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, 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 October 31, 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 SEPTEMBER 30, 2004
PART I - FINANCIAL INFORMATION
PAGE
ITEM 1 - Financial Statements
Consolidated Balance Sheets ....... ................................. 3
Consolidated Statements of Income (Loss) ............................ 4
Consolidated Statements of Comprehensive Income (Loss) ............. 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
- --------------------------------------------------------------------------------
2
CONSOLIDATED BALANCE SHEETS
September 30, 2004 and December 31, 2003
- -----------------------------------------------------------------------------------------------------
(Unaudited)
September 30, December 31,
2004 2003
---- ----
ASSETS
Cash and due from banks $ 5,475,225 $ 10,134,534
Merrill Lynch money market fund 553,445 508,695
------------- -------------
Total cash and cash equivalents 6,028,670 10,643,229
Loans held for sale 7,360,525 --
Securities available for sale, at fair value 24,114,086 26,247,238
Loans receivable, net 73,709,760 80,882,658
Federal Home Loan Bank stock 658,700 639,100
Premises and equipment, net 3,297,826 3,474,160
Accrued interest receivable 574,621 566,309
Cash surrender value of life insurance 2,350,860 2,284,990
Other assets 2,209,007 724,445
------------- -------------
$ 120,304,055 $ 125,462,129
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 8,078,532 $ 7,753,907
Interest-bearing deposits 100,121,771 103,241,721
------------- -------------
Total deposits 108,200,303 110,995,628
Other liabilities 812,120 441,249
------------- -------------
Total liabilities 109,012,423 111,436,877
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 7,624,266 7,559,313
Retained earnings 6,962,946 9,781,499
Treasury stock, at cost; 149,000 shares (2,728,688) (2,728,688)
Unearned ESOP shares (325,950) (372,510)
Unearned restricted stock awards (134,530) (134,530)
Accumulated other comprehensive income,
net of tax of $(58,935) at 2004 and $(45,242) in 2003 (114,403) (87,823)
------------- -------------
Total shareholders' equity 11,291,632 14,025,252
Total liabilities and shareholders' equity $ 120,304,055 $ 125,462,129
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
- -----------------------------------------------------------------------------------------------------
3
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months and Nine Months Ended September 30, 2004 and 2003
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
2004 2003 2004 2003
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 1,306,946 $ 1,590,877 $ 4,035,128 $ 5,009,295
Taxable securities 209,457 152,753 610,226 516,849
Tax exempt securities 39,042 26,194 77,402 71,749
Overnight deposit 4,741 18,424 37,851 58,843
----------- ----------- ----------- -----------
1,560,186 1,788,248 4,760,607 5,656,736
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 454,612 555,623 1,373,628 1,864,182
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,105,574 1,232,625 3,386,979 3,792,554
Provision for loan losses 180,000 195,000 540,000 690,000
----------- ----------- ----------- -----------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 925,574 1,037,625 2,846,979 3,102,554
NONINTEREST INCOME
Net securities gains -- 8,996 75,314 193,606
Service charges 118,889 152,867 348,532 379,454
Other 11,549 75,718 83,340 167,014
----------- ----------- ----------- -----------
130,438 237,581 507,186 740,074
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and benefits 487,502 504,001 1,513,507 1,487,801
Deposit insurance premiums 3,974 11,609 12,537 41,963
Occupancy and equipment 99,755 130,968 317,100 312,861
Data processing 96,040 152,600 284,804 509,758
Franchise tax 33,087 35,468 101,380 103,062
Advertising expense 19,080 13,900 61,256 63,652
Professional fees 79,392 76,478 240,047 242,617
Loss on loans 4,406,647 -- 4,406,647 --
Other 197,859 232,885 561,439 625,775
----------- ----------- ----------- -----------
5,423,336 1,157,909 7,498,717 3,387,489
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX (4,367,324) 117,297 (4,144,552) 455,139
Provision for (benefit) income tax (1,519,963) 23,260 (1,460,567) 109,764
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(2,847,361) $ 94,037 $(2,683,985) $ 345,375
=========== =========== =========== ===========
Basic earnings per common share $ (4.67) $ 0.16 $ (4.42) $ 0.56
=========== =========== =========== ===========
Diluted earnings per common share $ (4.67) $ 0.15 $ (4.42) $ 0.55
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
- ----------------------------------------------------------------------------------------------------------------------
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months and Nine Months Ended September 30, 2004 and 2003
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) $(2,847,361) $ 94,037 $(2,683,985) $ 345,375
Other comprehensive income:
Unrealized gains (losses) arising during
Period 649,523 (266,585) 35,041 (200,911)
Reclassification adjustment for gains
included in net income -- (8,996) (75,314) (193,606)
----------- ----------- ----------- -----------
649,523 (275,581) (40,273) (394,517)
Income tax effect (220,838) (93,697) 13,693 (134,136)
----------- ----------- ----------- -----------
Other comprehensive income (loss),
net of tax 428,685 (181,884) (26,580) (260,381)
----------- ----------- ----------- -----------
Comprehensive income (loss) $(2,418,676) $ (87,847) $(2,710,565) $ 84,994
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
- ----------------------------------------------------------------------------------------------------------------------
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Year Ended December 31, 2003 and the Nine Months Ended September 30, 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 (loss) -- -- (2,683,985) -- -- -- -- (2,683,985)
Net unrealized depreciation
on securities available
for sale, net of tax of
$(13,693) -- -- -- -- -- -- (26,580) (26,580)
Cash dividend - $0.21 per
share -- -- (134,568) -- -- -- -- (134,568)
Stock-based compensation -- 64,953 -- -- 46,560 -- -- 111,513
-------- ------------ ---------- ------------ ---------- ---------- --------- ------------
Balance, September 30, 2004 $ 7,991 $ 7,624,266 $6,962,946 $ (2,728,688) $ (325,950) $ (134,530) $(114,403) $ 11,291,632
======== ============ ========== ============ ========== ========== ========= ============
The accompanying notes are an integral part of these consolidated financial statements..
- -----------------------------------------------------------------------------------------------------------------------------------
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2004 and 2003
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
--------------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,683,985) $ 345,375
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 198,037 182,918
Provision for loan losses 540,000 690,000
Stock dividend on Federal Home Loan Bank stock (19,600) (18,400)
Net premium amortization (discount accretion) 106,147 152,820
Net securities gains (75,314) (193,606)
ESOP expense 111,513 101,200
Restricted stock award expense 50,449 80,299
Change in other assets and liabilities (8,585,156) (17,179)
------------ ------------
Net cash from operating activities (10,357,909) 1,323,427
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of:
Securities available for sale (11,193,394) (34,204,072)
Premises and equipment (21,703) (379,990)
Proceeds from:
Sale of securities available for sale 4,549,769 15,987,916
Calls, maturities and principal repayments of securities
available for sale 8,705,673 8,217,854
Sale of fixed assets -- 5,550
Net change in loans 6,632,898 11,604,226
------------ ------------
Net cash from investing activities 8,673,243 1,231,484
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in:
Deposits (2,795,325) (2,936,254)
Cash dividend paid (134,568) (136,323)
Purchase of treasury stock -- (1,045,088)
------------ ------------
Net cash from financing activities (2,929,893) (4,117,665)
------------ ------------
Net change in cash and cash equivalents (4,614,559) (1,562,754)
Cash and cash equivalents at beginning of the year 10,643,229 16,320,500
------------ ------------
Cash and cash equivalents at end of the period $ 6,028,670 $ 14,757,746
============ ============
Supplemental disclosures:
Cash paid during the period for:
Interest $ 1,378,833 $ 1,856,084
Income taxes 133,189 288,576
Non-cash transactions
Transfer of loans to real estate owned -- 126,195
Transfer of loans to loans held for sale 7,360,525 --
The accompanying notes are an integral part of these consolidated financial statements.
- ----------------------------------------------------------------------------------------------------------------
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(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,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Weighted average shares outstanding - Basic 609,911 599,042 607,212 611,244
Effect of stock options N/A 18,978 N/A 15,128
Effect of non-vested stock awards N/A 3,108 N/A 2,318
------- ------- ------- -------
Net Effect of stock options and non-vested
stock awards N/A 22,086 N/A 17,446
Weighted average shares outstanding - Diluted 609,911 621,128 607,212 628,690
======= ======= ======= =======
Due to the fact that a net loss was incurred, there is no dilutive impact of the
options or stock awards.
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,
2004 2003 2004 2003
---- ---- ---- ----
Reported net income $(2,847,361) $94,037 $(2,683,985) 345,375
Pro forma impact (9,725) (9,725) (29,175) (29,175)
------------ ------- ----------- --------
Pro forma net income $(2,857,086) $84,312 (2,713,160) 316,200
============ ======= =========== ========
Reported basic earnings per common share $(4.67) $0.16 $(4.42) $0.56
Pro forma impact (0.02) (0.02) (0.03) (0.03)
------- ------ ------ ------
Pro forma basic earnings per common share (4.69) 0.14 (4.45) 0.53
======= ====== ====== ======
Reported diluted earnings per common share (4.67) 0.15 (4.42) 0.55
Pro forma impact (0.01) (0.01) (0.03) (0.03)
------- ------ ------ ------
Pro forma diluted earnings per common share $(4.68) $0.14 $(4.45) $0.52
======= ====== ====== ======
BASIS OF PRESENTATION: 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, 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 September 30, 2004
and December 31, 2003, management believes the Bank complied with all regulatory
capital requirements. At September 30, 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.
- --------------------------------------------------------------------------------
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 30,2004:
- -----------------
Total capital (to risk-
weighted assets) $ 10,818 12.70% $ 6,814 8.0% $ 8,518 10.0%
Tier 1 (core) capital (to
risk-weighted assets) $ 10,216 11.99% $ 3,408 4.0% $ 5,112 6.0%
Tier 1 (core) capital (to
adjusted total assets) $ 10,216 8.48% $ 4,819 4.0% $ 6,023 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 applying to the OTS for approval provided that (1) the
total amount of all capital at the institution (including the proposed capital
distribution) for the applicable calendar year does not exceed the institution's
net income for that year to date plus the institution's retained net income for
the preceding two years; (2) the institution will be well capitalized following
the proposed capital distributions; and, (3) certain other conditions are met.
In addition to the restriction described above, the Bank may not 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.
- --------------------------------------------------------------------------------
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,
2004 2003
--------- ---------
(Dollars in Thousands)
Beginning Balance ...................................... $1,014 $1,111
Provision for Loan Losses .............................. 540 690
Charge Offs ............................................ (751) (807)
Recoveries ............................................. 16 30
------ ------
Ending Balance ......................................... $819 $1,024
====== ======
The following table shows the components of non-performing assets at:
September 30, December 31,
2004 2003
------------ ------------
(Dollars in Thousands)
Non-Accrual Loans ................................. $754 $340
Loans 90 days or more past due
and still accruing interest ..................... 989 1,492
------ ------
Total Non-Performing Loans ...................... 1,743 1,832
------ ------
Other Real Estate Owned ........................... 45 234
Total Non-Performing Assets ....................... $1,788 $2,066
====== ======
Non-performing loans to total loans ............... 2.34% 2.24%
Non-Performing assets to total loans plus 2.39% 2.52%
other real estate owned ........................
Allowance for credit losses to total 45.83% 55.37%
non-performing loans ...........................
Loans 90 days or more past due and 1.01% 1.82%
not on non-accrual to total loans ..............
NOTE 3 - SUBSEQUENT EVENTS
On October 12, 2004, Lawrence Financial entered into an Agreement and
Plan of Merger with Oak Hill Financial, Inc. ("Oak Hill Financial") pursuant to
which Lawrence Financial will merge with and into Oak Hill Financial and each
share of Lawrence Financial common stock will be exchanged for either $23.75 in
cash or shares of Oak Hill Financial common stock. The merger is subject to
regulatory approval and the approval of Lawrence Financial shareholders.
- --------------------------------------------------------------------------------
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,
-------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
SIGNIFICANT RATIOS:
Net income (loss) to
Average total assets (9.15)% 0.28% (2.85)% 0.34%
Average stockholders' equity (81.88) 2.60 (25.17) 3.26
Net Interest Margin 3.80 4.02 3.93 4.07
Average net loans to average deposits 83.48 79.18 79.47 79.31
Average stockholders' equity to
average total assets 11.17 10.35 11.10 10.41
Capital ratios
Tier I capital - Bank Only 12.70 9.75 12.70 9.75
Risk-based capital - Bank Only 8.48 15.96 8.48 15.96
- -------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Earnings per weighted average share
Basic $ (4.67) 0.16 $ (4.42) 0.56
Diluted (4.67) 0.15 (4.42) 0.55
Weighted average shares outstanding
Basic 609,911 599,042 607,212 611,244
Diluted 609,911 621,128 607,212 628,690
Total shares outstanding at end of period 650,110 650,110 650,110 650,110
Cash dividends per share $ 0.07 0.07 $ 0.21 0.21
Book value per share at end of period $ 17.37 21.21 $ 17.37 21.21
Market price at end of period
Source: NASDAQ.com $ 22.00 23.00 $ 22.00 23.00
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.
- --------------------------------------------------------------------------------
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 and other banks. 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.
RECENT DEVELOPMENTS
On October 12, 2004, Lawrence Financial entered into an Agreement and
Plan of Merger with Oak Hill Financial, Inc. ("Oak Hill Financial") pursuant to
which Lawrence Financial will merge with and into Oak Hill Financial and each
share of Lawrence Financial common stock will be exchanged for either $23.75 in
cash or shares of Oak Hill Financial common stock. The merger is subject to
regulatory approval and the approval of Lawrence Financial shareholders.
- --------------------------------------------------------------------------------
13
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
Total assets decreased $5.2 million, or 4%, to $120.3 million at
September 30, 2004 when compared to the balances at December 31, 2003. At
September 30, 2004, net loans receivable had decreased $7.2 million, or 9%, when
compared to the balances at December 31, 2003. Direct and indirect consumer
loans increased $7.5 million, or 41%, real estate loans decreased by $2.5
million, or 6%, indirect mobile home loans decreased $14.3 million, or 98%, and
commercial loans increased $1.9 million, or 20% at September 30, 2004. The
allowance for loan losses at September 30, 2004 was $819,000. The growth in the
direct and indirect loan portfolio resulted primarily from the purchase of $5.0
million in auto loans, in addition to the origination of $1.7 million in
indirect auto loans. Indirect mobile home loans decreased as a they were deemed
available for sale at September 30, 2004 and written down to market value. The
sale of the indirect mobile home loan portfolio was a condition to the agreement
with Oak Hill Financial. The growth in the commercial loan portfolio was due
primarily to the origination of one commercial loan participation with a local
commercial bank. Lawrence Federal's long term investments, held in the form of
securities, decreased by $2.0 million or 8%, when comparing September 30, 2004
balances to December 31, 2003. During the first nine months of 2004 Lawrence
Financial's available cash and cash equivalents decreased to $6.0 million, a
decrease of $4.6 million, or 43%. This decrease was primarily due to the
increase in loan volume.
Other assets increased $1.5 million when compared to balances at
December 31, 2003. This was a direct result of the benefit for income tax
expense being recorded on the loss from the write down of the mobile home loan
portfolio.
Compared to December 31, 2003, deposits decreased $305,000 or 1%, to
$110.7 million at September 30, 2004.
Equity decreased $2.7 million, or 19%, to $11.3 million at September 30,
2004 when compared to December 31, 2003. During the period ended September 30,
2004, retained earnings decreased $2.8 million as a result of the net loss for
the period and decreased as a result of the payment of $135,000 in cash
dividends to the shareholders. In addition to these changes, accumulated other
comprehensive income decreased $27,000 as a result of the net unrealized
depreciation in the investments portfolio.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDING SEPTEMBER 30, 2004 AND 2003
GENERAL. For the three months ended September 30, Lawrence Financial
reported a net loss of $2.8 million for 2004 compared to net income of $94,000
for 2003. For the nine month period ended September 30, Lawrence Financial
reported a net loss of $2.7 million for 2004 compared to net income of $345,000
for 2003. The loss in 2004 was the result of writing down the indirect mobile
home loan portfolio to market value in connection with its sale. Return on
average assets was (9.15)% and (2.85)% for the third quarter and first nine
months of 2004, respectively, compared to 0.28% and 0.34% for the same two
periods in 2003. Return on average equity was (81.88)% and (25.17)% for the
third quarter and first nine months of 2004, respectively, compared to 2.60% and
3.26% for the same two periods in 2003. Net interest income decreased $127,000,
or 10%, during the third quarter and decreased $406,000, or 11%, for the nine
month period ending September 30. Noninterest income decreased $107,000, or 45%,
during the third quarter and $233,000, or 31%, for the nine month period ending
September 30. Offsetting the decrease in net interest income was a $15,000 or 8%
decrease in the provision for loan losses for the quarter ended September 30,
and a $150,000 or 22% decrease in the provision for loan losses for the nine
months ended September 30. Offsetting the decrease in net interest and
noninterest income was a $141,000, or 12%, decrease in noninterest expense for
the quarter ended September 30 and a $295,000, or 9%, decrease in noninterest
expense for the nine months ended September 30. The Company experienced a
$26,000 or 2% increase in salaries, wages and benefits during the first nine
months of 2004 when compared to the same period of 2003. This increase was a
result of the creation of the operation and proof areas within the Company's
banking subsidiary and 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 $225,000, or 44%, when compared to the same period in
2003, with $80,000 of the decrease directly related to
- --------------------------------------------------------------------------------
14
the costs incurred for preparation of the data processing conversion the Company
underwent in July 2003.
INTEREST INCOME. Interest income decreased $228,000, or 13%, for the
quarter compared to the same quarter in 2003 and decreased $896,000, or 16%, for
the first nine months of 2004 compared to the first nine months of 2003.
Interest income on loans decreased $284,000, or 18%, and decreased $974,000, or
19%, 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 as a result of a decrease in the yield on the portfolio. Interest
income on long-term investments increased $21,000, or 11%, for the quarter and
increased $78,000, or 11%, for the nine months ended September 30 primarily as a
result of a larger average balance being carried by the Company during 2004. The
average yield on interest-earning assets declined to 5.40% for the quarter and
5.53% for the nine months ended September 30, 2004, from 5.80% and 6.05% for the
same two periods in 2003, as lower yielding long term investments became a
higher percentage of interest earning assets.
INTEREST EXPENSE. Interest expense decreased $101,000, or 18%, for the
quarter compared to the same quarter in 2003 and decreased $491,000, or 26%, for
the first nine months of 2004 compared to the first nine months in 2003. The
decrease in interest expense for the quarter and nine months ending September
30, 2004, was a direct result of a decline in the rates paid on deposits. The
average cost of interest-bearing liabilities was 1.79% for the quarter and 1.79%
in the first nine months of 2004 compared to 2.00% and 2.14% for the same
periods 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.
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 third quarter of
2004, to the fourth quarter 2003 and the third quarter of 2003.
The provision for loan losses was $180,000 for the third quarter of 2004
which represents a decrease of $15,000, or 8%, from the provision of $195,000
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.
The Bank expensed $540,000 of provision for loan loss for the first nine
months of 2004, compared to $690,000 for the same period of 2003. While the
provision for loan loss 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 charge
off experiences.
During the nine month period ended September 30, 2004, the Company had
net charge-offs of approximately $735,000, compared to $777,000 for the nine
month period ended September 30, 2003. At September 30, 2004, the Company had a
ratio of Allowance for Loan Loss to gross loans of 1.00% compared to 1.20% on
the same date in 2003.
Non-performing assets totaled $1.79 million at September 30, 2004, or
1.50% of assets. Of the $1.79 million in non-performing assets, $989,000 were
loans which are 90 days or more past due and still accruing interest and
$754,000 were loans in a non-accrual status. Non-performing indirect mobile home
loans made up $173,000 of the loans that were 90 days or more past due and still
accruing interest and $254,000 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.
- --------------------------------------------------------------------------------
15
Allowance for loan losses totaled $819,000 at September 30, 2004 and
$1.0 million at September 30, 2003. At September 30, 2004, Lawrence Federal's
allowance for loan losses represented 1.10% 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 September
30, 2004.
- --------------------------------------------------------------------------------
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, 2004 to the same period in 2003 and the nine months ending
September 30, 2004 to the same period in 2003.
Quarters Ended
Dollar Percentage
09/30/04 09/30/03 Change Change
------------ ----------- ------------ -------------
(Dollars in Thousands)
Net securities gains (losses) ................... $ -- $ 9 $ (9) N/M
Service charges ................................. 119 152 (33) (22)%
Other ........................................... 11 75 (64) (85)%
----- ---- -----
Total ......................................... $ 130 $236 $(106) (45)%
===== ==== ======
There were no securities sold during the third quarter ended September
30, 2004 to create gains or losses. The decrease in service charge income for
the quarter was a direct result of the decrease in NSF and Overdraft fees as a
result of account holders maintaining their accounts. In the Other category
income earned on the cash surrender value of life insurance was down $16,000 for
the quarter ended September 30, 2004 when compared to the same period of 2003 as
well as other items experiencing various decreases.
Nine Months Ended
Dollar Percentage
09/30/04 09/30/03 Change Change
------------ ----------- ------------ -------------
(Dollars in Thousands)
Net securities gains (losses) ................... $ 75 $194 $(119) N/M
Service charges ................................. 349 378 (29) (8)%
Other ........................................... 83 168 (85) (51)%
----- ---- -----
Total ......................................... $ 507 $740 $(233) (32)%
===== ==== =====
Net securities gains recognized in the first nine months of 2003 were
not duplicated in the same period of 2004. There were no sales of securities
during the third quarter of 2004. During the first nine months of 2003,
management had determined that there were investments being held that should be
sold due to market conditions. These conditions were no longer present during
the same period in 2004, resulting in fewer sales of securities and the related
gains. The decrease in service charge income for the quarter was a direct result
of a decrease of $21,000 in NSF and Overdraft fees as a result of account
holders maintaining their accounts. The decrease in "Other" was primarily due to
a $47,000 decrease in income earned on the cash surrender value of bank owned
life insurance.
- --------------------------------------------------------------------------------
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, 2004 to the same period in 2003 and the nine months ending
September 30, 2004 to the same period in 2003.
Quarters Ended
Dollar Percentage
09/30/04 09/30/03 Change Change
--------- --------- -------- ------------
(Dollars in Thousands)
Salaries and benefits ............ $488 $504 $(16) (3)%
Deposit insurance premiums ....... 4 12 (8) (66)%
Occupancy and equipment .......... 100 131 (31) (24)%
Data processing .................. 96 153 (57) (37)%
Franchise tax .................... 33 35 (2) (6)%
Advertising expense .............. 19 14 5 36%
Professional fees ................ 79 77 2 3%
Other ............................ 198 232 (34) (15)%
--- --- ----
Total ...................... $1,017 $1,158 $(141) (12)%
====== ====== ======
Non-interest expense decreased $141,000, or 12%, for quarter ended
September 30, 2004, as compared to the same period in 2003. One of the primary
reasons for this involves the $57,000 decrease in expenses related to the data
processing function of the Bank. This is a result of the successful conversion
to a new data processor which was completed during the third quarter of 2003. In
the other expense category, the company has experienced decreases in: printing
and supplies; various expenses related to the collection of delinquent mobile
home loans; and other various non-interest expenses.
Nine Months Ended
Dollar Percentage
09/30/04 09/30/03 Change Change
--------- --------- -------- ------------
(Dollars in Thousands)
Salaries and benefits ............ $1,514 $1,488 $26 2%
Deposit insurance premiums ....... 13 42 (29) (69)%
Occupancy and equipment .......... 317 313 4 1%
Data processing .................. 285 510 (225) (44)%
Franchise tax .................... 102 103 (1) (1)%
Advertising expense .............. 61 64 (3) (5)%
Professional Fees ................ 240 243 (3) (1)%
Other ............................ 560 625 (65) (10)%
------ ------ -----
Total ...................... $3,092 $3,388 $(296) (9)%
====== ====== ======
Non-interest expense decreased $296,000, or 9%, for the nine months
ended September 30, 2004, as compared to the same period in 2003. The increase
in salaries and benefits for the nine months ended September 30, 2004 compared
to the same period in 2003 reflects the addition of employees in the loan
collection, loan review, internal audit and operations departments within the
Company's banking subsidiary. The decrease in data processing is the direct
result of the successful conversion of data processors which was completed
during the third quarter of 2003. In the other category the Company has also
experienced decreases in: printing and supplies; expenses directly related to
the collection of delinquent mobile home loans; and other non-interest expenses.
- -------------------------------------------------------------------------------
18
INCOME TAX EXPENSE. The provision (benefit) for income tax was $(1.5)
million for the three months ended September 30, 2004, compared to $23,000 in
the same period for 2003 and $(1.5) million for the nine months ended September
30, 2004, compared to $110,000 in the same period for 2003. The benefit in 2004
was a direct result of the loss on sale of mobile home loans and the net
operating loss generated by the company. The effective tax rate for the quarter
ended September 30, 2004 was 35.0% compared with 19.8% for the same period in
2003 and for the nine months ended September 30, 2004 was 35.0% compared with
24.1% for the same period in 2003.
- --------------------------------------------------------------------------------
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,
--------------------------------------------------------------------------
2004 2003
--------------------------------- ---------------------------------
(DOLLARS IN THOUSANDS) AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE YIELD/ BALANCE YIELD/
RATE RATE
--------- ---------- --------- --------- ---------- ---------
Interest-earning assets:
Loans (1) ......................... $ 79,928 $2,728 6.85% $ 95,030 $3,418 7.22%
Securities (2) .................... 25,490 439 3.67% 22,514 411 3.95%
Short term investments ........... 9,441 33 0.07% 9,154 39 0.09%
-------- -- -------- --
Interest-earning assets:
Loans (1) ........................ $ 81,441 $4,035 6.61% $92,498 $5,009 7.23%
Securities (2) ................... 25,821 688 3.82% 23,559 591 3.65%
Short term investments ........... 7,062 38 0.71% 9,672 56 0.78%
-------- -- -------- --
Total interest-earning assets ..... 114,324 4,761 5.53% 125,729 5,656 6.05%
Non-interest-earning assets ......... 11,321 9,974
-------- --------
Total assets ............... $125,645 $135,703
======== ========
Interest-bearing liabilities:
Deposits:
Passbook accounts ............. $ 27,354 101 0.50% $ 32,452 259 1.07%
NOW accounts .................. 19,767 173 1.17% 14,674 66 0.60%
Certificates of deposit ....... 55,360 1,100 2.65% 68,516 1,532 2.99%
-------- ----- -------- -----
Total deposits ............. 102,481 1,374 1.79% 116,633 1,864 2.14%
FHLB advances .................... -- -- -- -- -- --
FHLB advances .................... -- -- -- -- -- --
Total interest-bearing
liabilities ............. 102,481 1,374 1.79% 116,633 1,864 2.14%
Non-interest-bearing
liabilities ...................... 9,217 4,947
Total liabilities........... 111,698 121,580
Total retained earnings ............. 13,947 14,123
-------- --------
Total liabilities and
retained earnings........ $125,645 $135,703
======== ========
Net interest-earning assets ...... $ 11,843 $ 9,097
======== ========
Net interest income/interest
rate spread (3) ............... $3,387 3.74% $3,792 3.91%
====== ======
Net interest margin (4) .......... 3.93% 4.07%
Ratio of interest-earning assets
to interest-bearing
liabilities ................... 111.56% 107.79%
- -----------------------------------
(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 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 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, 2004, 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.
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 14,449 (2,700) (16)% 11.59% (168)
300 12,969 (4,038) (24)% 10.50% (265)
200 14,491 (2,516) (15)% 11.54% (162)
100 15,871 (1,136) (7)% 12.44% (71)
Static 17,007 -- -- 13.15% --
(100) 17,670 663 4% 13.53% 38
(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.
- --------------------------------------------------------------------------------
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, 2004, cash and
short-term investments totaled $6.0 million. Securities classified as
available-for-sale totaled $24.1 million.
Funding is obtained primarily from activity involving deposit accounts
and Federal Home Loan Bank advances. In the first nine months of 2004 Lawrence
Federal experienced a net decrease in total deposits of $2.8 million since
December 31, 2003 compared to a decrease of $2.9 million for the same period in
2003. In addition, at September 30, 2004, 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. 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, 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 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
23
LAWRENCE FINANCIAL HOLDINGS, INC.
FORM 10-QSB
Quarter ended September 30, 2004
PART II - OTHER INFORMATION
Item 1- Legal Proceedings:
There are no matters required to be reported under this item.
Item 2- Unregistered Sales of Equity Securities and Use of Proceeds:
- ------------------------------- ------------------ ---------------- ------------------------------ ---------------------------------
(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: July 1, 2004
through July 31, 2004 0 N/A N/A 15,000
- ------------------------------- ------------------ ---------------- ------------------------------ ---------------------------------
Month #2: August 1, 2004
through August 31, 2004 0 N/A N/A 15,000
- ------------------------------- ------------------ ---------------- ------------------------------ ---------------------------------
Month #3: September 1, 2004
through September 30, 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 were none to be reported under this item.
Item 5- Other Information:
There are no matters required to be reported under this item.
Item 6- Exhibits:
(a) Exhibits -
2.1 - Agreement and Plan of Merger dated as of October 12, 2004
between Oak Hill Financial, Inc. and Lawrence Financial
Holdings, Inc. (incorporated by reference to exhibit 2.1
to the Form 8-K filed on October 15, 2004)
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
- --------------------------------------------------------------------------------
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 15, 2004 /s/ Jack L. Blair
------------------------------- ----------------------------------------
Jack L. Blair
President and Chief Executive Officer
Date: November 15, 2004 /s/ RobRoy Walters
------------------------------- ----------------------------------------
RobRoy Walters
Executive Vice President and Chief
Financial Officer
- --------------------------------------------------------------------------------
25