brought before the Annual Meeting.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO FILL IN, SIGN AND
RETURN THE PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.
By Order of the Board of Directors
East Liverpool, Ohio
March 24, 1997 Anne S. Myers, Secretary
9
<PAGE> 12
/x/ PLEASE MARK VOTES
AS IN THIS EXAMPLE
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF POTTERS
FINANCIAL CORPORATION
1997 ANNUAL MEETING OF SHAREHOLDERS
APRIL 24, 1997
The undersigned shareholder of Potters Financial Corporation ("PFC") hereby
constitutes and appoints Timothy M. O'Hara and Arthur T. Doak, or
either one of them, as the Proxy or Proxies of the undersigned with full power
of substitution and resubstitution, to vote at the Annual Meeting of
Shareholders of PFC to be held at the East Liverpool High School Alumni
Association Clock Tower and Museum, 216 East Fourth Street, East Liverpool,
Ohio, on April 24, 1997, at 10:00 A.M. (the "Annual Meeting"), all of the
shares of PFC which the undersigned is entitled to vote at the Annual Meeting,
or at any adjournment thereof, on each of the following proposals, all of which
are described in the accompanying Proxy Statement:
REVOCABLE PROXY
POTTERS FINANCIAL CORPORATION
For With- For All
hold Except
1. The election of four directors: / / / / / /
William L. Miller
Wm. Gaylord Billingsley
Edward L. Baumgardner
Suzanne B. Fitzgerald
INSTRUCTIONS; To withhold authority to vote for any individual nominee, mark
"For All Except" above and write that nominee's name in the space provided
below.
- --------------------------------------------------------------------------------
For Against Abstain
2. The ratification of the selection of Crowe, / / / / / /
Chizek and Company LLP as the auditors of
PFC for the current fiscal year.
3. In their discretion, the proxies are authorized to vote on any other
business as may properly come before the Annual Meeting or any adjournments
thereof.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. Unless otherwise specified, the
shares will be voted FOR Proposals 1 and 2.
Please sign exactly as your name appears on your Stock Certificate(s).
Executors, Administrators, Trustees, Guardians, Attorneys and Agents should
give their full titles.
Please be sure to sign and date Date
this Proxy in the box below.
Shareholder sign above Co-holder (if any) sign above
- --------------------------------------------------------------------------------
DETACH ABOVE CARD, SIGN, DATE AND MAIL IN POSTAGE PAID ENVELOPE PROVIDED
POTTERS FINANCIAL CORPORATION
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001010476
<NAME> POTTERS FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,376
<INT-BEARING-DEPOSITS> 51
<FED-FUNDS-SOLD> 158
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,878
<INVESTMENTS-CARRYING> 31,913
<INVESTMENTS-MARKET> 31,576
<LOANS> 65,080
<ALLOWANCE> 2,630
<TOTAL-ASSETS> 114,172
<DEPOSITS> 97,283
<SHORT-TERM> 3,830
<LIABILITIES-OTHER> 1,228
<LONG-TERM> 1,255
0
0
<COMMON> 4,880
<OTHER-SE> 5,696
<TOTAL-LIABILITIES-AND-EQUITY> 114,172
<INTEREST-LOAN> 4,534
<INTEREST-INVEST> 3,491
<INTEREST-OTHER> 181
<INTEREST-TOTAL> 8,206
<INTEREST-DEPOSIT> 4,189
<INTEREST-EXPENSE> 340
<INTEREST-INCOME-NET> 3,677
<LOAN-LOSSES> 249
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,688
<INCOME-PRETAX> 7
<INCOME-PRE-EXTRAORDINARY> (61)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
<YIELD-ACTUAL> 7.36
<LOANS-NON> 627
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,101
<LOANS-PROBLEM> 237
<ALLOWANCE-OPEN> 2,240
<CHARGE-OFFS> 538
<RECOVERIES> 679
<ALLOWANCE-CLOSE> 2,630
<ALLOWANCE-DOMESTIC> 2,630
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,245
</TABLE>
<PAGE> 1
Exhibit 99
----------
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
----------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. Potters Financial
Corporation desires to take advantage of the "safe harbor" provisions of the
Act. Certain information, particularly information regarding future economic
performance and finances and plans and objectives of management, contained or
incorporated by reference in Potters Financial Corporation's Annual Report on
Form 10-KSB for fiscal year 1996 is forward-looking. In some cases, information
regarding certain important factors that could cause actual results of
operations or outcomes of other events to differ materially from any such
forward-looking statement appear together with such statement. In addition,
forward-looking statements are subject to other risks and uncertainties
affecting the financial institutions industry, including, but not limited to,
the following:
Interest Rate Risk
- ------------------
Potters Financial Corporation's operating results are dependent to a significant
degree on its net interest income, which is the difference between interest
income from loans and investments and interest expense on deposits and
borrowings. The interest income and interest expense of Potters Financial
Corporation change as the interest rates on mortgages, securities and other
assets and on deposits and other liabilities change. Interest rates may change
because of general economic conditions, the policies of various regulatory
authorities and other factors beyond Potters Financial Corporation's control.
The interest rates on specific assets and liabilities of Potters Financial
Corporation will change or "reprice" in accordance with the contractual terms of
the asset or liability instrument and in accordance with customer reaction to
general economic trends. In a rising interest rate environment, loans tend to
prepay slowly and new loans at higher rates increase slowly, while interest paid
on deposits increases rapidly because the terms to maturity of deposits tend to
be shorter than the terms to maturity or prepayment of loans. Such differences
in the adjustment of interest rates on assets and liabilities may negatively
affect Potters Financial Corporation income. Moreover, rising interest rates
tend to decrease loan demand in general, negatively affecting Potters Financial
Corporation income.
Possible Inadequacy of the Allowance for Loan Losses
- ----------------------------------------------------
The Potters Savings and Loan Company maintains an allowance for loan losses
based upon a number of relevant factors, including, but not limited to, trends
in the level of nonperforming assets and classified loans, current and
anticipated economic conditions in the primary lending area, past loss
experience, possible losses arising from specific problem assets and changes in
the composition of the loan portfolio. While the Board of Directors of The
Potters Savings and Loan Company believes that it uses the best information
available to determine the allowance for loan losses, unforeseen market
conditions could result in material adjustments, and net earnings could be
significantly adversely affected if circumstances differ substantially from the
assumptions used in making the final determination.
Loans not secured by one-to-four family residential real estate are generally
considered to involve greater risk of loss than loans secured by one-to-four
family residential real estate due, in part, to the effects of general economic
conditions. The repayment of multifamily residential and nonresidential real
estate loans generally depends upon the cash flow from the operation of the
property, which may be negatively affected by national and local economic
conditions that cause leases not to be renewed or that negatively affect the
operations of a commercial borrower.
<PAGE> 2
Construction loans may also be negatively affected by such economic conditions,
particularly loans made to developers who do not have a buyer for a property
before the loan is made. The risk of default on consumer loans increases during
periods of recession, high unemployment and other adverse economic conditions.
When consumers have trouble paying their bills, they are more likely to pay
mortgage loans than consumer loans, and the collateral securing such loans, if
any, may decrease in value more rapidly than the outstanding balance of the
loan.
Competition
- -----------
The Potters Savings and Loan Company competes for deposits with other savings
associations, commercial banks and credit unions and issuers of commercial paper
and other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, The Potters Savings and Loan Company competes with
other savings associations, commercial banks, consumer finance companies, credit
unions, leasing companies, mortgage companies and other lenders. Competition is
affected by, among other things, the general availability of lendable funds,
general and local economic conditions, current interest rate levels and other
factors which are not readily predictable. The size of financial institutions
competing with The Potters Savings and Loan Company is likely to increase as a
result of changes in statutes and regulations eliminating various restrictions
on interstate and inter-industry branching and acquisitions. Such increased
competition may have an adverse effect upon Potters Financial Corporation.
Legislation and Regulation that may Adversely Affect The Potters Savings and
- ----------------------------------------------------------------------------
Loan Company's Earnings
- -----------------------
The Potters Savings and Loan Company is subject to extensive regulation by the
Office of Thrift Supervision (the "OTS") and the Federal Deposit Insurance
Corporation (the "FDIC") and is periodically examined by such regulatory
agencies to test compliance with various regulatory requirements. As a savings
and loan holding company, Potters Financial Corporation is also subject to
regulation and examination by the OTS. Such supervision and regulation of The
Potters Savings and Loan Company and Potters Financial Corporation are intended
primarily for the protection of depositors and not for the maximization of
shareholder value and may affect the ability of the company to engage in various
business activities. The assessments, filing fees and other costs associated
with reports, examinations and other regulatory matters are significant and may
have an adverse effect on Potters Financial Corporation's net earnings.
The FDIC is authorized to establish separate annual assessment rates for deposit
insurance of members of the Bank Insurance fund (the "BIF") and the Savings
Association Insurance Fund (the "SAIF"). The FDIC may increase assessment rates
for either fund if necessary to restore the fund's ratio of reserves to insured
deposits to the target level within a reasonable time and may decrease such
rates if such target level has been met. The FDIC has established a risk-based
assessment system for both SAIF and BIF members. Under such system, assessments
may vary depending on the risk the institution poses to its deposit insurance
fund. Such risk level is determined by reference to the institution's capital
level and the FDIC's level of supervisory concern about the institution.
Congress recently enacted a plan to recapitalize the SAIF. The recapitalization
plan also provides for the merger of the SAIF and BIF effective January 1, 1999,
assuming there are no savings associations under federal law. Congress is
considering legislation to eliminate the federal thrift charter and the separate
federal regulation of savings and loan associations, and the Department of the
Treasury is preparing a report for Congress on the development of a common
charter for all financial institutions. As a result, The Potters Savings and
Loan Company may have to convert to a different financial institution charter or
might be regulated under federal law as a bank. If The Potters Savings and Loan
Company becomes a bank or is regulated as a bank, it would become subject to the
more restrictive activity limitations imposed on national banks. Moreover,
Potters Financial Corporation might become subject to more
<PAGE> 3
restrictive holding company requirements, including activity limits and capital
requirements similar to those imposed on The Potters Savings and Loan Company.
Potters Financial Corporation cannot predict the impact of the conversion of The
Potters Savings and Loan Company to, or regulation of The Potters Savings and
Loan Company as, a bank until any legislation requiring such change is enacted.
Specific References
- -------------------
In addition to the foregoing, some of the matters, which are addressed in the
Form 10-KSB and Forms 10-QSB's filed by Potters Financial Corporation, contain
forward-looking statements including the following:
1. Pending legislation or proposals regarding changes in charter or
regulation.
2. Management's determination of the amount and adequacy of the
allowance for loan losses and expectations regarding 1997 and
future charge-offs .
3. Management's efforts to reduce the higher degree of risk in second
mortgage, multifamily residential real estate, developed building
lot, nonresidential real estate, construction loans, commercial
loans and consumer loans.
4. Management's efforts to manage delinquencies and credit risk.
5. Management's efforts to manage interest rate risk.
6. Management's characterization of its competition.
7. Pending regulatory proposals.
8. Levels of deposit insurance assessments.
9. Management's determination of appropriate liquidity and capital
levels.
10. Management's belief that Potters can more effectively service its
East End customers through its Downtown Branch Office.
11. Management's belief that the Employee Stock Ownership Plan and the
401(k) plan can more adequately serve the retirement needs of
Potters' employees at less cost than the defined benefit plan.
12. Management's expectation that local economic factors will not
change significantly or that regional economic factors will not
significantly impact the operations of Potters.
