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 March 31, 2002
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
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(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 April 30, 2002
Common Stock, $.01 par value 705,110 Common Shares
Transitional Small Business Disclosure Format (Check One): Yes |_| No |X|
Lawrence Financial Holdings, Inc.
FORM 10-QSB
Quarter Ended March 31, 2002
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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March 31, December 31,
2002 2001
---- ----
ASSETS
Cash and due from banks $ 11,510,480 $ 13,136,137
Money market fund 30,956 213,124
------------ ------------
Total cash and cash equivalents 11,541,436 13,349,261
Securities available for sale, at fair value 11,229,197 11,045,872
Loans receivable, net 102,551,560 105,017,604
Federal Home Loan Bank stock 593,500 587,000
Premises and equipment, net 3,296,724 3,315,192
Accrued interest receivable 788,905 797,483
Cash surrender value of life insurance 2,014,577 1,975,177
Other assets 468,336 340,858
------------ ------------
$132,484,235 $136,428,447
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 1,380,858 $ 1,465,129
Interest-bearing deposits 112,329,773 115,330,755
------------ ------------
Total deposits 113,710,631 116,795,884
Federal Home Loan Bank borrowings 2,000,000 2,000,000
Other liabilities 1,593,020 1,854,265
------------ ------------
Total liabilities 117,303,651 120,650,149
Shareholders' Equity
Common stock; par value $0.01 per share; shares
authorized: 4,000,000; shares issued: 799,110 7,991 7,991
Additional paid-in capital 7,436,799 7,426,239
Retained earnings 9,214,500 9,076,779
Treasury stock, at cost (37,000 shares) (651,900) --
Unearned ESOP shares (481,120) (496,660)
Unearned restricted stock awards (269,059) (269,059)
Accumulated other comprehensive income (loss), net
of tax of $(39,475) at 2002 and $17,004 at 2001 (76,627) 33,008
------------ ------------
Total shareholders' equity 15,180,584 15,778,298
------------ ------------
Total liabilities and shareholders' equity $132,484,235 $136,428,447
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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3
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2002 and 2001
(Unaudited)
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Three Months Ended
March 31,
--------------------------
2002 2001
---- ----
Interest income
Loans, including fees $ 2,077,877 $ 2,230,096
Taxable securities 165,436 96,321
Overnight deposits 31,538 49,270
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2,274,851 2,375,687
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Interest expense
Deposits 1,019,140 1,341,844
Federal Home Loan Bank borrowings 29,145 33,943
----------- -----------
1,048,285 1,375,787
----------- -----------
Net interest income 1,226,566 999,900
Provision for loan losses 150,000 48,000
----------- -----------
Net interest income after provision for loan losses 1,076,566 951,900
Noninterest income
Net securities (losses) (4,889) --
Service charges 107,588 87,770
Other 62,922 38,954
----------- -----------
165,621 126,724
Noninterest expense
Salaries and benefits 435,803 367,675
Occupancy and equipment 84,292 83,816
Data processing 134,163 119,272
Franchise tax 33,000 26,250
Advertising expense 31,324 16,048
Other 242,051 204,003
----------- -----------
960,633 817,064
----------- -----------
Income before income tax 281,554 261,560
Provision for income tax 89,199 81,508
----------- -----------
Net income $ 192,355 $ 180,052
=========== ===========
Basic earnings per common share $ 0.27 $ 0.25
=========== ===========
Diluted earnings per common share $ 0.26 $ 0.25
=========== ===========
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 March 31, 2002 and 2001
(Unaudited)
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Three Months Ended
March 31,
----------------------
2002 2001
---- ----
Net income $ 192,355 $ 180,052
Other comprehensive income:
Unrealized gains (losses) arising during period (171,003) 133,292
Reclassification adjustment for losses
included in net income 4,889 --
--------- ---------
(166,114) 133,292
Income tax effect 56,479 (45,319)
--------- ---------
Other comprehensive income (loss), net of tax (109,635) 87,973
--------- ---------
Comprehensive income $ 82,720 $ 268,025
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
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5
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Year Ended December 31, 2001 and the three months ended March 31, 2002
(Unaudited)
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Additional Unearned
Common Paid-In Retained Treasury ESOP
Stock Capital Earnings Stock Shares
----- ------- -------- ----- ------
Balance - January 1, 2001 $ 7,696 $ 6,994,305 $ 8,555,006 $ -- $ (558,660)
Net income -- -- 576,081 -- --
Net unrealized appreciation on
securities available for sale,
net of tax of $47,089 -- -- -- -- --
Cash dividend - $0.07 per share -- -- (54,308) -- --
Stock-based compensation 295 431,934 -- -- 62,000
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 $ 7,991 $ 7,426,239 $ 9,076,779 $ -- $ (496,660)
Net income -- -- 192,355 -- --
Net unrealized depreciation on
securities available for sale,
net of tax of $56,479 -- -- -- -- --
Treasury Stock - 37,000 shares -- -- -- (651,900) --
Cash dividend - $0.07 per share -- -- (54,634) -- --
Stock-based compensation -- 10,560 -- -- 15,540
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2002 $ 7,991 $ 7,436,799 $ 9,214,500 $ (651,900) $ (481,120)
============ ============ ============ ============ ============
Unearned Accumulated
Restricted Other
Stock Comprehensive
Awards Income Total
------ ------ -----
Balance - January 1, 2001 $ -- $ (58,402) $ 14,939,945
Net income -- -- 576,081
Net unrealized appreciation on
securities available for sale,
net of tax of $47,089 -- 91,410 91,410
Cash dividend - $0.07 per share -- -- (54,308)
Stock-based compensation (269,059) -- 225,170
------------ ------------ ------------
Balance, December 31, 2001 $ (269,059) $ 33,008 $ 15,778,298
Net income -- -- 192,355
Net unrealized depreciation on
securities available for sale,
net of tax of $56,479 --
(109,635) (109,635)
Treasury Stock - 37,000 shares -- -- (651,900)
Cash dividend - $0.07 per share -- -- (54,634)
Stock-based compensation -- -- 26,100
------------ ------------ ------------
Balance, March 31, 2002 $ (269,059) $ (76,627) $ 15,180,584
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2002 and 2001
(Unaudited)
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Three Months Ended
March 31,
--------------------------
2002 2001
---- ----
Cash flows from operating activities
Net income $ 192,355 $ 180,052
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 43,885 43,488
Provision for loan losses 150,000 48,000
Stock dividend on Federal Home Loan Bank stock (6,500) (9,800)
Net premium amortization (discount accretion) (7,370) 4,112
Net securities (gains) losses 4,889 --
ESOP expense 26,100 18,000
Restricted stock award expense 19,600 --
Change in other assets and liabilities (364,624) 684,505
----------- -----------
Net cash from operating activities 58,335 968,357
----------- -----------
Cash flows from investing activities
Purchase of:
Securities available for sale (1,365,000) (1,540,995)
Premises and equipment (25,417) (167)
Proceeds from:
Sale of securities available for sale 1,000,000 --
Calls, maturities and principal repayments of securities
available for sale -- 2,050,000
Net change in loans 2,316,044 (1,655,893)
----------- -----------
Net cash from investing activities 1,925,627 (1,147,055)
----------- -----------
Cash flows from financing activities
Net change in:
Deposits (3,085,253) 7,609,090
Federal Home Loan Bank short-term borrowings -- (3,000,000)
Cash dividend paid (54,634) --
Purchase of treasury stock (651,900) --
----------- -----------
Net cash from financing activities (3,791,787) 4,609,090
----------- -----------
Net change in cash and cash equivalents (1,807,825) 4,430,392
Cash and cash equivalents at beginning of quarter 13,349,261 4,885,079
----------- -----------
Cash and cash equivalents at end of quarter $11,541,436 $ 9,315,471
=========== ===========
Supplemental disclosures:
Cash paid during the quarter for:
Interest $ 1,043,605 $ 1,386,428
Income taxes 273,000 135,000
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. 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 the weighted average number of common shares outstanding during the period.
Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable. ESOP shares are considered to be outstanding
for this calculation unless they are unearned. The weighted average number of
common shares outstanding for basic and diluted earnings per share computations
were as follows:
March 31,
---------
2002 2001
---- ----
Weighted average shares outstanding - Basic .............. 715,669 719,966
Effect of stock options and non-vested stock awards ...... 23,969 0
------- -------
Weighted average shares outstanding - Diluted ............ 739,638 719,966
======= =======
Management's Opinion: In the opinion of management, the unaudited consolidated
financial statements include all adjustments (which consist of normal recurring
accruals) necessary to present fairly the consolidated financial position as of
March 31, 2002, the results of operations for the three months ended March 31,
2002 and 2001 and the statements of cash flows for the three months ended March
31, 2002 and 2001. 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,
2001 has been derived from the audited Consolidated Financial Statements of
Lawrence Financial Holdings, Inc. (the "Company"). The results of operations and
statements of cash flows for the three months ended March 31, 2002 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, 2001, 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
The Bank is subject to various regulatory capital requirements
administered by federal regulatory agencies. Failure to meet minimum capital
requirements can initiate certain mandatory actions that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and regulatory framework for prompt-corrective action, the
Bank must meet specific capital guidelines involving quantitative measures of
the Bank's assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by regulators about
the Bank's components, risk weightings and other factors. At March 31, 2002 and
December 31, 2001, 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.
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8
NOTE 2 - REGULATORY CAPITAL REQUIREMENTS - Continued
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
------ ----- ------ ----- ------ -----
March 31, 2002:
- ---------------
Total capital (to risk-
weighted assets) $ 14,547 15.03% $ 7,747 8.0% $ 9,683 10.0%
Tier 1 (core) capital (to
risk-weighted assets) $ 13,337 13.78% $ 3,872 4.0% $ 5,808 6.0%
Tier 1 (core) capital (to
adjusted total assets) $ 13,337 10.16% $ 5,301 4.0% $ 6,626 5.0%
December 31, 2001:
- ------------------
Total capital (to risk-
weighted assets) $ 14,467 14.58% $ 7,936 8.0% $ 9,921 10.0%
Tier 1 (core) capital (to
risk-weighted assets) $ 13,212 13.32% $ 3,968 4.0% $ 5,952 6.0%
Tier 1 (core) capital (to
adjusted total assets) $ 13,212 9.82% $ 5,381 4.0% $ 6,726 5.0%
Regulations of the Office of Thrift Supervision (OTS) limit the amount
of cash dividends, repurchase of common stock and other capital distributions
that may be paid by a bank without prior approval of the OTS. The regulatory
restriction provides that the Bank may make a capital distribution without
notifying the OTS or applying to the OTS for approval provided that (1) the
total amount of all capital at the institution (including the proposed capital
distribution) for the applicable calendar year does not exceed the institution's
net income for that year to date plus the institution's retained net income for
the preceding two years; (2) the institution will be well capitalized following
the proposed capital distributions; and, (3) certain other conditions are met.
In addition to the restriction described above, the Bank may not
declare or pay cash dividends or repurchase any of its shares of common stock if
the effect thereof would reduce the Bank's capital level below the aggregate
balance required for the liquidation account established in connection with the
Bank's mutual-to-stock conversion.
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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
March 31,
---------------------
2002 2001
---- ----
Significant Ratios
Net income to:
Average total assets 0.58% 0.58%
Average stockholders' equity 4.98% 4.79%
Average net interest margin 3.94% 3.42%
Average net loans to average deposits 90.61% 99.39%
Average stockholders' equity to
average total assets 11.64% 12.20%
Capital ratios:
Tier I capital 10.16% 10.22%
Risk-based capital 15.03% 15.26%
Per Share Data:
Earnings
Basic $ 0.27 $ 0.25
Diluted 0.26 0.25
Cash dividends per share $ 0.07 $ --
Weighted average shares outstanding
Basic 715,669 719,961
Diluted 739,638 719,961
Shares outstanding at the end of the period 762,110 775,827
Book value at end of period $ 19.92 $ 19.63
Market price at end of period $ 16.85 $ 11.50
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.
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10
Operating Strategy
Lawrence Financial, through its wholly-owned subsidiary Lawrence
Federal Savings Bank (the "Bank" or "Lawrence Federal"), operates as a
community-oriented financial institution focused on meeting the financial
service needs of consumers in its market area. To accomplish this objective,
Lawrence Federal offers a variety of mortgage and consumer loans and retail
deposit products. Lawrence Federal has extended its lending activities outside
of its market area through programs for originating mobile home and automobile
loans through a network of dealers. These indirect lending programs help
Lawrence Federal originate a larger amount of consumer loans, which typically
have shorter terms and higher yields than mortgage loans, than Lawrence Federal
would otherwise be able to originate. In addition, the origination of shorter
term consumer loans will help Lawrence Federal in managing its interest rate
risk.
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 deposit service charges. Lawrence Federal's noninterest expenses
primarily consist of employee compensation and benefits, occupancy expense, data
processing costs, and other operating expenses. Lawrence Federal's results of
operations are also affected by general economic and competitive conditions,
notably changes in market interest rates, government policies and regulations.
Comparison of Financial Condition at March 31, 2002 and December 31, 2001
During the first three months of 2002, total assets decreased $4
million, or 3%, to $132 million at March 31, 2002 when compared to the balances
at December 31, 2001. At the quarter ended March 31, 2002, net loans receivable
had decreased $2.5 million, or 2%, when compared to the end of the prior
quarter. At March 31, 2002, direct consumer loans and credit card balances
decreased $0.6 million, or 5%, indirect consumer loans decreased $0.5 million,
or 3%, real estate loans decreased by $0.9 million, or 2%, and indirect mobile
home loans decreased $0.1 million, or 1%, and commercial loans decreased $0.4
million, or 34%, when compared to balances at December 31, 2001. In general, the
decline in the direct consumer loan portfolios reflects a combination of reduced
loan demand and very aggressive competition from other in-market and
out-of-market lenders. The Bank has maintained competitve and consistent pricing
and underwriting criteria during this period of heightened competition. The
decline in indirect loan balances is the result of an ongoing strategic
objective to gradually reduce the outstanding amounts in both the indirect
mobile home and indirect consumer loan portfolios. Lawrence Federal's long term
investments, held in the form of securities, increased by $183,000, or 2%, when
comparing March 31, 2002 balances to December 31, 2001. During the first quarter
of 2002 Lawrence Financial's available cash and cash equivalents decreased $1.8
million, or 14%, when compared to the quarter ending December 31, 2001. A
portion of the decline is attributable to the repurchase of 37,000 shares of the
Company's stock at a total price of $652,000.
Compared to December 31, 2001, total deposits and borrowings decreased
$3.1 million, or 2.6%, to $113.7 million at March 31, 2002. Within the first
quarter of 2002, deposits decreased $3.1 million, or 2.6%, and the volume of
Federal Home Loan Bank advances was unchanged at $2.0 million. When comparing
March 31, 2002 balances to December 31, 2001, most of the reduction in deposit
volume occurred within the "time deposit" product which declined $9.3 million,
or 11.8%, while the total of the Bank's savings, interest bearing and
non-interest bearing checking products grew by $6.2 million, or 16.4%, during
the same period.
Equity decreased $598,000, or 4%, to $15.2 million at March 31, 2002
when compared to December 31, 2001. During the quarter ended March 31, 2002,
treasury stock purchased totaled $652,000, retained earnings increased $192,000
as a result of net income for the period, the net unrealized appreciation on
securities available-for-sale declined from an unrealized gain of $33,000 to an
unrealized loss of $77,000 and $54,634 of cash dividends were paid to
shareholders in the first quarter.
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11
Comparison of Operating Results for the Quarters Ending March 31, 2002 and 2001
General. For the quarter ended March 31, Lawrence Financial's net
income increased 7% to $192,000 for 2002 from $180,000 for 2001. Return on
average assets was 0.58% for the first quarter of 2002 and 0.58% for the same
period in 2001, and return on average equity was 4.98% in 2002 and 4.79% in
2001. During the first quarter net interest income increased $227,000, or 23%,
while noninterest income increased $39,000, or 31%, as a result of a $20,000
increase in service charge related income and an increase of $19,000 in the
remaining non interest income items. Net interest margin for the first quarter
of 2002 averaged 3.94% compared to 3.43% for the same period in 2001. The
increase in net interest margin of 52 basis points reflects an improvement of
15%. For the three months ending March 31, 2002, the average yield on earning
assets was 7.36%, a decrease of 88 basis points when compared to the same period
in 2001. The reduction in the yield on earning assets was more than offset by a
reduction in the average cost of funding for earning assets which was 3.42% for
the first quarter of 2002, a decrease of 140 basis points when compared to the
same period in 2001. This reduction in cost was generated by changes in both the
mix of, and the rate paid for interest bearing deposits. Borrowed funds were
unchanged quarter to quarter. Offsetting the increase in net interest and
noninterest income was a $144,000, or 18%, increase in noninterest expense.
There are several causes for the increase in non-interest expense. The Company
has expensed $46,000 year to date for the Employee Stock Ownership Program
(ESOP) and for the restricted stock awards compared to $18,000 during the same
period in 2001. The Company has also experienced increases in: salaries and
wages paid; the cost of employee benefits; data processing; and other
non-interest expenses which are related to the growth of the Company's customer
base.
Interest Income. Interest income decreased $101,000, or 4%, in the
quarter compared to the same quarter in 2001. Interest income on loans decreased
$152,000, or 7%, primarily as a result of a decline in the balance of the loan
portfolio and as a result of a decrease in the yield on the portfolio. Interest
income on long-term investments increased $69,000, or 72%, due to increases in
the average balance being carried by the Company during the first quarter of
2002. The average yield on interest-earning assets declined to 7.36% for the
quarter ending March 31, 2002, from 8.24% for the same period in 2001, as short
term, liquid deposits became a higher percentage of interest-earning assets and
the yield on overnight investments decreased.
Interest Expense. Interest expense decreased $328,000, or 24%, in for
the quarter ending March 31, 2002 compared to the first quarter of 2001.
Interest paid on deposits decreased $323,000, or 24%, as a result of a decline
in the rates paid on deposits. Interest paid on Federal Home Loan Bank advances
was $29,000 through the first three months of 2002 compared to $34,000 for the
same period in 2001. The average cost of interest-bearing liabilities decreased
to 3.65% in the first quarter of 2002 from 5.11% in 2001, primarily as a result
of lower market rates on certificates of deposits and a change in the mix of
deposits with a higher percentage of deposit dollars being made up from lower
cost funding sources.
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 monthly 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 comparing that estimate to
the allowance's balance. Management calculates its estimate of probable losses
primarily by applying expected loss percentages to classified loans and
homogeneous loan categories. The impact of these events are described in more
detail below as part of the discussion comparing the first quarter 2002, fourth
quarter 2001 and first quarter 2001 provisions for loan losses.
The provision for loan losses was $150,000 for the first quarter of
2002 which represents an increase of $102,000, or 213%, over the $48,000 of
provision recorded for the same period in 2001. The increase in provision
between the two quarters was driven, in part, by a shift in the loan portfolio's
mix toward more consumer loan balances which, historically, contain more risk of
loss to the Bank than loans secured by mortgages. The average balance of
non-mortgage loans, direct and indirect, for the first quarter of 2002 was $49
million, or 47% of gross loans, compared to $46 million, or 43% of gross loans,
for the first quarter of 2001. Among the individual loan portfolios, the largest
increase in average balance between the two quarters occurred in the indirect
automobile portfolio which was $2 million higher in the first quarter of 2002
than in the same period in 2001. As part of management's stated objectives for
the
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12
Bank, the outstanding balances of both indirect consumer loans and indirect
mobile home loans will likely continue to decline from totals reported at
December 31, 2001.
In addition to the change in the mix of the loan portfolio, the Bank
has experienced a trend, particularly over the last six months, showing a
deterioration in asset quality evidenced by an increase in total nonperforming
assets. At March 31, 2001, total nonperforming assets equaled $916,000, or 0.85%
of gross loans. At December 31, 2001, total nonperforming assets equaled $1.3
million, or 1.20% of gross loans, and at March 31, 2002, total nonperforming
assets equaled $1.7 million, or 1.60% of gross loans. One of the major
components of nonperforming assets, loans which are 90 days or more delinquent,
increased from $518,000 at December 31, 2001 to $623,000 at March 31, 2002. A
second component of nonperforming assets, loans in a nonaccrual status,
increased from $752,000 at December 31, 2001 to $1,031,000 at March 31, 2002.
The increase in nonaccrual loans occurred primarily in the indirect mobile home
portfolio which contained a balance of $429,000 loans not accruing interest at
December 31, 2001 and a balance of $658,000 loans not accruing interest at March
31, 2002. The Bank has become more aggressive in its approach to classifying
loans as "substandard" and in placing loans into a nonaccrual status. To
facilitate long-term improvement in the Bank's our loan review and collection
processes the Bank hired an experienced collection officer in October, 2001, and
reorganized the collection area of the Bank in the first quarter of 2002. The
Bank is currently in the process of reorganizing the loan review area of the
Bank which will serve to enhance future loan quality. Management believes that
these changes have already served to improve the quality of the information used
to analyze the credit risk contained on the balance sheet and the adequacy of
the Bank's allowance.
Allowance for loan losses totaled $1.2 million at March 31, 2002, an
increase of $397,000, or 49%, compared to the same date in 2001. At March 31,
2002, Lawrence Federal's allowance for loan losses represented 1.19% of total
gross loans and 75% of nonperforming loans. Although management believes that it
uses the best information available to establish the allowance for loan losses,
future adjustments to the allowance for loan losses may be necessary and results
of operations could be adversely affected. Furthermore, while Lawrence Federal
believes it has established its existing allowance for loan losses in conformity
with generally accepted accounting principles, there can be no assurance that
regulators, in reviewing Lawrence Federal's loan portfolio, will not request
Lawrence Federal to increase its future provisions for loan losses. In addition,
because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that increases will not be necessary should the quality of
any loans deteriorate as a result of the factors discussed above. Any material
increase in the allowance for loan losses may adversely affect Lawrence
Federal's financial condition and results of operations.
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
for loan losses. Management believes the company to be adequately reserved at
March 31, 2002.
Noninterest Income. The following table shows the components of noninterest
income and the dollar and percentage change from the first quarter of 2002 to
the first quarter of 2001.
Dollar Percentage
03/31/02 03/31/01 Change Change
-------- -------- ------ ----------
(Dollars in Thousands)
Net securities gains (losses) ............................... $ (5) $ -- $(5) N/A
Service charges ............................................. 108 88 20 23%
Other ....................................................... 63 39 24 62%
-- -- --
Total ................................................... $166 $127 $39 31%
==== ==== ===
Net securities losses incurred in the first quarter of 2002 were not
duplicated in the same period of 2001. Service charges increased during the
quarter as a result of growth in the number of deposit accounts and changes to
the fee structure. The increase in "Other" non interest income reflects an
increase in the cash surrender value of Bank owned life insurance of $13,000 and
a $12,000 increase in miscellaneous operating income.
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13
Noninterest Expense. The following table shows the components of noninterest
expense and the dollar and percentage change from the three months ending March
31, 2002 to the same period in 2001.
Dollar Percentage
03/31/02 03/31/01 Change Change
-------- -------- ------ ----------
(Dollars in Thousands)
Salaries and benefits ...................................... $436 $368 $68 18%
Deposit insurance premiums ................................. 14 5 9 180%
Occupancy and equipment .................................... 84 84 -- --
Data processing ............................................ 134 119 15 13%
Franchise tax .............................................. 33 26 7 27%
Advertising expense ........................................ 31 16 15 94%
Other ...................................................... 229 199 30 15%
---- ---- ----
Total ................................................ $961 $817 $144 18%
==== ==== ====
Non-interest expense increased $144,000, or 18%, for the three months
ended March 31, 2002, as compared to the same period in 2001. The increase in
salaries and benefits for the three months ended March 31, 2002 compared to the
same period in 2001 reflects the following increases: an increase of $26,000 in
salary and wage expense; an increase of $28,000 in expense for the Employee
Stock Ownership Program (ESOP) and for restricted stock awards; an increase of
$6,000 in health insurance premiums; as well as other changes to components of
the "Salaries and benefits" line item. The Company has also experienced
increases in: data processing; printing and supplies; and other non-interest
expenses which are related to the growth of the Company's customer base and the
daily operation of the Company.
Income Tax Expense. The provision for income tax was $89,000 in for the
quarter ended March 31, 2002, compared to $82,000 in the same period for 2001.
The provision increased as a result of higher taxable income. The effective tax
rate for the first quarter of 2002 was 31.7% compared with 31.2% for the same
period in 2001.
New Accounting Pronouncements. New accounting standard, FASB No.143
dealing with asset retirement obligations, which will apply in 2003, will have
no material effect on the Company's results of operation. On January 1, 2002,
the Company adopted FASB No.144 which provides a new method of accounting for
impairment and disposal of long lived assets. The effect from FASB No.144 on the
results of operation of the Company was not material.
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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.
----------------------------------------------------------------------------
Quarter ended March 31,
----------------------------------------------------------------------------
2002 2001
---------------------------------- -----------------------------------
(Dollars in Thousands) Average Interest Average Average Interest Average
Balance Yield/ Balance Yield/
Rate Rate
---------- ---------- ---------- ---------- --------- ----------
Interest-earning assets:
Loans (1) .............................. 103,759 2,078 8.06% 106,371 2,230 8.45%
Securities (2) ......................... 11,632 165 5.69% 6,474 97 5.96%
Interest-bearing short term inv ........ 8,870 32 1.46% 3,307 49 6.06%
----- -- ----- --
Total interest-earning assets .... 124,261 2,275 7.36% 116,152 2,376 8.24%
Non-interest-earning assets ............... 10,426 9,202
------ -----
Total assets ..................... 134,687 125,354
======= =======
Interest-bearing liabilities:
Deposits:
Passbook accounts ................... 25,484 144 2.29% 20,123 128 2.58%
Money market accounts ............... 1,003 8 3.40% 784 5 2.54%
NOW accounts ........................ 14,264 50 1.39% 11,624 72 2.51%
Certificates of deposit ............. 73,757 817 4.49% 74,495 1,137 6.19%
------ --- ------ -----
Total deposits ................... 114,508 1,019 3.61% 107,026 1,342 5.08%
FHLB advances .......................... 2,000 29 5.90% 2,258 34 6.09%
----- -- ----- --
Total interest-bearing
liabilities .................... 116,508 1,048 3.65% 109,284 1,376 5.11%
----- -----
Non-interest-bearing liabilities........... 2,503 775
----- ---
Total liabilities ................ 119,011 110,059
Total retained earnings ................... 15,676 15,295
------ ------
Total liabilities and
shareholders equity ............ 134,687 125,354
======= =======
Net interest-earning assets ............ 7,753 6,868
===== =====
Net interest income/interest
rate spread (3) ...................... 1,227 3.71% 1,000 3.12%
===== ===== ===== =====
Net interest margin (4) ................ 3.94% 3.43%
==== =====
Ratio of interest-earning assets
to interest-bearing liabilities ...... 106.65% 106.28%
====== ======
- -----------------------------------
(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 three months of 2002 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 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 December 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 8,801 -5,803 -40% 6.79% -386
200 10,904 -3,700 -25% 8.25% -241
100 12,894 -1,710 -12% 9.57% -109
Static 14,604 -- -- 10.65% --
-100 15,935 1,331 9% 11.46% 81
(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.
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16
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 March 31, 2002, cash and
short-term investments totaled $12 million and securities classified as
available-for-sale totaled $11 million.
Funding is obtained primarily from activity involving deposit accounts
and Federal Home Loan Bank advances. In the first three months of 2002 Lawrence
Federal experienced a net decrease in total deposits of $2 million compared to
an increase of $8 million for the same period in 2001. In addition, at March 31,
2002, 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 2001, Federal Home Loan
Bank advances were also at $2 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 March 31, 2002,
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 Form 10QSB 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.
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17
Subsequent Events
Subsequent to the end of the first quarter of 2002, the Company
completed its initial stock repurchase program. On April 17, 2002, the Company
purchased a block of 57,000 shares at $18.10 per share which brought the total
shares repurchased to the stated target of 94,000 shares. The Company spent
$1,683,600 in the repurchase of the 94,000 shares resulting in an average price
per share repurchased of $17.91. Repurchased shares are being held in treasury
and will be available for the Company's benefit plans.
Management Comments
Beginning with our conversion to a stock form of corporation in
December, 2000 the Company has placed a high priority on the process of
continual review and improvement. The Board of Directors together with senior
management have targeted several areas for improvement and have prioritized them
to form a strategic plan for the continued operation and improvement of the
Company. Once the priorities were established, management incorporated several
sources of information to help in forming an action plan. From the use of "Best
Practices" found within the financial services industry, to the use of external
review by regulators, auditors and other professional advisors, to employing new
members of the management team with needed expertise, the Company has actively
pursued the process of continual review and improvement. Many of the changes
that have been implemented through this process have been internal and the
results are not readily observed by the those outside the Company. However, one
result which can be observed by all is the improvement in shareholder value
since conversion to stock form in late 2000.
The process of continuous improvement is a set of ongoing actions which
require management to continually seek better methods of operating the Company.
As part of this on-going process we will be implementing several improvements to
the methods used to classify and review new and existing loans. As part of the
improved loan classification process the Company will be redefining homogenous
loan groups in the second quarter of 2002. In the past the Company has grouped
loans more by the type of collateral associated with the borrowing than by the
purpose of the loan. We are now in the process of reclassifying loans by the
purpose of the loan and, once we have completed the identification process, we
will link the loans by "purpose" to the proper general ledger accounts. As a
result of this reclassification process the next set of quarter-end reports will
show an increase in commercial loans secured by real estate with a smaller
increase in the volume of commercial loans secured by collateral other than real
estate. Next quarter's reports will also reflect the corresponding decreases in
existing categories of mortgage loans and consumer loans secured by collateral
other than real estate. Reclassifying loans by purpose enables management to
better monitor risk characteristics for the assessment of allowance for loan and
lease loss balances and we believe it also improves the quality of the
information contained in our reports to shareholders and regulators.
In addition to the changes described above the Company is evaluating
various areas for improvement in management information systems. In July, 2003
the contract with our current, third-party information processor will be
complete. Even though we are 15 months from implementing a possible change in
providers, the Company is already well into the process of assessing the
opportunities to improve the flexibility offered by our central data processor.
Our objectives are to: improve the amount of information available to the
Company for the purpose of cross-selling products and services to our existing
customer base; improve the level of data available to management for use in
assessing the profitability of each of our five locations; and to enhance the
amount of information which can be extracted for use by management in modeling
the potential benefit from strategic objectives which target growth and improved
shareholder value.
The Company's management team is evaluating and implementing various
changes designed to improve management information systems, operating
efficiencies, and product and service delivery channels. By following a process
of continuous review and improvement management believes it can significantly
improve several of the Company's core operational areas generating both
short-term and long-term benefits to customers and shareholders.
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18
Lawrence Financial Holdings, Inc.
Form 10-Q
Quarter ended March 31, 2002
PART II - Other Information
Item 1- Legal Proceedings:
There are no matters required to be reported under this item.
Item 2- Changes in Securities:
There are no matters required to be reported under this item.
Item 3- Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4- Submission of Matters to a Vote of Security Holders:
There are no matters required to be reported under this item.
Item 5- Other Information:
There are no matters required to be reported under this item.
Item 6- Exhibits and Reports on Form 8-K:
(a) Exhibits - Not applicable.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on March 19, 2001. Under Item 5,
Other Matters, Lawrence Financial Holdings, Inc. reported that it issued a press
release to announce the date of its annual meeting of shareholders.
Signatures
In accordance with 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: 5/13/02 /s/ Jack L. Blair
-------------------- -------------------------------------------------
Jack L. Blair
President and Chief Executive Officer
Date: 5/13/02 /s/ RobRoy Walters
-------------------- -------------------------------------------------
RobRoy Walters
Senior Vice President and Chief Financial Officer
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19