<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-28162
LENOX BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
Ohio 31-1445959
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
5255 Beech Street, St. Bernard, Ohio 45217
(Address of principal executive offices) (Zip Code)
(513) 242-6900
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changes since last report)
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 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 268,001 shares of common stock,
par value $0.01 per share, were outstanding as of August 12, 1999.
Transitional Small Business Disclosure Format (check one): Yes No X
---- ----
1
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LENOX BANCORP, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
Page
----
PART I. FINANCIAL INFORMATION............................................3
Item 1. Financial Statements-Unaudited......................................3
Consolidated Balance Sheets at
June 30, 1999 (unaudited) and December 31, 1998..................3
Consolidated Statements of Income - For the Three
Months and Six Months Ended June 30, 1999 and 1998 (unaudited)...4
Consolidated Statements of Cash Flows - For the
Six Months Ended June 30, 1999 and 1998 (unaudited).............6
Notes to Unaudited Consolidated Financial Statements.............7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................7
PART II: OTHER INFORMATION...............................................16
Item 1. Legal Proceedings..............................................16
Item 2. Changes in Securities and Use of Proceeds......................16
Item 3. Defaults Upon Senior Securities................................16
Item 4. Submission of Matters to a Vote of Security Holders............16
Item 5. Other Information..............................................16
Item 6. Exhibits and Reports on Form 8-K...............................16
SIGNATURES..................................................................18
2
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PART I. FINANCIAL INFORMATION
LENOX BANCORP, INC.
JUNE 30, 1999
Item 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
LENOX BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
--------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks................................................. $ 417 $ 2,350
Certificates of deposit................................................. 188 183
Investment securities - available for sale, at fair value (amortized
cost of $2,702 and $3,303 at June 30, 1999 and December 31, 1998).... 2,643 3,301
Mortgage-back securities - available for sale, at fair value (amortized
cost of $654 and $799 at June 30, 1999 and December 31, 1998).... 653 805
Collateralized mortgage obligations - available for sale, at fair value
(amortized cost of $1,035 and $2,167 at June 30, 1999 and
December 31, 1998).................................................... 1,013 2,179
Collateralized mortgage obligations - held to maturity, (fair value of
$4,630 and $5,992 at June 30, 1999 and December 31, 1998)............. 4,558 5,925
Loans receivable, net................................................... 54,640 38,308
Loans held for sale - at lower of cost or market........................ - 220
Accrued interest receivable:
Loans............................................................... 277 161
Mortgage-backed securities.......................................... 4 5
Collateralized mortgage obligation.................................. 28 40
Investments and certificates of deposit............................. 50 63
Property and equipment, net............................................. 535 564
Federal Home Loan Bank stock - at cost.................................. 1,221 822
Prepaid expenses and other assets....................................... 235 157
Prepaid federal income taxes............................................ 40 6
------- -------
Total assets...................................................... $66,502 $55,089
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Savings, club and other accounts.................................... $ 5,372 $ 5,113
Money market and NOW accounts....................................... 4,649 4,813
Certificate accounts................................................ 27,228 23,141
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Total deposits.................................................... 37,249 33,067
Advances from Federal Home Loan Bank.................................. 24,115 14,440
Advance payments by borrowers for taxes and insurance................. 121 162
Accrued expenses...................................................... 82 161
Deferred federal income taxes......................................... 79 112
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Total liabilities................................................. $61,646 $47,942
======= =======
Stockholders' Equity:
Common stock - no par value: 2,000,000 authorized, 425,677 issued
and 277,525 outstanding at June 30, 1999 and 396,910 outstanding
at December 31, 1998................................................ $ -- $ --
Additional paid in capital............................................ 3,743 3,743
Retained earnings - substantially restricted.......................... 4,197 4,216
Unearned ESOP shares.................................................. (240) (240)
Share acquired for Stock Incentive Plan............................... (99) (112)
Treasury stock 148,152 shares at June 30, 1999 and 28,767 shares at
December 31, 1998................................................... (2,691) (471)
Unrealized gain on available for sale securities net of tax of $28
and $1 at June 30, 1999 and December 31, 1998........................ (54) 11
------- -------
Total stockholders' equity........................................ 4,856 7,147
------- -------
Total liabilities and stockholders' equity............................ $66,502 $55,089
======= =======
</TABLE>
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<TABLE>
<CAPTION>
LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED
JUNE 30,
------------------------
1999 1998
--------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C>
INTEREST INCOME AND DIVIDEND INCOME
Loans............................................ $ 890 $ 727
Mortgage-backed securities....................... 10 17
Collateralized mortgage obligations.............. 81 138
Investments and interest bearing deposits........ 46 75
FHLB stock dividends............................. 16 14
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Total.......................................... 1,043 971
INTEREST EXPENSE
Deposits......................................... 420 385
Borrowed money and capitalized leases............ 237 216
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Total.......................................... 657 601
Net interest income before provision for loan losses 386 370
Provision for loan losses.......................... 9 5
- -
Net interest income after provision for loan losses 377 365
OTHER INCOME
Service fee income............................... 27 37
Gain on sale of loans............................ 27 24
Gain on sale of investments...................... 22 --
------- -------
Total.......................................... 76 61
GENERAL AND ADMINISTRATIVE EXPENSES
Compensation and employee benefits............... 165 154
Occupancy and equipment.......................... 53 51
Federal insurance premium........................ 5 5
Franchise taxes.................................. 24 21
Other expenses................................... 155 115
------- -------
Total.......................................... 402 346
Income before provision for income taxes......... 51 80
Provision for income taxes......................... 20 27
------- -------
Net income....................................... $ 31 $ 53
====== ======
Basic earnings per share......................... $0.09 $0.13
===== =====
Diluted earnings per share....................... $0.09 $0.13
===== =====
</TABLE>
4
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<TABLE>
<CAPTION>
LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30,
------------------------
1999 1998
--------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
------------------------------
<S> <C> <C>
INTEREST INCOME AND DIVIDEND INCOME
Loans............................................ $ 1,625 $ 1,496
Mortgage-backed securities....................... 21 36
Collateralized mortgage obligations.............. 166 222
Investments and interest-bearing deposits........ 115 158
FHLB stock dividends............................. 30 27
----------- -----------
Total....................................... 1,957 1,939
INTEREST EXPENSE
Deposits......................................... 818 752
Borrowed money and capitalized leases............ 438 417
----------- -----------
Total....................................... 1,256 1,169
Net interest income before provision for loan losses 701 770
Provision for loan losses.......................... 18 5
----------- -----------
Net interest income after provision for loan losses 683 765
OTHER INCOME
Service fee income............................... 61 73
Gain on sale of loans............................ 47 51
Gain on sale of investments...................... 22 --
----------- -----------
Total....................................... 130 124
GENERAL AND ADMINISTRATIVE EXPENSES
Compensation and employee benefits............... 327 316
Occupancy and equipment.......................... 108 104
Federal insurance premiums....................... 10 10
Franchise taxes.................................. 45 40
Other expenses................................... 285 241
----------- -----------
Total....................................... 775 711
Income before provision for income taxes......... 38 178
Provision for income taxes......................... 17 60
----------- -----------
Net income....................................... $ 21 $ 118
=========== ===========
Basic earnings per share........................... $ 0.06 $ 0.3
=========== ===========
Diluted earnings per share......................... $ 0.06 $ 0.3
=========== ===========
</TABLE>
5
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<TABLE>
<CAPTION>
LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
JUNE 30, 1999
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
--------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 21 $ 118
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization................................. 72 31
Provision (credit) for losses on loans........................ 18 5
Amortization of deferred loan fees............................ (11) (25)
Deferred loan origination fees (cost)......................... (54) 15
FHLB stock dividends.......................................... (30) (27)
Gain on sale of investments................................... (22) --
Gain on sale of loans......................................... (47) (51)
Amortization of stock incentive plan award.................... 13 34
ESOP expense, net of tax benefit.............................. 33 22
Effect of change in operating assets and liabilities:
Accrued interest receivable................................. (90) (9)
Prepaid expenses............................................ (78) (89)
Advances by borrowers for taxes and insurance............... (41) (79)
Accrued expenses............................................ (79) 31
Accrued federal income taxes................................ (34) (44)
Deferred federal income taxes............................... (33) 14
------------ -----------
Net cash provided (used) by operating activities............ (362) (54)
Cash flows from investing activities:
Property and equipment additions................................ (6) (25)
Repayments of mortgage-backed securities........................ 140 55
Purchase of certificates of deposits............................ (5) (5)
Loan disbursements.............................................. (25,497) (9,793)
Loan principal repayments....................................... 6,902 7,142
Proceeds from sale of investments............................... 1,154 --
Proceeds from sale of mortgage loans............................ 2,605 3,634
Purchase of FHLB stock.......................................... (399) (141)
Purchase of investments - HTM................................... -- (1,858)
Purchase of investments - AFS................................... -- (2,167)
Maturity on investments - HTM.............................. 1,337 651
Maturity of investments - AFS.............................. 600 1,950
------------ -----------
Net cash used by investing activities...................... (13,169) (557)
Cash flows from financing activities:
Net increase (decrease) in deposits............................. 4,182 1,211
Borrowings from FHLB............................................ 20,775 4,050
Repayments of FHLB advances..................................... (11,100) (2,159)
Purchase Treasury Stock......................................... (2,223) (63)
Reissue Treasury Stock.......................................... 4 --
Dividends paid.................................................. (40) (39)
------------ -----------
Net cash provided by financing activities..................... 11,598 3,000
------------ -----------
Increase (decrease) in cash and cash equivalents.................. (1,933) 2,389
Cash and cash equivalents at beginning of period.................. 2,350 664
------------ -----------
Cash and cash equivalents at end of period........................ $ 417 $ 3,053
============ ===========
Supplemental disclosure:
Cash paid for:
Interest expense.............................................. $ 1,254 $ 1,156
Income taxes.................................................. 51 105
</TABLE>
6
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LENOX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED JUNE 30, 1999 AND 1998
1. Principles of Consolidation
---------------------------
The consolidated unaudited financial statements include the accounts of
Lenox Bancorp, Inc. ("Lenox" or the "Company") and its wholly-owned subsidiary
Lenox Savings Bank (the "Bank"). All significant intercompany transactions have
been eliminated in consolidation. The investment in the Bank on Lenox's
financial statements is carried at the parent company's equity in the underlying
net assets.
The consolidated balance sheet as of June 30, 1999, and related
consolidated statement of income and cash flows for the three and six months
ending June 30, 1999, and 1998 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial statements have
been included. Such adjustments consisted of normal recurring items. Interim
results are not necessarily indicated of results for a full year.
The financial statements and notes are presented as permitted by Form
10-QSB and Regulation S-B. The interim statements are unaudited and should be
read in conjunction with the financial statements and notes thereto contained in
the Bank's annual report for the year ended dated December 31, 1998.
2. Earnings Per Share
------------------
The net income for the three months ended June 30, 1999, was $.09 per
share or $31,000 on an average of 330,077 shares, compared to net income for the
quarter ending June 30, 1998, of $53,000 or $.13 per share on an average of
396,729 shares. Earnings for the six months ending June 30, 1999 was $21,000 or
$.06 per share on an average of 347,386 shares compared to $118,000 or $.30 on
an average of 397,582 shares for the six months ended June 30, 1998.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following analysis discusses changes in the financial condition and
results of operations at and for the three and six months ended June 30, 1999,
and should be read in conjunction with the Company's Consolidated Financial
Statements and the notes thereto, appearing in Part I, Item 1 of this document.
7
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Forward-Looking Statements
- --------------------------
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company and the Bank include, but are not limited to, changes
in: interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
The Company does not undertake -- and specifically disclaims any
obligation -- to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Management Strategy
- -------------------
The Bank's current strategic plan is to enhance its long-term
profitability, reduce the level of interest rate risk and improve market share.
Management is committed to achieving a substantial increase in the Bank's return
on equity within the next three years. Improving earnings and reducing capital
levels are the two important steps toward meeting this objective. Capital levels
have been reduced through the Company's repurchase program, which resulted in
approximately 120,000 shares being repurchased this quarter. Asset growth has
increased over 40% since the Bank's conversion from mutual to stock form in
1996. Asset growth is expected to continue due to special loan programs designed
for the Bank's niche market with Procter & Gamble employees, expanding the loan
portfolio to include multi-family lending and attracting new customers through
the Bank's new branch opened in October 1997. The Bank also intends to enhance
profitability by continuing to seek means of increasing non-interest income
through the generation of transaction fees, commissions and selling loans in the
secondary market. Finally, the Bank intends to continue to seek to reduce cost.
Management's committed to its goal of enhancing shareholder value through
improving profitability, reducing interest rate risk and increasing market share
and believes that the actions it has taken to date and its future strategic plan
will enhance the long-term profitability of the Company.
8
<PAGE> 9
Comparison of Financial Condition at June 30, 1999 and December 31, 1998
- ------------------------------------------------------------------------
ASSETS. Total assets increased by $11.4 million, or 20.7%, to $66.5
------
million at June 30, 1999 from $55.1 million at December 31, 1998. This increase
was due to a $16.3 million, or 42.6%, increase in loans receivable from $38.3
million at December 31, 1998, to $54.6 million at June 30, 1999. This was due to
an increase of $10.9 million, or 32.8%, in one- to four-family loans from $33.3
million at December 31, 1998, to $ 44.2 million at June 30, 1999, and an
increase of $3.8 million, or 382.9%, in multi-family loans from $1.0 million to
$4.8 million. The increase in loans resulted from management's decision to grow
the balance sheet to enhance future profits. Federal Home Loan Bank (the "FHLB")
stock increased $399,000, or 48.5%, increasing from $822,000 at December 31,
1998, to $1.2 million at June 30, 1999, resulting from an increase in FHLB
advances. The increase in assets due to increased loans was offset by a $1.9
million decrease in cash and due from banks, from $2.3 million at December 31,
1998, to $417,000 at June 30, 1999, as the cash was used to finance the loans
made. The increase in assets was also offset by a $805,000 decrease in
investments and mortgage-backed securities to $3.5 million at June 30, 1999,
from $4.3 million at December 31, 1998, due to principal payments and $600,000
in investment securities being called. Collateralized Mortgage Obligations,
("CMOs") decreased $2.5 million, or 31.3%, to $5.6 million at June 30, 1999 from
$8.1 million at December 31, 1998, from the sale of $1.2 million in CMOs held
available for sale and principal repayments on both available for sale and held
to maturity CMOs.
LIABILITIES. Total liabilities increased by $13.7 million, or 28.6%, from
-----------
$47.9 million at December 31, 1998 to $61.6 million at June 30, 1999, primarily
due to an increase in advances from the FHLB of $9.7 million, or 67.0%, from
$14.4 million at December 31, 1998 to $24.1 million at June 30, 1999. The
advances were borrowed on a short term basis to fund asset growth while lowering
the cost of funds. Deposits increased $4.1 million or 12.6% to $37.2 million at
June 30, 1999 from $33.1 million at December 31, 1998. This increase in deposits
was primarily due to a $4.1 million increase in certificates of deposits to
$27.2 million at June 30, 1999 from $23.1 million at December 31, 1998 resulting
from an aggressive approach by management to attract deposits for loan demand by
increasing rates on current products. Savings and other accounts also increased
$259,000 to $5.4 million at June 30, 1999, from $5.1 million at December 31,
1998. These increases were offset by a reduction of $164,000 in Money Market and
NOW accounts from $4.8 million at December 31, 1998 to $4.6 million at June 30,
1999.
TERMINATION OF LEASEHOLD IMPROVEMENTS. In July 1999 Procter and Gamble
----------------------------------------
("P&G") advised the Company that it will not renew the Company's lease for its
main office in St. Bernard, Ohio, when the lease becomes due on December 31,
1999. Management is currently seeking alternative office space in and around the
St. Bernard, Ohio area and is confident that a new location will be found at or
below the cost of the Company's current lease with P&G prior to December 31,
1999; however, no assurance can be given that acceptable office space will be
found or that the Company's non-interest expense will not increase as a result
of the change in office location. As of July 31, 1999 the remaining net book
value on the leasehold improvements totaled $165,000. As per the lease
agreement, P&G will reimburse the Company an estimated $22,000 for the leasehold
improvements at the lease termination date. The Company anticipates it will
record, in the third quarter of 1999, an after-tax charge to earnings of $91,000
to record the impairment of leasehold improvements.
9
<PAGE> 10
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $2.2 million or 32.1%
--------------------
from $7.1 million at December 31, 1998, to $4.9 million at June 30, 1999. The
decrease was primarily due to the stock repurchase of 119,640 shares of the
Company's outstanding common stock which totaled $2.2 million, a decrease in
market value on securities of $65,000, net of taxes, and the payment of a
quarterly dividend. The repurchase of the Company's outstanding common stock,
completed in June 1999, was an important step in increasing the return on equity
over the next three years.
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of funds
--------------------------------
are deposits, FHLB advances, principal and interest payments on loans and loan
sales in the secondary market. While maturities and scheduled amortization of
loans are predictable sources of funds, deposit flow and mortgage prepayments
are strongly influenced by changes in general interest rates, economic
conditions and competition.
The primary investment activity of the Company for the six months ended
June 30, 1999, was the origination of mortgage and consumer loans in the amount
of $25.5 million. The most significant source of funds for the six months ending
June 30, 1999, was the borrowing of FHLB advances totaling $20.8 million. Also,
the repayment of loans totaled $6.9 million for the six months ended June 30,
1999.
The Bank is required to maintain a minimum level of liquidity (net cash,
short term and marketable assets divided by total withdrawable deposits and
short term liabilities), as defined by the Federal Deposit Insurance Corporation
("FDIC"). The Bank's liquidity at June 30, 1999, was 9.6%. The Bank's most
liquid assets are cash, federal funds sold, and marketable securities. The
levels of the Bank's liquid assets are dependent on the Bank's operation,
financing, lending and investing activities during any given period. At June 30,
1999, assets qualifying for short term liquidity, including cash and short term
investment, totaled $4.9 million. To increase the Bank's liquidity level,
management converted the CMOs classified as held to maturity to available for
sale as of July 1, 1999, as permitted under FASB, with SFAS No. 133, amended by
SFAS No. 137.
At June 30, 1999, the Bank's capital exceeded all the capital requirements
of the FDIC, which are 4% for tier I capital and Tier II of 8%. The Bank's tier
1 leverage and total capital to risk-weighted capital ratios were 7.7% and
13.8%, respectively.
Comprehensive income (loss) for the six months ending June 30, 1999, and
1998 was ($11,000) and $146,000, respectively. The difference between net income
and comprehensive income consists solely of the effect of unrealized gain and
losses, net of taxes, on available for sale securities.
10
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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH ENDED JUNE 30,
- ----------------------------------------------------------------------
1999 AND 1998.
- --------------
GENERAL. The Company reported net income of $31,000 for the three months
-------
ending June 30, 1999, which represents a $22,000 decrease from $53,000 of net
income reported for the three months ended June 30, 1998. This decrease was
attributable to a decrease in the Bank's net interest margin due to refinancings
due to a lower interest rate environment, whereas the yields on deposits have
only decreased slightly. Additionally, the Bank's general and administrative
expenses increased from $346,000 for the three months ended June 30, 1998 to
$402,000 for the same period ended June 30, 1999. This increase in general and
administrative expenses was primarily attributable to additional legal and
professional expenses related to the Company's annual meeting.
INTEREST INCOME AND DIVIDEND INCOME. Interest income and dividend income
------------------------------------
for the three months ended June 30, 1999 was $1.0 million compared to $971,000
for the three months ended June 30, 1998, an increase of $72,000 or 7.4%. The
increase was primarily due to the increase in loan production, primarily the
origination of adjustable rate loans, increasing the average balance for the
three months ended June 30, 1999 to $44.9 million from $33.3 million for the
same period ended June 30, 1998, a $11.6 million or a 34.8% increase. However,
such increase was offset by a decrease in the average yield from 7.26% on
interest earning assets for the three months ended June 30, 1998 to a yield of
6.86% for the three months ended June 30, 1999 due to a lower interest rate
environment. This increase in loan interest was offset by a decrease of income
from the CMO portfolio.
INTEREST EXPENSE. Interest expense for the three months ended June 30,
-----------------
1999, was $657,000 compared to $601,000 for the three months ended June 30,
1998, an increase of $56,000, or 9.3%, due to the increase in deposits and
borrowings from the FHLB to fund the increase in loan demand. Deposits interest
increased $35,000, or 9.1%, from $385,000 for the three months ended June 30,
1998 to $420,000 for the three months ended June 30, 1999. The increase in the
interest earned on deposits was offset by a decrease in the average yield from
4.58% for the three months ended June 30, 1998 to a yield of 4.45% for the three
months ended June 30, 1999. The interest expense on borrowed fund increased
$21,000 from $216,000 for the three months ended June 30, 1998 to $237,000 for
the three months ended June 30, 1999.
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. Net interest income
----------------------------------------------------
after provision for loan losses increased $12,000, or 3.3%, for the three months
ended June 30, 1999 to $377,000 from $365,000 for the three months ended June
30, 1998. This increase takes into accounts an increase of $4,000 provision for
loan losses for the three months ending June 30, 1999, to $9,000 compared to
$5,000 for the three months ended June 30, 1998, due to an increase in the loan
portfolio. The increase in loan loss reserve is relative to the increase in
lending.
OTHER INCOME. Other income increased $15,000, or 24.6%, for the three
------------
months ended June 30, 1999 to $76,000 from $61,000 for the three months ended
June 30, 1998. This increase was primarily due to the gain on the sale of
investments of $22,000 for the three months ended June 30, 1999, where there
were no sales for the same period ended June 30, 1998. The proceeds from the
sale of investments was used to fund the loan demand. The gain on the sale of
loans for the three
11
<PAGE> 12
months ending June 30, 1999, was $27,000 compared to $24,000 or a 12.5% increase
from the sale of loans for the same period ending June 30, 1998. These increases
were offset by a reduction in service fee income of $10,000 or 27% from $37,000
for the three months ended June 30, 1998, compared to $27,000 for the three
months ended June 30, 1999. The reduction in service fee income is largely
related to a reduction in loan commitment fees and a reduction in debit card
income.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
------------------------------------
for the three months ended June 30, 1999, were $402,000 compared to $346,000 for
the three months ended June 30, 1998, an increase of $56,000 or 16.2%. The
increase was primarily due to other expenses which increased $40,000 or 34.8%
from $115,000 for the three months ended June 30, 1998 to $155,000 for the three
months ended June 30, 1999, primarily attributable to additional expenses
related to the Company's annual meeting. Other expenses include legal fees,
other professional fees, ATM expense, now account servicing, payroll tax,
postage and telephone expense. The compensation and employee benefits increased
$11,000, or 7.1% due normal increases and the timing of the salary expenses.
INCOME TAXES. Income taxes for the three months ended June 30, 1999,
-------------
decreased $7,000 to $20,000 for the three months ended June 30, 1999 from
$27,000 for the three months ending June 30, 1998, because of a reduction in
pre-tax earnings. Net income before taxes was $80,000 for the three months ended
June 30, 1998 compared to $51,000 for the same period ending June 30, 1999.
Taxes are calculated based on net income less the employee stock ownership plan
expenses as required by Statement of Position ("SOP") 93-6.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
- --------------------------------------------------------------------------------
1998.
- -----
GENERAL. The Company reported net income of $21,000 for the six months
-------
ended June 30, 1999, which represents a $97,000 decrease from $118,000 of net
income reported for the six months ended June 30, 1998. This decrease was
attributable to a decrease in the Bank's net interest margin due to refinancings
due to a lower interest rate environment, whereas the yields on deposits have
only decreased slightly. Net income also decreased due to the prepayment of
mortgages underlying a portion of the Company's CMO portfolio, resulted in the
Company having to amortize premiums. The Company anticipates, during the second
half of fiscal 1999, accreting discounts on additional CMOs in the portfolio
that will offset the premium amortization it experienced. Additionally, the
Bank's general and administrative expenses increased to $775,000 for the six
months ended June 30, 1999, from $711,000 for the same period ended June 30,
1998. This increase in general and administrative expenses was primarily
attributable to additional expenses related to the Company's annual meeting.
INTEREST INCOME AND DIVIDEND INCOME. Interest income and dividend income
------------------------------------
for the six months ended June 30, 1999, increased $18,000, or 0.9%, to $2.0
million from $1.9 million for the six months ended June 30, 1998, due to the
increase in the average earning assets, which increased from $52.6 million for
the six months ended June 30, 1998, to $ 57.6 million for the six months ended
June 30, 1999 due to increased lending, primarily the origination of
adjustable-rate loans. This increase was offset by a decrease in the average
yield from 7.38% for the six months ended June
12
<PAGE> 13
30, 1998 to 6.79% for the six months ended June 30, 1999. The decrease in yield
on earning assets was primarily a result of loan customers refinancing due to a
lower interest rate environment and the amortization of the premiums on a
portion of the Bank's CMO portfolio were accelerated due to increased prepayment
speeds. The Bank does anticipate that discounts associated with CMO portfolio
will also accelerate in the second half of this fiscal year.
INTEREST EXPENSE. Interest expense for the six months ended June 30, 1999,
----------------
was $1.3 million compared to $1.2 million for the six months ended June 30,
1998, an increase of $87,000, or 7.4%, due to the increase in deposits and
borrowings from the FHLB to fund the increase in loan demand. Interest on
deposits increased $66,000, or 8.8%, to $818,000 for the six months ended June
30, 1999 from $752,000 for the six months ended June 30, 1998. This increase was
due to a $4.3 million increase in the average balance of deposits from $32.6
million for the six months ended June 30, 1998 to $36.3 million for the six
months ended June 30, 1999. Such increase was offset by a 9 basis point decrease
in the average yield from 4.66% for the six months ended June 30, 1998 to 4.57%
for the six months ended June 30, 1999. The interest expense on borrowed funds
increased $21,000, or 5.0%, to $438,000 for the six months ended June 30, 1999
from $417,000 for the six months ended June 30, 1998.
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. Net interest income
-----------------------------------------------------
after provision for loan losses decreased $82,000, or 10.7%, for the six months
ended June 30, 1999 to $683,000 from $765,000 for the six months ended June 30,
1998. This decrease takes into accounts an increase of $13,000 provision for
loan losses for the six months ended June 30, 1999, to $18,000 compared to
$5,000 for the six months ended June 30, 1998, due to an increase in the loan
portfolio and the additional risks associated with increased multi-family
lending. The Bank has maintained the same percentage of reserves to loans from
0.15% as of June 30, 1998 as compared to 0.15% as of June 30, 1999, as past due
loans more than 90 days dropped from $126,000 at June 30, 1998 to $69,000 at
June 30, 1999.
OTHER INCOME. Other income increased $6,000 or 4.8% for the six months
-------------
ended June 30, 1999, to $130,000 from $124,000 for the six months ended June 30,
1998. This increase was primarily due to the gain on the sale of investments of
$22,000 for the six months ended June 30, 1999, where there were no sales for
the same period ended June 30, 1998. These same investments funded loans
resulting in a higher yield. This increase was reduced by the reduction in gain
on the sale of loans for the six months ending June 30, 1999 of $4,000, or 7.8%,
to $47,000 from $51,000 for the same period ending June 30, 1998. Loan sales for
the six months ended June 30, 1998 was $3.6 million compared to $2.6 million for
the six months ended June 30, 1999. Other income was further reduced by the
reduction in service fee income of $12,000, or 15.4%, from $73,000 for the six
months ended June 30, 1998 compared to $61,000 for the six months ended June 30,
1999. The reduction in service fee income is largely related to a reduction in
loan commitment fees and a reduction in debit card income.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
------------------------------------
for the six months ended June 30, 1999, were $775,000 compared to $711,000 for
the six months ended June 30, 1998, an increase of $64,000 or 9.0%. The increase
was primarily due to an increase of $44,000, or 18.3%, increase in other
expenses from $241,000 for the six months ended June 30, 1998, to
13
<PAGE> 14
$285,000 for the six months ended June 30, 1999, due to additional expenses
related to the Company's annual meeting. In addition to other expenses,
compensation and employee benefits increased $11,000 or 3.5% from $316,000 for
the six months ended June 30, 1998, to $327,000 for the six months ended June
30, 1999, due to normal salary adjustments.
INCOME TAXES. Income taxes for the six months ended June 30, 1999,
-------------
decreased $43,000 to $17,000 for the six months ended June 30, 1999, from
$60,000 for the six months ending June 30, 1998, because of a reduction in
pre-tax earnings. Net income before taxes was $178,000 for the six months ended
June 30, 1998, compared to $38,000 for the same period ending June 30, 1999.
Taxes are calculated based on net income less employee stock ownership plan
expenses as required by SOP 93-6.
RECENT ACCOUNTING PRONOUNCEMENTS.
--------------------------------
In June 1997, the FASB issued SFAS No. 131, 'Disclosure about Segments of
an Enterprise and Related Information," which significantly changed the way that
public business enterprises report information about operating segments in
annual and interim financial statements issued to shareholders. SFAS No. 131
uses a 'management approach' to disclose financial and descriptive information
about an enterprise's reportable operating segments which is based on
management's method for making operating decisions and assessing performances.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. There was no effect from the adoption of this pronouncement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes for derivative
instruments, including derivative instruments imbedded in other contracts, and
for hedging activities. It requires that an entire recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
YEAR 2000 COMPLIANCE.
--------------------
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed without considering the impact of
the upcoming change in the century. If not corrected, many computer applications
and systems could fail or create erroneous results by or at the 'Year 2000.' The
Bank primarily utilizes a third party vendor and such vendor's proprietary
software to process its electronic data. The third party data processor vender
has modified, upgraded or replaced its computer software applications and
systems as necessary to accommodate the Year 2000 dating changes necessary to
permit correct recording of year dates for 2000 or later years. The third party
vendors also have engaged various consultants to review its Year 2000 issues and
has implemented a Year 2000 compliance program, and deemed to be in compliance.
The Bank has representation from its primary third party data processing vendor
that it has completed all of the Year 2000 problems in its software and is Year
2000 compliant. The Bank has also implemented its Year 2000 plan and tested its
internal system for compliance status.
14
<PAGE> 15
The Bank's operations may also be affected by the Year 2000 compliance of
its significant suppliers and other vendors, including those vendors that
provide non-informational and technology systems. In the event that the Bank's
significant suppliers or other vendors prove not to be Year 2000 compliant, the
Bank has prepared a contingency plan in the event there are any system
interruptions. There can be no assurance, however, that such plan or the
performances by any of the Bank's suppliers will be effective to remedy all
potential problems. In the worst case scenario, there could be an excess amount
of withdrawal requests created by depositor concerns over Year 2000 failures and
the Bank could lose communication with the data processing center. However, the
Bank's contingency plan covers both scenarios.
The Company has upgraded its technology system in addition to implementing
its Year 2000 policy. The Bank has held that the cost arising from Year 2000
issues will not materially impact the institution, and as June 30, 1999, the
Bank has incurred cost of approximately $17,000. The current budget for Year
2000 issues is $20,000 but is not limited to that amount. The Bank's systems
have been tested and appear to be Year 2000 compliant, but additional cost may
be incurred in the education of the Bank's customers. Lenox has developed a
customer awareness plan for all customers which begins in August and will
continue throughout the year. After evaluating the customer base and because
substantially all of the Bank's borrowers are individuals rather than commercial
enterprises, management believes that Year 2000 issues will not materially
impair the ability of the Bank's borrowers to repay their debts.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
The Company is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of
business. Such routine legal proceedings, in the aggregate, are
believed by management to be immaterial to the Company's financial
condition or results of operation.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
The Company entered into a Stockholder Protection Rights Agreement,
dated as of May 5, 1999, between with The Fifth Third Bank, as Right
Agent (the "Rights Agreement"). Under the Rights Agreement each
stockholder of record as of May 27, 1999 will receive a dividend of
one right ("Right") for each outstanding share of common stock, no
par value of the Company (the "Common Stock") they own. Each Right
entitles the registrant holder to purchase from the Company one-half
of one share of the Common Stock at an exercise price of $55.00,
subject to adjustment. The description and terms of the Rights are
set forth in the Rights Agreement, a copy of which is included
herein as Exhibit 10.1.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Other Information.
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K (Section 249.308 of this Chapter).
------------------------------------------------------------------
(a) Exhibits
3.1 Amended Articles of Incorporation of Lenox Bancorp,
Inc.*
3.2 Amended and Restated Code of Regulations of Lenox
Bancorp, Inc.*
10.1 Stockholder Protection Rights Agreement, dated as of May
5, 1999, between Lenox Bancorp, Inc. and The Fifth Third
Bank, as Rights Agent**
11.0 Statement re: Computation of Per Share Earnings
27.0 Financial Data Schedule
16
<PAGE> 17
(b) Reports on Form 8-K
On June 1, 1999, the Company filed an 8-K to announce that on
May 27, 1999, the Company filed a registration statement on
Form 8-A with the Securities and Exchange Commission
registering its Stockholder Protection Rights Agreement, dated
as of May 5, 1999 between the Company and The Fifth Third
Bank, as Right Agent (the "Rights Agreement"). A copy of the
Rights Agreement was filed by exhibit.
- ----------------------
* Incorporated herein by reference to the Company's Form 10-KSB, filed on
March 25, 1998.
** Incorporated herein by reference to the Company's Form 8-K, filed on June
1, 1999.
17
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
LENOX BANCORP, INC.
Dated: August 16, 1999 By: /s/ Virginia M. Deisch
----------------------
Virginia M. Deisch
President and Chief Executive Officer
(principal executive officer)
Dated: August 16, 1999 By: /s/ Michael P. Cooper
---------------------
Michael P. Cooper
Chief Financial Officer and Treasurer
(principal financial and accounting
officer)
18
<PAGE> 19
EXHIBIT INDEX
PAGES
-----
11.0 Statement re: Computation of Per Share Earnings.................20
27.0 Financial Data Schedule (submitted only with electronic
filing).........................................................--
19
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 11.0
COMPUTATION OF PER SHARE EARNINGS
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
1999 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net income............................................ $ 21 $ 118
Average shares outstanding............................ 347 398
-------- --------
Per share amount...................................... $ 0.06 $ 0.30
======== ========
Net income............................................ $ 21 $ 118
Average shares outstanding............................ 347 398
-------- --------
Net effect of dilutive stock options based on the
treasury stock method using the average market
price or quarter end price, whichever is greater.... 13 --
-------- --------
Total shares outstanding................... 360 398
-------- --------
Per share amount...................................... $ 0.06 $ 0.30
======== ========
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the Form 10-QSB
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001000050
<NAME> Lenox Bancorp, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 417
<INT-BEARING-DEPOSITS> 188
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,309
<INVESTMENTS-CARRYING> 4,558
<INVESTMENTS-MARKET> 4,630
<LOANS> 54,723
<ALLOWANCE> 83
<TOTAL-ASSETS> 66,502
<DEPOSITS> 37,249
<SHORT-TERM> 13,745
<LIABILITIES-OTHER> 282
<LONG-TERM> 10,370
0
0
<COMMON> 0
<OTHER-SE> 4,856
<TOTAL-LIABILITIES-AND-EQUITY> 66,502
<INTEREST-LOAN> 1,625
<INTEREST-INVEST> 332
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<INTEREST-TOTAL> 1,957
<INTEREST-DEPOSIT> 818
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<INTEREST-INCOME-NET> 701
<LOAN-LOSSES> 18
<SECURITIES-GAINS> 47
<EXPENSE-OTHER> 775
<INCOME-PRETAX> 38
<INCOME-PRE-EXTRAORDINARY> 38
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.06
<YIELD-ACTUAL> 6.79
<LOANS-NON> 69
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7
<ALLOWANCE-OPEN> 66
<CHARGE-OFFS> 5
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</TABLE>
