1 EXHIBIT 99.3 FEDERAL DEPOSIT INSURANCE CORPORATION Washington, DC 20429 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the quarterly period ended March 31, 2001 [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the transition period from _____ to _____ FDIC Certificate No. 23288 LAWRENCE SAVINGS BANK (Exact name of registrant as specified in its Charter) MASSACHUSETTS 04-1528790 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 30 MASSACHUSETTS AVENUE, NORTH ANDOVER, MA 01845 (Address of principal executive offices) (Zip Code) (978) 725-7500 (Registrant's telephone number, including area code) Indicated by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of March 31, 2001 - ----- -------------------------------- Common Stock, par value $.10 per share 4,371,500 shares 2 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LAWRENCE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, December 31, 2001 2000 ---- ---- (In Thousands) ASSETS Assets: Cash and due from banks $ 9,795 $ 7,086 Federal funds sold 17,296 15,427 --------- --------- Total cash and cash equivalents 27,091 22,513 Investment securities held to maturity (market value of $145,238 in 2001 and $118,393 in 2000) 143,277 117,806 Investment securities available for sale (amortized cost of $25,820 in 2001 and $32,840 in 2000 26,288 33,027 Federal Home Loan Bank stock, at cost 5,950 5,950 Loans, net of allowance for loan losses (Notes 2 and 6) 216,640 218,360 Bank premises and equipment 3,357 3,337 Accrued interest receivable 2,703 2,969 Other real estate owned 29 32 Deferred income tax asset 6,984 7,511 Other assets 1,489 1,585 --------- --------- Total assets $ 433,808 $ 413,090 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Interest bearing deposits (Note 3) $ 270,581 $ 259,325 Non-interest bearing deposits 10,410 11,223 Federal Home Loan Bank advances 91,898 82,283 Other borrowed funds 3,704 3,878 Advance payments by borrowers for taxes and insurance 620 513 Other liabilities 3,711 3,555 --------- --------- Total liabilities 380,924 360,777 --------- --------- Stockholders' equity: Preferred stock, $.10 par value per share; 5,000,000 shares authorized, none issued -- -- Common stock, $.10 par value per share; 20,000,000 shares authorized; 4,371,500 and 4,364,800 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively 437 436 Additional paid-in capital 57,740 57,711 Accumulated deficit (5,602) (5,956) Accumulated other comprehensive income 309 122 --------- --------- Total stockholders' equity 52,884 52,313 --------- --------- Total liabilities and stockholders' equity $ 433,808 $ 413,090 ========= ========= The accompanying notes are an integral part of these unaudited financial statements. 2 3 LAWRENCE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months ended March 31, ----------------------------------- 2001 2000 ---------- ---------- (In Thousands, except per share data) Interest and dividend income: Loans (Note 4) $ 4,528 $ 4,036 Investment securities held to maturity 2,042 2,019 Investment securities available for sale 439 829 Federal Home Loan Bank stock 106 104 Other interest and dividend income 283 27 ---------- ---------- Total interest and dividend income 7,398 7,015 ---------- ---------- Interest expense: Deposits (Note 5) 2,766 2,211 Borrowed funds 1,341 1,115 Securities sold under agreements to repurchase and other borrowed funds 89 452 ---------- ---------- Total interest expense 4,196 3,778 ---------- ---------- Net interest income 3,202 3,237 Provision for loan losses -- -- ---------- ---------- Net interest income after provision for loan losses 3,202 3,237 ---------- ---------- Non-interest income: Loan servicing fees 58 82 Deposit account fees 132 124 Gains on sales of mortgage loans 4 10 Other income 87 72 ---------- ---------- Total non-interest income 281 288 ---------- ---------- Non-interest expense: Salaries and employee benefits 1,295 1,242 Occupancy and equipment expenses 214 195 Professional expenses 167 123 Data processing expenses 158 155 Other expenses 374 413 ---------- ---------- Total non-interest expenses 2,208 2,128 ---------- ---------- Income before income tax benefit 1,275 1,397 Income tax expense 484 497 ---------- ---------- Net income $ 791 $ 900 ========== ========== Average shares outstanding 4,369,546 4,356,800 Average diluted shares outstanding 4,516,683 4,426,668 ========== ========== Basic earnings per share $ 0.18 $ 0.21 Diluted earnings per share $ 0.18 $ 0.20 ========== ========== The accompanying notes are an integral part of these unaudited financial statements. 3 4 LAWRENCE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) Accumulated Additional Other Total Common Paid-In (Accumulated Comprehensive Stockholders' Stock Capital Deficit) Income (Loss) Equity ----- ------- -------- ------------- ------ (In Thousands) Balance at December 31, 1999 $ 436 $ 57,668 $ (9,145) $ (551) $ 48,408 Net income -- -- 900 -- 900 Other comprehensive income: Unrealized loss on securities available for sale (tax effect $48) -- -- -- (91) (91) -------- Total comprehensive income 809 Dividends declared and paid ($0.05 per share) -- -- (218) -- (218) -------- -------- -------- -------- -------- Balance at March 31, 2000 $ 436 $ 57,668 $ (8,463) $ (642) $ 48,999 ======== ======== ======== ======== ======== Balance at December 31, 2000 $ 436 $ 57,711 $ (5,956) $ 122 $ 52,313 Net income -- -- 791 -- 791 Other comprehensive income: Unrealized gain on securities available for sale (tax effect $94) -- -- -- 187 187 -------- Total comprehensive income 978 Exercise of stock options 1 29 -- -- 30 Dividends declared and paid ($0.10 per share) -- -- (437) -- (437) -------- -------- -------- -------- -------- Balance at March 31, 2001 $ 437 $ 57,740 $ (5,602) $ 309 $ 52,884 ======== ======== ======== ======== ======== The accompanying notes are an integral part of these unaudited financial statements. 4 5 LAWRENCE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months ended March 31, --------------------------- 2001 2000 --------- --------- (In Thousands) Cash flow from operating activities: Net income $ 791 $ 900 Adjustments to reconcile net income to net cash provided by operating activities: Gains on sales of mortgage loans (4) (10) Depreciation and amortization of premises and equipment, investments and other assets 25 191 Loans originated for sale (1,006) (421) Proceeds from sales of mortgage loans and mortgage-backed securities 411 431 Decrease (increase) in accrued interest receivable 266 (226) Decrease in deferred income tax asset 433 449 Decrease (increase) in other assets 96 (13) Increase in advance payments by borrowers 107 84 Increase in other liabilities 156 29 --------- --------- Net cash provided by operating activities 1,275 1,414 --------- --------- Cash flows from investing activities: Proceeds from maturities of investment securities held to maturity 84,872 2,308 Proceeds from sales of investment securities available for sale 6,118 -- Purchases of investment securities held to maturity (113,777) (16,430) Principal payments of securities held to maturity 3,497 2,372 Principal payments of securities available for sale 933 828 Decrease in loans, net 2,319 2,559 Proceeds from payments on OREO 3 6 Purchases of Bank premises and equipment (139) (99) --------- --------- Net cash used in investing activities (16,174) (8,456) --------- --------- Cash flows from financing activities: Net increase in deposits 10,443 3,377 Additions to Federal Home Loan Bank advances 10,000 354,000 Payments on Federal Home Loan Bank advances (385) (357,688) Increase in securities sold under agreement to repurchase -- 38,630 Decrease in other borrowed funds (174) (31,228) Dividends paid (437) (218) Proceeds from exercise of stock options 30 -- --------- --------- Net cash provided by financing activities 19,477 6,873 --------- --------- Net increase (decrease) in cash and cash equivalents 4,578 (169) Cash and cash equivalents, beginning of period 22,513 7,597 --------- --------- Cash and equivalents, end of period $ 27,091 $ 7,428 ========= ========= Cash paid during the year for: Interest on deposits $ 2,767 $ 2,210 Interest on borrowed funds 1,390 1,419 Supplemental Schedule of non-cash activities: Net change in valuation of investment securities available for sale 281 (139) ========= ========= The accompanying notes are an integral part of these unaudited financial statements. 5 6 LAWRENCE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 1. BASIS OF PRESENTATION The unaudited consolidated financial statements of Lawrence Savings Bank (the "Bank") and subsidiaries presented herein should be read in conjunction with the consolidated financial statements of the Bank as of and for the year ended December 31, 2000. In the opinion of management, the unaudited financial statements reflect all adjustments necessary for a fair presentation. Interim results are not necessarily indicative of results to be expected for the entire year. 2. The following table reflects the loan portfolio at March 31, 2001 and December 31, 2000: 3/31/01 12/31/00 ------- -------- (In Thousands) Residential mortgage loans $ 78,085 $ 77,926 Loans held for sale 599 -- Equity loans 15,041 15,997 Construction loans 17,114 17,148 Commercial real estate loans 88,265 87,129 Commercial loans 20,051 22,602 Consumer loans 1,215 1,243 --------- --------- Total loans 220,370 222,045 Allowance for loan losses (3,730) (3,685) --------- --------- Total loans, net $ 216,640 $ 218,360 ========= ========= 3. The following table reflects the components of interest bearing deposits at March 31, 2001 and December 31, 2000: 3/31/01 12/31/00 ------- -------- (In Thousands) NOW and Super NOW accounts $ 33,154 $ 29,731 Savings accounts 39,754 38,813 Money market investment accounts 54,693 51,344 Certificates of deposit 115,513 112,239 Retirement accounts 27,467 27,198 -------- -------- Total interest bearing deposits $270,581 $259,325 ======== ======== 6 7 4. The following table lists the components of loan interest income for the three month periods ended March 31, 2001 and 2000: Three months ended ---------------------------- 3/31/01 3/31/00 ------- ------- (In Thousands) Residential mortgage loans $1,441 $1,431 Loans held for sale 2 3 Equity loans 300 242 Construction loans 386 266 Commercial real estate loans 1,925 1,800 Commercial loans 445 267 Consumer loans 29 27 ------ ------ Total loan interest income $4,528 $4,036 ====== ====== 5. The following table lists the components of deposit interest expense for the three month periods ended March 31, 2001 and 2000: Three months ended --------------------------- 3/31/01 3/31/00 (In Thousands) NOW and Super NOW accounts $ 38 $ 32 Savings deposit accounts 189 192 Money market investment accounts 493 384 Certificates of deposit 1,660 1,251 Retirement accounts 386 352 ------ ------ Total deposit interest expense $2,766 $2,211 ====== ====== 6. The following table summarizes changes in the allowance for loan losses for the three month period ended March 31, 2001 and 2000. Three months ended ---------------------------- 3/31/01 3/31/00 ------- ------- (In Thousands) Beginning balance $3,685 $3,381 Provision charged to operations -- -- Recoveries on loans previously charged-off 45 12 Loans charged-off -- -- ------ ------ Ending balance $3,730 $3,393 ====== ====== 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Bank has made forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as amended) in this document that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of the Bank. Also, when words such as "believes," "expects," "anticipates" or similar expressions are used, forward-looking statements are being made. Stockholders should note that many factors, some of which are discussed elsewhere in this document and in the documents which we incorporate by reference, could affect the future financial results of the Bank and could cause results to differ materially from those expressed in or incorporated by reference in this document. Those factors include fluctuations in interest rates, inflation, government regulations and economic conditions and competition in the geographic and business areas in which the Bank conducts its operations. Risk Assets Risk assets consist of non-performing loans and other real estate owned. Non-performing loans consist of both a) loans 90 days or more past due and b) loans placed on non-accrual because full collection of the principal balance is in doubt. Other real estate owned (OREO) is comprised of foreclosed properties where the Bank has formally received title or has possession of the collateral. Properties are carried at the lower of the investment in the related loan or the estimated fair value of the property or collateral less selling costs. Fair value of such property or collateral is determined based on independent appraisals and other relevant factors. Management periodically reviews property values and makes adjustments as required. Gains from sales of properties, net operating expenses and any subsequent provisions to increase the allowance for losses on real estate acquired by foreclosure are charged to other real estate owned expenses. Losses are charged to the allowance. Total risk assets were $39 thousand at March 31, 2001. This represents a decrease of $3 thousand from December 31, 2000. The following table summarizes the Bank's risk assets for the past quarters: 3/31/01 12/31/00 3/31/00 ------- -------- ------- (In thousands) Non-performing loans $ 10 $ 10 $ 10 Other real estate owned 29 32 513 ---- ---- ---- Total risk assets $ 39 $ 42 $523 ==== ==== ==== Risk assets as a percent of total assets 0.01% 0.01% 0.13% ==== ==== ==== 8 9 Liquidity and Capital Resources The Bank's primary sources of funds include collections of principal payments and prepayments on outstanding loans, increases in deposits, advances from the Federal Home Loan Bank of Boston (FHLB) and securities sold under agreements to repurchase. The Bank has a line of credit of $6.8 million with the FHLB. The Bank also has a $5 million unsecured Federal Funds line of credit. At March 31, 2001 the Bank's stockholders' equity was $52.9 million as compared to $52.3 million at December 31, 2000. The increase during the first quarter of 2001 occurred due to net income of $0.8 million offset by $0.4 million dividends paid and an increase in market value of $0.2 million on securities available for sale. The Bank's leverage ratio at March 31, 2001 and December 31, 2000 was 11.87% and 11.71%. The Bank exceeds all regulatory minimum capital ratios requirements as defined by the FDIC. Three Months Ended March 31, 2001 and 2000 Overview The Bank has maintained risk assets below 1% for the past year. Lawrence Savings Bank maintains its commitment to servicing the needs of the local communities in the Merrimack Valley area of Massachusetts. The investment securities portfolio increased by $18.7 million as of March 31, 2001 from December 31, 2000 funded by deposits and borrowings. Total deposits increased by $10.4 million at March 31, 2001 to $281.0 million from $270.5 million at December 31, 2000 with the growth primarily in money market, NOW and certificate of deposit accounts. The Bank reported net income of $0.8 million and $0.9 million for the three months ended March 31, 2001 and 2000, respectively. The decrease is primarily due to expenses associated with the establishment of a bank holding company as part of the reorganization of the bank, which were included in non-interest expense. The establishment of the holding company will require stockholder and regulatory approval. The holding company reorganization is expected to be completed at the end of the second quarter or beginning of the third quarter 2001. Net Interest Income From Operations Net interest income remained fairly level at $3.2 million for the quarters ended March 31, 2001 and 2000. The net interest rate spread decreased to 2.63% from 2.82%. This decrease occurred because the average rate paid on interest bearing liabilities increased to 4.83% in 2001 from 4.41% in 2000. The following table presents the components of net interest income and net interest spread: Income/Expense Yield/Rate ------------------------ ---------------------- Quarter Ended ------------------------------------------------------- 3/31/01 3/31/00 3/31/01 3/31/00 ------- ------- ------- ------- (In Thousands) Interest income and average yield: Loans $4,528 $4,036 8.39% 8.25% Investments, mortgage-backed securities and other earning assets 2,870 2,979 6.35 6.19 ------ ------ Total 7,398 7,015 7.46 7.23 ------ ------ ---- ---- Interest expense and average rate paid: Deposits 2,766 2,211 4.27 3.75 Federal Home Loan Bank advances 1,341 1,115 6.34 5.78 Securities sold under agreements to repurchase and other borrowed funds 89 452 9.67 6.03 ------ ------ Total 4,196 3,778 4.83 4.41 ------ ------ ---- ---- Net interest income $3,202 $3,237 ====== ====== Net interest rate spread 2.63% 2.82% ==== ==== 9 10 Interest and Dividend Income Interest income for the first quarter of 2001 and 2000 was $7.4 million and $7.0 million, respectively. The increase of $0.4 million was due to higher average balances and higher yields on interest earning assets. The impact to interest income due to higher average balances was $0.3 million and higher yields was $0.1 million in the first quarter in 2001 from 2000. Although the Bank had higher average balances for total interest earning assets, the Bank had lower average balances for investments. Higher average loan balances of $218.8 million versus $196.7 million for the quarters ended March 31, 2001 and 2000, respectively, resulted in a $0.5 million increase to interest income. Lower average investment balances of $183.4 million versus $193.6 million for the same quarters resulted in an $0.2 million decrease of interest income. Yields on loans were 8.39% and 8.25% for the quarters ended March 31, 2001 and 2000, which had a minimal impact to interest income. Yields on investment securities and other earning assets were 6.35% and 6.19% for the same periods in 2001 and 2000, which resulted in a $0.1 million increase in interest income. Interest Expense Interest expense for the first quarter of 2001 was $4.2 million. This is an increase of $0.4 million from the same quarter of 2000. Average rates paid on interest bearing liabilities increased resulting in $0.6 million increase in interest expense and changes in average balances resulted in a decline of $0.2 million in interest expense. Higher cost of deposits had a $0.3 million impact to interest expense while higher cost of borrowed funds also had an impact of $0.3 million. The average rate paid on deposits were 4.27% and 3.75% for the quarters ended March 31, 2001 and 2000, respectively. Lower average balances for borrowed funds resulted in $0.5 million decrease in interest expense. Average balances of Federal Home Loan Bank advances increased to $85.8 million versus $77.6 million for the quarters ended March 31, 2001 and 2000, respectively. Other borrowed funds decreased to $3.7 million in 2001 from $30.1 million for the same quarter in 2000. Higher average deposit balances of $262.9 million versus $237.2 million resulted in an increase of interest expense of $0.3 million. Provision and Allowance for Loan Losses The provision for loan losses was zero for the quarters ended March 31, 2001 and 2000, respectively. The following table shows the allowance for loan losses information: 3/31/01 12/31/00 3/31/00 --------- ---------- --------- (In thousands) Non-performing loans $ 10 $ 10 $ 10 Allowance for loan losses $ 3,730 $ 3,685 $ 3,393 Allowance for loan losses as a percent of total loans 1.69% 1.66% 1.74% The allowance for the loan losses balance reflects management's assessment of losses and is based on a review of the risk characteristics of the loan portfolio. The Bank considers many factors in determining the adequacy of the allowance for loan losses. Collateral value on a loan by loan basis, trends of loan delinquencies on a portfolio segment level, risk classification identified in the Bank's regular review of individual loans, and economic conditions are primary factors in establishing allowance levels. The allowance level is adequate to absorb estimated credit losses associated with loan and lease portfolio, including all binding commitments to lend and off-balance sheet credit instruments. The allowance for loan losses reflects all information available at the end of each period. Non-Interest Income 10 11 Non-interest income remained level at $0.3 for the quarters ended March 31, 2001 and 2000, respectively. Loan servicing fees decreased slightly to $58,000 at March 31, 2001 from $82 thousand at March 31, 2000. This was offset by increases in deposit account fees and debit card fees. Non-Interest Expense Non-interest expense was $2.2 million and $2.1 million for the first quarter of 2001 and 2000, respectively. The slight increase in non-interest expense is due to expenses associated with the establishment of a bank holding company as part of a reorganization of the Bank. Income Taxes The Bank reported an income tax expense of $0.5 million for the quarters ended March 31, 2001 and 2000 representing an effective tax rate of 38.0% and 35.6%, respectively. 11 12 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The response is incorporated herein by reference from the discussion under the subcaption "Interest Rate Sensitivity" of the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" on pages 13 and 14 of the Annual Report which is incorporated herein by reference. Part II - Other Information ITEM 1. LEGAL PROCEEDINGS The response is incorporated herein by reference from the discussion under the caption "CONTINGENCIES" on page 34 of the Annual Report which is incorporated herein by reference. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 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 None. 12 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LAWRENCE SAVINGS BANK AND SUBSIDIARIES May 14, 2001 /s/ PAUL A. MILLER ----------------------- Paul A. Miller President and Chief Executive Officer May 14, 2001 /s/ JOHN E. SHARLAND ----------------------- John E. Sharland Senior Vice President Chief Financial Officer Treasurer