SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission file number: 0-31847
Lawrence Financial Holdings, Inc.
---------------------------------
(Exact name of registrant as specified in its charter)
Maryland 31-1724442
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
311 South Fifth Street, Ironton, Ohio 45638
-------------------------------------------
(Address of principal executive offices)
(740) 532-0263
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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
----------------------- -----------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class: Outstanding at April 30 , 2001
Common Stock, $.01 par value 775,827 Common Shares
Lawrence Financial Holdings, Inc.
FORM 10-QSB
Quarter Ended March 31, 2001
Part I - Financial Information
Page
----
ITEM 1 - Financial Statements
Consolidated Balance Sheets ................................... 3
Consolidated Statements of Income.............................. 4
Consolidated Statements of Comprehensive Income................ 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity.......................................... 6
Consolidated Statements of Cash Flows.......................... 7
Notes to the Consolidated Financial Statements................. 8
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 10
Part II - Other Information
Other Information....................................................... 20
Signatures.............................................................. 20
2
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2001 2000
----------------------------
ASSETS
Cash and due from banks $ 9,197,539 $ 2,206,856
Money market fund 117,932 2,678,223
----------------------------
Total cash and cash equivalents 9,315,471 4,885,079
Securities available for sale, at fair value 6,051,086 6,430,911
Loans receivable, net 106,993,290 105,385,397
Federal Home Loan Bank stock 558,900 549,100
Premises and equipment, net 3,409,773 3,453,094
Accrued interest receivable 780,920 815,816
Cash surrender value of life insurance 1,883,970 1,870,231
Other assets 230,197 455,590
----------------------------
$129,223,607 $123,845,218
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 1,529,089 $ 1,409,413
Interest-bearing deposits 109,186,586 101,697,172
------------------------------
Total deposits 110,715,675 103,106,585
Federal Home Loan Bank borrowings 2,000,000 5,000,000
Other liabilities 1,281,962 798,688
------------------------------
Total liabilities 113,997,637 108,905,273
Shareholders' Equity
Preferred stock; par value $0.01 per share; shares
authorized: 1,000,000; shares issued: none -- --
Common stock; par value $0.01 per share; shares
authorized: 4,000,000; shares issued: 775,827 7,696 7,696
Additional paid-in capital 6,996,306 6,994,305
Retained earnings 8,735,058 8,555,006
Unearned ESOP shares - 54,301 at YTD 2001 (542,661) (558,660)
Accumulated other comprehensive gain (loss), net of tax
of $15,234 at 2001 and $(30,086) at 2000 29,571 (58,402)
------------------------------
Total shareholders' equity 15,225,970 14,939,945
------------------------------
Total liabilities and shareholders' equity $ 129,223,607 $ 123,845,218
==============================
The accompanying notes are an integral part of these consolidated financial
statements.
3
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2001 and 2000
(Unaudited)
Three Months Ended
March 31,
-------------------------
2001 2000
-------------------------
Interest income
Loans, including fees $ 2,230,096 $ 1,564,457
Taxable securities 96,321 198,051
Overnight deposits 49,270 8,708
-------------------------
2,375,687 1,771,216
-------------------------
Interest expense
Deposits 1,341,844 986,807
Federal Home Loan Bank borrowings 33,943 33,441
-------------------------
1,375,787 1,020,248
-------------------------
Net interest income 999,900 750,968
Provision for loan losses 48,000 30,000
-------------------------
Net interest income after provision for loan losses 951,900 720,968
Noninterest income
Net securities (losses) -- (13,739)
Service charges 87,770 78,852
Other 38,954 34,913
-------------------------
126,724 100,026
Noninterest expense
Salaries and benefits 367,675 268,448
Deposit insurance premiums 4,830 4,807
Occupancy and equipment 83,816 88,525
Data processing 119,272 106,237
Franchise tax 26,250 26,250
Advertising expense 16,048 36,443
Other 199,173 110,553
-------------------------
817,064 641,263
-------------------------
Income before income tax 261,560 179,731
Provision for income tax 81,508 55,577
-------------------------
Net income $ 180,052 $ 124,154
=========================
Basic and diluted earnings per common share $ 0.25 N/A
===========
4
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, 2001 and 2000
(Unaudited)
Three Months Ended
March 31,
---------------------
2001 2000
---------------------
Net income $180,052 $124,154
Other comprehensive income:
Unrealized gains arising during period 133,292 41,879
Reclassification adjustment for losses
included in net income -- 13,739
---------------------
133,292 55,618
Income tax (expense) (45,319) (18,910)
---------------------
Other comprehensive income, net of tax 87,973 36,708
---------------------
Comprehensive income $268,025 $160,862
=====================
The accompanying notes are an integral part of these
consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Year Ended December 31, 2000 and the three months ended March 31, 2001
(Unaudited)
Additional Unearned Accum Other
Common Paid-In Retained ESOP Comprehensive
Stock Capital Earnings Shares Income Total
------------------------------------------------------------------------
Balance - January 1, 2000 $ -- $ -- $8,132,702 $ -- $(341,189) $ 7,791,513
Net income -- -- 422,304 -- -- 422,304
Net unrealized appreciation on securities
available for sale, net of tax of $145,678 -- -- -- -- 282,787 282,787
Proceeds from the sale of 775,827 shares of
common stock, net of conversion costs 7,758 7,056,243 -- -- -- 7,064,001
Purchase of 62,066 shares of common stock
for ESOP -- -- -- (620,660) -- (620,660)
6,200 shares committed to be released under
the ESOP (62) (61,938) -- 62,000 -- --
------------------------------------------------------------------------
Balance - December 31, 2000 $7,696 $6,994,305 $8,555,006 $(558,660) $ (58,402) $14,939,945
------------------------------------------------------------------------
Net income -- -- 180,052 -- -- 180,052
1,565 shares committed to be released under
the ESOP -- 2,001 -- 15,999 -- 18,000
Net unrealized appreciation on securities
available for sale, net of tax of $(45,319) -- -- -- -- 87,973 87,973
------------------------------------------------------------------------
Balance - March 31, 2001 $7,696 $6,996,306 $8,735,058 $(542,661) $ 29,571 $15,225,970
========================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001 and 2000
(Unaudited)
Three Months Ended
March 31,
------------------------
2001 2000
---------- ----------
Cash flows from operating activities
Net income $ 180,052 $ 124,154
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 43,488 49,471
Provision for loan losses 48,000 30,000
Stock dividend on Federal Home Loan Bank stock (9,800) (8,890)
Net premium amortization 4,112 (51,817)
Net securities (gains) losses -- 13,739
ESOP expense 18,000 --
Change in other assets and liabilities 684,505 (69,532)
------------------------
Net cash from operating activities 968,357 87,125
------------------------
Cash flows from investing activities
Purchase of:
Securities available for sale (1,540,995) (2,050,000)
Premises and equipment (167) (847)
Proceeds from:
Sale of securities available for sale -- 2,103,966
Calls, maturities and principal repayments of
securities available for sale 2,050,000 --
Net change in loans (1,655,893) (2,335,126)
------------------------
Net cash from investing activities (1,147,055) (2,282,007)
------------------------
Cash flows from financing activities
Net change in:
Deposits 7,609,090 2,948,859
Federal Home Loan Bank short-term borrowings (3,000,000) (2,500,000)
------------------------
Net cash from financing activities 4,609,090 448,859
------------------------
Net change in cash and cash equivalents 4,430,392 (1,746,023)
Cash and cash equivalents at beginning of quarter 4,885,079 4,667,632
------------------------
Cash and cash equivalents at end of quarter $9,315,471 $2,921,609
========================
Supplemental disclosures:
Cash paid during the quarter for:
Interest $1,386,428 $1,042,961
Income taxes 135,000 0
The accompanying notes are an integral part of these
consolidated financial statements.
7
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
- -----------------------------
Lawrence Financial Holdings, Inc. and its wholly-owned subsidiary, Lawrence
Federal Savings Bank (the "Bank") and the Bank's wholly-owned subsidiary,
Lawrence Financial Services Corporation (together, the "Company"). Intercompany
transactions and balances are eliminated in consolidation.
Nature of Operations: The Company provides financial services through its
- ----------------------
offices in Lawrence and Scioto Counties. Its primary deposit products are
checking, savings, and term certificate accounts, and its primary lending
products are real estate mortgage and installment loans. Substantially all loans
are secured by specific items of collateral including consumer assets and real
estate. Lawrence Financial Services Corporation holds real property for
investment purposes. Management considers the Company to operate in one segment,
banking.
Earnings Per Common Share: Basic earnings per common share is net income divided
- --------------------------
by 775,827 weighted average number of common shares outstanding less 55,866 of
unearned ESOP shares. A total of 719,961 weighted average shares were
outstanding for the period. Diluted earnings per common share includes the
dilutive effect of additional potential common shares issuable. Earnings and
dividends per share are restated for all stock splits and dividends through the
date of issue of the financial statements. As of March 31, 2001, 2000 and 1999
there were no potentially dilutive items. The following table reflects the
Company's basic and diluted earnings per share of common stock.
03/31/01 03/31/00 03/31/99
Basic earnings per common share $ 0.25 N/A N/A
Diluted earnings per common share 0.25 N/A N/A
Management's Opinion: In the opinion of management, the unaudited Consolidated
- ---------------------
Financial Statements include all adjustments (which consist of normal recurring
accruals) necessary to present fairly the consolidated financial position as of
March 31, 2001, the results of operations for the three months ended March 31,
2001 and 2000 and the statements of cash flows for the three months ended March
31, 2001 and 2000. In accordance with generally accepted accounting principles
for interim financial information, these statements do not include certain
information and footnote disclosures required by generally accepted accounting
principles for complete annual financial statements. Financial information as of
December 31, 2000 has been derived from the audited Consolidated Financial
Statements of Lawrence Financial Holdings, Inc. (the "Company"). The results of
operations and statements of cash flows for the three months ended March 31,
2001 are not necessarily indicative of the results to be expected for the full
year. For further information, refer to the Consolidated Financial Statements
and footnotes thereto for the year ended December 31, 2000, included in the
Company's Annual Report on Form 10-KSB. (Certain reclassifications have been
made to prior periods' consolidated financial statements and related notes to
conform with the current period presentation.)
NOTE 2 - EMPLOYEE BENEFITS
Retirement Plan: The Company sponsors a 401(k) profit sharing plan for eligible
- -----------------
employees. Under the plan, employees who are at least 21 1/2 years of age and
have completed six months of service are eligible to participate. The Company
matches each employee's contribution at a rate of 100% of employees'
contributions up to 5% of gross compensation. Participants become 100% vested as
to the Company's contributions after three years of service.
Employee Stock Option Plan: Employees participate in an Employee Stock Option
- ----------------------------
Plan (ESOP). On December 29, 2000, the ESOP borrowed $620,660 from the Company
to purchase 62,066 shares of common stock at $10 per share. The Company makes
discretionary contributions to the ESOP, and the ESOP uses funds it receives to
repay the loan. ESOP shares are allocated to participants based on relative
compensation and expense is recorded.
8
NOTE 3 - REGULATORY CAPITAL REQUIREMENTS
Lawrence Federal Savings Bank (the "Bank") is subject to various regulatory
capital requirements administered by federal regulatory agencies. Failure to
meet minimum capital requirements can initiate certain mandatory actions that,
if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and regulatory framework for
prompt-corrective action, the Bank must meet specific capital guidelines
involving quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classifications are also subject to qualitative
judgments by regulators about the Bank's components, risk weightings and other
factors. At March 31, 2001 and December 31, 2000, management believes the Bank
complied with all regulatory capital requirements. Based on the Bank's computed
regulatory capital ratios, the Bank was considered well capitalized under
Section 38 of the Federal Deposit Insurance Act as of its last regulatory exam.
Management is unaware of any events or circumstances that would change the
Bank's classification since that time.
The Bank's actual capital levels and minimum required levels were as
follows:
Minimum
Required to be
Well Capitalized
Minimum Required Under Prompt
for Capital Corrective Action
Actual Adequacy Purposes Regulations
----------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------
March 31,2001:
- --------------
Total capital (to risk-
weighted assets) $14,014 15.26% $7,345 8.0% $9,181 10.0%
Tier 1 (core) capital (to
risk-weighted assets) $13,208 14.39% $3,672 4.0% $5,509 6.0%
Tier 1 (core) capital (to
adjusted total assets) $13,208 10.22% $5,202 4.0% $6,502 5.0%
December 31,2000:
- -----------------
Total capital (to risk-
weighted assets) $13,771 15.32% $7,190 8.0% $8,988 10.0%
Tier 1 (core) capital (to
risk-weighted assets) $12,996 14.46% $3,595 4.0% $5,393 6.0%
Tier 1 (core) capital (to
adjusted total assets) $12,996 10.44% $5,012 4.0% $6,265 5.0%
Regulations of the Office of Thrift Supervision (OTS) limit the amount of
cash dividends, repurchase of common stock and other capital distributions that
may be paid by a bank without prior approval of the OTS. The regulatory
restriction provides that the Bank may make a capital distribution without
notifying the OTS or applying to the OTS for approval provided that (1) the
total amount of all capital at the institution (including the proposed capital
distribution) for the applicable calendar year does not exceed the institution's
net income for that year to date plus the institution's retained net income for
the preceding two years; (2) the institution will be well capitalized following
the proposed capital distributions; and, (3) certain other conditions are met.
In addition to the restriction described above, the Bank may not declare or
pay cash dividends or repurchase any of its shares of common stock if the effect
thereof would reduce the Bank's capital level below the aggregate balance
required for the liquidation account.
9
ITEM 2
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Selected Financial Data
Three Months Ended
March 31,
------------------
2001 2000
------ ------
Significant Ratios
Net income to:
Average total assets 0.58% 0.49%
Average stockholders' equity 4.78 6.32
Net Interest Margin 3.43 3.21
Average net loans to average deposits 99.39 86.57
Average stockholders' equity to
average total assets 12.20 7.72
Capital ratios:
Tier I capital 10.22 7.79
Risk-based capital 15.26 11.78
- ----------------------------------------------------------------------
Per Share Data:
Earnings
Basic $ 0.25 N/A
Diluted 0.25 N/A
Cash dividends per share -- N/A
Weighted average shares outstanding
Basic 719,961 N/A
Diluted 719,961 N/A
Book value at end of period $ 21.15 N/A
Market price at end of period 11.50 N/A
10
Introduction
This report contains certain "forward-looking statements" within the
meaning of the federal securities laws. These statements are not historical
facts, rather they are statements based on Lawrence Financial Holdings, Inc.'s
("Lawrence Financial") current expectations regarding its business strategies,
intended results and future performance. Forward-looking statements are preceded
by terms such as "expects," "believes," "anticipates," "intends" and similar
expressions.
Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the market area in
which Lawrence Financial operates, as well as nationwide, Lawrence Financial's
ability to control costs and expenses, competitive products and pricing, loan
delinquency rates and changes in federal and state legislation and regulation.
These factors should be considered in evaluating the forward-looking statements
and undue reliance should not be placed on such statements. Lawrence Financial
assumes no obligation to update any forward-looking statements.
Operating Strategy
Lawrence Financial, through its wholly owned subsidiary Lawrence Federal
Savings Bank ("Lawrence Federal"), operates as a community-oriented financial
institution focused on meeting the financial service needs of consumers in its
market area. To accomplish this objective, Lawrence Federal offers a variety of
mortgage and consumer loans and retail deposit products. Lawrence Federal has
extended its lending activities outside of its market area through programs for
originating mobile home and automobile loans through a network of dealers. These
indirect lending programs help Lawrence Federal originate a larger amount of
consumer loans, which typically have shorter terms and higher yields than
mortgage loans, than Lawrence Federal would otherwise be able to originate. In
addition, the origination of shorter term consumer loans will help Lawrence
Federal in managing its interest rate risk. Lawrence Federal intends to continue
to focus on further expansion of its non-mortgage lending.
General
Lawrence Federal's results of operations depend primarily on net interest
income, which is the difference between the interest income earned on Lawrence
Federal's interest-earning assets, such as loans and securities, and the
interest expense on its interest-bearing liabilities, such as deposits and
borrowings. Lawrence Federal also generates noninterest income primarily from
loan fees and service charges. Lawrence Federal's noninterest expenses primarily
consist of employee compensation and benefits, occupancy expense, data
processing costs, and other operating expenses. Lawrence Federal's results of
operations are also affected by general economic and competitive conditions,
notably changes in market interest rates, government policies and regulations.
Comparison of Financial Condition at March 31, 2001 and December 31, 2000
During the first three months of 2001, total assets increased $5 million,
or 4%, to $129 million at March 31, 2001 when compared to the balances at
December 31, 2000. At the quarter ended March 31, 2001, net loans receivable had
grown $2 million, or 2%, when compared to the end of the prior quarter. Direct
and indirect consumer loans grew $1 million, or 5%, real estate loans decreased
by $1 million, or 2%, and indirect mobile home loans grew $790,000, or 4%.
commercial loans were at $1 million on March 31, 2001 with no comparable balance
at December 31, 2000. The growth in the commercial loan portfolio was due to a
reclassification of real estate based, commercial purpose loans from the real
estate loan portfolio. The majority of the growth in consumer loans is tied to
the indirect automobile lending program, while real estate loans decreased as a
result of reclassifications and reduced market demand. Mobile home loans
increased as a result of increased origination efforts by the third party
through which Lawrence Federal originates most of its mobile home loans.
Lawrence Federal's long term investments, held in the form of securities,
decreased by $380,000, or 6%, when comparing March 31, 2001 balances to December
31, 2000. During the third and fourth quarters of 2000, Lawrence Financial
deployed most of the liquidity provided by the sale of these assets as a source
of funds to generate higher yielding loans. During the first quarter of 2001
Lawrence Financial's available cash and cash equivalents grew to $9 million an
increase of $4 million, or 91%, when compared to the quarter ending December 31,
2000. This growth was primarily due to increases in interest bearing deposits.
11
Compared to December 31, 2000, total deposits and borrowings increased $5
million, or 4%, to $113 million at March 31, 2001. Within the first quarter of
2001, deposits increased $8 million, or 7%, and the volume of Federal Home Loan
Bank advances decreased by $3 million to a balance of $2 million at March 31,
2001. Deposits grew during this period as a result of marketing efforts and
aggressively priced products.
Equity increased $286,000, or 2%, to $15 million at March 31, 2001 when
compared to the same period in December 31, 2000. On December 28, 2000, Lawrence
Financial completed its initial public offering in connection with the
conversion of Lawrence Federal to a stock company. The first quarter of 2001
marks the end of the first three months of operating with the new level of
capital. During the quarter ended March 31, 2001, retained earnings increased
$180,000 as a result of net income for the period while changes to the net
unrealized appreciation on securities available-for-sale improved from an
unrealized loss of $58,000 to an unrealized gain of $30,000.
Comparison of Operating Results for the Quarters Ending March 31, 2001 and 2000
General. For the quarter ended March 31, Lawrence Financial's net income
increased 45% to $180,000 for 2001 from $124,000 for 2000. Return on average
assets was 0.58% for the first quarter of 2001 and 0.49% for the same period in
2000, and return on average equity was 4.78% in 2001 and 6.32% in 2000. Net
interest income increased $249,000, or 33%, while noninterest income increased
$27,000, or 27%, as a result of a $14,000 losses taken in the first quarter of
2000 on the sale of securities and an increase in service charge related income
in the first quarter of 2001. The increase in net interest income was primarily
the result of the increase in the size of the loan portfolio and, secondarily,
the result of an increased yield on interest-earning assets, which was partially
offset by an increased cost of funds. Offsetting the increase in net interest
and noninterest income was a $176,000, or 27%, increase in noninterest expense.
Employee salaries and benefits increased $99,000, or 37%, when compared to the
first quarter of 2000, accounting for the majority of the increase. There are
several causes for the increase in salary and wage expense between the two
periods. First, the Company has employed additional personnel in the indirect
lending and finance areas and existing personnel received an annual merit
increase. Another cause for the increase is the monthly accrual for expense
related to the ESOP which was implemented at the date of conversion, December
28, 2000. And finally, the Company is accruing monthly for the potential rewards
which may be earned by employees as part of the new, results oriented, incentive
processes implemented by the Company in the first quarter of 2001. The Company
also experienced an increase in supply costs, professional services, data
processing and other noninterest expenses related to the additional financial
reporting processes required of a public company and the growth of the Company's
customer base.
Interest Income. Net interest income increased $249,000, or 33%, in the
quarter compared to the same quarter in 2000. Interest income on loans increased
$666,000, or 43%, primarily as a result of growth in the loan portfolio and, to
a lesser extent, as a result of the increase in the yield on the portfolio.
Interest income on short-term investments increased $40,000, or 466%, primarily
as a result of a larger average balance being carried by the Company during the
first quarter of 2001. The average yield on interest-earning assets improved to
8.23% for the quarter ending March 31, 2001, from 7.62% for the same period in
2000, as loans became a higher percentage of interest-earning assets and the
yield on the portfolio increased.
Interest Expense. Interest expense increased $356,000, or 35%, in for the
quarter ending March 31, 2001 compared to the first quarter of 2000. Interest
paid on deposits increased $355,000, or 36%, as a result of growth in deposit
accounts and the increase in rates paid on deposits. Interest paid on Federal
Home Loan Bank advances was $34,000 through the first three months of 2001
compared to $33,000 for the same period in 2000. The average cost of
interest-bearing liabilities rose to 5.11% in the first quarter of 2001 from
4.37% in 2000, primarily as a result of higher market rates on certificates of
deposits and the addition of higher costing Federal Home Loan Bank advances.
12
Provision for Loan Losses. Activity in the allowance for loan losses
consists of increases due to monthly provisions for loan losses and decreases
for periodic charge offs, net of recoveries. Management analyzes the adequacy of
the allowance balance quarterly by determining its estimate of probable losses
in the portfolio and comparing that estimate to the allowance balance.
Management calculates its estimate of probable losses primarily by applying
expected loss percentages to classified loans and major loan categories. In the
first quarter of 2001, management reevaluated the loss percentage used for
determining the required allowance for each loan category. The impact of these
events are described in more detail below as part of the discussion comparing
the first quarter 2001 and 2000 provisions for loan losses.
The provision for loan losses was $48,000 for the first quarter of 2001
compared to $30,000 for the same period in 2000. The provision for the first
quarter of 2001 and 2000 reflected management's assessment of probable losses,
which is impacted by loan growth and changes in the composition of the loan
portfolio, particularly the growth of indirect automobile, indirect mobile home,
and direct consumer loans. Management's assessment of probable losses in the
loan portfolio increased for the first three months of 2001 when compared to the
same period in 2000, primarily due to the changes in both the volume and the mix
of the loan portfolio. During the first quarter of 2001, management also
reevaluated Lawrence Federal's historic loss percentage and incorporated other
factors such as peer comparisons, underwriting quality and local economic
conditions in its analysis of allowance levels. While the economy in Lawrence
County has generally been good the past few years, recent plant closings have
resulted in job losses. Over the past several years, unemployment in Lawrence
County has been greater than the state and national rate. Management considers
these factors when calculating its estimate of the required level of the
allowance for loan losses.
Management believes that the average balance of outstanding indirect
automobile loans will not grow significantly beyond its ending balance at March
31, 2001. Management anticipates that its estimate of the required level of
allowance associated with Lawrence Federal's indirect automobile lending program
will decrease when compared to the year 2000, but will increase if the bank
experiences growth in its loan volume or an unexpected increase in loan
delinquency.
While management believes the existing level of reserves is adequate,
future adjustments to the allowance may be necessary due to economic, operating,
regulatory, and other conditions that may be beyond Lawrence Federal's control.
Noninterest Income. The following table shows the components of noninterest
income and the dollar and percentage change from the first quarter of 2001 to
the first quarter of 2000.
Dollar Percentage
03/31/01 03/31/00 Change Change
-------- -------- ------ ----------
(Dollars in Thousands)
Net securities gains (losses) -- -14 14 N/A
Service charges 88 79 9 11
Other 39 35 4 11
--- --- ---
Total 127 100 27 27
=== === === ===
Net securities losses incurred in the first quarter of 2000 were not
duplicated in the same period of 2001. Service charges increased during the
quarter as a result of growth in the number of deposit accounts. Other income
consists of increases in the cash surrender value of life insurance policies and
$2,500 of fees paid to the Company for the origination of fixed rate mortgages.
The origination of long-term, fixed rate mortgages through a third party was
started in the first quarter of 2001 and is part of the Company's overall
interest rate risk management strategy.
13
Noninterest Expense. The following table shows the components of noninterest
expense and the dollar and percentage change from the three months ending March
31, 2001 to the same period in 2000.
Dollar Percentage
03/31/01 03/31/00 Change Change
-------- -------- ------ ----------
(Dollars in Thousands)
Salaries and benefits 368 268 100 37
Deposit insurance premiums 5 5 -- --
Occupancy and equipment 84 89 -5 -6
Data processing 119 106 13 12
Franchise tax 26 26 -- --
Advertising expense 16 36 -20 -55
Other 199 111 88 79
--- --- ---
Total 817 641 176 27
=== === === ===
Employee salaries and benefits increased $100,000, or 37%, when compared to
the first quarter of 2000, accounting for the majority of the increase in
noninterest expenses. There are several causes for the increase in salary and
wage expense between the two periods. First, the Company has employed additional
personnel in the indirect lending and finance areas and existing personnel
received an annual merit increase. Another cause for the increase is the monthly
accrual for expense related to the ESOP which was implemented at the date of
conversion, December 28, 2000. And finally, the Company is accruing monthly for
the potential rewards which may be earned by employees as part of the new,
results oriented, incentive processes implemented by the Company in the first
quarter of 2001. The Company also experienced an increase in supply costs,
professional services, data processing and other noninterest expenses related to
the additional financial reporting processes required of a public company and
the growth of the Company's customer base.
Income Tax Expense. The provision for income tax was $81,500 in for the
quarter ended March 31, 2001, compared to $55,600 in the same period for 2000.
The provision increased as a result of higher taxable income. The effective tax
rate for the first quarter of 2001 was 31.2% compared with 30.9% for the same
period in 2000.
14
Average Balances, Interest and Average Yields/Cost
The following table presents certain information regarding average balances
of assets and liabilities, as well as the total dollar amounts of interest
income from average interest-earning assets and interest expense on average
interest-bearing liabilities and the resulting average yields and costs. The
yields and costs for the periods indicated are derived by dividing income or
expense by the average balances of assets or liabilities, respectively, for the
periods presented. Average balances were derived from daily balances.
-----------------------------------------------------------
Quarter ended March 31,
-----------------------------------------------------------
2001 2000
---------------------------- ----------------------------
(Dollars in Thousands) Average Interest Average Average Interest Average
Balance Yield/ Balance Yield/
Rate Rate
------- -------- ------- ------- -------- -------
Interest-earning assets:
Loans (1) 106,371 2,230 8.44% 79,414 1,565 7.89%
Securities (2) 6,474 97 5.96% 12,548 198 6.32%
Interest-bearing short term inv 3,307 49 6.05% 1,138 9 3.07%
------- ----- ------- -----
Total interest-earning assets 116,152 2,376 8.23% 93,100 1,771 7.62%
Non-interest-earning assets 9,202 9,180
------- -------
Total assets 125,354 102,280
======= =======
Interest-bearing liabilities:
Deposits:
Passbook accounts 20,123 128 2.58% 18,115 125 2.77%
Money market accounts 784 5 2.54% 910 6 2.65%
NOW accounts 11,624 72 2.51% 12,011 81 2.71%
Certificates of deposit 74,495 1,137 6.19% 60,700 775 5.14%
------- ----- ------- -----
Total deposits 107,026 1,342 5.08% 91,736 987 4.33%
FHLB advances 2,258 34 6.09% 2,194 33 6.12%
------- ----- ------- -----
Total interest-bearing
liabilities 109,284 1,376 5.11% 93,930 1,020 4.37%
----- -----
Non-interest-bearing liabilities 775 451
------- -------
Total liabilities 110,059 94,381
Total retained earnings 15,295 7,899
------- -------
Total liabilities and
retained earnings 125,354 102,280
======= =======
Net interest-earning assets 6,868 (830)
======= =======
Net interest income/interest
rate spread (3) 1,000 3.12% 751 3.25%
===== ==== ===== ====
Net interest margin (4) 3.43% 3.21%
===== =====
Ratio of interest-earning assets
to interest-bearing liabilities 106.28% 99.12%
======= =======
- ----------
(1) Balances are net of deferred loan origination costs, allowance for loan
losses, undisbursed proceeds of construction loans in process, and include
non-accrual loans.
(2) Includes investment securities available-for-sale, stock in the Federal
Home Loan Bank of Cincinnati and mutual funds.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
15
Management of Interest Rate Risk and Market Risk Analysis
Qualitative Aspects of Market Risk. Lawrence Federal's most significant
form of market risk is interest rate risk. The principal objectives of Lawrence
Federal's interest rate risk management are to evaluate the interest rate risk
inherent in certain balance sheet accounts, determine the level of risk
appropriate given Lawrence Federal's business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with the Board of Director's approved guidelines. Lawrence
Federal has an Asset/Liability Committee (ALCO), responsible for reviewing its
asset/liability policies and interest rate risk position, which meets monthly
and reports trends and interest rate risk position to the Board of Directors
quarterly. The ALCO is actively involved in reviewing the mix, volume and
pricing strategies associated with managing the Bank's balance sheet and
interest rate risk. During the first quarter of 2001 management developed
several additional internal reports to better analyze the current financial
position of the Bank, and the Company, and to identify historic trends in the
both entities performance. However, the extent of the movement of interest rates
is an uncertainty that could have a negative impact on the earnings of Lawrence
Federal.
At this time, Lawrence Federal is liability sensitive which makes the Bank
subject to increased interest expense during periods of rising interest rates.
During the first quarter of 2001, the Federal Reserve lowered short-term
interest rates by 150 basis points which should result in improved net interest
margins for the Bank. In recent years, Lawrence Federal has used the following
strategies to manage interest rate risk: (1) emphasizing shorter term consumer
loans; (2) maintaining a high quality portfolio of short- to intermediate-term
securities; and (3) managing the rates and terms of certificates of deposit to
better structure the repricing opportunities of its rate sensitive liabilities.
Lawrence Federal intends to increase its emphasis on adjustable-rate loans and
to originate some fixed-rate mortgage loans through a third party which will
reduce the interest rate risk contained in the balance sheet and generate
additional noninterest income. Lawrence Federal currently does not participate
in hedging programs, interest rate swaps or other activities involving the use
of off-balance sheet derivative financial instruments.
Quantitative Aspects of Market Risk. Lawrence Federal primarily utilizes an
interest sensitivity analysis prepared by the Office of Thrift Supervision to
review the level of interest rate risk. This analysis measures interest rate
risk by computing changes in the net portfolio value of Lawrence Federal's cash
flows from assets, liabilities and off-balance sheet items in the event of a
range of assumed changes in market interest rates. Net portfolio value
represents the market value of portfolio equity and is equal to the market value
of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items. This analysis assesses the risk of loss in market risk
sensitive instruments in the event of a sudden and sustained 100 to 300 basis
point increase or decrease in market interest rates with no effect given to any
steps that management might take to counter the effect of that interest rate
movement. The following table, which is based on information provided to
Lawrence Federal by the Office of Thrift Supervision, presents the change in
Lawrence Federal's net portfolio value at December 31, 2000, that would occur
upon an immediate change in interest rates based on Office of Thrift Supervision
assumptions, but without giving effect to any steps that management might take
to counteract that change.
Change in Net Portfolio Value NPV as % of Portfolio
Interest Rates Value of Assets
In Basis Points
(Rate Shock)
- --------------- ------------------------------- ---------------------
(Dollars in thousands)
NPV
$ Amount $ Change % Change Ratio Change (1)
- --------------- -------- -------- -------- ----- ----------
300 6,142 -5,019 -45% 5.28% -380
200 7,865 -3,296 -30% 6.63% -245
100 9,579 -1,582 -14% 7.92% -115
Static 11,161 -- -- 9.07% --
-100 12,386 1,224 11% 9.93% 85
-200 13,911 2,750 25% 10.97% 189
-300 16,046 4,885 44% 12.39% 332
(1) Expressed in basis points.
The preceding table shows that in the event of a sudden and sustained
increase in market interest rates of 2% or more, the net portfolio value of
Lawrence Federal would decrease moderately.
16
The Office of Thrift Supervision uses certain assumptions in assessing the
interest rate risk of savings associations. These assumptions relate to interest
rates, loan prepayment rates, deposit decay rates, and the market values of
certain assets under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, if interest rates change, expected rates of
prepayments on loans and early withdrawals from certificates of deposit could
deviate significantly from those assumed in calculating the table.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations
of a short-term nature. Lawrence Federal further defines liquidity as the
ability to respond to the needs of depositors and borrowers as well as
maintaining the flexibility to take advantage of investment opportunities.
Lawrence Federal's primary sources of funds consist of deposit inflows, loan
repayments, maturities and sales of investment securities and borrowings from
the Federal Home Loan Bank. While maturities and scheduled amortization of loans
and securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
Liquidity management is both a daily and long-term responsibility of
management. Lawrence Federal adjusts its investments in liquid assets based upon
management's assessment of (1) expected loan demand, (2) expected deposit flows,
(3) yields available on interest-earning deposits and securities, and (4) the
objectives of its asset/liability management program. Excess liquid assets are
invested generally in interest-earning overnight deposits and short- and
intermediate-term U.S. Government and agency obligations.
Lawrence Federal's most liquid assets are cash and short-term investments
(securities maturing in one year or less). The levels of these assets are
dependent on Lawrence Federal's operating, financing, lending and investing
activities during any given period. At March 31, 2001, cash and short-term
investments totaled $9 million. Securities classified as available-for-sale
totaled $6 million at March 31, 2001. In addition, at March 31, 2001, Lawrence
Federal had the ability to borrow a total of approximately $10 million from the
Federal Home Loan Bank of Cincinnati. On that date, Lawrence Federal had
advances outstanding of $2 million.
The primary investing activities of Lawrence Federal are the origination of
loans and the purchase of securities. In the first quarter of 2001, Lawrence
Federal originated $9 million of loans and purchased $1 million of securities.
During the same period in 2000, Lawrence Federal originated $6 million of loans
and purchased $2 million of securities.
Funding is obtained primarily from activity involving deposit accounts and
Federal Home Loan Bank advances. In the first quarter of 2001 Lawrence Federal
experienced a net increase in total deposits of $8 million compared to an
increase of $3 million for the first quarter of 2000. Deposit flows are affected
by the overall level of interest rates, the interest rates and products offered
by Lawrence Federal and its local competitors and other factors. Lawrence
Federal generally manages the pricing of its deposits to be competitive and to
increase core deposit relationships. Occasionally, Lawrence Federal offers
promotional rates on certain deposit products in order to attract deposits. At
March 31, 2001, Federal Home Loan Bank advances were $2 million. On the same
date in 2000, Federal Home Loan Bank advances were at $2 million. The difference
between the two balances is that the 2001 borrowing has a 24 month maturity and
the borrowing at March 31, 2000 was a short-term, overnight, borrowing.
At March 31, 2001, Lawrence Federal had outstanding commitments to
originate loans of $5 million. Lawrence Federal anticipates that it will have
sufficient funds available to meet its current loan commitments. Loan
commitments have, in recent periods, been funded through liquidity or through
Federal Home Loan Bank borrowings. Certificates of deposit that are scheduled to
mature in one year or less from March 31, 2001 totaled $53 million. Management
believes, based on past experience, that a significant portion of those deposits
will remain with Lawrence Federal. Based on the foregoing, Lawrence Federal
considers its liquidity and capital resources sufficient to meet its outstanding
short-term and long-term needs.
17
Lawrence Federal is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision including a risk-based capital
measure. The risk-based capital guidelines include both a definition of capital
and a framework for calculating risk-weighted assets by assigning balance sheet
assets and off-balance sheet items to broad risk categories. At March 31, 2001,
Lawrence Federal exceeded all of its regulatory capital requirements. Lawrence
Federal is considered "well capitalized" under regulatory guidelines.
Impact of Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities. Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," issued in June 1998 (as amended by SFAS No. 137),
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. The statement requires
entities to carry all derivative instruments in the statement of financial
position at fair value. The accounting for changes in the fair value, gains and
losses, of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so, on the reasons for
holding it. If certain conditions are met, entities may elect to designate a
derivative instrument as a hedge of exposures to changes in fair value, cash
flows or foreign currencies. Lawrence Federal adopted FASB No. 133 on January 1,
2001. The statement did not affect Lawrence Federal because Lawrence Federal
does not currently purchase derivative instruments or enter into hedging
activities.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
in this prospectus have been prepared following generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time due to inflation. The primary
impact of inflation is reflected in the increased cost of Lawrence Federal's
operations. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
Looking Forward......
The close of business, March 31, 2001, marked the completion of our first
three months as a stock company. The results posted by the Company are
consistent with the mission, goal and strategic objectives of the organization.
Our corporate "Mission" is to provided the communities within our market with
competitively priced financial services, delivered by a knowledgeable and
professional staff, in a convenient and timely manner. Our corporate "Goal" is
to achieve an annual increase in net income of at least 8.00% while maintaining
a balance of asset quality and growth. The long-term result of this goal will be
to provide enhanced value to our shareholders.
Both the mission and the goal of the Company will be achieved through the
continued education of our associates and improved teamwork. The combination of
these two elements creates a positive banking environment in which the staff can
grow professionally and personally. As a result, our customers will receive
value added services, our communities will receive the financial support they
need and our shareholders will receive a reasonable return on their investment.
During the first quarter of 2001 the Company implemented a set of tailored
incentive programs to reward associates for producing results which are
consistent with the Company's stated mission, goal and strategic objectives.
There are three separate incentive programs. Each program is structured to
strike a balance between five fundamental elements necessary for long-term
corporate success: growth; profit; quality; efficiency; and enhanced shareholder
value.
18
The Company is focused on expanding our customer base. One method of
accomplishing this objective is through the introduction of new financial
products and services. Another method for improving the customer base is to
focus on enhancing the number of banking relationships with existing customers.
A third alternative is by expanding our current delivery network. Management
believes that the Company is now in a position to pursue appropriate business
opportunities and to focus part of its energies on evaluating possible banking
center expansion via denovo construction and/or by purchasing existing locations
as a means of acquiring new sales centers and enhancing revenue opportunities.
Future acquisitions, if they occur, may not be limited to a specific geographic
location or proximity to current branch operations. Lawrence Financial will
consider only those business opportunities that are consistent with both the
mission and the strategic goals of the Company and which management believes
have the potential to generate additional shareholder value.
The Company's management team is evaluating various methods to leverage
existing and new technologies to improve operating efficiencies, product and
service delivery channels, and the measurement/analysis of internal data. By
performing these "ground-up" reviews management believes it can significantly
improve several core processes generating both short-term and long-term benefits
to customers and shareholders.
The Board of Directors, the management team and each associate of the
Company are focused on producing positive results. Generating a short-term spike
in income or growth is not the objective. To be consistent with corporate
objectives positive results must enhance franchise value over the long-term,
deliver value added services to the customer and the community, and build
sustained shareholder value.
The first quarter of 2001 produced several positive results for the Company
and it marked a good beginning but it is only that, "... a good beginning".
19
Lawrence Financial Holdings, Inc.
Form 10-Q
Quarter ended March 31, 2001
PART II - Other Information
Item 1- Legal Proceedings:
There are no matters required to be reported under this item.
Item 2- Changes in Securities:
There are no matters required to be reported under this item.
Item 3- Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4- Submission of Matters to a Vote of Security Holders:
There are no matters required to be reported under this item.
Item 5- Other Information:
There are no matters required to be reported under this item.
Item 6- Exhibits and Reports on Form 8-K:
(a) Exhibits - Not applicable.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on March 19, 2001. Under Item 5, Other
Matters, Lawrence Financial Holdings, Inc. reported that it issued a press
release to announce the date of its annual meeting of shareholders.
Signatures
In accordance with 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 Financial Holdings, Inc.
Date: May 14, 2001 /s/Jack L. Blair
Jack L. Blair
President and Chief Executive Officer
Date: May 14, 2001 /s/RobRoy Walters
RobRoy Walters
Senior Vice President and Chief Financial Officer
20