(Mark One)
For the quarterly period ended June 30, 2002
For the transition period from ________________ to ______________
Ohio | 31-1445959 |
Check whether the issuer: (1) filed all documents and 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 NoAs of August 9, 2002, the Company had 366,847 Common Shares outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X1
LENOX BANCORP, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements-Unaudited
Consolidated Balance Sheets ....................................... 3
Consolidated Statements of Income ................................ 4
Consolidated Statements of Cash Flows ........................... 5
Notes to Unaudited Consolidated Financial Statements .............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation....................................... 6
PART II.OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 8
Item 2. Changes in Securities ............................................. 8
Item 4. Submission of Matters to a Vote of Security Holders................ 9
Item 5. Other Information ................................................. 9
Item 6. Exhibits and Reports on Form 8-K .................................. 10
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements accompanied by meaningful cautionary statements. Statements contained in this report and the information incorporated by reference into this report that are not historical facts are forward-looking statements based on our current expectations and beliefs concerning future developments. There can be no assurance that future developments affecting us will be the same as those that we anticipated. Actual results could differ materially from those projected in the forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identified by use of the words “may,” “will,” “continue,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Our 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 our operations include:
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on statements. Further information concerning us and our business, including additional factors that could materially affect our financial results, is included in our filings with the Securities and Exchange Commission.
2
Lenox Bancorp, Inc.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
LENOX BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
June 30, Dec. 31,
2002 2001
(UNAUDITED)
------------ -----------
Assets
Cash and due from banks $ 5,997 $ 4,095
Investment securities - available
for sale, at fair value (amortized
cost of $2,017 and $0 at
June 30, 2002 and Dec. 31, 2001) 2,019 0
Mortgage-backed securities - available
for sale, at fair value (amortized
cost of $5,311 and $360 at June 30, 2002
and Dec. 31, 2001) 5,333 366
Collateralized mortgage obligations -
available for sale, at fair value
(amortized cost of $1,226 and $3,963
at June 30, 2002 and Dec. 31, 2001) 1,225 3,970
------- -------
Total Investment Securities 8,577 4,336
Loan receivable, (net of allowance for
loan loss of $360 and $290 at
June 30, 2002 and Dec. 31, 2001) 42,467 50,659
Loans held for sale - at lower
of cost or market 0 0
Accrued interest receivable 288 346
Property and equipment, net 1,166 1,197
Federal Home Loan Bank stock - at cost 1,930 1,886
Other Real Estate Owned 0 39
Prepaid expenses and other assets 329 400
Prepaid federal income taxes 0 39
$60,754 $62,997
======= =======
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Savings, club and other accounts $ 6,314 $ 6,890
Money market and NOW accounts 4,101 4,532
Certificate accounts 21,449 21,877
------- -------
Total deposits 31,864 33,299
Advances from Federal Home Loan Bank 22,791 23,179
Advance payments by borrowers
for taxes and insurance 108 364
Accrued expenses 368 581
------- -------
Total liabilities $55,131 $57,423
Commitments and other liabilities
Equity for ESOP Shares $ 174 $124
Stockholders' equity:
Preferred Stock - no par value:
500,000 authorized, none issued -- --
Common Stock - no par value:
4,500,000 authorized, 507,496 issued
and 366,847 outstanding at
June 30, 2002 and at December 31, 2001 -- --
Additional paid in capital $ 4,506 $ 4,558
Retained earnings - substantially restricted 3,790 3,785
Unearned ESOP shares -117 -136
Share acquired for Stock Incentive Plan -179 -198
Treasury stock 140,649 shares at
June 30, 2001 and 140,649 shares at
December 31, 2000 -2,567 -2,567
Accumulated other comprehensive income:
Unrealized (loss) on available for
sale securities net of taxes 16 8
------- -------
total stockholders' equity $ 5,449 $ 5,450
------- -------
Total liabilities and stockholders' equity $60,754 $62,997
======= =======
See notes to consolidated financial statements
3
LENOX BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands Except Per Share Data)
Three months Six months
ending ending
June 30, June 30,
--------------- ---------------
2002 2001 2002 2001
------ ------ ------ ------
Interest Income and Dividend Income
Loans $ 854 $1,092 $1,816 $2,183
Mortgage-backed securities 57 7 72 14
Collateralized mortgage obligations 28 63 64 136
Investments and interest bearing 21 43 36 124
FHLB stock dividends 22 32 43 64
------ ------ ------ ------
Total 982 1,237 2,031 2,521
Interest Expense
Deposits 243 427 514 863
Borrowed money 327 379 656 822
------ ------ ------ ------
Total 570 806 1,170 1,685
Net interest income before
provision for loan losses 412 431 861 836
Provision for loan losses 55 221 70 229
------ ------ ------ ------
Net interest income after
provision for loan losses 357 210 791 607
Other Income
Service fee income 71 49 134 91
Gain on sale of loans and securities 44 69 111 97
Other Income 0 106 0 166
------ ------ ------ ------
Total 115 224 245 354
General and Administrative Expenses
Compensation and employee benefits 217 524 448 736
Occupancy and equipment 62 74 123 129
Federal insurance premium 4 6 8 11
Franchise taxes 15 8 27 23
Other expenses 259 239 418 419
------ ------ ------ ------
Total 557 851 1,024 1,318
Income (Loss) before
provision for income taxes -85 -417 12 -357
Provision (Credit) for income taxes -27 -133 4 -110
------ ------ ------ ------
Net Income (Loss) -$58 -$284 $ 8 -$247
====== ====== ====== ======
Basic Income (Loss) per share -$0.17 -$1.00 $0.02 -$0.87
====== ====== ====== ======
Diluted Income (Loss) per share -$0.17 -$1.00 $0.02 -$0.87
====== ====== ====== ======
See notes to consolidated financial statements
4
LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Six Months Ended
June 30
------------------------
2002 2001
---------- ---------
Cash flows from operating activities:
Net income (loss) $ 8 -$247
Adjustments to reconcile net income
to net cash provided (used)
by operating activities
Depreciation and amortization 32 44
Provision (credit) for losses on loans 70 229
Amortization of deferred loan fees 31 25
Loans disbursed for sale in the
secondary market -5,395 -7,696
Proceeds from sale of loans in
secondary market 5,309 11,171
Deferred loan origination fees (cost) -3 -18
FHLB stock dividends -44 -64
Gain on sale of investments and loans -- -97
Amortization of stock incentive plan award 10 10
Effect of change in operating assets
and liabilities
Accrued interest receivable 58 115
Prepaid expenses 70 -190
Prepaid federal income tax 39 -76
Advances by borrowers for taxes and insurance -256 -150
Accrued expenses -209 332
------- -------
Net cash provided (used) by operating activities -280 3,388
Cash flow from Investing activities
Property and equipment additions -- -5
Repayments of mortgage backed securities 2,836 82
Purchase of Investments & certificates of deposit -2,017 -2
Purchase of mortgage back securities -5,050 --
Net change in loans 8,202 -1,470
Proceeds from sale of investments -- 711
Proceeds from sale of real estate acquired
through foreclosure 34
Purchase of FHLB stock -- --
Maturity of investments - AFS -- 700
------- -------
Net cash provided (used) by investing activities 4,005 16
Cash Flows from financing activities
Net increase (decrease) in deposits -1,435 -1,487
Borrowings from FHLB -- --
Repayments of FHLB advances -388 -3,570
------- -------
Net cash provided (used) by investing activities -1,823 -5,057
Increase (decrease) in cash and cash equivalents 1,902 -1,653
Cash and cash equivalents at beginning of period 4,095 2,591
------- -------
Cash and cash equivalents at end of period 5,997 938
======= =======
Supplemental disclosure
Cash Paid for:
Interest expense 1,178 1,724
Income taxes -37 --
See notes to consolidated financial statements
5
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The consolidated financial statements include the accounts of Lenox Bancorp, Inc. (“Lenox” or the “Company”) and its wholly owned subsidiary Lenox Savings Bank (the “Bank”). In the opinion of Lenox, the unaudited consolidated financial statements include all adjustments (consisting of recurring accruals) considered necessary for a fair presentation of financial position, results of operation and cash flow for the interim period. All significant inter-company transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Results of operations and cash flows for the six-month period ended June 30, 2002, are not necessarily indicative of the results to be expected for the full year to end December 31, 2002. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2001 filed with the Securities and Exchange Commission.
2. EARNINGS PER SHARE
The net income for the six months ended June 30, 2002 was $8,000, or $0.02 per share on an average of 345,048 shares, compared to a net loss for the six months ended June 30, 2001 of $247,000 or ($0.87) per share.
3. CHANGE IN SECURITES
The shareholders authorized an additional 2,500,000 common shares from 2,000,000 to 4,500,000 common shares.
Additionally, 500,000 preferred shares were authorized. A 2002 Stock Option and Incentive Plan was approved with 150,000 common shares issued for the 2002 Plan.
Comparison of Financial Condition at June 30, 2002 and December 31, 2001
ASSETS. Total assets decreased by 3.6% to $60.8 million at June 30, 2002. This decrease was due to a 16.2% decrease in loans receivable from $50.7 million at December 31, 2001 to $42.5 million at June 30, 2002, primarily due to the early payoff of loans. Total investment securities increased to $8.6 million at June 30, 2002 from $4.3 million at December 31, 2001, as a result of investing the proceeds from the loan payoffs.
LIABILITIES. Total liabilities decreased by 4.0% to $55.1 million at June 30, 2002. This decrease was primarily due to a 4.3% decrease in deposits to $31.9 million at June 30, 2002. Total deposits declined $1.4 million to $31.9 million at June 30, 2002, due to lower pricing in an effort to reduce the Company’s cost of funds.
STOCKHOLDERS' EQUITY. Stockholders' equity remained relatively unchanged at $5.5 million for the period ending June 30, 2002.
6
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, 2002 was the purchase of mortgage-backed securities. The most significant source of funds for the six months ending June 30, 2002, was the repayment of $8.2 million in mortgage loans.
The Bank is required to maintain a minimum level of liquidity consistent with the safe and sound operation of the institution. 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, 2002, assets qualifying for short-term liquidity, including cash and short-term investment, totaled approximately $14.6 million.
At June 30, 2002, the Bank’s capital exceeded all the capital requirements of the FDIC. The Bank’s Tier 1 leverage and total capital to risk-weighted capital ratios were 9.15% and 18.87%, respectively.
Comparison of Results of Operations For the six months ended June 30, 2002 and 2001.
GENERAL. The Company reported net income of $8,000 for the six months ending June 30, 2002, which represents a $255,000 increase compared to net income reported for the six months ending June 30, 2001.
Comprehensive income for the six months ending June 30, 2002 was $16,000 compared to a comprehensive loss of $170,000 for the six months ending June 30, 2001. 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.
INTEREST AND DIVIDEND INCOME. Interest and dividend income for the six months ended June 30, 2002 decreased 19.4%. Interest income on loans decreased by 16.8% to $1.8 million for the six months ended June 30, 2002. This was primarily due to a lower average balance of loans. Other investments and investment bearing deposits decreased by 36.4% to $215,000 for the six months ended June 30, 2002, mainly due to lower interest rate environment, partially offset by increase in average investment balances.
INTEREST EXPENSE. Interest expense for the six months ended June 30, 2002 was $1.2 million compared to $1.7 million for the six months ended June 30, 2001, a decrease of 30.6%. Interest expense on deposits decreased 40.4% due to lower interest rates paid on deposits. Interest expense on borrowed money decreased by $166,000 to $656,000 for the six months ended June 30, 2002 due to lower average FHLB advances outstanding.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income before provision for loan losses increased 3.0% to $861,000 for the six months ended June 30, 2002.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased from $229,000 for the six months ending June 30, 2001 to $70,000 for the six months ended June 30, 2002. The loan loss was increased to reflect the increase in the amount of loans secured by non-owner occupied real estate located outside the Cincinnati lending area.
The Company uses different formulas to determine the appropriate level of provision necessary for the allowance for loan losses to cover the losses in the loan portfolio. Because future events affecting the loan portfolio cannot be predicted with complete accuracy, there can be no assurance that management’s estimates are correct and that the existing allowance for loan losses is adequate. However, management believes that based on the information available to it on June 30, 2002, the Company’s allowance for loan losses is sufficient to cover losses inherent in the Company’s current loan portfolio.
OTHER INCOME. Other income decreased by $109,000 due primarily to the decrease in gains on sale of loans in the period ending June 30, 2002.
7
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the six months ended June 30, 2002 were $1.0 million compared to $1.3 million for the six months ended June 30, 2001. Compensation and benefits decreased by $288,000 to $448,000 for six months ended June 30, 2002. This decrease was due primarily to the accrual of $300,000 in June 2001, for a potential payout for an employee contract.
INCOME TAXES. Income taxes for the six months ended June 30, 2002 increased by $114,000 to $4,000 due to an increase in pretax earnings. Net income before tax provision was $12,000 for the six months ended June 30, 2002, compared to net loss of $357,000 for the same period ending June 30, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS. On July 29, 2001, the FASB issued SFAS 141 and 142. SFAS 141 requires that all business combinations be accounted for under a single method, the purchase method. The use of the pooling of interest method is no longer permitted. SFAS 141 requires that the purchase method be used for combinations initiated after September 30, 2001. SFAS 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. These statements have no material effect on the Company at this time since it has not been involved in a business combination subject to SFAS 141 and does not have goodwill or other intangible assets subject to SFAS 142.
Item 1. Legal Proceedings.
On September 25, 2001, Virginia M. Heitzman, the former CEO and President of Lenox and the Bank, filed with the American Arbitration Association a demand for arbitration with Lenox and the Bank. Ms. Heitzman’s demand sets forth claims for, among other things, reinstatement of employment and an unspecified amount of damages, including punitive damages, as a result of alleged wrongful termination of her employment agreements with Lenox and the Bank. On July 13, 2001 the Boards of Directors of Lenox and the Bank notified Ms. Heitzman of the termination of her employment agreements. Lenox and the Bank have accrued for the potential payout of the employment agreements and are contesting the arbitration demands of Ms. Heitzman. The matter is currently pending before the American Arbitration Association panel. Lenox and the Bank have filed a motion to stay or dismiss the case. The motion to dismiss was denied by the arbitrator who also ruled that Ms. Heitzman was entitled to compensation from Lenox only (and not the Bank) during the pendency of the arbitration. Lenox has filed a complaint with the Federal District Court for the Southern District of Ohio to vacate that award. Lenox and the Bank submitted to the FDIC and OTS the question as to whether Ms. Heitzman is entitled to any payment under applicable federal regulations prohibiting such payments by certain institutions regulated by the FDIC and OTS. On March 29, 2002, the FDIC determined that Ms. Heitzman was not entitled to any of the payments she is seeking. On May 23, 2002 the OTS also made a determination that she was not entitled to such payments. Ms. Heitzman continues to pursue her arbitration claims.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
8
Item 4. Submission of Matters to a Vote of Security Holders.
The Company’s Annual Shareholders Meeting was held on April 26, 2002. Each of the following maters were voted upon and approved by the Company’s shareholders as indicated below:
Election of Directors
For Withheld
------- --------
John C. Lame 286,889 35,969
Gary K. Kreider 287,176 35,682
Gail R. Behymer 287,176 35,682
Jane Schank 287,176 35,682
Guy E. Napier 287,176 35,682
Proposal Broker
- ------------------------------------------- Non
For Against Abstain Votes
------- ------- ------- -------
1: Amend Articles of Incorporation 217,510 21,080 2,840 81,428
1.1: Increase Shares of Common Stock 294,425 25,633 2,800 -0-
1.2: Authorize Shares of Preferred Stock 214,690 23,940 2,800 81,428
1.3: Opt Out of Share Acquisition Act 196,030 42,600 2,800 81,428
1.4: Increase Threshold Percentage of
Shareholder Vote for Certain Actions
to 60% 200,198 39,232 2,000 81,428
1.5: Eliminate 75% Voting Power Requirement 214,368 24,275 2,787 81,428
2: Amend Code of Regulations 218,338 21,042 2,050 81,428
2.1: Eliminate Classification of Board 213,812 25,468 2,150 81,428
2.2: Allow Electronic Communications 299,483 21,375 2,000 -0-
2.3: Expand Indemnification 277,323 43,535 2,000 -0-
3.1: Set Number of Directors to 5 299,603 21,155 2,100 -0-
5: 2002 Stock Option and Incentive Plan 197,670 41,560 2,200 81,428
6: Ratify Independent Accountants 282,876 20,430 19,552 -0-
Item 5. Other Information.
As a result of the April 26, 2002 Annual Shareholders' Meeting and a subsequent resignation, the Board of Directors of Lenox now consists of Gail R. Behymer, John C. Lame, Guy E. Napier, and Jane Schank. The officers of Lenox are John C. Lame, Chairman of the Board, President and Chief Executive Officer; Jane Schank, Secretary and Treasurer. The Directors of the Bank are Gail R. Behymer, Michael W. Jordan, John C. Lame, Guy E. Napier, and Jane Schank. The officers of the Bank are: Gail R. Behymer, Chairman of the Board; Jane Schank, President and Chief Executive Officer and Joseph A. Kues, Chief Operating Officer and Treasurer.
9
Item 6. Exhibits and Reports on Form 8-K (ss.249.308 of this Chapter).
(a) Exhibits
99.1 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K
Lenox filed a Form 8-K dated April 22, 2002 under Item 5 pursuant to which it reported earnings information and that the Memorandum of Understanding imposed by banking regulators in 1999 had been removed. Lenox filed a Balance Sheet and Consolidated Statement of Income each for the three months ended March 31, 2002 and March 31, 2001 with this Form 8-K.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LENOX BANCORP, INC.
Dated: August 9, 2002 | By:/s/ John C. Lame |