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, 2003
Commission file number: 0-31847
LAWRENCE FINANCIAL HOLDINGS, INC.
---------------------------------
(Exact name of small business issuer as specified in its charter)
Maryland 31-1724442
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
311 SOUTH FIFTH STREET, IRONTON, OHIO 45638
-------------------------------------------
(Address of principal executive offices)
(740) 532-0263
--------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past ninety days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class: Outstanding at October 31, 2003
Common Stock, $.01 par value 650,110 Shares
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
LAWRENCE FINANCIAL HOLDINGS, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2003
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 ...................... 12
ITEM 3 - Controls and Procedures .......................................... 23
PART II - OTHER INFORMATION
Other Information ......................................................... 24
Signatures ................................................................ 25
Exhibits .................................................................. 26
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2
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and December 31, 2002
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
September 30, December 31,
2003 2002
---- ----
ASSETS
Cash and due from banks $ 13,893,588 $ 16,140,900
Money market fund 864,158 179,600
------------- -------------
Total cash and cash equivalents 14,757,746 16,320,500
Securities available for sale, at fair value 23,828,889 14,192,370
Loans receivable, net 84,036,612 96,457,033
Federal Home Loan Bank stock 632,800 614,400
Premises and equipment, net 3,533,202 3,340,888
Accrued interest receivable 620,072 685,755
Cash surrender value of life insurance 2,246,935 2,131,685
Other assets 697,722 645,916
------------- -------------
Total Assets $ 130,353,978 $ 134,388,547
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 7,966,592 $ 1,995,918
Interest-bearing deposits 108,023,309 116,930,237
------------- -------------
Total deposits 115,989,901 118,926,155
Other liabilities 570,503 673,601
------------- -------------
Total liabilities 116,560,404 119,599,756
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 7,521,665 7,467,042
Retained earnings 9,695,023 9,485,971
Treasury stock, at cost; shares: 149,000 in
2003 and 94,000 in 2002 (2,728,688) (1,683,600)
Unearned ESOP shares (388,003) (434,580)
Unearned restricted stock awards (201,794) (201,794)
Accumulated other comprehensive income,
net of tax of $(58,017) at 2003 and $76,119 in 2002 (112,620) 147,761
------------- -------------
Total shareholders' equity 13,793,574 14,788,791
------------- -------------
Total liabilities and shareholders' equity $ 130,353,978 $ 134,388,547
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
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3
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended and Nine Months September 30, 2003 and 2002
(Unaudited)
- --------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $1,590,877 $1,983,305 $5,009,295 $6,109,553
Taxable securities 152,753 167,252 516,849 493,692
Tax exempt securities 26,194 -- 71,749 --
Overnight deposit 18,424 28,928 58,843 90,078
---------- ---------- ---------- ----------
1,788,248 2,179,485 5,656,736 6,693,323
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 555,623 867,798 1,864,182 2,812,019
Federal Home Loan Bank borrowings -- 29,793 -- 88,407
---------- ---------- ---------- ----------
555,623 897,591 1,864,182 2,900,426
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,232,625 1,281,894 3,792,554 3,792,897
Provision for loan losses 195,000 372,000 690,000 702,000
---------- ---------- ---------- ----------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 1,037,625 909,894 3,102,554 3,090,897
NONINTEREST INCOME
Net securities gains 8,996 5,888 193,606 14,102
Service charges 152,867 113,707 379,454 330,799
Other 75,718 69,465 167,014 183,055
---------- ---------- ---------- ----------
237,581 189,060 740,074 527,956
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and benefits 504,001 431,506 1,487,801 1,298,328
Deposit insurance premiums 11,609 14,828 41,963 72,468
Occupancy and equipment 130,968 117,963 312,861 285,208
Data processing 152,600 134,651 509,758 400,534
Franchise tax 35,468 29,163 103,062 94,413
Advertising expense 13,900 24,432 63,652 79,624
Professional fees 76,478 57,340 242,617 197,044
Other 232,885 195,193 625,775 539,173
---------- ---------- ---------- ----------
1,157,909 1,005,076 3,387,489 2,966,792
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX 117,297 93,878 455,139 652,061
Provision for income tax 23,260 33,810 109,764 199,903
---------- ---------- ---------- ----------
NET INCOME $ 94,037 $ 60,068 $ 345,375 $ 452,158
========== ========== ========== ==========
Basic earnings per common share $ 0.16 $ 0.09 $ 0.56 $ 0.67
========== ========== ========== ==========
Diluted earnings per common share $ 0.15 $ 0.09 $ 0.55 $ 0.65
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME Three Months Ended and Nine Months September 30, 2003 and 2002
(Unaudited)
- --------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 94,037 $ 60,068 $ 345,375 $ 452,158
Other comprehensive income:
Unrealized gains (losses) arising
during period (266,585) 100,196 (200,911) 228,990
Reclassification adjustment for gains
included in net income (8,996) (5,888) (193,606) (14,102)
---------- ---------- ---------- ----------
(275,581) 94,308 (394,517) 214,888
Income tax effect (93,697) (32,065) (134,136) (73,062)
---------- ---------- ---------- ----------
Other comprehensive income (loss),
net of tax (181,884) 62,243 (260,381) 141,826
---------- ---------- ---------- ----------
Comprehensive income $ (87,847) $ 122,311 $ 84,994 $ 593,984
========== ========== ========== ==========
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, 2002 and the Nine Months Ended September 30, 2003
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Unearned Accumulated
Additional Unearned Restricted Other
Common Paid-In Retained Treasury ESOP Stock Comprehensive
Stock Capital Earnings Stock Shares Awards Income Total
----- ------- -------- ----- ------ ------ ------ -----
Balance - January 1, 2002 $ 7,991 $7,426,239 $9,076,779 $ -- $(496,660) $(269,059) $ 33,008 $15,778,298
Net income -- -- 606,449 -- -- -- -- 606,449
Net unrealized appreciation
on securities available
for sale, net of tax of
$59,115 -- -- -- -- -- -- 114,753 114,753
Treasury Stock acquired -
94,000 shares -- -- -- (1,683,600) -- -- -- (1,683,600)
Cash dividend -
$0.28 per share -- -- (197,257) -- -- -- -- (197,257)
Stock-based compensation -- 40,803 -- -- 62,080 67,265 -- 170,148
-------- ---------- ----------- ------------ ---------- ---------- ----------- ------------
Balance, December 31, 2002 7,991 7,467,042 9,485,971 (1,683,600) (434,580) (201,794) 147,761 14,788,791
Net income -- -- 345,375 -- -- -- -- 345,375
Net unrealized depreciation
on securities available
for sale, net of tax of
$(134,136) -- -- -- -- -- -- (260,381) (260,381)
Treasury Stock acquired -
55,000 shares -- -- -- (1,045,088) -- -- -- (1,045,088)
Cash dividend -
$0.21 per share -- -- (136,323) -- -- -- -- (136,323)
Stock-based compensation -- 54,623 -- -- 46,577 -- -- 101,200
-------- ---------- ----------- ------------ ---------- ---------- ----------- ------------
Balance, September 30, 2003 $ 7,991 $7,521,665 $9,695,023 $(2,728,688) $(388,003) $(201,794) $ (112,620) $13,793,574
======== ========== =========== ============ ========== ========== =========== ============
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, 2003 and 2002
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
---------------------------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 345,375 $ 452,158
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 182,918 161,654
Provision for loan losses 690,000 702,000
Stock dividend on Federal Home Loan Bank stock (18,400) (20,600)
Net premium amortization 152,820 1,261
Net securities gains (193,606) (14,102)
ESOP expense 101,200 75,652
Restricted stock award expense 80,299 50,010
Change in other assets and liabilities (17,179) (293,356)
--------------- ---------------
Net cash from operating activities 1,323,427 1,114,677
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of:
Securities available for sale (34,204,072) (8,355,970)
Premises and equipment (379,990) (203,922)
Proceeds from:
Sale of securities available for sale 15,987,916 6,373,041
Calls, maturities and principal repayments of securities
available for sale 8,217,854 1,636,301
Sale of fixed assets 5,550 --
Net change in loans 11,604,226 3,924,765
--------------- ---------------
Net cash from investing activities 1,231,484 3,374,215
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in:
Deposits (2,936,254) 2,489,033
Cash dividend paid (136,323) (149,203)
Purchase of treasury stock (1,045,088) (1,683,600)
--------------- ---------------
Net cash from financing activities (4,117,665) 656,230
--------------- ---------------
Net change in cash and cash equivalents (1,562,754) 5,145,122
Cash and cash equivalents at beginning of the year 16,320,500 12,197,766
--------------- ---------------
Cash and cash equivalents at end of the period $ 14,757,746 $ 17,342,888
=============== ===============
Supplemental disclosures:
Cash paid during the period for:
Interest $ 1,856,084 $ 2,907,041
Income taxes 288,576 610,383
Non-cash transactions
Transfer of loans to real estate owned 126,195 121,040
The accompanying notes are an integral part of these consolidated financial statements.
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7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
- --------------------------------------------------------------------------------
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 only holds liquid assets in the
form of cash. The operations from Lawrence Financial Services Corporation are
not considered to be significant. 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:
THREE MONTH PERIOD NINE MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30
------------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
Weighted average shares outstanding - Basic 599,042 643,186 611,244 669,952
Effect of stock options 18,978 4,532 15,128 6,369
Effect of non-vested stock awards 3,108 16,874 2,318 16,875
--------- --------- --------- ---------
Net Effect of stock options and non-vested
stock awards 22,086 21,406 17,446 23,244
Weighted average shares outstanding - Diluted 621,128 664,592 628,690 693,196
========= ========= ========= =========
STOCK-BASED COMPENSATION: Employee compensation under the stock option plan is
reported if options are granted below market price at grant date. Pro forma
disclosures of compensation cost of stock-based awards have been determined
using the fair value method that considers the time value of the option
considering the volatility of the Company's stock, expected dividend yield, and
the risk-free interest rate over the expected life of the option using a
Black-Scholes valuation model.
The options granted on December 31, 2001 have an exercise price of $14.45 and
expire in December 2011. One-fifth of the options vested on the date of grant;
the remaining options vest over four years. The fair value of options granted in
2001 was estimated using the following assumptions: Risk-free interest rate of
4.49%, expected life of 5 years, expected volatility of stock price of 27% and
expected dividend yield of 1.94%. Based on these assumptions, the estimated fair
value of options granted in 2001 was $3.77 per option.
- --------------------------------------------------------------------------------
8
The following pro forma information presents net income and earnings per common
share had the fair value of the options been used to measure compensation cost
for the stock option plan.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Reported net income $94,037 $60,068 $345,375 $452,158
Pro forma impact (9,725) (9,725) (29,175) (29,175)
------- ------- -------- --------
Pro forma net income $84,312 $50,343 $316,200 $422,983
======= ======= ======== ========
Reported basic earnings per common share $0.16 $0.09 $0.56 $0.67
Pro forma impact (0.02) (0.02) (0.03) (0.02)
------ ------ ------ ------
Pro forma basic earnings per common share $0.14 $0.07 $0.53 $0.65
===== ===== ===== =====
Reported diluted earnings per common share $0.15 $0.09 $0.55 $0.65
Pro forma impact (0.01) (0.01) (0.03) (0.02)
------ ------ ------ ------
Pro forma diluted earnings per common share $0.14 $0.08 $0.52 $0.63
===== ===== ===== =====
MANAGEMENT'S OPINION: In the opinion of management, the accounting and reporting
policies followed by Lawrence Financial Holdings, Inc. conform to accounting
principles generally accepted in the United States of America (US GAAP). The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. Actual results could differ from those
estimates. The allowance for loan losses is particularly subject to change.
These interim financial statements are prepared without audit and reflect all
adjustments of a normal recurring nature which, in the opinion of management,
are necessary to present fairly the consolidated financial position of Lawrence
Financial Holdings, Inc. at September 30, 2003, and its results of operations
and cash flows for the periods presented. Certain amounts in prior financial
statements have been reclassified to conform to the current presentation. The
accompanying consolidated financial statements do not contain all financial
disclosures required by US GAAP. Lawrence Financial Holdings, Inc.'s Annual
Report for the year ended December 31, 2002, contains consolidated financial
statements and related notes which should be read in conjunction with the
accompanying consolidated financial statements.
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, 2003
and December 31, 2002, management believes the Bank complied with all regulatory
capital requirements. At September 30, 2003, Lawrence Federal exceeded all of
its regulatory capital requirements. Lawrence Federal is considered "well
capitalized" under regulatory guidelines. Management is unaware of any events or
circumstances that would change the Bank's classification since this time.
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9
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 30,2003:
- -----------------
Total capital (to risk-
weighted assets) $ 13,515 15.96% $ 6,774 8.0% $ 8,468 10.0%
Tier 1 (core) capital (to
risk-weighted assets) $ 12,767 15.08% $ 3,386 4.0% $ 5,080 6.0%
Tier 1 (core) capital (to
adjusted total assets) $ 12,767 9.75% $ 5,238 4.0% $ 6,547 5.0%
December 31,2002:
- ----------------
Total capital (to risk-
weighted assets) $ 13,806 15.19% $ 7,271 8.0% $ 9,089 10.0%
Tier 1 (core) capital (to
risk-weighted assets) $ 12,976 14.28% $ 3,635 4.0% $ 5,452 6.0%
Tier 1 (core) capital (to
adjusted total assets) $ 12,976 9.67% $ 5,368 4.0% $ 6,709 5.0%
Regulations of the Office of Thrift Supervision (OTS) limit the amount
of capital distributions that may be made by the Bank without prior approval of
the OTS. The regulatory restriction provides that the Bank may make a capital
distribution after notifying the OTS and not receiving an objection within the
designated time period 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. Capital distributions
that are not eligible for the OTS notice process require prior approval from the
OTS.
In addition to the restriction described above, the Bank may not make
any capital distributions 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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10
NOTE 3 - ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING LOANS
Activity in the allowance for loan losses is as follows:
Nine Months Ended September 30,
2003 2002
------------ -----------
(Dollars in Thousands)
Beginning Balance ..................... $1,111 $1,232
Provision for Loan Losses ............. 690 702
Charge Offs ........................... (807) (857)
Recoveries ............................ 30 34
-- --
Ending Balance ........................ $1,024 $1,111
====== ======
The following table shows the components of non-performing assets at:
September 30, December 31,
2003 2002
------------- ------------
(Dollars in Thousands)
Non-Accrual Loans ..................... $528 $531
Loans 90 days or more past due
and still accruing interest ......... 1,461 1,411
Total Non-Performing Loans .......... 1,989 1,942
----- -----
Other Real Estate Owned ............... 158 151
Total Non-Performing Assets ........... $2,147 $2,093
====== ======
Non-performing loans to total loans ... 2.34% 1.99%
Non-performing assets to total loans
plus other real estate owned ........ 2.52% 2.14%
Allowance for credit losses to total
non-performing loans ................ 51.50% 57.20%
Loans 90 days or more past due and
not on non-accrual to total loans ... 1.72% 1.45%
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11
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,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
SIGNIFICANT RATIOS:
Net income to
Average total assets 0.28% 0.18% 0.34% 0.45%
Average stockholders' equity 2.60 1.62 3.26 4.04
Net Interest Margin 4.02 4.10 4.07 4.06
Average net loans to average deposits 79.18 87.86 79.31 89.49
Average stockholders' equity to
average total assets 10.35 10.89 10.41 11.20
Capital ratios
Tier I capital - Bank Only 9.75 9.86 9.75 9.86
Risk-based capital - Bank Only 15.96 15.03 15.96 15.03
- --------------------------------------------------------------------------------
PER SHARE DATA:
Earnings per weighted average share
Basic $ 0.16 0.09 $ 0.56 0.67
Diluted 0.15 0.09 0.55 0.65
Weighted average shares outstanding
Basic 599,042 643,186 611,244 669,952
Diluted 621,128 664,592 628,690 693,196
Total shares outstanding at end
of period 600,832 644,978 600,832 644,978
Cash dividends per share $ 0.07 0.07 $ 0.21 0.21
Book value per share at end of
period $ 21.21 20.73 $ 21.21 20.73
Market price at end of period
Source: NASDAQ.com $ 23.00 14.30 $ 23.00 14.30
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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12
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 extends its lending activities outside of its
market area through programs for originating automobile loans through a network
of dealers. The consumer loans originated through these indirect lending
programs 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. However, these indirect lending
programs represent a higher risk of credit loss than real estate loans, since
the collateral securing these loans may decline in value quickly.
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.
The Bank continued to experience credit quality issues in portions of
the loan portfolio, and expensed $300,000 of provision in the first quarter of
2003, $195,000 in the second quarter of 2003, and $195,000 in the third quarter
of 2003, compared to $150,000 in the first quarter of 2002, $180,000 in the
second quarter of 2002, and $372,000 in the third quarter of 2002.
During the nine month period ended September 30, 2003, the Company had
net charge-offs of approximately $777,000, of which $294,000 occurred in the
third quarter. At September 30, 2003, the Company had a ratio of allowance for
loan losses to gross loans of 1.20% compared to 1.22% at the end of the prior
quarter, and 1.10% for the same period in 2002.
- --------------------------------------------------------------------------------
13
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
During the first nine months of 2003, total assets decreased $4.03
million or 3.0%, to $130.4 million at September 30, 2003 when compared to
December 31, 2002. At September 30, 2003, net loans receivable had decreased
$12.4 million, or 12.9%, when compared to December 31, 2002. Direct and indirect
consumer loans decreased $5.7 million, or 14%, real estate loans decreased by
$10.1 million, or 20%, indirect mobile home loans decreased $2.5 million, or
15%, and commercial loans increased by $2.8 million, or 54%. The allowance for
loan losses at September 30, 2003 was $1.0 million. The growth in the commercial
loan portfolio was due primarily to the origination of commercial loan
participations with other, local commercial banks. In general, the decline in
the direct consumer loan portfolios and residental mortgage 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 mobile home loan balances is the result of
an ongoing strategic objective to reduce the outstanding amounts in this loan
portfolio. Lawrence Federal's long term investments, held in the form of
securities, increased by $9.6 million, or 68%, when comparing September 30, 2003
balances to December 31, 2002. The reason for the growth in long term
investments was due to the fact the bank had excess liquidity in the form of
overnight deposits, which were earning only minimal interest. During the first
nine months of 2003, Lawrence Financial's available cash and cash equivalents
decreased to $14.8 million, a decrease of $1.6 million, or 10%. This decrease
was primarily due to the purchase of long term investments.
Compared to December 31, 2002, total deposits decreased $2.9 million,
or 2.5%, to $115.9 million at September 30, 2003.
Equity decreased $1.0 million, or 7%, to $13.8 million at September 30,
2003 when compared to December 31, 2002. During the period ended September 30,
2003, treasury stock purchased totaled $1.0 million, retained earnings increased
$345,000 as a result of net income for the period, the net unrealized
appreciation on securities available-for-sale decreased from an unrealized gain
of $148,000 to an unrealized loss of $113,000 and $136,000 of cash dividends
were paid to shareholders.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDING SEPTEMBER 30, 2003 AND 2002
GENERAL. For the three months ended September 30, Lawrence Financial's
net income increased 57% to $94,000 for 2003 from $60,000 for 2002. For the nine
month period ended September 30, Lawrence Financial's net income decreased 24%
to $345,000 for 2003 from $452,000 for 2002. Return on average assets was 0.28%
and 0.34% for the third quarter and first nine months of 2003, respectively,
compared to 0.18% and 0.45% for the same two periods in 2002. Return on average
equity was 2.66% and 3.26% for the third quarter and first nine months of 2003,
respectively, compared to 1.62% and 4.04% for the same two periods in 2002. Net
interest income decreased $49,000, or 4%, during the third quarter and decreased
$300, or less than 1%, for the nine month period ending September 30.
Noninterest income increased $49,000, or 26%, during the third quarter and
$212,000, or 40%, for the nine month period ending September 30. Positevly
affecting net income was a $177,000 or 48% decrease in the provision for loan
losses for the quarter ended September 30, and a $12,000 or 2% decrease in the
provision for loan losses for the nine months ended September 30. Offsetting the
increase in net interest and noninterest income was a $153,000, or 15%, increase
in noninterest expense for the quarter ended September 30 and a $421,000, or
14%, increase in noninterest expense for the nine months ended September 30.
There are several causes for the increase in non-interest expense. The Company
has expensed $926,000 year to date for salaries and wages compared to $801,000
during the same period in 2002. The Company has also experienced: increased
costs of employee benefits; increased data processing fees; increased costs
related to the collection of delinquent mobile home loans; and other
non-interest expenses which are related to the growth of the Company's customer
base.
INTEREST INCOME. Interest income decreased $391,000, or 18%, for the
quarter compared to the same quarter in 2002 and decreased $1.0 million, or 15%,
for the first nine months of 2003 compared to the first nine months of 2002.
- --------------------------------------------------------------------------------
14
Interest income on loans decreased $392,000, or 20%, and decreased $1.1 million,
or 18%, for the quarter and nine months ended September 30, respectively. These
decreases were primarily a result of a decline in the balance of the loan
portfolio and secondarily, as a result of a decrease in the yield on the
portfolio. Interest income on long-term investments decreased $14,000, or 8%,
for the quarter and increased $23,000, or 5%, for the nine months ended
September 30. The decrease in the quarter earnings was primarily due to the
purchase of securities at lower yields, while the increase was primarily a
result of a larger average balance being carried by the Company during 2003. The
average yield on interest-earning assets declined to 5.80% for the quarter and
6.05% for the nine months ended September 30, 2003, from 6.95% and 7.16% for the
same two periods in 2002, as lower yielding long term investments became a
higher percentage of interest earning assets.
INTEREST EXPENSE. Interest expense decreased $342,000, or 38%, for the
quarter compared to the same quarter in 2002 and decreased $1.04 million, or
36%, for the first nine months of 2003 compared to the first nine months in
2002. The decrease in interest expense for the quarter and nine months ending
September 30, 2003, was a direct result of a decline in the rates paid on
deposits. In the third quarter and first nine months of 2003, there was no
interest paid on Federal Home Loan Bank advances, compared to $30,000 and
$88,000 for the same periods in 2002. The average cost of interest-bearing
liabilities was 2.00% for the quarter and 2.14% in the first nine months of 2003
compared to 3.01% and 3.31% for the same periods in 2002, 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 third quarter of 2003, to
the fourth quarter 2002 and to the third quarter 2002 provisions for loan
losses.
The provision for loan losses was $195,000 for the third quarter of
2003 which represents a decrease of $177,000, or 48%, over the $372,000 of
provision recorded for the same period in 2002. The provision for loan losses
was $690,000 for the nine months ended September 30, 2003 compared to $702,000
for the same period in 2002. Through the nine month periods ended September 30,
provision decreased $12,000, or 2% when comparing 2003 to 2002.
Non-performing assets totaled $2.15 million at September 30, 2003, or
1.65% of assets. Of the $2.15 million in non-performing assets, $1.46 million
were loans which are 90 days or more past due and still accruing interest and
$528,000 were loans in a non-accrual status. Non-performing indirect mobile home
loans made up $535,000 of the loans that were 90 days or more past due and still
accruing interest and $234,000 of the loans that are carried in a non-accrual
status. At December 31, 2002, non-performing assets totaled $2.09 million or
1.56% of assets. Of the $2.09 million, $1.41 million were loans which are 90
days or more past due and still accruing interest and $531,000 were loans in a
non-accrual status. At December 31, 2002, non-performing indirect mobile home
loans made up $975,000 of the loans that were 90 days or more past due and still
accruing interest and $180,000 of the loans that are carried in a non-accrual
status. To facilitate long-term improvement to the quality of the Bank's loan
portfolios, the Bank's loan review and collection processes were enhanced in
2002 by the addition of experienced employees. In addition to these improvements
the Bank hired an experienced Certified Public Accountant to implement a full
time internal audit function within the Company during the second quarter of
2002. Management believes that these changes have 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 for loan losses.
Allowance for loan losses totaled $1.0 million at September 30, 2003
and $1.1 million at September 30, 2002. At September 30, 2003, Lawrence
Federal's allowance for loan losses represented 1.20% of total gross loans and
51.50% 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
- --------------------------------------------------------------------------------
15
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
September 30, 2003.
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16
NONINTEREST INCOME. The following table shows the components of noninterest
income and the dollar and percentage change from the three months ended
September 30, 2003 to the same period in 2002 and the nine months ending
September 30, 2003 to the same period in 2002.
Quarters Ended Dollar Percentage
9/30/03 9/30/02 Change Change
--------- --------- -------- ------------
(Dollars in Thousands)
Net securities gains (losses) .... $9 $6 $3 50%
Service charges .................. 152 114 38 33%
Other ............................ 75 69 6 9%
-- -- -
Total ...................... $236 $189 $47 25%
==== ==== ===
Service charges increased during the period as a result of repricing
the service fees for the various types of deposit accounts.
Nine Months Ended Dollar Percentage
9/30/03 9/30/02 Change Change
--------- --------- -------- ------------
(Dollars in Thousands)
Net securities gains (losses) .... $194 $14 $180 N/M
Service charges .................. 378 331 47 14%
Other ............................ 166 183 (17) (9)%
--- --- ----
Total ...................... $738 $528 $210 40%
==== ==== ====
Net securities gains recognized in the first nine months of 2003 were
not duplicated in the same period of 2002. Securities were sold in the first
quarter of 2003 to reduce the Bank's exposure to unrealized losses in an upward
rate environment. During the first quarter of 2003, management determined that
there were investments being held that should be sold due to market conditions.
The gains recognized are not expected to be repeated during the remainder of
2003. The decrease in "Other" was due to fluctuations in various items. Service
charges increased during the period as a result of repricing the service fees
for the various types of deposit accounts.
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17
NON-INTEREST EXPENSE. The following tables show the components of noninterest
expense and the dollar and percentage change from the three months ended
September 30, 2003 to the same period in 2002 and the nine months ending
September 30, 2003 to the same period in 2002.
Quarters Ended Dollar Percentage
9/30/03 9/30/02 Change Change
--------- --------- -------- ------------
(Dollars in Thousands)
Salaries and benefits .................. $504 $432 $72 17%
Deposit insurance premiums ............. 12 15 (3) (20)%
Occupancy and equipment ................ 131 118 13 11%
Data processing ........................ 153 135 18 13%
Franchise tax .......................... 35 29 6 21%
Advertising expense .................... 14 24 (10) (42)%
Professional fees ...................... 77 57 20 35%
Other .................................. 232 195 37 19%
--- --- --
Total ............................ $1,158 $1,005 $153 15%
====== ====== ====
Non-interest expense increased $153,000, or 15%, for quarter ended
September 30, 2003, as compared to the same period in 2002. The increase in
salaries and benefits for the quarter ended September 30, 2003 compared to the
same period in 2002 reflects the addition of employees as discussed below. The
Company has also experienced increases in: data processing as described in
greater detail below; 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.
Nine Months Ended Dollar Percentage
9/30/03 9/30/02 Change Change
--------- --------- -------- ------------
(Dollars in Thousands)
Salaries and benefits .................. $1,488 $1,298 $190 15%
Deposit insurance premiums ............. 42 72 (30) (42)%
Occupancy and equipment ................ 313 285 28 10%
Data processing ........................ 510 401 109 27%
Franchise tax .......................... 103 94 9 10%
Advertising expense .................... 64 80 (16) (20)%
Professional Fees ...................... 243 197 46 23%
Other .................................. 625 540 85 16%
--- --- --
Total ............................ $3,388 $2,967 $421 14%
====== ====== ====
Non-interest expense increased $421,000, or 14%, for the nine months
ended September 30, 2003, as compared to the same period in 2002. The increase
in salaries and benefits for the nine months ended September 30, 2003 compared
to the same period in 2002 reflects the addition of employees in the loan
collection, loan review, internal audit and operations departments within the
Company's banking subsidiary. The increase in data processing is the result of
an $80,000 expense related to the conversion process (discussed in the following
paragraph). The Company has also experienced increases in: costs incurred in the
collection of delinquent mobile home loans; 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.
In July of 2003, the Company replaced its existing data processing
system. This conversion to a new processing system will better position the Bank
to offer additional products, manage existing products, enhance customer service
value, and as an ultimate result, enhance shareholder value. The final direct
costs for the deconversion process were $80,000. The final savings for the post
conversion process from the current processor will more than offset these costs
within the first full year of processing under the new data processing service
provider.
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18
INCOME TAX EXPENSE. The provision for income tax was $23,000 for the
three months ended September 30, 2003, compared to $34,000 in the same period
for 2002 and $110,000 for the nine months ended September 30, 2003, compared to
$200,000 in the same period for 2002. The provision decreased as a result of
lower taxable income. The effective tax rate for the quarter ended September 30,
2003 was 19.8% compared with 36.08% for the same period in 2002 and for the nine
months ended September 30, 2003 was 24.1% compared with 30.6% for the same
period in 2002.
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19
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,
----------------------------------------------------------------------------
2003 2002
---------------------------------- -----------------------------------
(DOLLARS IN THOUSANDS) AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/ BALANCE INTEREST YIELD/
RATE RATE
--------- ---------- ---------- ---------- ---------- ----------
Interest-earning assets:
Loans (1) ....................... $92,498 $5,009 7.23% $103,125 $6,109 7.89%
Securities (2) .................. 23,559 591 3.65% 12,062 494 5.46%
Short term investments .......... 9,672 56 0.78% 9,403 90 1.28%
----- -- ----- --
Total interest-earning
assets ................... 125,729 5,656 6.05% 124,590 6,693 7.16%
Non-interest-earning assets ........ 9,974 9,228
----- -----
Total assets .............. $135,703 $133,818
======== ========
Interest-bearing liabilities:
Deposits:
Passbook accounts ............ $32,452 259 1.07% $27,586 443 2.14%
Money market accounts ........ 991 7 0.89% 992 19 2.56%
NOW accounts ................. 14,674 66 0.60% 15,448 151 1.30%
Certificates of deposit ...... 68,516 1,532 2.99% 71,214 2,199 4.12%
------ ----- ------ -----
Total deposits ............ 116,633 1,864 2.14% 115,240 2,812 3.26%
FHLB advances ................... -- -- -- 2,000 88 5.91%
-- -- ----- --
Total interest-bearing
liabilities .............. 116,633 1,864 2.14% 117,240 2,900 3.31%
-----
Non-interest-bearing
liabilities ....................... 4,947 1,595
----- -----
Total liabilities ......... 121,580 118,835
Total retained earnings ............ 14,123 14,983
------ ------
Total liabilities
and retained earnings .... $135,703 $133,818
======== ========
Net interest-earning assets ..... $9,097 $14,983
====== =======
Net interest
income/interest
rate spread (3) ................ $3,792 3.91% $3,793 3.85%
====== ======
Net interest margin (4) ......... 4.07% 4.06%
Ratio of interest-earning
assets to interest-bearing
liabilities .................... 107.79% 106.27%
- -----------------------------------
(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.
- -------------------------------------------------------------------------------------------------------------------
20
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 2003 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 originating adjustable-rate
loans and attracting longer term fixed rate time deposits, of which, both 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 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, 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, 2003, that would occur upon an immediate change in interest rates based
on OTS assumptions, but without giving effect to any steps that management might
take to counteract that change.
NPV AS % OF PORTFOLIO
NET PORTFOLIO VALUE VALUE OF ASSETS
CHANGE IN ------------------------------------------- ----------------------
INTEREST RATES (DOLLARS IN THOUSANDS) NPV CHANGE (1)
IN BASIS POINTS
(RATE SHOCK) $ AMOUNT $ CHANGE % CHANGE RATIO
----------------- ---------- ---------- ---------- ------- ------------
300 14,190 (2,090) (13)% 10.40% (115)
200 15,203 (1,076) (7)% 10.99% (55)
100 15,953 (327) (2)% 11.41% (14)
Static 16,279 -- -- 11.55% --
(100) 16,277 (2) N/M 11.48% (7)
(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 OTS 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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21
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, 2003, cash and
short-term investments totaled $14.8 million. Securities classified as
available-for-sale totaled $23.8 million.
Funding is obtained primarily from activity involving deposit accounts
and Federal Home Loan Bank advances. In the first nine months of 2003 Lawrence
Federal experienced a net decrease in total deposits of $2.9 million since
December 31, 2002 compared to an increase of $2.5 million for the same period in
2002. In addition, at September 30, 2003, Lawrence Federal had the ability to
borrow a total of approximately $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 no long term advances outstanding. On the same
date in 2002, Federal Home Loan Bank advances were 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 OTS 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, 2003,
Lawrence Federal exceeded all of its regulatory capital requirements. Lawrence
Federal is considered "well capitalized" under regulatory guidelines. See the
table on page ten (10) 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 10-QSB 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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22
ITEM 3
CONTROLS AND PROCEDURES
The Company's management, including the Company's principal executive
officer and principal financial officer, have evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the "SEC") (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (2) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. In
addition, based on that evaluation, no change in the Company's internal control
over financial reporting occurred during the quarter ended September 30, 2003
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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23
LAWRENCE FINANCIAL HOLDINGS, INC.
FORM 10-QSB
Quarter ended September 30, 2003
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 -
31.1 - Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
31.2 - Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer
32.1 - Section 1350 Certification of Chief Executive Officer
32.2 - Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K.
A report on form 8-K was filed on July 10, 2003. Under
Item 9, Regulation FD Disclosure, Lawrence Financial
Holdings, Inc. reported that it issued a press release to
announce financial results for the quarter ended
June 30, 2003.
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24
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: November 12, 2003 /s/ Jack L. Blair
--------------------- ----------------------------------------------------
Jack L. Blair
President and Chief Executive Officer
Date: November 12, 2003 /s/ RobRoy Walters
---------------------- ---------------------------------------------------
RobRoy Walters
Executive Vice President and Chief Financial Officer
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25