UNITED STATES 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 June 30, 2001
Commission file number: 0-31847
Lawrence Financial Holdings, Inc.
---------------------------------
(Exact name of small business issuer as specified in its charter)
Maryland 31-1724442
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(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
------------------------------------------------
(Issuer's telephone number, including area code)
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 July 31 , 2001
Common Stock, $.01 par value 775,827 Common Shares
Lawrence Financial Holdings, Inc.
FORM 10-QSB
Quarter Ended June 30, 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
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 ......................................................... 19
Signatures ................................................................ 19
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2
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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June 30, December 31,
2001 2000
------------- -------------
ASSETS
Cash and due from banks $ 8,345,493 $ 2,206,856
Money market fund 222,311 2,678,223
------------- -------------
Total cash and cash equivalents 8,567,804 4,885,079
Securities available for sale, at fair value 7,057,038 6,430,911
Loans receivable, net 107,917,938 105,385,397
Federal Home Loan Bank stock 569,000 549,100
Premises and equipment, net 3,402,572 3,453,094
Accrued interest receivable 708,131 815,816
Cash surrender value of life insurance 1,898,303 1,870,231
Other assets 234,087 455,590
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$ 130,354,873 $ 123,845,218
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 1,496,866 $ 1,409,413
Interest-bearing deposits 110,015,399 101,697,172
------------- -------------
Total deposits 111,512,265 103,106,585
Federal Home Loan Bank borrowings 2,000,000 5,000,000
Other liabilities 1,373,931 798,688
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Total liabilities 114,886,196 108,905,273
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 7,001,074 6,994,305
Retained earnings 8,954,932 8,555,006
Unearned ESOP shares - 52,751 at 2001 and
55,866 at 2000 (525,129) (558,660)
Accumulated other comprehensive income (loss),
net of tax of $15,508 at 2001 and $(30,086) at 2000 30,104 (58,402)
------------- -------------
Total shareholders' equity 15,468,677 14,939,945
------------- -------------
Total liabilities and shareholders' equity $ 130,354,873 $ 123,845,218
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
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3
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended and Six Months June 30, 2001 and 2000
(Unaudited)
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Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
2001 2000 2001 2000
---- ---- ---- ----
Interest income
Loans, including fees $2,260,667 $1,725,998 $4,484,825 $ 3,292,189
Taxable securities 116,978 200,914 222,513 402,567
Overnight deposit 54,351 32,636 94,406 37,741
---------- ---------- ---------- -----------
2,431,996 1,959,548 4,801,744 3,732,497
---------- ---------- ---------- -----------
Interest expense
Deposits 1,342,646 1,120,552 2,684,490 2,112,524
Federal Home Loan Bank borrowings 29,469 34,688 63,412 68,129
---------- ---------- ---------- -----------
1,372,115 1,155,240 2,747,902 2,180,653
---------- ---------- ---------- -----------
Net interest income 1,059,881 804,308 2,053,842 1,551,844
Provision for loan losses 60,000 30,000 108,000 60,000
---------- ---------- ---------- -----------
Net interest income
after provision for loan losses 999,881 774,308 1,945,842 1,491,844
Noninterest income
Net securities losses -- -- -- (13,739)
Service charges 107,563 82,397 201,272 167,714
Other 47,545 44,981 86,498 79,429
---------- ---------- ---------- -----------
155,108 127,378 287,770 233,404
Noninterest expense
Salaries and benefits 378,031 268,856 745,706 538,872
Deposit insurance premiums 15,920 12,215 31,720 24,587
Occupancy and equipment 82,166 90,215 165,983 179,775
Data processing 118,871 98,268 238,143 204,505
Franchise tax 24,000 22,785 50,250 50,535
Advertising expense 19,587 22,439 42,385 58,883
Other 189,396 135,511 370,847 236,963
---------- ---------- ---------- -----------
827,971 650,289 1,645,034 1,294,120
---------- ---------- ---------- -----------
Income before income tax 327,018 251,397 588,578 431,128
Provision for income tax 107,144 77,180 188,652 132,757
---------- ---------- ---------- -----------
Net income $ 219,874 $ 174,217 $ 399,926 $ 298,371
========== ========== ========== ===========
Basic and diluted earnings per common share $ 0.30 N/A $ 0.55 N/A
========== ========== ========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
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4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended and Six Months June 30, 2001 and 2000
(Unaudited)
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Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 219,874 $ 174,217 $ 399,926 $ 298,371
Other comprehensive income:
Unrealized gains (losses)
arising during period 808 (21,791) 134,100 20,088
Reclassification adjustment for losses
included in net income -- -- -- 13,739
--------- --------- --------- ---------
Total other comprehensive income 808 (21,791) 134,100 33,827
Income tax benefit (expense) (275) 7,408 (45,594) (11,501)
--------- --------- --------- ---------
Other comprehensive income, net of tax 533 (14,383) 88,506 22,326
--------- --------- --------- ---------
Comprehensive income $ 220,407 $ 159,834 $ 488,432 $ 320,697
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
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5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Year Ended December 31, 2000 and the Six Months Ended June 30, 2001
(Unaudited)
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Additional Unearned Accum Other
Common Paid-In Retained ESOP Comprehensive
Stock Capital Earnings Shares Income (Loss) 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 -- 399,926 -- -- 399,926
3,115 shares committed to be released under
the ESOP -- 6,769 -- 33,531 -- 40,300
Net unrealized appreciation on securities
available for sale, net of tax of $45,594 -- -- -- -- 88,506 88,506
------- ----------- ---------- --------- --------- ------------
Balance - June 30, 2001 $ 7,696 $ 7,001,074 $8,954,932 $(525,129) $ 30,104 $ 15,468,677
======= =========== ========== ========= ========= ============
The accompanying notes are an integral part of these consolidated
financial statements.
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6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2001 and 2000
(Unaudited)
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Six Months Ended
June 30,
-----------------------
2001 2000
---- ----
Cash flows from operating activities
Net income $ 399,926 $ 298,371
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 88,881 93,560
Provision for loan losses 108,000 60,000
Stock dividend on Federal Home Loan Bank stock (19,900) (18,300)
Net premium amortization (discount accretion) 7,970 (73,880)
Net securities losses -- 13,739
ESOP expense 40,300 --
Change in other assets and liabilities 723,068 1,443,417
----------- ------------
Net cash from operating activities 1,348,245 1,816,907
----------- ------------
Cash flows from investing activities
Purchase of:
Securities available for sale (3,750,000) (2,050,000)
Premises and equipment (38,659) (15,669)
Proceeds from:
Sale of securities available for sale -- 2,103,966
Calls, maturities and principal repayments of securities
available for sale 3,250,000 --
Net change in loans (2,532,541) (11,835,539)
----------- ------------
Net cash from investing activities (3,071,200) (11,797,242)
----------- ------------
Cash flows from financing activities
Net change in:
Deposits 8,405,680 9,546,958
Federal Home Loan Bank short-term borrowings (3,000,000) (500,000)
----------- ------------
Net cash from financing activities 5,405,680 9,046,958
----------- ------------
Net change in cash and cash equivalents 3,682,725 (933,377)
Cash and cash equivalents at beginning of the year 4,885,079 4,667,632
----------- ------------
Cash and cash equivalents at end of the period $ 8,567,804 $ 3,734,255
=========== ============
Supplemental disclosures:
Cash paid during the period for:
Interest $ 2,773,900 $ 2,102,000
Income taxes 195,000 119,000
The accompanying notes are an integral part of these consolidated
financial statements.
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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, Ohio. 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 53,526
weighted average of unearned shares allocated to the Employee Stock Ownership
Plan (the "ESOP") for the three months ended June 30, 2001 and 54,309 weighted
average of unearned shares allocated to the ESOP for the six months ended June
30, 2001. A total of 722,301 weighted average shares were outstanding for the
three month period ended June 30, 2001 and 721,518 weighted average shares were
outstanding for the six month period ended June 30, 2001. Diluted earnings per
common share includes the dilutive effect of additional potential common shares
issuable. As of June 30, 2001 and there were no potentially dilutive items.
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
June 30, 2001, the results of operations for the three month period and the six
month period ended June 30, 2001 and 2000 and the statements of cash flows for
the six months ended June 30, 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 and six months ended June 30, 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 - 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 June 30, 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
Minimum Required Well Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
June 30,2001:
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8
Total capital (to risk-
weighted assets) $ 14,149 15.19% $ 7,451 8.0% $ 9,313 10.0%
Tier 1 (core) capital (to
risk-weighted assets) $ 13,310 14.29% $ 3,725 4.0% $ 5,588 6.0%
Tier 1 (core) capital (to
adjusted total assets) $ 13,310 10.34% $ 5,183 4.0% $ 6,479 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 the 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.
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9
ITEM 2
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Selected Financial Data
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Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
Significant Ratios:
Net income to
Average total assets 0.67% 0.64% 0.63% 0.57%
Average stockholders' equity 5.73 8.65 5.26 7.50
Net Interest Margin 3.50 3.21 3.46 3.21
Average net loans to average deposits 96.92 86.36 97.95 86.41
Average stockholders' equity to
average total assets 11.77 7.44 11.99 7.58
Capital ratios
Tier I capital 10.34 7.35 10.34 7.35
Risk-based capital 15.19 10.78 15.19 10.78
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Per Share Data:
Earnings per weighted average share
Basic $ 0.30 N/A $ 0.55 N/A
Diluted 0.30 N/A 0.55 N/A
Weighted average shares outstanding
Basic 722,301 N/A 721,518 N/A
Diluted 722,301 N/A 721,518 N/A
Total shares outstanding 775,827 N/A 775,827 N/A
Cash dividends per share -- N/A -- N/A
Book value per share at end of period $ 19.94 N/A $ 19.94 N/A
Market price at end of period
Source: NASDAQ.com 12.90 N/A 12.90 N/A
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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. 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 June 30, 2001 and December 31, 2000
During the first six months of 2001, total assets increased $6.5 million,
or 5%, to $130.4 million at June 30, 2001 when compared to the balances at
December 31, 2000. At the six months ended June 30, 2001, net loans receivable
had grown $2.5 million, or 2%, when compared to the balances at December 31,
2000. Direct and indirect consumer loans grew $3.9 million, or 15%, real estate
loans decreased by $2.9 million, or 5%, and indirect mobile home loans grew $0.9
million, or 5%, commercial loans were at $1.4 million and the allowance for loan
losses was $0.8 million. The growth in the commercial loan portfolio was due to
a reclassification of loans from the real estate loan portfolio. These loans
were made for a commercial purpose and were secured by real estate. 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 reduced market demand.
The pace of growth in the indirect mobile home portfolio has slowed as the
Company nears the desired mix of these loans to the total loan portfolio.
Lawrence Federal's long term investments, held in the form of securities,
increased by $0.6 million, or 10%, when comparing June 30, 2001 balances to
December 31, 2000. During the first six months of 2001 Lawrence Financial's
available cash and cash equivalents grew to $8.6 million, an increase of $3.7
million, or 75%. This growth was primarily due to increases in interest bearing
deposits.
Compared to December 31, 2000, total deposits and borrowings increased
$5.4 million, or 5%, to $113.5 million at June 30, 2001. Within the first six
months of 2001, deposits increased $8.4 million, or 8%, and the volume of
Federal Home Loan Bank advances decreased by $3 million to a balance of $2
million at June 30, 2001. Deposits grew during this period as a result of
marketing efforts and aggressively priced products.
Equity increased $529,000, or 4%, to $15.5 million at June 30, 2001 when
compared to the balance at December 31, 2000. During the six months ended June
30, 2001, retained earnings increased $400,000 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 and the impact of the unearned ESOP was reduced by $41,000
during the first six months of 2001.
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11
Comparison of Operating Results for the Three Month and Six Month Periods Ending
June 30, 2001 and 2000
General. For the three months ended June 30, Lawrence Financial's net
income increased 26% to $220,000 for 2001 from $174,000 for 2000. For the six
month period ended June 30, Lawrence Financial's net income increased 34% to
$400,000 for 2001 from $298,000 for 2000. Return on average assets was 0.67% and
0.63% for the second quarter and first six months of 2001 respectively compared
to 0.64% and 0.57% for the same two periods in 2000. Return on average equity
was 5.73% and 5.21% for the second quarter and first six months of 2001
respectively compared to 8.65% and 7.46% for the same two periods in 2000. Net
interest income increased $256,000, or 32%, during the second quarter and
$502,000, or 32%, for the six month period ending June 30. 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. Noninterest
income increased $28,000, or 22%, during the second quarter and $54,000, or 23%,
for the six month period ending June 30. Offsetting the increase in net interest
and noninterest income was a $178,000, or 27%, increase in noninterest expense
for the quarter ended June 30 and a $351,000, or 27%, increase in noninterest
expense for the six months ended June 30. Employee salaries and benefits
increased $109,000, or 41%, for the quarter ended June 30 and $207,000, or 38%,
when compared to the six months ended June 30, accounting for the majority of
the increase. There are several causes for the increase in salary and wage
expense. 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 probable rewards
which are being 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 $256,000, or 32%, for the
quarter compared to the same quarter in 2000 and increased $502,000, or 32%, for
the first six months of 2001 compared to the first six months of 2000. Interest
income on loans increased $535,000, or 31%, and increased $1.2 million, or 36%,
for the quarter and six months ended June 30 respectively. These increases were
primarily a result of growth in the loan portfolio and the increase in the yield
on the portfolio. Interest income on short-term investments increased $22,000,
or 67%, for the quarter and increased $57,000, or 150%, for the six months ended
June 30 primarily as a result of a larger average balance being carried by the
Company during 2001. The average yield on interest-earning assets improved to
8.05% for the quarter and 8.13% for the six months ended June 30, 2001, from
7.87% and 7.75% for the same two periods in 2000. As the average balance of the
Company's loan portfolio grew, loans became a higher percentage of total
interest-earning assets resulting in an increase in the yield on total
interest-earning assets. However, as earning assets reprice in the current,
lower rate environment the overall yield on interest-earning assets may
gradually decrease from June 30, 2001, levels.
Interest Expense. Interest expense increased $217,000, or 19%, for the
quarter ended June 30, 2001 compared to the second quarter of 2000. For the six
months ended June 30 interest expense increased $567,000, or 26%, compared to
the same period in 2000. Interest paid on deposits increased $222,000, or 20%,
and $572,000, or 27%, for the quarter and the six month period respectively, as
a result of growth in deposit volume. Interest paid on Federal Home Loan Bank
advances was $30,000 for the quarter and $63,000 through the first six months of
2001 compared to $35,000 and $68,000 for the same periods in 2000. The average
cost of interest-bearing liabilities was 4.85% for the quarter and 4.97% in the
first six months of 2001 compared to 4.63% and 4.50% for the same periods in
2000.
Provision for Loan Losses. Activity in the allowance for loan losses (the
"Allowance") 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 loan portfolio and compares that estimate to the
Allowance's balance. Management calculates its estimate of probable losses
primarily by applying expected loss percentages to classified loans and major
loan categories. The impact resulting from management's review is described in
more detail below as part of the discussion comparing the second quarter and
first six months of 2001 and the provisions for loan losses during the same two
periods in 2000.
The provision for loan losses was $60,000 for the second quarter of 2001
compared to $30,000 for the same period in 2000. The provision for loan losses
was $108,000 for the six months ended June 30, 2001 compared to $60,000 for the
same period in 2000. Through the six month periods ended June 30, provision
increased $48,000, or 80% when comparing 2001 to 2000. The increase in provision
was driven primarily by significant growth in the loan portfolio combined with a
shift in the portfolio's loan mix which reflects management's focus on
increasing consumer loan originations. The ratio of Allowance to gross loans at
of June 30, 2001, was 0.77% compared to 0.69% at June 30, 2000. The Company's
average, year-to-date allowance for loan loss as a percentage of average gross
loans outstanding increased by three basis points from 0.72%, through June 30,
2000, to 0.75%, through June 30, 2001. Management uses these ratios to evaluate
the Bank's Allowance and to target the Allowance's growth at a pace equal to,
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12
or greater than, the rate of increase in the loan portfolio. In addition to
monitoring the rate of loan growth management assesses probable losses contained
within the existing loans. The model used to estimate possible losses
incorporates Lawrence Federal's historic loss percentage and other factors such
as peer comparisons, underwriting quality and local economic conditions.
Management's assessment of probable losses in the loan portfolio increased for
the first six 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.
Management believes that the volume of indirect automobile and indirect mobile
home loans, expressed as a percent of the total loan portfolio, will not grow
significantly beyond June 30, 2001, levels. At June 30, 2001, indirect
automobile and indirect mobile home loans were 16% and 18%, respectively, of
total gross loans outstanding.
The economy in Lawrence County has generally been good in the past few
years, but recent plant closings have resulted in the loss of several jobs.
However, given recent economic conditions, Lawrence Federal has not experienced
a significant increase in the percentage of charged off loan balances. The ratio
of non-performing loans (those loans 90 days or more delinquent and loans placed
on non-accrual) to gross loans as of June 30, 2001, was at 1.55% compared to
0.85% at March 31, 2001. In dollars, these percentages represent an increase of
$767,000 in non-performing loans, from $916,000 at March 31, 2001, to $1,683,000
at June 30, 2001. $627,000, or 83%, of the increase was related to action taken
by the Company on June 29, 2001, against a group of local borrowers which have
operated a retail grocery business in the community for many years. The Company
is in first position on all real estate, fixtures and inventory related to the
operation of the business and has the personal guarantees of each owner.
Management has not established a specific reserve for this loan and believes the
Company to be adequately secured in the unlikely event of a liquidation.
A few business days after quarter-end June 30, 2001, the Company reduced
non-performing loans by $95,000 through the completion of two real estate
related transactions that were pending at the close of the quarter. Management
continues to monitor closely the risk characteristics of the loan portfolio,
local economic conditions and, as stated earlier, will consider these factors
when evaluating the appropriate amount of provision and Allowance. Management
believes the company to be adequately reserved.
While management believes the existing ratio of Allowance to gross loans
is adequate, future adjustments to the provision 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 six months of 2001 to
the first six months of 2000.
Dollar Percentage
06/30/01 06/30/00 Change Change
------------ ---------- ----------- --------------
(Dollars in Thousands)
Net securities gains (losses) ............................... -- -14 14 N/A
Service charges ............................................. 201 168 33 20
Other ....................................................... 87 79 8 10
--- --- --
Total ................................................. 288 233 55 24
=== === ==
Net securities losses incurred in the first six months of 2000 were not
duplicated in the same period of 2001. Service charges increased during the
period 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
$6,700 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.
Noninterest Expense. The following table shows the components of noninterest
expense and the dollar and percentage change from the six months ending June 30,
2001 to the same period in 2000.
Dollar Percentage
06/30/01 06/30/00 Change Change
-------------- ----------------- ----------------- ----------------
(Dollars in Thousands)
Salaries and benefits ........................... 746 539 207 38
Deposit insurance premiums ...................... 32 25 7 28
Occupancy and equipment ......................... 166 180 -14 -8
Data processing ................................. 238 204 34 17
Franchise tax ................................... 50 50 -- --
Advertising expense ............................. 42 59 -17 -29
Other ........................................... 371 237 134 57
--- --- ---
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13
Total ..................................... 1,645 1,294 351 27
===== ===== ===
Employee salaries and benefits increased $207,000, or 38%, when compared
to the first six months 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 are being 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 $188,700 in for the
six months ended June 30, 2001, compared to $132,800 in the same period for
2000. The provision increased as a result of higher taxable income. The
effective tax rate for the first six months of 2001 was 32.1% compared with
30.8% for the same period in 2000.
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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.
----------------------------------------------------------------------------
Six months ended June 30,
----------------------------------------------------------------------------
2001 2000
---------------------------------- ----------------------------------
Average Average
(Dollars in Thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- ---------- --------- --------- ---------- ----------
Interest-earning assets:
Loans (1) ......................... 107,242 4,485 8.40% 82,130 3,291 8.03%
Securities (2) .................... 7,072 223 6.36% 12,650 392 6.20%
Short term investments ............ 4,207 94 4.51% 1,633 48 5.95%
------- ----- ------- -----
Total interest-earning assets ... 118,521 4,802 8.13% 96,413 3,731 7.75%
Non-interest-earning assets .......... 9,442 9,155
------- -------
Total assets ................ 127,963 105,568
======= =======
Interest-bearing liabilities:
Deposits:
Passbook accounts .............. 19,899 286 2.89% 18,369 263 2.88%
Money market accounts .......... 821 12 2.92% 852 12 2.83%
NOW accounts ................... 12,861 143 2.24% 12,358 149 2.42%
Certificates of deposit ........ 75,767 2,244 5.97% 63,366 1,684 5.34%
------- ----- ------- -----
Total deposits .............. 109,348 2,685 4.95% 94,945 2,108 4.46%
FHLB advances ..................... 2,129 63 6.01% 2,169 68 6.31%
------- ----- ------- -----
Total interest-bearing
liabilities ............... 111,477 2,748 4.97% 97,114 2,176 4.50%
----- -----
Non-interest-bearing liabilities ..... 1,145 453
------- -------
Total liabilities ........... 112,622 97,567
Total retained earnings .............. 15,341 8,001
------- -------
Total liabilities and
retained earnings ......... 127,963 105,568
======= =======
Net interest-earning assets ....... 7,044 (701)
======= =======
Net interest income/interest
rate spread (3) .................. 2,054 3.16% 1,555 3.25%
===== ==== ===== ====
Net interest margin (4) ........... 3.46% 3.21%
==== ====
Ratio of interest-earning assets
to interest-bearing liabilities .. 106.32% 99.28%
======= ======
- ----------
(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.
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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, 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 six months of 2001 management has utilized
several new internal reports to better analyze the current financial position of
the Bank, and the Company, and to identify historic trends in the both entities.
However, management is aware that the movement of interest rates is an
uncertainty which 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 six months of 2001, the Federal Reserve lowered short-term
interest rates by 275 basis points which should result in an improved net
interest margin for the Bank. Lawrence Federal has placed an emphasis on
adjustable-rate loans and the origination of 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. When evaluating interest rate risk
Lawrence Federal utilizes an interest sensitivity analysis prepared by the
Office of Thrift Supervision (the "OTS"), which is supplemented by an internally
generated, quarterly repricing "Gap Report" and a monthly "Rate-Volume-Variance
Report". 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 March 31, 2001, 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.
NPV as % of Portfolio
Change in Net Portfolio Value Value of Assets
Interest Rates ------------------------------------------ -------------------------
In Basis Points (Dollars in thousands) NPV
(Rate Shock) $ Amount $ Change % Change Ratio Change (1)
- ----------------- ----------- ------------ -------------- --------- -------------
300 8,983 -5,690 -39% 7.25% -393
200 10,824 -3,850 -26% 8.58% -261
100 12,652 -2,021 -14% 9.84% -135
Static 14,674 -- -- 11.19% --
-100 16,100 1,426 10% 12.09% 90
-200 17,300 2,627 18% 12.82% 164
-300 18,670 3,996 27% 13.64% 245
(1) Expressed in basis points.
The preceding table shows that in the event of a sudden and sustained
increase in market interest rates of 200 basis points or more, the net portfolio
value of Lawrence Federal would decrease moderately.
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
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16
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.
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 June 30, 2001, cash and short-term
investments totaled $8.6 million. Securities classified as available-for-sale
totaled $7.1 million at June 30, 2001.
Funding is obtained primarily from activity involving deposit accounts and
Federal Home Loan Bank advances. In the first six months of 2001 Lawrence
Federal experienced a net increase in total deposits of $8.4 million compared to
an increase of $9.5 million for the same period in 2000. In addition, at June
30, 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. On the same date in
2000, Federal Home Loan Bank advances were at $4 million. 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.
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 June 30, 2001,
Lawrence Federal exceeded all of its regulatory capital requirements. Lawrence
Federal is considered "well capitalized" under regulatory guidelines. See the
table on page four (4) of this filing for more detail regarding the Bank's
capital position.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
in this interim report 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.
What shareholders want to know .........
Your Company has successfully completed six months of operation as a
publicly trade stock corporation. The volume and variety of change experienced
within the Company since December 28, 2000, has been significant. When any
company goes through change of this magnitude it becomes critical to stay
focused on the proven fundamentals of doing business in today's competitive
market. Whether your business competes in the financial services industry,
manufacturing or retail sales, when faced with the challenge of re-engineering,
one must never lose sight of core business principles. For your Company those
principles are stated in the corporate "Mission". Our corporate "Mission" is to
provide the communities within our market with competitively priced financial
services, delivered by a knowledgeable and professional staff, in a convenient
and timely manner. Lawrence Financial's approach to managing a newly converted
stock company is to build a solid foundation for the continuation of balanced
growth and profitability. The strategic priority of the Company is to enhance
both customer and shareholder value using a "long-term" perspective with less
emphasis on quarter-to-quarter results.
To date the Company's performance has been consistent with management's
expectations and, judging from the comments received from several shareholders,
the Company's results through the first six months of 2001 range from "good" to
"very good". To keep the momentum of success going management has established
the following priorities for the second half of 2001 and beyond (in no
particular order):
A. Improve the quality of our assets;
B. Improve the systems and processes we use to manage and measure risk
within the Company;
C. Find new ways to deliver products and services more efficiently to a
larger customer base;
- --------------------------------------------------------------------------------
17
D. Develop a strategic plan for 2002 and 2003 detailing specific
actions to improve the quality of our products and services while
enhancing shareholder value; and
E. Capital management.
The Company continues to focus on expanding our customer base through a
combination of three strategic objectives. One method is through the
introduction of new financial products and services. A second method for
improving the customer base is to focus on enhancing the number of banking
relationships with existing customers. The third alternative is by expanding our
current delivery network. Management believes that the Company is 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
stockholder value.
One of the most frequently asked questions from shareholder's centers
around the payment of dividends from the Company and the possibility of the
Company doing a stock repurchase program (a "buy-back"). Regarding a "buy-back"
program: under current OTS regulations the Company cannot implement any type of
buy-back program prior to twelve months after our conversion date. Following the
mandatory waiting period the Board of Directors will evaluate all available
options with respect to capital management.
Regarding the payment of dividends: the Board of Directors is in the
process of reviewing the potential impact to the Company's capital position
generated by implementation of a dividend program. This review process should be
concluded after the close of the third quarter, September 30, 2001.
Thank you for your questions and your continued support.
Lawrence Financial Holdings, Inc.
Form 10-QSB
Quarter ended June 30, 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.
Signatures
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18
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: August 6, 2001 /s/ Jack L. Blair
-------------------------------------------------
Jack L. Blair
President and Chief Executive Officer
Date: August 6, 2001 /s/ RobRoy Walters
-------------------------------------------------
RobRoy Walters
Senior Vice President and Chief Financial Officer
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19