<PAGE> 1
Page 1 of 19 pages
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1997
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT FOR THE TRANSITION PERIOD FROM TO
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Commission file number: 0-27980
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Potters Financial Corporation
-----------------------------
(Exact name of small business issuer
as specified in its charter)
Ohio 34-1817924
---- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
519 Broadway, East Liverpool, Ohio 43920
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (330) 385-0770
--------------
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Common Shares, no par value Outstanding at April 22, 1997
486,830 Common Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE> 2
FORM 10-QSB
QUARTER ENDED MARCH 31, 1997
Part I - Financial Information
Item 1. Financial Statements
Interim financial information required by Regulation 210.10-01 of
Regulation S-X is included in this Form 10-QSB as referenced below:
Page
Number (s)
----------
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-17
Part II - Other Information
Item 1. Legal Proceedings 18
Item 2. Change in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE> 3
POTTERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,232 $ 4,376
Interest-bearing deposits with Federal Home Loan Bank 78 51
Federal funds sold and cash management account 872 158
----------- -----------
Cash and cash equivalents 3,182 4,585
Securities available for sale,
at estimated fair value (Note 2) 10,760 10,878
Securities held to maturity (estimated
fair value: March 31, 1997 - $30,492;
December 31, 1996 - $31,576) (Note 2) 31,046 31,913
Federal Home Loan Bank stock 837 822
Loans receivable, net (Note 3) 67,589 62,450
Premises and equipment, net 1,738 1,738
Other assets 1,769 1,786
----------- -----------
Total assets $ 116,921 $ 114,172
=========== ===========
LIABILITIES
Deposits $ 97,970 $ 97,283
Federal Home Loan Bank advances (Note 4) 7,520 5,085
Accrued expenses and other liabilities 1,020 1,228
----------- -----------
Total liabilities 106,510 103,596
----------- -----------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
Common shares, no par value
Authorized: 10,000,000 shares;
Issued: 538,470 shares
Paid-in capital 4,880 4,880
Treasury shares (51,640 shares in 1997
and 26,640 shares in 1996, at cost) (923) (436)
Unearned compensation on
recognition and retention plan (100) (100)
Unrealized loss on investment
securities available for sale, net of tax (174) (94)
Retained earnings, substantially restricted 6,728 6,326
----------- -----------
Total shareholders' equity 10,411 10,576
----------- -----------
Total liabilities and shareholders' equity $ 116,921 $ 114,172
=========== ===========
</TABLE>
------------------------------------------------------------------------------
See accompanying notes to financial statements.
3
<PAGE> 4
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
INTEREST INCOME
Loans $ 1,344 $ 1,114
Securities 672 817
Other interest income 19 85
--------- ---------
Total interest income 2,035 2,016
--------- ---------
INTEREST EXPENSE
Interest on deposits 1,004 1,062
Other interest expense 79 40
--------- ---------
Total interest expense 1,083 1,102
--------- ---------
NET INTEREST INCOME 952 914
Provision for loan losses (Note 3) (350) 219
--------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,302 695
Loan and investment security gains 1
Other noninterest income 74 61
--------- ---------
Total noninterest income 74 62
--------- ---------
Compensation and benefits 330 333
Occupancy and equipment 94 84
FDIC deposit insurance premiums 16 64
Other noninterest expense 272 258
--------- ---------
Total noninterest expense 712 739
--------- ---------
INCOME BEFORE INCOME TAX 664 18
Income tax expense 226 8
--------- ---------
NET INCOME $ 438 $ 10
========= =========
Earnings per share $ 0.88 $ 0.02
========= =========
</TABLE>
- ------------------------------------------------------------------------------
See accompanying notes to financial statements.
4
<PAGE> 5
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
BALANCE - JANUARY 1 $ 10,576 $ 11,189
Net income for the three months ended March 31 438 10
Purchase of treasury shares (25,000 in 1997) (487)
Cash dividends declared ($.07 per share in 1997) (36)
Change in net unrealized loss on
securities available for sale (80) (118)
----------- -----------
BALANCE - MARCH 31 $ 10,411 $ 11,081
=========== ===========
</TABLE>
- ------------------------------------------------------------------------------
See accompanying notes to financial statements.
5
<PAGE> 6
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 438 $ 10
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 48 34
Provision for losses (350) 219
Net investment amortization 11 20
Net gain on:
Securities (1)
Sale of foreclosed real estate and
repossessed assets (50)
Stock dividend on FHLB stock (15) (12)
Change in other assets and liabilities 90 (127)
------- --------
Net cash from operating activities 172 143
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Proceeds from sales 2,500
Proceeds from calls and maturities 3,000
Purchases (12,900)
Securities held to maturity
Proceeds from repayments, calls and maturities 854 2,394
Purchases (497)
Net decrease in loans 1,129 1,056
Loan purchases (5,924) (1,488)
Proceeds from sale of foreclosed real estate
and repossessed assets 50 3
Property and equipment expenditures (42) (105)
-------- ---------
Net cash from investing activities (3,933) (6,037)
-------- ----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
6
<PAGE> 7
POTTERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 687 1,540
Proceeds from FHLB advances 4,000
Repayments of FHLB advances (1,565) (1,566)
Net change in official checks (169) 92
Net decrease in advances from
borrowers for taxes and insurance (72) (70)
Treasury share purchases (487)
Cash dividends paid (36)
-------- ----------
Net cash from financing activities 2,358 (4)
-------- ----------
Net change in cash and cash equivalents (1,403) (5,898)
Cash and cash equivalents at beginning of year 4,585 11,230
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,182 $ 5,332
======== =========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 1,059 $ 1,104
Income taxes 85
Noncash transactions
Transfer from loans to foreclosed real estate and
repossessed assets 23
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Potters Financial Corporation ("PFC") is a unitary savings and loan holding
company headquartered in East Liverpool, Ohio. PFC is the sole shareholder of
The Potters Savings and Loan Company ("Potters"), also headquartered in East
Liverpool, Ohio.
The accompanying consolidated financial statements include the accounts of PFC
and Potters. All significant intercompany transactions and balances have been
eliminated in consolidation.
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present
fairly the consolidated financial position of PFC at March 31, 1997, and its
results of operations and statement of cash flows for the periods presented.
All such adjustments are normal and recurring in nature. The accompanying
consolidated financial statements do not purport to contain all the necessary
financial disclosures required by generally accepted accounting principles that
might otherwise be necessary in the circumstances and should be read in
conjunction with the consolidated financial statements of PFC and notes thereto
included in the 1996 Annual Report.
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
was adopted in 1997. It revised the accounting for transfers of financial
assets, such as loans and securities, and for distinguishing between sales and
secured borrowings. It is effective for some transactions in 1997 and others in
1998. The adoption of SFAS No. 125 did not materially impact PFC's financial
statements, and management does not anticipate that it will have a material
impact in the future.
Earnings per share was calculated on the basis of the weighted average number
of shares outstanding during the period. Such weighted average shares were
498,608 for the first quarter of 1997 and 532,809 for the three months ended
March 31, 1996.
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year.
NOTE 2 - SECURITIES
At March 31, 1997, 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
---- ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and U.S.
Government agencies $ 9,989 $ $ (246) $ 9,743
Mutual funds 1,034 (17) 1,017
----------- ----------- ----------- -----------
$ 11,023 $ $ (263) $ 10,760
=========== =========== =========== ===========
Securities held to maturity:
U.S. Treasury and U.S.
Government agencies $ 6,857 $ 2 $ (119) $ 6,740
Obligations of states and
political subdivisions 175 34 209
Other securities 816 1 (1) 816
Agency issued mortgage-
backed securities 23,198 72 (543) 22,727
----------- ----------- ----------- -----------
$ 31,046 $ 109 $ (663) $ 30,492
=========== =========== =========== ===========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
8
<PAGE> 9
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- -------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated fair value of debt securities at March
31,1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<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 $ 513 $ 510
Due after one year through five years $ 7,996 $ 7,827 4,123 4,091
Due after five years through ten years 1,993 1,916 1,907 1,866
Due after ten years 1,305 1,298
Agency issued mortgage-
backed securities 23,198 22,727
--------- -------- --------- ---------
$ 9,989 $ 9,743 $ 31,046 $ 30,492
========= ======== ========= =========
</TABLE>
No securities were purchased, sold or called during the three months ended
March 31, 1997. The net unrealized holding loss on securities available for
sale increased by $119,000 during 1997.
The carrying value of investment securities pledged as collateral for public
funds amounted to $2.5 million at March 31, 1997.
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
---- ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and U.S.
Government agencies $ 9,988 $ $ (135) $ 9,853
Mutual funds 1,034 (9) 1,025
----------- ----------- ----------- -----------
$ 11,022 $ $ (144) $ 10,878
=========== =========== =========== ===========
Securities held to maturity:
U.S. Treasury and U.S.
Government agencies $ 6,854 $ 7 $ (74) $ 6,787
Obligations of states and
political subdivisions 175 7 182
Other securities 866 6 872
Agency issued mortgage-
backed securities 24,018 82 (365) 23,735
----------- ----------- ----------- -----------
$ 31,913 $ 102 $ (439) $ 31,576
=========== =========== =========== ===========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
9
<PAGE> 10
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- -------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized below:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Real estate loans
One-to-four family residences $ 53,975 $ 49,086
Nonresidential property 5,858 5,897
Multifamily and other 2,068 2,034
----------- -----------
61,901 57,017
----------- -----------
Consumer and other loans
Home equity loans 3,892 3,859
Commercial loans and unsecured lines of credit 1,334 1,316
Mobile home loans 824 906
Other 2,288 2,347
----------- -----------
8,338 8,428
----------- -----------
Total loan principal balances 70,239 65,445
Loans in process (555) (466)
Unearned interest and deferred fees, net 159 101
Allowance for loan losses (2,254) (2,630)
----------- -----------
$ 67,589 $ 62,450
=========== ===========
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of year $ 2,630 $ 2,240
Provision for loan losses (350) 219
Recoveries 4 8
Charge-offs (30) (405)
-------- ---------
Balance at end of year $ 2,254 $ 2,062
======== =========
</TABLE>
Nonaccrual and renegotiated loans totaled $975,000 and $1.7 million at March
31, 1997 and December 31, 1996, respectively. Potters is not committed to lend
additional funds to debtors whose loans have been modified.
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Average investment in impaired loans $ 365 $ 185
======== =========
Interest income recognized on impaired loans
including interest income recognized on a cash basis $ 0 $ 14
======== =========
Interest income recognized on impaired loans
on a cash basis $ 0 $ 14
======== =========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
10
<PAGE> 11
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- -------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
Information regarding impaired loans, which are included in nonaccrual and
renegotiated loans disclosed above, is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance of impaired loans $ 365 $ 547
Less portion for which no allowance for
loan losses is allocated (365) (547)
-------- ---------
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>
NOTE 4 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank ("FHLB") advances are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Variable-rate Cash Management Advance with monthly interest payments:
5.75% Cash Management Advance due May 29, 1997 $ 500
Fixed-rate advances with monthly interest payments:
5.80% Advance due May 28, 1997 3,830 $ 3,830
6.30% Advance due June 24, 1998 2,000
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 283 333
5.85% Advance due September 1, 1999 157 172
----------- -----------
$ 7,520 $ 5,085
=========== ===========
</TABLE>
FHLB advances obtained through the Community Investment Program are amortizing
loans requiring monthly principal payments. As of March 31, 1997, the aggregate
future minimum annual principal payments on FHLB advances were $4.5 million in
1997, $2.9 million in 1998 and $48,000 in 1999. As of March 31, 1997, the
Company was approved to borrow a total of $5.5 million in cash management
advances. FHLB advances are collateralized by all shares of FHLB stock owned by
Potters and by 100% of its qualified real estate loan portfolio.
- -------------------------------------------------------------------------------
(Continued)
11
<PAGE> 12
POTTERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- -------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, various outstanding commitments and
contingent liabilities are not reflected in the accompanying consolidated
financial statements. These include certain claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
position of PFC.
Loan Commitments
As of March 31, 1997, Potters had commitments to make loans (at market rates)
and unused lines of credit approximating $3,862,000, of which $19,000 carry a
fixed rate of 8.375%, and $3,843,000 carry adjustable rates. Since loan
commitments may expire without being used, the amounts do not necessarily
represent future cash commitments.
NOTE 6 - CONCENTRATIONS OF CREDIT RISK
Most of Potters' current business activities are with customers located within
the immediate lending area, which includes portions of Columbiana and Jefferson
Counties in northeastern Ohio and northern Hancock County in West Virginia. At
March 31, 1997, the loan portfolio included approximately $16.2 million of
purchased one-to-four family real estate loans, $13.6 million on properties
located in northwestern Ohio and $2.6 million on properties in southwestern
Ohio. As of March 31, 1997, the loan portfolio also included approximately $3.4
million in nonresidential real estate loans secured by property located
primarily in the State of Colorado.
- -------------------------------------------------------------------------------
12
<PAGE> 13
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
Potters Financial Corporation, a unitary thrift holding company ("PFC"), owns
all of the outstanding shares of The Potters Savings and Loan Company
("Potters"), a savings and loan institution. In the following pages, management
presents an analysis of PFC's financial condition as of March 31, 1997 and
December 31, 1996, and the results of operations for the three months ended
March 31, 1997, as compared to the prior year. In addition to the historical
information, the following discussion contains forward-looking statements that
involve risks and uncertainties, including regulatory policy changes, interest
rate fluctuations, loan demand and other risks. Economic circumstances,
operations and actual strategies and results in future time periods may differ
materially from those currently expected. Such forward-looking statements
represent PFC's judgment as of the current date. PFC disclaims, however, any
intent or obligation to update such forward-looking statements. Some of the
factors that could cause or contribute to such differences are discussed herein
but also include changes in the economy and interest rates in the nation and in
Potters' general market area. See Exhibit 99 to Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996, which is incorporated herein by
reference.
Without limiting the foregoing, some of the forward-looking statements included
herein are the statements under the following headings and regarding the
following matters:
1) Results of Operations - Management's belief that the final settlement
documents in the Bennett Funding Group Inc. ("Bennett") bankruptcy matter
will be approved and that no additional losses will be incurred.
Management's statements regarding the amount and adequacy of the allowance
for loan losses and future loan loss provisions.
Statements regarding management's intent to continue the shifting of funds
from securities and other investments into loans.
Management's statement that the outsourcing of part of the internal audit
and compliance functions should contain future audit and compliance costs
while allowing management to concentrate on implementing Potters'
strategic initiatives.
2) Recent Accounting Pronouncements - Management's expectation that the new
accounting requirements for calculating earnings per share will not
significantly affect future basic earnings per share and diluted earnings
per share.
The following discussion and financial information are presented to provide
shareholders with a more comprehensive review of the financial position and
operating results than could be obtained from an examination of the financial
statements alone. The review should be read in conjunction with the
consolidated financial statements and accompanying notes. Because the
activities of PFC have been limited primarily to holding the shares of Potters,
the following discussion essentially concerns the operations of Potters.
13
<PAGE> 14
RESULTS OF OPERATIONS
PFC recorded net income of $438,000, or $.88 per common share, for the three
months ended March 31, 1997, compared to $10,000, or $.02 per share, for the
comparable period during 1996. The primary reason for the increase in net
income was an event tied to Potters' ongoing strategic initiative of reducing
credit risk from loans on out-of-state nonresidential real estate. In January
1997, a $756,000 nonperforming loan located in Colorado was repaid, which,
through the removal of the allowance specifically allocated to the loan,
increased the portion of the allowance for loan losses not allocated to any
specific loan or group of loans by over $350,000. In addition to management's
ongoing review of all loans with respect to the adequacy of the allowance for
loan losses, a periodic analysis of the percentages allocated to various types
of real estate, consumer and commercial loans is conducted. Because of the
decline in nonperforming loans and in the risk composition of Potters' loan
portfolio, and primarily because of the payoff of the Colorado nonresidential
real estate loan, a negative provision for loan losses of $350,000 was recorded
during the first quarter of 1997 to remove excess allowances for loan losses.
The provision had a $231,000 after tax positive impact on 1997 earnings. At
March 31, 1997, nonperforming loans totaled $975,000, or .83% of total assets,
and the unallocated allowance exceeded $1.4 million. In addition, the allowance
for loan losses totaled $2.3 million and represented 231.2% of nonperforming
loans.
The increase in net income resulted in annualized returns on average assets and
average shareholders' equity of 1.53% and 16.56%, respectively, for the three
months ended March 31, 1997, compared to .04% and .37%, respectively, for the
comparable period during 1996.
Also contributing to the $428,000 increase in net income during the first
quarter of 1997 compared to the first quarter of 1996 was an increase in net
interest income and noninterest income and a reduction in noninterest expense.
Somewhat offsetting these positive variances was a $218,000 increase in income
taxes in 1997 due to the $646,000 increase in net income before income taxes.
First quarter 1996 earnings were significantly affected by an additional
provision for loan losses of $188,500 relating to the writedown of the Bennett
equipment lease credits by 50% upon learning of Bennett's bankruptcy filing and
investigation by the Securities and Exchange Commission for alleged securities
fraud. The Court has since ruled that the manner in which the lease credits
were structured and recorded was sufficient to perfect Potters' position in the
lease credits as a secured creditor. Further, in January 1997, the bankruptcy
Trustee extended various settlement options to all financial institutions
involved in the case. After careful consideration, Potters' Board of Directors
agreed to accept one of the settlement options. On February 27, 1997, the
motions for settlement were heard and approved by the Court, subject to the
approval of final settlement documents by Potters' Board of Directors.
Attorneys continue to work on finalizing the documents. While the amount
Potters will receive is uncertain under the terms of the settlement offer and
depends upon events outside Potters' control, and no assurances can be given
that additional losses will not be incurred or that additional provisions will
not be required, no additional losses are anticipated on the Bennett lease
credits.
The allowance for loan losses at March 31, 1997 was $2.3 million, representing
a decline of $376,000 from $2.6 million at December 31, 1996. During 1997, net
loan charge-offs totaled $26,000, compared to $397,000 for the first quarter of
1996. Due to the current level of unallocated allowances, no provision for loan
losses is planned for the remainder of 1997, although no assurances can be
given that provisions will not be made during that time if circumstances
change, such as increases in the loan portfolio, changes in the economy or
increases in nonperforming loans. The provision for loan losses during the
first three months of 1996 totaled $219,000, relating primarily to the Bennett
credits.
14
<PAGE> 15
Nonperforming loans of $975,000 at March 31, 1997 represented decreases of
$753,000 from the $1.7 million level at December 31, 1996, and $1.7 million
from a level of $2.7 million at March 31, 1996. The decrease, despite the
inclusion of the Bennett credits, resulted primarily from payoffs in the
Colorado portfolio. The allowance for loan losses increased from 152.5% of
nonperforming loans at December 31, 1996, to 231.2% at March 31, 1997. Impaired
loans totaled $365,000 at December 31, 1996 and March 31, 1997, and consisted
solely of the Bennett credits.
Interest income increased $19,000, to $2.0 million, for the three months ended
March 31, 1997, compared to the same period for 1996. Although the overall
increase in interest income was not dramatic, the change in the composition of
interest income was significant. Interest income on loans increased $230,000,
or 20.6%, from the first quarter of 1996 to the first quarter of 1997, while
interest on securities and other investments declined $211,000 during the same
period. The shifting of funds from securities and other investments into loans
occurred throughout 1996, continued during the first quarter of 1997 and should
continue into the future as Potters' strategic initiatives are executed,
although no assurances can be provided that loan demand will continue. Loan
originations are affected by many circumstances and events, including interest
rates nationally and locally, competition and other changes in the national and
local economy. Yields on interest-earning assets increased by 10 basis points,
from 7.40% for the first three months of 1996 to 7.50% for the same period
during 1997. Although the yield on loans actually decreased between the two
first quarters, more of Potters' assets were placed into loans which yield
significantly higher than securities and other investments.
Interest expense decreased $19,000, to $1.1 million, for the three months ended
March 31, 1997 compared to the same period during 1996. The decrease was
primarily attributable to a decline in the average balances and yields on
deposit accounts and a decrease in the yield on FHLB advances from the first
quarter of 1996 to the first quarter of 1997. The increased use of FHLB
advances during 1997 compared to 1996 had somewhat of a negative impact on
interest expense because such instruments generally bear higher interest rates
than deposits. The cost of funds decreased from 4.34% for the three months
ended March 31, 1996 to 4.27% for the comparable period in 1997.
The increase in the yield on interest-earning assets and the decline in the
cost of funds resulted in a widening of the interest rate spread from 3.06%
during the first three months of 1996 to 3.23% for the same period in 1997 and
an increase in net interest income of $38,000 during 1997 compared to net
interest income during the first quarter of 1996.
Noninterest income increased $12,000, or 19.4%, for the three months ended
March 31, 1997 compared to the respective period in 1996. The increase during
1997 compared to 1996 came primarily from increased service charges on deposit
accounts, Automated Teller Machine ("ATM") and other customer fees from the
development and implementation of new products and services.
Noninterest expense decreased $27,000 for the three months ended March 31,
1997, compared to the same period in 1996. Due to the recapitalization of the
Savings Association Insurance Fund, deposit insurance premiums during the first
quarter of 1997 declined $48,000 from the first quarter of 1996. Included in
1997 noninterest expense was a $50,000 gain on the sale of foreclosed real
estate in Colorado. Compensation and benefits expense decreased marginally
between 1996 and 1997, while data processing, office occupancy and advertising
expense increased due to commitments to upgrade technology and the continued
development of a strategic marketing program, both of which should result in
improved customer service and increased efficiency in handling customer
transactions. Professional fees increased significantly during the first
quarter of 1997 from the settlement of the Bennett lease credits and from
Potters' decision to outsource part of its internal audit and compliance
functions. Such an arrangement should contain future audit and compliance costs
while allowing management to concentrate on implementing Potters' strategic
initiatives.
15
<PAGE> 16
As part of management's ongoing process to contain costs, branch operations at
Potters' East End Office were terminated on March 31, 1997. Management is in
the process of installing an ATM in an East End grocery store in order to
utilize technology to accommodate more customers in the East End. Potters
continued its strategic commitment to invest in employee training and
development during the first three months of 1997. Throughout 1997 training
efforts will continue to reflect Potters' philosophy of helping employees
perform at the level necessary to redefine customer expectations.
FINANCIAL CONDITION
PFC's assets at March 31, 1997 increased $2.7 million to $116.9 million
compared to $114.2 million at December 31, 1996. Potters continued to
restructure its balance sheet during the first quarter of 1997 in accordance
with its strategic focus and long-term goals of increasing interest income and
the interest rate spread. During the first three months of 1997, funds from
loan and securities repayments, and FHLB advances were utilized to originate
loans and purchase one-to-four family real estate loans.
Cash and cash equivalents decreased $1.4 million, from $4.5 million at
December 31, 1996 to $3.2 million at March 31, 1997.
Securities available for sale decreased marginally, totaling $10.8 million at
March 31, 1997, compared to $10.9 million at December 31, 1996. Securities
designated as available for sale are carried at their fair values, with
resulting unrealized gains or losses added to or deducted from shareholders'
equity, net of tax. The unrealized loss on securities available for sale
increased from $144,000 at year-end 1996 to $263,000 at March 31, 1997 due to a
general rise in interest rates during the first quarter of 1997. The equity
component, representing unrealized losses, net of tax, on securities available
for sale, increased from $94,000 at December 31, 1996 to $174,000 at March 31,
1997.
At March 31, 1997, the held-to-maturity securities portfolio totaled $31.0
million and consisted of agency issued mortgage-backed securities totaling
$23.2 million and $7.8 million of other securities, primarily U.S. Government
agency securities. Repayments on such securities, totaling $854,000 during the
first quarter of 1997, were used to fund loan growth.
Net loans receivable increased $5.1 million, from $62.5 million at December 31,
1996, to $67.6 million at March 31, 1997. Loan purchases and local loan
originations during 1997 resulted in a net increase of $4.9 million, or 10.0%,
in one-to-four family real estate loans. Loan purchases totaled $5.9 million of
adjustable-rate real estate loans during the first quarter of 1997. The
adjustable-rate features of the loan purchases continued management's
asset/liability strategy of controlling exposure to interest rate risk.
Total deposits increased $687,000 during the first quarter of 1997, from $97.3
million at December 31, 1996 to $98.0 million at March 31, 1997. Inflows
occurred primarily in 18-month and 30-month certificates of deposit. Potters
has aggressively priced selected certificates of deposit with maturities
exceeding one year in an attempt to maintain deposit levels despite strong
competition for certificates of deposit in the local area. The Asset and
Liability Management Committee continues to focus on strategies for reduced
interest rate risk and responsible deposit management.
FHLB advances totaled $7.5 million at March 31, 1997, compared to $5.1 million
at December 31, 1996. Advances totaling $4.0 million received during the first
quarter of 1997 were used to fund Potters' loan growth and for cash management
purposes. Repayments totaling $1.6 million occurred during 1997.
16
<PAGE> 17
Despite net income of $438,000 for the three months ended March 31, 1997,
shareholders' equity decreased $165,000 during 1997 due primarily to the
repurchase of 25,000 PFC shares for $487,000 relating to a repurchase program
announced in October 1996, an increase of $80,000 in the unrealized loss, net
of income tax, on securities available for sale and dividends paid of $36,000,
or $.07 per share.
LIQUIDITY AND CAPITAL RESOURCES
Potters' normal, recurring sources of funds are primarily customer deposits,
securities available for sale, maturities, calls and repayments of securities
held to maturity, loan repayments and other funds provided by operations.
Potters has the ability to borrow from the FHLB when needed as a secondary
source of liquidity.
The most significant component of cash flows from investing activities during
the first three months of 1997 were loan purchases of $5.9 million somewhat
offset by a $1.1 million decrease in loans other than such purchases.
Repayments of securities held to maturity totaled $854,000 during the year.
Investing activities during the first three months of 1996 included the
purchase of $12.9 million in securities available for sale, offset by $2.5
million in sales of such securities and $5.4 million in calls and maturities of
both available-for-sale and held-to-maturity securities. Loan purchases during
1996 totaled $1.5 million, offset by a $1.1 million net decrease in loans.
Financing activities during the three months ended March 31, 1997 included net
deposit inflows of $687,000, proceeds from FHLB advances of $4.0 million and
advance repayments totaling $1.6 million. In addition, PFC purchased 25,000 PFC
shares for a total of $487,000. Deposit inflows of $1.5 million occurred during
the first three months of 1996, while FHLB advance activity included repayments
totaling $1.6 million.
Potters' average regulatory liquidity ratio for March 1997 was 12.98%. At March
31, 1997, Potters had commitments to originate loans of $109,000 and unused
lines of credit totaling $3.8 million.
The following table details the minimum capital requirements set forth by
regulation for all federally insured savings institutions and Potters' capital
levels as of March 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
---------------- ---------------- -----------------
Amount % Amount % Amount %
------ -- ------ -- ------ --
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital -
computed $ 9,988 8.53 $ 9,988 8.53% $ 10,689 19.61%
Minimum capital
requirement 1,756 1.50 3,513 3.00 4,361 8.00
-------- ---- -------- ---- -------- ----
Regulatory capital -
excess $ 8,232 7.03% $ 6,475 5.53% $ 6,328 11.61%
======== ==== ======== ==== ======== =====
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the accounting requirements for calculating earnings per share
were revised. Basic earnings per share for 1997 and later will be calculated
solely on average common shares outstanding. Diluted earnings per share will
reflect the potential dilution of stock options and other common stock
equivalents. All prior calculations will be restated to be comparable to the
new methods. As PFC has not had significant dilution from stock options, the
new calculation methods will not significantly affect future basic earnings per
share and diluted earnings per share.
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
<TABLE>
<S> <C>
Exhibit 2.1 Agreement and Plan of Reorganization Incorporated by reference to the
dated December 14, 1995, by and among Annual Report on Form 10-KSB
Potters Financial Corporation, The Potters filed by PFC with the Securities
Savings and Loan Company and Potters and Exchange Commission
Merger Corp. ("SEC") for the year ended
December 31, 1995, Exhibit 2.1.
Exhibit 3.1 Articles of Incorporation of Potters Incorporated by reference to the
Financial Corporation Form 8-A filed with the SEC on
March 4, 1996 (the "8-A").
Exhibit 3.2 Code of Regulations of Potters Incorporated by reference to the 8-A.
Financial Corporation
Exhibit 11 Statement re: computation of Incorporated by reference to Note 1
per share earnings to the Consolidated Financial
Statements.
Exhibit 27 Financial Data Schedule Included herewith.
Exhibit 99 Safe Harbor Under the Private Incorporated by reference to the
Securities Litigation Reform Act of 1995 Annual Report on Form 10-KSB
filed by PFC with the SEC
for the year ended December 31,
1996, Exhibit 99.
B. Reports on Form 8-K - none.
</TABLE>
18
<PAGE> 19
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
POTTERS FINANCIAL CORPORATION
Date: May 9, 1997 By: /s/ EDWARD L. BAUMGARDNER
----------------------------
Edward L. Baumgardner
Duly Authorized Representative,
President and Chief Executive Officer
By: /s/ ANNE S. MYERS
----------------------------
Anne S. Myers
Principal Financial Officer and
Principal Accounting Officer
19
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001010476
<NAME> POTTERS FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,232
<INT-BEARING-DEPOSITS> 78
<FED-FUNDS-SOLD> 872
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,760
<INVESTMENTS-CARRYING> 31,046
<INVESTMENTS-MARKET> 30,492
<LOANS> 69,843
<ALLOWANCE> 2,254
<TOTAL-ASSETS> 116,921
<DEPOSITS> 97,970
<SHORT-TERM> 4,592
<LIABILITIES-OTHER> 1,020
<LONG-TERM> 2,928
0
0
<COMMON> 4,880
<OTHER-SE> 5,531
<TOTAL-LIABILITIES-AND-EQUITY> 116,921
<INTEREST-LOAN> 1,344
<INTEREST-INVEST> 672
<INTEREST-OTHER> 19
<INTEREST-TOTAL> 2,035
<INTEREST-DEPOSIT> 1,004
<INTEREST-EXPENSE> 79
<INTEREST-INCOME-NET> 952
<LOAN-LOSSES> (350)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 712
<INCOME-PRETAX> 664
<INCOME-PRE-EXTRAORDINARY> 438
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 438
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.88
<YIELD-ACTUAL> 7.50
<LOANS-NON> 632
<LOANS-PAST> 0
<LOANS-TROUBLED> 343
<LOANS-PROBLEM> 236
<ALLOWANCE-OPEN> 2,630
<CHARGE-OFFS> 30
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 2,254
<ALLOWANCE-DOMESTIC> 2,254
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,415
</TABLE>
