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 SEPTEMBER 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 October 31 , 2001
Common Stock, $.01 par value 775,827 Common Shares
Traditional Small Business Disclosure Format (Check One) : Yes [ ] No [ X ]
LAWRENCE FINANCIAL HOLDINGS, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 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 ...................................................... 20
Signatures ............................................................. 20
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2
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30, December 31,
2001 2000
---- ----
ASSETS
Cash and due from banks $ 8,481,349 $ 2,206,856
Money market fund 1,061,354 2,678,223
-------------- --------------
Total cash and cash equivalents 9,542,703 4,885,079
Securities available for sale, at fair value 10,231,498 6,430,911
Loans receivable, net 108,021,810 105,385,397
Federal Home Loan Bank stock 579,000 549,100
Premises and equipment, net 3,358,196 3,453,094
Accrued interest receivable 785,415 815,816
Cash surrender value of life insurance 1,912,866 1,870,231
Other assets 172,128 455,590
-------------- --------------
$ 134,603,616 $ 123,845,218
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 1,569,686 $ 1,409,413
Interest-bearing deposits 113,902,095 101,697,172
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Total deposits 115,471,781 103,106,585
Federal Home Loan Bank borrowings 2,000,000 5,000,000
Other liabilities 1,245,220 798,688
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Total liabilities 118,717,001 108,905,273
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 7,758 7,696
Additional paid-in capital 7,073,313 6,994,305
Retained earnings 9,153,266 8,555,006
Unearned ESOP shares - 51,201 at 2001 and
55,866 at 2000 (505,530) (558,660)
Accumulated other comprehensive income (loss),
net of tax of $81,295 at 2001 and $(30,086) at 2000 157,808 (58,402)
-------------- --------------
Total shareholders' equity 15,886,615 14,939,945
-------------- --------------
Total liabilities and shareholders' equity $ 134,603,616 $ 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 and Nine Months Ended September 30, 2001 and 2000
(Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 2,251,457 $ 1,995,878 $ 6,736,282 $ 5,288,067
Taxable securities 128,268 179,707 340,555 582,274
Overnight deposits 47,604 (5,527) 152,236 32,214
------------ ------------ ------------ ------------
2,427,329 2,170,058 7,229,073 5,902,555
------------ ------------ ------------ ------------
INTEREST EXPENSE
Deposits 1,281,691 1,202,570 3,966,181 3,315,094
Federal Home Loan Bank borrowings 29,793 116,334 93,205 184,463
------------ ------------ ------------ ------------
1,311,484 1,318,904 4,059,386 3,499,557
------------ ------------ ------------ ------------
NET INTEREST INCOME 1,115,845 851,154 3,169,687 2,402,998
Provision for loan losses 72,000 110,000 180,000 170,000
------------ ------------ ------------ ------------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 1,043,845 741,154 2,989,687 2,232,998
NONINTEREST INCOME
Net securities gains (losses) 13,090 (143,089) 13,090 (156,828)
Service charges 113,177 94,940 314,449 262,654
Other 40,361 37,660 126,859 117,089
------------ ------------ ------------ ------------
166,628 (10,489) 454,398 222,915
NONINTEREST EXPENSE
Salaries and benefits 430,610 284,265 1,176,317 823,137
Deposit insurance premiums 13,541 12,530 23,322 37,116
Occupancy and equipment 83,089 81,737 249,072 261,512
Data processing 125,001 108,585 363,144 313,090
Franchise tax 22,875 19,552 73,125 70,087
Advertising expense 21,545 21,736 63,930 80,619
Other 222,218 128,653 615,002 365,617
------------ ------------ ------------ ------------
918,879 657,058 2,563,912 1,951,178
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX 291,594 73,607 880,173 504,735
Provision for income tax 93,260 19,340 281,913 152,097
------------ ------------ ------------ ------------
NET INCOME $ 198,334 $ 54,267 $ 598,260 $ 352,638
============ ============ ============ ============
Basic and diluted earnings per common share $ 0.27 N/A $ 0.83 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 and Nine Months Ended September 30, 2001 and 2000
(Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 198,334 $ 54,267 $ 598,260 $ 352,638
Other comprehensive income:
Unrealized gains
arising during period 206,581 258,044 340,681 291,870
Reclassification adjustment for (gains)
losses included in net income (13,090) 143,089 (13,090) 156,828
---------- ---------- ---------- ----------
Total other comprehensive income 193,491 401,133 327,591 448,698
Income tax expense (65,787) (136,385) (111,381) (152,557)
---------- ---------- ---------- ----------
Other comprehensive income, net of tax 127,704 264,748 216,210 296,141
---------- ---------- ---------- ----------
Comprehensive income $ 326,038 $ 318,965 $ 814,470 $ 648,779
========== ========== ========== ==========
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 Nine Months Ended September 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 -- -- 598,260 -- -- 598,260
4,665 shares committed to be released
under the ESOP 62 79,008 -- 53,130 -- 132,200
Net unrealized appreciation on securities
available for sale, net of tax of $111,381 -- -- -- -- 216,210 216,210
---------- ------------- ------------- ----------- ------------- -------------
Balance - September 30, 2001 $ 7,758 $ 7,073,313 $ 9,153,266 $ (505,530) $ 157,808 $ 15,886,615
========== ============= ============= =========== ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
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6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2001 and 2000
(Unaudited)
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Nine Months Ended
September 30,
----------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 598,260 $ 352,638
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 134,103 147,181
Provision for loan losses 180,000 170,000
Stock dividend on Federal Home Loan Bank stock (29,900) (28,393)
Net premium amortization 5,266 10,707
Net securities (gains) losses (13,090) 156,828
Change in other assets and liabilities 738,579 2,670,000
------------- -------------
Net cash from operating activities 1,613,218 3,126,323
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of:
Securities available for sale (9,000,000) (2,050,000)
Premises and equipment (39,205) (38,392)
Proceeds from:
Sale of securities available for sale 2,284,828 8,276,369
Calls, maturities and principal repayments of securities
available for sale 3,250,000 --
Net change in loans (2,816,413) (21,773,000)
------------- -------------
Net cash from investing activities (6,320,790) (15,585,023)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in:
Deposits 12,365,196 9,312,000
Federal Home Loan Bank advances (3,000,000) 3,500,000
------------- -------------
Net cash from financing activities 9,365,196 12,812,000
------------- -------------
Net change in cash and cash equivalents 4,657,624 353,300
Cash and cash equivalents at beginning of the year 4,885,079 4,667,632
------------- -------------
Cash and cash equivalents at end of the period $ 9,542,703 $ 5,020,932
============= =============
Supplemental disclosures:
Cash paid during the period for:
Interest $ 4,083,950 $ 3,466,435
Income taxes 248,000 172,000
The accompanying notes are an integral part of these consolidated
financial statements.
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7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 51,962
weighted average of unearned shares allocated to the Employee Stock Ownership
Plan (the "ESOP") for the three months ended September 30, 2001 and 53,308
weighted average of unearned shares allocated to the ESOP for the nine months
ended September 30, 2001. A total of 723,865 weighted average shares were
outstanding for the three month period ended September 30, 2001 and 722,519
weighted average shares were outstanding for the nine month period ended
September 30, 2001. Diluted earnings per common share includes the dilutive
effect of additional potential common shares issuable. As of September 30, 2001
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
September 30, 2001, the results of operations for the three month period and the
nine month period ended September 30, 2001 and 2000 and the statements of cash
flows for the nine months ended September 30, 2001 and 2000. In accordance with
accounting principles generally accepted in the United States of America for
interim financial information, these statements do not include certain
information and footnote disclosures required by accounting principles generally
accepted in the United States of America for complete annual financial
statements. Financial information as of December 31, 2000 has been derived from
the audited Consolidated Financial Statements of the Company. The results of
operations and statements of cash flows for the three months and nine months
ended September 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.
NEW ACCOUNTING PRONOUNCEMENTS: In 2001, new accounting guidance was issued that
will, beginning in 2002, revise the accounting for goodwill and intangible
assets. Intangible assets with indefinite lives and goodwill will no longer be
amortized, but will periodically be reviewed for impairment and written down if
impaired. Additional disclosures about intangible assets and goodwill may be
required. An initial goodwill impairment test is required during the first six
months of 2002. The Company does not expect this new guidance to have a material
effect on its financial statements.
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8
NOTE 2 - REGULATORY CAPITAL REQUIREMENTS
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 September 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
------ ----- ------ ----- ------ -----
September 30,2001:
- -----------------
Total capital (to risk-
weighted assets) $ 14,228 15.05% $ 7,562 8.0% $ 9,452 10.0%
Tier 1 (core) capital (to
risk-weighted assets) $ 13,388 14.16% $ 3,781 4.0% $ 5,671 6.0%
Tier 1 (core) capital (to
adjusted total assets) $ 13,388 10.08% $ 5,345 4.0% $ 6,681 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% $ 4,981 4.0% $ 6,226 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
- ---------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
SIGNIFICANT RATIOS:
Net income to
Average total assets 0.60% 0.19% 0.62% 0.43%
Average stockholders' equity 5.01 2.55 5.17 5.75
Net Interest Margin 3.66 3.17 3.53 3.23
Average net loans to average deposits 95.64 96.27 97.25 89.83
Average stockholders' equity to
average total assets 11.88 7.37 11.95 7.52
Capital ratios
Tier I capital 10.08 7.11 10.08 7.11
Risk-based capital 15.05 10.65 15.05 10.65
- ---------------------------------------------------------------------------------------------
PER SHARE DATA:
Earnings per weighted average share
Basic $ 0.27 N/A $ 0.83 N/A
Diluted 0.27 N/A 0.83 N/A
Weighted average shares outstanding
Basic 723,865 N/A 722,519 N/A
Diluted 723,865 N/A 722,519 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 $ 20.48 N/A $ 20.48 N/A
Last sale at end of period
Source: NASDAQ.com 13.75 N/A 13.75 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.
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 SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
During the first nine months of 2001, total assets increased $10.8
million, or 9%, to $134.6 million at September 30, 2001 when compared to the
balances at December 31, 2000. At September 30, 2001, net loans receivable had
grown $2.6 million, or 3%, when compared to the balances at December 31, 2000.
Direct and indirect consumer loans grew $4.4 million, or 16%, real estate loans
decreased by $3.2 million, or 5%, and indirect mobile home loans grew $1.0
million, or 6%, commercial loans totaled $1.2 million at September 30, 2001.
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 $3.8 million, or 59%, when comparing September 30, 2001 balances to
December 31, 2000. During the first nine months of 2001 Lawrence Financial's
available cash and cash equivalents grew to $9.5 million, an increase of $4.7
million, or 95%. This growth was primarily due to increases in interest bearing
deposits.
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11
Compared to December 31, 2000, total deposits and borrowings increased
$9.4 million, or 9%, to $117.5 million at September 30, 2001. Within the first
nine months of 2001, deposits increased $12.4 million, or 12%, and the volume of
Federal Home Loan Bank advances decreased by $3 million to a balance of $2
million at September 30, 2001. Deposits grew during this period as a result of
marketing efforts and aggressively priced products.
Equity increased $947,000, or 6%, to $15.9 million at September 30,
2001 when compared to the balance at December 31, 2000. During the nine months
ended September 30, 2001, retained earnings increased $598,000 as a result of
net income for the period while changes to the net unrealized appreciation on
securities available-for-sale, net of tax, improved from an unrealized loss, net
of tax, of $58,000 to an unrealized gain, net of tax, of $158,000 and the impact
of the unearned ESOP was reduced by $132,200 during the first nine months of
2001.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDING SEPT. 30, 2001 AND 2000
GENERAL. For the three months ended September 30, Lawrence Financial's
net income increased 265% to $198,000 for 2001 from $54,000 for 2000. For the
nine month period ended September 30, Lawrence Financial's net income increased
70% to $598,000 for 2001 from $353,000 for 2000. Reported earnings for the two
periods in 2000 reflect a loss on the sale of securities of $143,000, pre-tax
during the quarter and a total loss on sale of securities of $157,000, pre-tax,
for the nine months ended September 30. Normalized net income, which is net
income adjusted for the after-tax impact from non-recurring items, increased by
an estimated $38,000, or 24%, when compared to the third quarter of 2000, and
$136,000, or 29%, when compared to the first nine months of 2000. Return on
average assets was 0.60% and 0.62% for the third quarter and first nine months
of 2001 respectively compared to 0.19% and 0.43% for the same two periods in
2000. Return on average equity was 5.01% and 5.17% for the third quarter and
first nine months of 2001 respectively compared to 2.55% and 5.75% for the same
two periods in 2000. Net interest income increased $265,000, or 31%, during the
third quarter and $767,000, or 32%, for the nine month period ending September
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. Excluding the impact from a $13,000 gain on the sale of
securities in the third quarter of 2001 and a ($143,000) loss on the sale of
securities in the third quarter of 2000, noninterest income increased $21,000,
or 16%, during the third quarter and $62,000, or 16%, for the nine month period
ending September 30. Offsetting the increase in net interest and noninterest
income was a $262,000, or 40%, increase in noninterest expense for the quarter
ended September 30 and a $613,000, or 31%, increase in noninterest expense for
the nine months ended September 30. Employee salaries and benefits increased
$146,000, or 51%, for the quarter ended September 30 and $353,000, or 43%, when
compared to the nine months ended September 30, accounting for the majority of
the increase. There are several causes for the increase in non-interest
expenses. The Company has expensed $64,000 year-to-date for the Employee Stock
Ownership Program (ESOP). The Company is also accruing on a monthly basis for
the expense related to the employee Incentive Bonus programs which have been
restructured from the annual bonuses paid in previous years. These awards, if
paid, are based on specific results produced during the year. $50,000 in expense
has been accrued for the payment of the Incentive Bonus during the first nine
months of 2001 compared to no "bonus" expense being accrued during the same
period in 2000. 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 $265,000, or 31%, for
the quarter compared to the same quarter in 2000 and increased $767,000, or 32%,
for the first nine months of 2001 compared to the first nine months of 2000.
Interest income on loans increased $256,000, or 13%, and increased $1.4 million,
or 27%, for the quarter and nine months ended September 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 $53,000 for the quarter and increased $120,000, or 373%,
for the nine months ended September 30 primarily as a result of a larger average
balance being carried by the Company during 2001. The average yield on
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12
interest-earning assets decreased to 7.92% for the quarter and increased to
8.06% for the nine months ended September 30, 2001, from 8.08% and 7.93% for the
same two periods in 2000. As the year to date 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.
The reduction of yield between the three months ended September 30, 2000 and
2001, is primarily due to an increase in the average balance of short term
investments combined with an 82 basis point reduction in the yield from these
investments when compared to the preceding quarter. As earning assets reprice in
the current, lower rate environment the overall yield on interest-earning assets
may gradually decrease from September 30, 2001, levels.
INTEREST EXPENSE. Interest expense decreased $7,000, or 0.6%, for the
quarter ended September 30, 2001 compared to the third quarter of 2000. For the
nine months ended September 30 interest expense increased $560,000, or 16%,
compared to the same period in 2000. Interest paid on deposits increased
$79,000, or 7%, and $651,000, or 20%, for the quarter and the nine 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 $93,000 through the
first nine months of 2001 compared to $116,000 and $184,000 for the same periods
in 2000. The average cost of interest-bearing liabilities was 4.56% for the
quarter and 4.83% in the first nine months of 2001 compared to 4.97% and 4.71%
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 third quarter and
first nine months of 2001 and the provisions for loan losses during the same two
periods in 2000.
The provision for loan losses was $72,000 for the third quarter of 2001
compared to $110,000 for the same period in 2000. During the third quarter of
2000 the Company recorded additional provision in order to keep the reserve
adequate for the increased balances in indirect auto loans. The provision
recorded in the third quarter of 2001 is consistent with the growth of the loan
portfolio and management's estimate of the risk contained within the portfolio.
The provision for loan losses was $180,000 for the nine months ended September
30, 2001 compared to $170,000 for the same period in 2000. Through the nine
month periods ended September 30, provision increased $10,000, or 6% 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 September 30,
2001, was 0.77% compared to 0.71% at September 30, 2000. The Company's average,
year to date allowance for loan loss as a percentage of average gross loans
outstanding increased by forty-six basis points from 0.26%, through September
30, 2000, to 0.72%, through September 30, 2001. Management uses these ratios to
evaluate the Bank's Allowance and to target the Allowance's growth at a pace
equal to, 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 probable
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 nine 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 September 30, 2001, levels. At September 30,
2001, indirect automobile and indirect mobile home loans were 16% and 18%,
respectively, of total gross loans outstanding. These percentages are unchanged
from those reported at June 30, 2001.
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 September 30, 2001, was at 1.13% compared
to 1.55% at June 30, 2001. In dollars, these percentages represent a decrease of
$457,000 in non-performing loans, from $1,683,000 at June 30, 2001, to
$1,226,000 at September 30, 2001. Management has not established a specific
reserve for any individual loan.
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13
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 nine months of 2001
to the first nine months of 2000.
Percentage
09/30/01 09/30/00 Dollar Change Change
-------------- ----------------- ----------------- ----------------
(Dollars in Thousands)
Net securities gains (losses) 13 (157) 170 --
Service charges 314 263 51 19
Other 127 117 10 9
--- --- ---
Total 454 223 231 104
=== === ===
Net securities losses incurred in the first nine 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 and increases in
service charges assessed. Other income consists of increases in the cash
surrender value of life insurance policies and 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 nine months ending
September 30, 2001 to the same period in 2000.
Percentage
09/30/01 09/30/00 Dollar Change Change
-------------- ----------------- ----------------- ----------------
(Dollars in Thousands)
Salaries and benefits 1,176 823 353 43
Deposit insurance premiums 23 37 -14 -38
Occupancy and equipment 249 261 -12 -5
Data processing 363 313 50 16
Franchise tax 73 70 3 4
Advertising expense 64 81 -17 -21
Other 616 366 250 68
--- --- ---
Total 2,564 1,951 613 31
===== ===== ===
Employee salaries and benefits increased $353,000, or 43%, when
compared to the first nine months of 2000, accounting for the majority of the
increase in noninterest expenses. There are several causes for the increase in
non-interest expenses. The Company has expensed $64,000 year to date for the
Employee Stock Ownership Program (ESOP). The Company is also accruing on a
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14
monthly basis for the expense related to the employee Incentive Bonus programs
which have been restructured from the annual bonuses paid in previous years.
These awards, if paid, are based on specific results produced during the year.
$50,000 in expense has been accrued for the payment of the Incentive Bonus
during the first nine months of 2001 compared to no "bonus" expense being
accrued during the same period in 2000. By implementing this type of positive
incentive program the Company believes it has realized improvements in customer
service. The Company has also experienced an increase in supply costs,
professional services, data processing and other non-interest 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 $282,000 in for
the nine months ended September 30, 2001, compared to $152,000 in the same
period for 2000. The provision increased as a result of higher taxable income.
The effective tax rate for the first nine months of 2001 was 32.0% compared with
30.1% for the same period in 2000.
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15
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.
---------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
2001 2000
--------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS) AVERAGE AVERAGE
AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/
BALANCE RATE BALANCE RATE
--------- ---------- --------- ---------- --------- ---------
Interest-earning assets:
Loans (1) ............................. 107,382 6,736 8.37% 85,649 5,288 8.23%
Securities (2) ........................ 7,211 341 6.30% 12,345 582 6.38%
Short term investments ................ 5,151 152 3.95% 1,813 32 2.35%
-------- -------- -------- --------
Total interest-earning assets.... 119,744 7,229 8.06% 99,807 5,902 7.93%
Non-interest-earning assets .............. 9,674 8,813
-------- --------
Total assets .................... 129,418 108,620
======== ========
Interest-bearing liabilities:
Deposits:
Passbook accounts .................. 19,971 429 2.87% 18,452 397 2.87%
Money market accounts .............. 811 18 2.93% 849 18 2.83%
NOW accounts ....................... 13,174 217 2.20% 10,995 226 2.74%
Certificates of deposit ............ 76,467 3,302 5.77% 65,047 2,677 5.50%
-------- -------- -------- --------
Total deposits .................. 110,423 3,966 4.81% 95,343 3,318 4.64%
FHLB advances ......................... 2,086 93 5.97% 3,738 184 6.56%
-------- -------- -------- --------
Total interest-bearing
liabilities ......................... 112,509 4,059 4.83% 99,081 3,502 4.71%
-------- -------- -------- --------
Non-interest-bearing liabilities ......... 1,450 1,366
-------- --------
Total liabilities ............... 113,959 100,447
Total retained earnings .................. 15,459 8,173
-------- --------
Total liabilities and retained
earnings ............................ 129,418 108,620
======== ========
Net interest-earning assets ........... 7,415 726
======== ========
Net interest income/interest
rate spread (3) ..................... 3,170 3.23% 2,403 3.22%
======== ======== ======== ========
Net interest margin (4) ............... 3.53% 3.23%
======== ========
Ratio of interest-earning assets
to interest-bearing liabilities ..... 106.60% 100.73%
======== ========
- -----------------------------------
(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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16
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 nine months of 2001 management has utilized
several 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. Lawrence Federal has placed an emphasis on adjustable-rate loans and the
origination of fixed-rate mortgage loans through a third party which, over the
long-term, will serve to make the balance sheet less liability sensitive.
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 June 30, 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.
CHANGE IN
INTEREST RATES
IN BASIS POINTS NPV AS % OF PORTFOLIO
(RATE SHOCK) NET PORTFOLIO VALUE VALUE OF ASSETS
- ----------------- ------------------------------------------ -------------------------
(DOLLARS IN THOUSANDS) NPV CHANGE (1)
$ AMOUNT $ CHANGE % CHANGE RATIO
- ----------------- ----------- ------------ -------------- --------- -------------
300 8,734 -6,098 -41% 7.13% -425
200 10,720 -4,112 -28% 8.58% -281
100 12,757 -2,075 -14% 10.00% -139
Static 14,832 -- -- 11.39% --
-100 16,278 1,446 10% 12.30% 92
-200 17,625 2,793 19% 13.13% 174
-300 19,088 4,256 29% 14.00% 261
(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.
- --------------------------------------------------------------------------------
17
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.
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 September 30, 2001, cash and
short-term investments totaled $9.5 million. Securities classified as
available-for-sale totaled $10.2 million at September 30, 2001.
Funding is obtained primarily from activity involving deposit accounts
and Federal Home Loan Bank advances. In the first nine months of 2001 Lawrence
Federal experienced a net increase in total deposits of $12.4 million compared
to an increase of $9.3 million for the same period in 2000. In addition, at
September 30, 2001, Lawrence Federal had the ability to borrow a total of $15
million from the Federal Home Loan Bank of Cincinnati through the use of an
existing Cash Management Advance agreement. On that date, Lawrence Federal had
long term advances outstanding of $2 million. On the same date in 2000, Federal
Home Loan Bank advances were at $8 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 September 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 nine (9) 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 accounting
principles generally accepted in the United States of America, 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.
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18
WHAT SHAREHOLDERS WANT TO KNOW .........
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 nine months of 2001 have been
acceptable. To keep the momentum 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;
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 method 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 construction of new branches
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 shareholders 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, which was
December 28, 2000. 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 issued a
press release on October 23, 2001, announcing the declaration of a cash dividend
for the quarter ending December 31, 2001 of $0.07 per share to stockholders of
record on November 08, 2001. The payment of the cash dividend will be made on
December 14, 2001.
Thank you for your questions and your continued support.
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19
LAWRENCE FINANCIAL HOLDINGS, INC.
FORM 10-QSB
Quarter ended September 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:
See "Rider A"
Item 5- Other Information:
There are no matters required to be reported under this item.
Item 6- Exhibits and Reports on Form 8-K:
See "Rider B"
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: November 8, 2001 /S/ Jack L. Blair
- ---------------------- -----------------
Jack L. Blair
President and Chief Executive Officer
Date: November 8, 2001 /S/ RobRoy Walters
- ---------------------- ------------------
RobRoy Walters
Senior Vice President and Chief Financial
Officer
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20
RIDER A
The Annual Meeting of Stockholders of the Company was held on July 5,
2001. The results of the vote on the matters presented at the meeting is as
follows:
1. The following individuals were elected as directors, each for
a three-year term:
Vote For Vote Withheld
-------- -------------
Jack L. Blair 646,714 62,050
Tracy E. Brammer, Jr. 645,634 63,130
The terms of Directors Charles E. Austin, II, Phillip O.
McMahon, Herbert J. Karlet and Robert N. Taylor continued
after the Meeting.
Broker non-votes totaled zero.
2. The Lawrence Financial Holdings, Inc. 2001 Stock-based
Incentive Plan was approved by stockholders by the following
vote:
For 441,566; Against 103,975; Abstain 18,650
Broker non-votes totaled 144,573.
3. The appointment of Crowe, Chizek and Company LLP as auditors
for the Corporation for the fiscal year ending December 31,
2001 was ratified by stockholders by the following vote:
For 655,214; Against 52,400; Abstain 1,150
Broker non-votes totaled zero.
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21
RIDER B
(a) Exhibits
3.1 Certificate of Incorporation of Lawrence Financial Holdings,
Inc. *
3.2 Bylaws of Lawrence Financial Holdings, Inc. *
-------------------
* Incorporated herein by reference from the Exhibits to Form
SB-2, Registration Statement and amendments thereto, initially
filed on September 8, 2000. Registration No. 333-45404.
(b) Reports on Form 8-K
None
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22