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, 2004
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 April 30, 2004
Common Stock, $.01 par value 650,110 Common Shares
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
LAWRENCE FINANCIAL HOLDINGS, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2004
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............................................. 21
PART II - OTHER INFORMATION
Other Information............................................................ 22
Signatures................................................................... 23
Exhibits..................................................................... 24
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2
CONSOLIDATED BALANCE SHEETS
March 31, 2004 and December 31, 2003
- -----------------------------------------------------------------------------------------------------
(Unaudited)
March 31, December 31,
2004 2003
---- ----
ASSETS
Cash and due from banks $ 13,990,399 $ 10,134,534
Merrill Lynch money market fund 847,805 508,695
------------- -------------
Total cash and cash equivalents 14,838,204 10,643,229
Securities available for sale, at fair value 22,838,669 26,247,238
Loans receivable, net 79,065,366 80,882,658
Federal Home Loan Bank stock 645,400 639,100
Premises and equipment, net 3,412,646 3,474,160
Accrued interest receivable 521,626 566,309
Cash surrender value of life insurance 2,306,466 2,284,990
Other assets 622,656 724,445
------------- -------------
$ 124,251,033 $ 125,462,129
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 7,660,416 $ 7,753,907
Interest-bearing deposits 101,959,544 103,241,721
------------- -------------
Total deposits 109,619,960 110,995,628
Other liabilities 459,116 441,249
------------- -------------
Total liabilities 110,079,076 111,436,877
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 7,582,118 7,559,313
Retained earnings 9,808,208 9,781,499
Treasury stock, at cost; 149,000 shares (2,728,688) (2,728,688)
Unearned ESOP shares (356,992) (372,510)
Unearned restricted stock awards (134,530) (134,530)
Accumulated other comprehensive income,
net of tax of $(3,233) at 2004 and $(45,242) in 2003 (6,276) (87,823)
------------- -------------
Total shareholders' equity 14,171,831 14,025,252
------------- -------------
Total liabilities and shareholders' equity $ 124,251,033 $ 125,462,129
============= =============
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, 2004 and 2003
(Unaudited)
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Three Months Ended
March 31,
----------------------------
2004 2003
---- ----
INTEREST INCOME
Loans, including fees $ 1,379,083 $ 1,741,084
Taxable securities 210,747 192,020
Tax exempt securities 6,705 22,336
Overnight deposits 17,100 22,484
----------- -----------
1,613,635 1,977,924
----------- -----------
Interest expense
Deposits 457,104 680,711
----------- -----------
Net interest income 1,156,531 1,297,213
Provision for loan losses 180,000 300,000
----------- -----------
Net interest income
after provision for loan losses 976,531 997,213
Noninterest income
Net securities gains (losses) 75,314 153,122
Service charges 110,510 106,498
Other 35,808 40,317
----------- -----------
221,632 299,937
Noninterest expense
Salaries and benefits 543,370 488,550
Deposit insurance premiums 4,376 15,272
Occupancy and equipment 106,207 92,164
Data processing 93,268 196,383
Franchise tax 34,650 33,000
Advertising expense 21,557 30,642
Professional fees 101,448 88,831
Other 192,365 181,699
----------- -----------
1,097,241 1,126,541
----------- -----------
INCOME BEFORE INCOME TAX 100,922 170,609
Provision for income tax 29,357 43,779
----------- -----------
NET INCOME $ 71,565 $ 126,830
=========== ===========
Basic earnings per common share $ 0.12 $ 0.20
=========== ===========
Diluted earnings per common share $ 0.11 $ 0.20
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
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4
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2004 and 2003
(Unaudited)
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Three Months Ended
March 31,
-----------------------
2004 2003
---- ----
Net income $ 71,565 $ 126,830
Other comprehensive income:
Unrealized gains (losses)
arising during period 198,870 (85,764)
Reclassification adjustment for (gains)
losses included in net income (75,314) (153,122)
--------- ---------
Total other comprehensive income (loss) 123,556 (238,886)
Income tax expense (benefit) (42,009) 81,221
--------- ---------
Other comprehensive income (loss),
net of tax 81,547 (157,665)
--------- ---------
Comprehensive income (loss) $ 153,112 $ (30,835)
========= =========
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, 2003 and the Three Months Ended March 31, 2004
(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, 2003 $ 7,991 $ 7,467,042 $9,485,971 $ (1,683,600) $ (434,580) $ (201,794) $ 147,761 $ 14,788,791
Net income -- -- 477,190 -- -- -- -- 477,190
Net unrealized depreciation
on securities available
for sale, net of tax of
$(121,361) -- -- -- -- -- -- (235,584) (235,584)
Treasury Stock acquired -
55,000 shares -- -- -- (1,045,088) -- -- -- (1,045,088)
Cash dividend - $0.28
per share -- -- (181,662) -- -- -- -- (181,662)
Stock-based compensation -- 92,271 -- -- 62,070 67,264 -- 221,605
-------- ------------ ---------- ------------ ---------- ---------- --------- ------------
Balance, December 31, 2003 7,991 7,559,313 9,781,499 (2,728,688) (372,510) (134,530) (87,823) 14,025,252
Net income -- -- 71,565 -- -- -- -- 71,565
Net unrealized depreciation
on securities available
for sale, net of tax of
$42,009 -- -- -- -- -- -- 81,547 81,547
Cash dividend - $0.07
per share -- -- (44,856) -- -- -- -- (44,856)
Stock-based compensation -- 22,805 -- -- 15,518 -- -- 38,323
-------- ------------ ---------- ------------ ---------- ---------- --------- ------------
Balance, March 31, 2004 $ 7,991 $ 7,582,118 $9,808,208 $ (2,728,688) $ (356,992) $ (134,530) $ (6,276) $ 14,171,831
======== ============ ========== ============ ========== ========== ========= ============
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, 2004 and 2003
(Unaudited)
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Three Months Ended
March 31,
--------------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 71,565 $ 126,830
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 67,825 53,352
Provision for loan losses 180,000 300,000
Stock dividend on Federal Home Loan Bank stock (6,300) (6,000)
Net premium amortization 27,007 32,807
Net securities (gains) losses (75,314) (153,122)
Gain on disposal of fixed assets -- (2,800)
ESOP expense 38,323 33,157
Restricted stock award expense 16,816 16,816
Change in other assets and liabilities 84,162 (102,532)
------------ ------------
Net cash from operating activities 404,084 298,508
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of:
Securities available for sale (5,355,938) (17,351,736)
Premises and equipment (6,311) (139,271)
Proceeds from:
Sale of securities available for sale 4,049,769 12,823,839
Calls, maturities and principal repayments of securities
available for sale 4,886,603 619,703
Sale of fixed assets -- 2,800
Net change in loans 1,637,292 743,660
------------ ------------
Net cash from investing activities 5,211,415 (3,301,005)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in Deposits (1,375,668) 2,212,769
Cash dividend paid (44,856) (46,455)
Purchase of treasury stock -- (492,580)
------------ ------------
Net cash from financing activities (1,420,524) 1,673,734
------------ ------------
Net change in cash and cash equivalents 4,194,975 (1,328,762)
Cash and cash equivalents at beginning of the year 10,643,229 16,320,500
------------ ------------
Cash and cash equivalents at end of the period $ 14,838,204 $ 14,991,737
============ ============
Supplemental disclosures:
Cash paid during the period for:
Interest $ 461,011 $ 683,206
Income taxes 86,150 100,000
Non-cash transactions
Transfer of loans to real estate owned -- 43,235
The accompanying notes are an integral part of these consolidated financial statements.
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7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
Lawrence Financial Holdings, Inc. and its wholly-owned subsidiary, Lawrence
Federal Savings Bank (the "Bank") and the Bank's wholly-owned subsidiary,
Lawrence Financial Services Corporation (together, the "Company"). Intercompany
transactions and balances are eliminated in consolidation.
NATURE OF OPERATIONS: The Company provides financial services through its
offices in Lawrence and Scioto Counties, Ohio. Its primary deposit products are
checking, savings, and term certificate accounts, and its primary lending
products are real estate mortgage and installment loans. Substantially all loans
are secured by specific items of collateral including consumer assets and real
estate. Lawrence Financial Services Corporation 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
ENDED MARCH 31
--------------
2004 2003
---- ----
Net weighted average shares outstanding - Basic 604,491 633,122
Effect of stock options 21,405 9,745
Effect of non-vested stock awards 2,390 1,668
Net effect of stock options and non-vested
stock awards 23,795 11,413
------- -------
Weighted average shares outstanding - Diluted 628,286 644,535
======= =======
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.
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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
March 31,
---------------------------
2004 2003
---- ----
Reported net income $ 71,565 $ 126,830
Pro forma impact (9,725) (9,725)
---------- -----------
Pro forma net income $ 61,840 $ 117,105
========== ===========
Reported basic earnings per common share $ 0.12 $ 0.20
Pro forma impact (0.02) (0.02)
---------- -----------
Pro forma basic earnings per common share $ 0.10 $ 0.18
========== ===========
Reported diluted earnings per common share $ 0.11 $ 0.20
Pro forma impact (0.02) (0.02)
---------- -----------
Pro forma diluted earnings per common share $ 0.09 $ 0.18
========== ===========
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 March 31, 2004, 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, 2003, 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 March 31, 2004 and December
31, 2003, management believes the Bank complied with all regulatory capital
requirements. At March 31, 2004, 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
------ ----- ------ ----- ------ -----
MARCH 31, 2004:
Total capital (to risk-
weighted assets) $ 13,686 16.65% $ 6,576 8.0% $ 8,220 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 12,911 15.71 3,287 4.0 4,931 6.0
Tier 1 (core) capital (to
adjusted total assets) 12,911 10.40 4,966 4.0 6,207 5.0
DECEMBER 31,2003:
Total capital (to risk-
weighted assets) $ 13,521 16.39% $ 6,600 8.0% $ 8,250 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 12,803 15.52 3,300 4.0 4,950 6.0
Tier 1 (core) capital (to
adjusted total assets) 12,803 10.18 5,031 4.0 6,289 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 without notifying the OTS or applying to the OTS for approval
provided that (1) the total amount of all capital distributions 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 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:
Three Months Ended March 31
2004 2003
---------- ----------
(Dollars in Thousands)
Beginning Balance...................................... $1,014 $1,111
Provision for Loan Losses.............................. 180 300
Charge Offs............................................ (209) (227)
Recoveries............................................. 6 17
Ending Balance......................................... $991 $1,201
The following table shows the components of non-performing assets at:
3/31/04 12/31/03
---------- ----------
(Dollars in Thousands)
Non-Accrual Loans...................................... $391 $531
Loans 90 days or more past due
and still accruing interest.......................... 1,860 1,411
----- -----
Total Non-Performing Loans........................... 2,251 1,942
----- -----
Other Real Estate Owned................................ 75 151
Total Non-Performing Assets............................ $2,326 $2,093
====== ======
Non-performing loans to total loans.................... 2.81% 2.20%
Non-performing assets to total loans plus 2.90% 2.48%
other real estate owned.............................
Allowance for loan losses to total 44.02% 56.37%
non-performing loans................................
Loans 90 days or more past due and 2.32% 1.78%
not on non-accrual to total loans...................
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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
March 31,
--------------------
2004 2003
---- ----
SIGNIFICANT RATIOS (ANNUALIZED):
Net income to
Average total assets 0.23% 0.38%
Average stockholders' equity 2.05 3.52
Net Interest Margin 4.08 4.11
Average net loans to average deposits 77.89 80.11
Average stockholders' equity to
average total assets 11.16 10.68
Capital ratios
Tier I capital 10.40 9.25
Risk-based capital 16.65 14.75
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PER SHARE DATA:
Earnings per weighted average share
Basic $ 0.12 $ 0.20
Diluted 0.11 0.20
Weighted average shares outstanding
Basic 604,491 633,122
Diluted 628,286 644,535
Total shares outstanding 650,110 677,610
Cash dividends per share .07 .07
Book value per share at end of period $ 21.80 $ 21.03
Last sale at end of period
Source: NASDAQ.com 22.50 18.70
INTRODUCTION
This report contains certain "forward-looking statements" within the
meaning of the federal securities laws. These statements are not historical
facts, rather they are statements based on Lawrence Financial Holdings, Inc.'s
("Lawrence Financial") current expectations regarding its business strategies,
intended results and future performance. Forward-looking statements are preceded
by terms such as "expects," "believes," "anticipates," "intends" and similar
expressions.
Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the market area in
which Lawrence Financial operates, as well as nationwide, Lawrence Financial's
ability to control costs and expenses, competitive products and pricing, loan
delinquency rates and changes in federal and state legislation and regulation.
These factors should be considered in evaluating the forward-looking statements
and undue reliance should not be placed on such statements. Lawrence Financial
assumes no obligation to update any forward-looking statements.
OPERATING STRATEGY
Lawrence Financial, through its wholly owned subsidiary Lawrence Federal
Savings Bank (the "Bank" or
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12
"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 expensed $180,000 of provision in the first quarter of 2004,
compared to $300,000 in the first quarter of 2003. While the provision has been
reduced from the same period in 2003 as a direct result of the continued efforts
in the collection department, management has determined that the current level
is adequate considering the current and projected charge off experiences.
During the three month period ended March 31, 2004, the Company had net
charge-offs of approximately $203,000. At March 31, 2004, the Company had a
ratio of Allowance for Loan Loss to gross loans of 1.24% compared to 1.24% on
the same date in 2003.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND DECEMBER 31, 2003
Total assets decreased $1.2 million, or 1%, to $124.3 million at March
31, 2004 when compared to the balances at December 31, 2003. At March 31, 2004,
net loans receivable had decreased $1.8 million, or 2%, when compared to the
balances at December 31, 2003. Direct and indirect consumer loans decreased
$278,000, or 2%, real estate loans decreased by $1.6 million, or 4%, indirect
mobile home loans decreased $745,000, or 5%, and commercial loans increased
$822,000, or 9% at March 31, 2004. The allowance for loan losses at March 31,
2004 was $991,000. The growth in the commercial loan portfolio was due primarily
to the origination of several commercial loan participations with other local
commercial banks. Lawrence Federal's long term investments, held in the form of
securities, decreased by $3.4 million or 13%, when comparing March 31, 2004
balances to December 31, 2003. During the first three months of 2004 Lawrence
Financial's available cash and cash equivalents increased to $14.8 million, an
increase of $4.2 million, or 39%. This increase was primarily due to the
decrease in loans as a result of competitive rates with other local financial
institutions and the maturity, sales and paydowns on certain long term
investments.
Compared to December 31, 2003, deposits decreased $1.4 million, or 1%, to
$109.6 million at March 31, 2004.
Equity increased $146,000, or 1.0%, to $14.2 million at March 31, 2004
when compared to December 31, 2003. During the period ended March 31, 2004,
retained earnings increased $72,000 as a result of net income for the period and
decreased as a result of the payment of $45,000 in cash dividends to the
shareholders.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDING MARCH 31, 2004
AND 2003
GENERAL. For the three months ended March 31, Lawrence Financial's net
income decreased 44% to $72,000 for 2004 from $127,000 for 2003. Return on
average assets was 0.23% for the first quarter of 2004, compared to 0.38% for
the same period in 2003. Return on average equity was 2.05% for the first
quarter of 2004, compared to 3.52% for the same period in 2003. Net interest
income decreased $141,000, or 11%, during the first quarter ending March 31,
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13
2004 compared to the same period in 2003. Noninterest income decreased $78,000,
or 26%, during the first quarter ending March 31, 2004 compared to the same
period in 2003. Offsetting the decrease in net interest income was a $120,000,
or 40%, decrease in the provision for loan losses for the quarter ended March
31, 2004. Also offsetting the decrease in net interest and noninterest income
was a $29,000, or 3%, decrease in noninterest expense for the quarter ended
March 31. The Company experienced a $54,000 or 11% increase in salaries, wages
and benefits during the first quarter of 2004 when compared to the same period
of 2003. This increase is a result of the creation of the operation and proof
areas within the Company's banking subsidiary; increased medical insurance
costs, as well as other related costs. The Company has determined that the 2004
salaries and wages will be held at the 2003 levels to help offset the rising
benefit costs. Data processing costs decreased $103,000, or 53%, when compared
to the same period in 2003, with $50,000 of the decrease directly related to the
costs incurred for preparation of the data processing conversion the Company
underwent in July 2003. In addition to the increase in employee costs, fees
related to professional services, audit and legal services, have increased by
$13,000 or 14% in the first quarter of 2004 when compared to the same period of
2003.
INTEREST INCOME. Interest income decreased $364,000, or 18%, for the
quarter compared to the same quarter in 2003. Interest income on loans decreased
$362,000, or 21%, for the quarter. These decreases were primarily a result of a
decline in the balance of the loan portfolio and a decrease in the yield on the
portfolio. Interest income on short-term investments and securities decreased
$2,000, or 1%, for the quarter, primarily as a result of lower yielding
securities being carried by the Company during 2004. The average yield on
interest-earning assets declined to 5.70% for the quarter ended March 31, 2004,
from 6.27% for the same period in 2003, as lower yielding short term and long
term investments became a higher percentage of interest-earning assets.
INTEREST EXPENSE. Interest expense decreased $224,000, or 33%, for the
quarter compared to the same quarter in 2003. The decrease in interest expense
for the quarter ending March 31, 2004, was a direct result of a decline in the
rates paid on deposits. The average cost of interest-bearing liabilities was
1.61% for the quarter ended March 31, 2004 compared to 2.30% for the same period
in 2003, 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.
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14
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 at least 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 of 2004, to
the fourth quarter 2003 and the first quarter of 2003.
The provision for loan losses was $180,000 for the first quarter of 2004
which represents a decrease of $120,000, or 40%, from the provision of $300,000
recorded for the same period in 2003. The decrease in provision was driven, in
part, by management's evaluation of historic trends and estimates regarding
charge-offs. In the first quarter of 2003, the Bank recorded a larger than
normal provision based on what management believed to be accurate estimates for
charge-offs in the second and third quarters of 2003. For the first quarter of
2004, management has reduced the provision based on its interpretation of
historic and current trends of charge-offs and non-performing loans.
Non-performing assets totaled $2.33 million at March 31, 2004, or 1.87%
of assets. Of the $2.33 million in non-performing assets, $1.86 million were
loans which are 90 days or more past due and still accruing interest and
$391,000 were loans in a non-accrual status. Non-performing indirect mobile home
loans made up $475,000 of the loans that were 90 days or more past due and still
accruing interest and $251,000 of the loans that are carried in a non-accrual
status. At December 31, 2003, non-performing assets totaled $2.07 million or
1.65% of assets. Of the $2.07 million, $1.49 million were loans which are 90
days or more past due and still accruing interest and $340,000 were loans in a
non-accrual status. At December 31, 2003, non-performing indirect mobile home
loans made up $569,000 of the loans that were 90 days or more past due and still
accruing interest and $229,000 of the loans that are carried in a non-accrual
status.
Allowance for loan losses totaled $991,000 at March 31, 2004 and $1.2
million at March 31, 2003. At March 31, 2004, Lawrence Federal's allowance for
loan losses represented 1.24% of total gross loans and 46% 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 allowance to be adequate at March 31,
2004.
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15
NONINTEREST INCOME. The following table shows the components of
noninterest income and the dollar and percentage change from the three months
ended March 31, 2004 to the same period in 2003.
Quarters Ended
3/31/04 3/31/03 Dollar Percentage
Change Change
--------- --------- -------- ------------
(Dollars in Thousands)
Net securities gains ............. $75 $153 $(78) (51)%
Service charges .................. 111 106 5 5%
Other ............................ 36 41 (5) (12)%
-- -- ---
Total ...................... $222 $300 $78 26%
==== ==== ===
Net securities gains recognized for the quarter ended March 31, 2003 were
not duplicated in the same period of 2004. Management determined that there were
securities that should be 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 2004, these conditions were not present resulting in fewer securities
transactions and smaller gains. The decrease in "Other" was due to fluctuations
in various items including a decrease in income earned on the cash surrender
value of bank owned life insurance.
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16
NON-INTEREST EXPENSE. The following tables show the components of
noninterest expense and the dollar and percentage change from the three months
ended March 31, 2004 to the same period in 2003.
Quarters Ended
3/31/04 3/31/03 Dollar Percentage
Change Change
--------- --------- -------- ------------
(Dollars in Thousands)
Salaries and benefits ............ $543 $489 54 11%
Deposit insurance premiums ....... 4 15 (11) (13)
Occupancy and equipment .......... 106 92 14 15
Data processing .................. 93 196 (103) (53)
Franchise tax .................... 35 33 2 6
Advertising expense .............. 22 31 (9) (29)
Professional Fees ................ 101 89 12 13
Other ............................ 193 182 11 6
--- --- -- -
Total ...................... $1,097 $1,127 $(30) 3%
====== ====== ===== ==
Non-interest expense decreased $30,000, or 3%, for the three months ended
March 31, 2004, as compared to the same period in 2003. The increase in salaries
and benefits for the three months ended March 31, 2004 compared to the same
period in 2003 reflects increased salaries and wages of $42,000, due to the
creation of the operation and proof areas; medical insurance costs increased
$8,000, and all other related costs in this category increased $4,000. The
decrease in data processing expense is the result of the successful data
processing conversion that was completed during the third quarter of 2003. Of
the $103,000 decrease, $50,000 was directly related to the costs incurred by the
Company in preparation of the conversion that was completed in July 2003. The
savings benefits and customer enhancements are now being realized as a result of
this data processing conversion. The Company has also experienced increases in:
professional fees, including audit and legal services; printing and supplies;
and other non-interest expenses which are related to maintaining the Company's
customer base and the daily operation of the Company.
INCOME TAX EXPENSE. The provision for income tax was $29,000 for the
three months ended March 31, 2004, compared to $44,000 in the same period for
2003. The provision decreased as a result of lower taxable income. The effective
tax rate for the quarter ended March 31, 2004 was 29.0% compared with 26.0% for
the same period in 2003.
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17
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, which have been annualized, 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.
--------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------
2004 2003
--------------------------------- ---------------------------------
(DOLLARS IN THOUSANDS) AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE YIELD/ BALANCE YIELD/
RATE RATE
--------- ---------- --------- --------- ---------- ---------
Interest-earning assets: ............
Loans (1) ......................... 79,877 1,379 6.84% 96,252 1,741 7.28%
Securities (2) .................... 23,559 217 3.74% 20,261 214 4.44%
Short term investments ........... 10,653 18 0.66% 11,145 23 0.83%
------ -- ------ --
Total interest-earning assets ... 114,089 1,614 5.70% 127,658 1,978 6.27%
Non-interest-earning assets ......... 12,055 8,986
------ -----
Total assets .................... 126,144 136,644
======= =======
Interest-bearing liabilities:
Deposits:
Savings accounts ................ 27,666 33 0.48% 33,414 81 0.98%
NOW accounts .................... 19,167 55 1.16% 16,998 35 0.83%
Certificates of deposit ......... 55,705 369 2.67% 69,736 565 3.29%
------ --- ------ ---
Total deposits-interest
bearing liabilities ......... 102,538 457 1.79% 120,148 681 2.30%
Non-interest-bearing liabilities .... 9,527 1,899
----- -----
Total liabilities ............. 112,065 122,047
Total retained earnings ............. 14,079 14,597
------ ------
Total liabilities and
retained earnings ........... 126,144 136,644
======= =======
Net interest-earning assets ....... 11,551 7,510
====== =====
Net interest income/interest
rate spread (3) ................. 1,157 3.91% 1,297 3.97%
===== ===== ===== =====
Net interest margin (4) ........... 4.08% 4.11%
Ratio of interest-earning
assets to interest-bearing
liabilities ..................... 111.27% 106.25%
___________________________________
(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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18
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 2004 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
originating shorter term consumer loans 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 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, 2003 (the most recent data available), 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.
NET PORTFOLIO VALUE NPV AS % OF PORTFOLIO
CHANGE IN VALUE OF ASSETS
INTEREST RATES -------------------------------------- ----------------------
IN BASIS POINTS (DOLLARS IN THOUSANDS) NPV
(RATE SHOCK) $ AMOUNT $ CHANGE % CHANGE RATIO CHANGE (1)
- --------------- ---------- ------------ ---------- ------- ------------
300 $13,703 $(3,445) (20)% 10.90% (219)
200 15,138 (2,010) (12) 11.85% (124)
100 16,326 (821) (5) 12.61% (49)
Static 17,148 -- -- 13.10% --
-100 17,416 269 2 13.21% 11
(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 suffer a moderate decrease.
The Office of Thrift Supervision uses certain assumptions in assessing
the interest rate risk of savings associations. These assumptions relate to
interest rates, loan prepayment rates, deposit decay rates, and the market
values of certain assets under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, if interest rates change, expected rates of
prepayments on loans and early withdrawals from certificates of deposit could
deviate significantly from those assumed in calculating the table.
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19
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, 2004, cash and short-term
investments totaled $14.8 million. Securities classified as available-for-sale
totaled $22.8 million at March 31, 2004.
Funding is obtained primarily from deposits and Federal Home Loan Bank
advances. In the first three months of 2004 Lawrence Federal experienced a net
decrease in total deposits of $1.4 million compared to an increase of $2.2
million for the same period in 2003. In addition, at March 31, 2004, Lawrence
Federal had the ability to borrow a total of approximately $15.0 million from
the Federal Home Loan Bank of Cincinnati through the use of an existing Cash
Management Advance agreement. On that date as well as the same date in 2003,
Lawrence Federal had no advances outstanding. 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, 2004,
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 interim report have been prepared following accounting
principles generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The primary impact of inflation is reflected in the
increased cost of Lawrence Federal's operations. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
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20
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.
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21
Lawrence Financial Holdings, Inc.
Form 10-QSB
Quarter ended March 31, 2004
PART II - Other Information
Item 1- Legal Proceedings:
There are no matters required to be reported under this item.
Item 2- Changes in Securities:
- ------------------------------- ------------------ ---------------- ------------------------------ ---------------------------------
(c) (d)
(a) (b) Total Number of Shares (or Maximum Number (or Approximate
Total Number of Average Price Units) Purchased as Part of Dollar Value) of Shares (or
Shares (or Paid per Share Publicly Announced Plans or Units) that May Yet Be Purchased
Period Units) Purchased (or Unit) Programs Under the Plans or Program
- ------------------------------- ------------------ ---------------- ------------------------------ ---------------------------------
Month #1: January 1, 2004
through January 31, 2004 0 N/A N/A 15,000
- ------------------------------- ------------------ ---------------- ------------------------------ ---------------------------------
Month #2: February 1, 2004
through February 29, 2004 0 N/A N/A 15,000
- ------------------------------- ------------------ ---------------- ------------------------------ ---------------------------------
Month #3: March 1, 2004
through March 31, 2004 0 N/A N/A 15,000 (1)
- ------------------------------- ------------------ ---------------- ------------------------------ ---------------------------------
Total 0 N/A N/A N/A
- ------------------------------- ------------------ ---------------- ------------------------------ ---------------------------------
(1) On October 24, 2003, Lawrence Financial announced a repurchase program under
which it would repurchase up to 15,000 shares of its common stock. The
repurchase program will continue until it is completed or terminated by the
Board of Directors.
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 items to be reported under this item.
Item 6- Exhibits and Reports on Form 8-K:
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 January 12, 2004. Under Item
5, Other Events, Lawrence Financial Holdings, Inc. reported
that it issued a press release to announce the date of its
annual meeting of shareholders.
A report on Form 8-K was filed on February 17, 2004. Under Item
5, Other Events, Lawrence Financial Holdings, Inc. reported
that it declared its regularly quarterly dividend. Under Item
12, Lawrence Financial Holdings, Inc. Furnished information
regarding its results of operations for the quarter and year
ended December 31, 2003.
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused
- --------------------------------------------------------------------------------
22
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Lawrence Financial Holdings, Inc.
Date: May 11, 2004 /s/ Jack L. Blair
------------------- ----------------------------------------------------
Jack L. Blair
President and Chief Executive Officer
Date: May 11, 2004 /s/ RobRoy Walters
------------------- ----------------------------------------------------
RobRoy Walters
Executive Vice President and Chief Financial Officer
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23