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, 1998
or
[ ] 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.
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(Exact name of small business issuer as specified in its charter)
Ohio 31-1445959
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
5255 Beech Street, St. Bernard, Ohio 45217
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(Address of principal executive offices) (Zip Code)
(513) 242-6900
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(Issuer's telephone number)
Not Applicable
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(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
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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: 404,413 shares of common
stock, par value $0.01 per share, were outstanding as of August 13, 1998.
Transitional Small Business Disclosure Format (check one): Yes No X
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LENOX BANCORP, INC.
FORM 10-QSB
For the Quarter Ended June 30, 1998
INDEX
Page
----
PART I. FINANCIAL INFORMATION...........................................................................3
Item 1. Financial Statements-Unaudited...........................................................................3
Consolidated Balance Sheets at
June 30, 1998 and December 31, 1997.............................................................3
Consolidated Statements of Operations - For the Three
Months and Six Months Ended June 30, 1998 and 1997..............................................4
Consolidated Statements of Cash Flows - For the
Six Months Ended June 30, 1998 and 1997.........................................................6
Notes to Unaudited Consolidated Financial Statements............................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................................8
PART II: OTHER INFORMATION..............................................................................15
Item 1. Legal Proceedings..............................................................................15
Item 2. Changes in Securities and Use of Proceeds......................................................15
Item 3. Defaults Upon Senior Securities................................................................15
Item 4. Submission of Matters to a Vote of Security Holders............................................15
Item 5. Other Information..............................................................................15
Item 6. Exhibits and Reports on Form 8-K...............................................................15
SIGNATURES.......................................................................................................16
2
PART I. FINANCIAL INFORMATION
LENOX BANCORP, INC.
JUNE 30, 1998
Item 1. FINANCIAL STATEMENTS.
LENOX BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
(Dollars in thousands)
Assets
Cash and due from banks........................................................ $ 3,053 $ 664
Certificates of deposit........................................................ 178 173
Investment securities - available for sale, at fair value (amortized cost
of $2,346 and $4,294 at June 30, 1998 and December 31, 1997).................. 2,357 4,291
Mortgage-back securities - available for sale, at fair value (amortized
cost of $970 and $1,026 at June 30, 1998 and December 31, 1997)............... 975 1,030
Collateralized mortgage obligations - available for sale, at fair value
(amortized cost of $2,167 at June 30, 1998)................................... 2,194 --
Collateralized mortgage obligations - held to maturity, (fair value of
$5,995 and $4,761 at June 30, 1998 and December 31, 1997)..................... 5,973 4,766
Loans receivable, net.......................................................... 38,019 39,002
Accrued interest receivable:
Loans...................................................................... 177 153
Mortgage-backed securities................................................. 6 7
Collateralized mortgage obligation......................................... 44 27
Investments and certificates of deposit.................................... 53 84
Property and equipment, net.................................................... 589 598
Federal Home Loan Bank stock - at cost......................................... 793 625
Prepaid expenses and other assets.............................................. 178 89
------- -------
Total assets............................................................ 54,589 51,509
======= =======
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Savings, club and other accounts........................................... 5,075 5,461
Money market and NOW accounts.............................................. 4,987 4,778
Certificate accounts....................................................... 23,016 21,628
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Total deposits.......................................................... 33,078 31,867
Advances from Federal Home Loan Bank.......................................... 14,178 12,287
Advance payments by borrowers for taxes and insurance......................... 55 134
Accrued expenses.............................................................. 145 118
Accrued federal income taxes ................................................. - 40
Deferred federal income taxes................................................. 112 98
------- -------
Total liabilities....................................................... 47,568 44,544
======= =======
Stockholders' Equity:
Common stock - no par value: 2,000,000 authorized, 396,729 issued
and outstanding at June 30, 1998 and 400,258 issued and outstanding
at December 31, 1997....................................................... -- --
Additional paid in capital.................................................... 3,713 3,713
Retained earnings - substantially restricted.................................. 4,152 4,073
Unearned ESOP shares.......................................................... (282) (282)
Share acquired for Stock Incentive Plan....................................... (116) (128)
Treasury stock 28,948 shares at June 30, 1998 and 25,419 shares at
December 31, 1997.......................................................... (475) (412)
Unrealized gain on available for sale securities net of tax of $14 and $1 at
June 30, 1998 and December 31, 1997........................................ 29 1
Total stockholders' equity.............................................. 7,021 6,965
------- -------
Total liabilities and stockholders' equity.................................... $54,589 $51,509
======= =======
3
LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended
June 30,
--------------------------------
1998 1997
------------ ------------
(Unaudited)
(Dollars in thousands
except per share data)
Interest Income and Dividend Income
Loans..................................................................... $727 $748
Mortgage-backed securities................................................ 17 20
Collateralized mortgage obligations....................................... 138 --
Investments and interest bearing deposits................................. 75 117
FHLB stock dividends...................................................... 14 9
----- -----
Total.................................................................. 971 894
Interest Expense
Deposits.................................................................. 385 370
Borrowed money and capitalized leases..................................... 216 130
----- -----
Total.................................................................. 601 500
Net interest income before provision for loan losses...................... 370 394
Provision for loan losses.................................................. 5 4
----- -----
Net interest income after provision for loan losses....................... 365 390
Other Income
Service fee income........................................................ 37 32
Gain on sale of loans..................................................... 24 --
----- -----
Total.................................................................. 61 32
General and Administrative Expenses
Compensation and employee benefits........................................ 154 127
Occupancy and equipment................................................... 51 37
Federal insurance premium................................................. 5 8
Franchise taxes........................................................... 21 19
Other expenses............................................................ 115 139
----- -----
Total.................................................................. 346 330
Income before provision for income taxes.................................. 80 92
Provision for income taxes................................................. 27 31
----- -----
Net income................................................................ $ 53 $ 61
===== =====
Basic earnings per share.................................................. $0.13 $0.14
===== =====
Diluted earnings per share................................................ $0.13 $0.14
===== =====
4
LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended June 30,
---------------------------------
1998 1997
------------- --------------
(Unaudited)
(Dollars in thousands, except per
share data)
Interest Income and Dividend Income
Loans..................................................................... $1,496 $1,477
Mortgage-backed securities................................................ 36 39
Collateralized mortgage obligations....................................... 222 --
Investments and interest-bearing deposits................................. 158 240
FHLB stock dividends...................................................... 27 16
------ ------
Total............................................................. 1,939 1,772
Interest Expense
Deposits.................................................................. 752 745
Borrowed money and capitalized leases..................................... 417 242
------ ------
Total............................................................. 1,169 987
Net interest income before provision for loan losses...................... 770 785
Provision for loan losses.................................................. 5 6
------ ------
Net interest income after provision for loan losses....................... 765 779
Other Income
Service fee income........................................................ 73 58
Gain on sale of loans..................................................... 51 --
Total............................................................. 124 58
General and Administrative Expenses
Compensation and employee benefits........................................ 316 265
Occupancy and equipment................................................... 104 75
Federal insurance premiums................................................ 10 16
Franchise taxes........................................................... 40 35
Other expenses............................................................ 241 240
------ ------
Total............................................................. 711 631
Income before provision for income taxes.................................. 178 206
Provision for income taxes................................................. 60 70
------ ------
Net income................................................................ $ 118 $ 136
====== ======
Basic earnings per share................................................... $ 0.30 $ 0.32
====== ======
Diluted earnings per share................................................. $ 0.30 $ 0.32
====== ======
5
LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
June 30, 1998
For the Six Months Ended
June 30,
----------------------------------
1998 1997
------------- ---------------
(Unaudited)
(Dollars in thousands)
Cash flows from operating activities:
Net income............................................................... $ 118 $ 136
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization......................................... 31 25
Provision (credit) for losses on loans................................ 5 6
Amortization of deferred loan fees.................................... (25) --
Deferred loan origination fees (cost)................................. 15 (17)
FHLB stock dividends.................................................. (27) (16)
Gain on sale of loans................................................. (51) --
Amortization of stock incentive plan award............................ 34 --
ESOP expense, net of tax benefit...................................... 22 --
Effect of change in operating assets and liabilities:
Accrued interest receivable........................................ (9) 17
Prepaid expenses................................................... (89) (21)
Advances by borrowers for taxes and insurance...................... (79) (69)
Accrued expenses................................................... 31 106
Accrued federal income taxes....................................... (44) (13)
Deferred federal income taxes...................................... 14 --
------- -------
Net cash provided (used) by operating activities................... (54) 154
Cash flows from investing activities:
Property and equipment additions......................................... (25) (19)
Repayments of mortgage-backed securities................................. 55 74
Purchase of certificates of deposits..................................... (5) (5)
Loan disbursements....................................................... (9,793) (5,074)
Loan principal repayments................................................ 7,142 3,711
Proceeds from sale of mortgage loans..................................... 3,634 --
Purchase of FHLB stock................................................... (141) (61)
Purchase of investments - HTM............................................ (1,858) --
Purchase of investments - AFS............................................ (2,167) --
Maturity on investments - HTM...................................... 651 --
Maturity of investments - AFS...................................... 1,950 --
------- -------
Net cash used by investing activities................................. (557) (1,374)
Cash flows from financing activities:
Net increase (decrease) in deposits...................................... 1,211 (1,818)
Borrowings from FHLB..................................................... 4,050 3,025
Repayments of FHLB advances.............................................. (2,159) (244)
Payments on capitalized lease obligations................................ -- (3)
Purchase Treasury Stock.................................................. (63) --
Dividends paid........................................................... (39) (43)
------- -------
Net cash provided by financing activities............................. 3,000 917
------- -------
Increase (decrease) in cash and cash equivalents.......................... 2,389 (303)
Cash and cash equivalents at beginning of period.......................... 664 1,115
------- -------
Cash and cash equivalents at end of period................................ $ 3,053 $ 812
======= =======
Supplemental disclosure:
Cash paid for:
Interest expense...................................................... $ 1,156 $ 975
Income taxes.......................................................... $ 105 $ 83
6
LENOX BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED JUNE 30, 1998 AND 1997
1. Principles of Consolidation
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"). 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, 1998, and related the
consolidated statement of income, cash flows and changes in stockholder's
equity for the three and six months ended June 30, 1998, and 1997 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 indicative of
results for a full year.
The financial statements and notes are presented as permitted by Form
10-QSB. 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 as presented in Lenox's Form 10-KSB dated December 31, 1997.
2. Conversion to Capital Stock Form of Ownership
The Board of Directors of Lenox Savings Bank adopted a plan of
conversion, pursuant to which the Bank converted from an Ohio chartered mutual
savings bank to an Ohio chartered capital stock savings bank, with the
concurrent formation of the holding company, Lenox Bancorp, Inc. On July 17,
1996, the conversion from a mutual form of ownership to a stock form was
finalized. Lenox was capitalized through the initial sale of 425,677 shares of
common stock to eligible account holders, an employee benefit plan of the Bank,
supplemental eligible account holders, other members of the Bank and the general
public. Lenox then used a portion of the proceeds from the sale to purchase all
of the outstanding shares of the Bank. This transaction was accounted for in a
manner similar to the pooling of interest method.
The Bank may not declare or pay cash dividends on or repurchase any of
its shares of common stock if the effect thereof would cause equity to be
reduced below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements
3. Basic Earnings Per Share
Net income for the three months ended June 30, 1998, was $53,000 or
$.13 per share on an average of 396,729 shares, and the net income for the
quarter ended June 30, 1997, was $61,000 or $.14 per share on an average of
425,677. Earnings for the six months ended June 30, 1998 was
7
$118,000 or $.30 per share on an average of 397,582 share compares to $136,000
or $.32 per share on an average of 425,677 for the six months ended June 30,
1997
Item 2. MANAGEMENT'S 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, 1998,
and should be read in conjunction with the Bank's Consolidated Financial
Statements and the notes thereto, appearing in Part I, Item 1 of this document.
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 subsidiaries 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
When the Bank converted from mutual to stock form in 1996, the
Bank's net income had been adversely affected by changes in interest rates
largely because of the composition of its loan portfolio. In 1992 and 1993, the
Bank began experiencing a significant amount of prepayments in its loan
portfolio as a result of the declining interest rate environment. Many of the
Bank's loans were refinanced into new adjustable-rate mortgage ("ARM")
loans offered by the Bank which carried initial rates that were below market
rates. Additionally, in the past, the Bank had originated ARM
8
loans tied to a lagging market index, some of which had interest rate margins as
low as 50 basis points above the lagging market index. Further, some of the ARM
loans had annual interest rate caps of 1% or less. As a result, by 1994, when
interest rates began to rise, the Bank had approximately $5.0 million of 3-year
ARM loans that had been originated at low rates and had not yet repriced and
$9.0 million of ARM loans that were tied to a lagging index, many of which were
repricing downward in accordance with the lagging market index, even though the
Bank's cost of funds was increasing. The composition of the Bank's
loan portfolio, coupled with the majority of the Bank's deposits having
maturities of one year or less, made the Bank vulnerable to increases in
interest rates and adversely affected earnings. In 1996, as management was
addressing its problems with its loan portfolio, its non-interest expense began
increasing because Procter & Gamble, who owns the property where the Bank has
its main office, renegotiated the Bank's lease, substantially increasing
the Bank's lease expense. This further impaired the Bank's ability
to enhance earnings.
The Bank has significantly changed its lending policies and has taken
other action to improve its profitability, including opening a new branch
office, which management believes will be accretive to earnings within three
years; however, this process will take time. The Bank's current strategic
plan is to enhance its long-term profitability, reduce the level of interest
rate risk and improve market share. The Bank seeks to enhance long-term
profitability through emphasizing the origination of residential loans to
customers living in the Bank's primary market area, which includes
Hamilton County, Ohio, as well as Warren, Butler and Clermont counties, Ohio,
and Boone, Campbell and Kenton counties, Kentucky. The Bank also intends to
enhance profitability by continuing to seek means of increasing non-interest
income through the generation of transaction fees and commissions. Finally, the
Bank intends to continue to seek to reduce costs. The Bank's strategy has
resulted in the Bank's net income increasing from $29,000 for fiscal 1995
to $186,000 and $195,000 for fiscal years 1996 and 1997, respectively.
Management recognizes the need to continue to improve its earnings. Management
is committed to its goal of remaining independent and 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 plans will enhance the long-term profitability of the
Company.
Comparison of Financial Condition at June 30, 1998 and December 31, 1997
Assets. Total assets increased by $3.1 million, or 6.0%, to $54.6
million, at June 30, 1998, from $51.5 million at December 31, 1997. Asset growth
was primarily the result of increases in cash and due from banks which increased
$2.4 million. Additionally, investments and mortgage-backed securities increased
$1.4 million, or 14%, to $11.5 million at June 30, 1998, from $10.1 million at
December 31, 1997, reflecting a $41,000 increase in market value and the
purchase of $4.0 million in Collateralized Mortgage Obligations, ("CMO's"). This
increase was offset by principal reductions of $55,000, or 5.5%, of
mortgage-backed securities, $1.9 million in investment securities being called,
along with principal repayments of $700,000 during the same time period. Loans
receivable, net decreased $1.0 million, or 2.5%, to $38.0 million from $39.0
million. The decrease in net loans was a result of loan disbursements totaling
$9.8 million, principal repayments of $7.1 million and a loan sale to Freddie
Mac totaling $3.6 million. The required amount of Federal Home Loan Bank
("FHLB") stock increased $168,000, or 26.9%, from $625,000 at December 31, 1997,
to $793,000 at June 30, 1998, due to the Bank's increase in borrowings from the
FHLB.
9
Liabilities. Total liabilities increased by $3.0 million, or 6.8%, from
$44.5 million at December 31, 1997, to $47.6 million at June 30, 1998, due to an
increase in advances from the FHLB and an increase in deposits. FHLB advances
increased $1.9 million, or 15.4%, from $12.3 million at December 31, 1997, to
$14.2 million at June 30, 1998, in order to purchase investments. The new
advances of $4.1 million were offset by payoff and principal reduction of $1.9
million. Deposits increased $1.2 million, or 3.8%, from $31.9 million to $33.1
million at June 30, 1998. Certificate accounts increased $1.4 million, or 6.4%,
while money market and NOW accounts increased $209,000, or 4.4%, and savings,
club and other accounts decreased $386,000, or 7.5%.
Stockholders' Equity. Stockholders' equity increased $56,000 or 0.8%
from $6.97 million at December 31, 1997, to $7.02 million at June 30, 1998. The
increase was a combination of the increase of unrealized gain on securities
available for sale of $28,000 net of tax, net income of $118,000, offset by the
cost associated with the Company's repurchase of 3,529 shares of its common
stock totaling $63,000 and the paying of two quarterly dividends of $0.05 per
share for the six months ended June 30, 1998.
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, 1998, was the origination of mortgage and consumer loans in the amount
of $9.8 million and the purchase of $4.0 million of CMO's. The most significant
source of funds for the six months ended June 30, 1998, was the repayment of
mortgage loans totaling $7.1 million.
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, 1998, was 25.6%.
The Bank's most liquid assets are cash, due from banks, and marketable
securities. The level 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, 1998, assets qualifying for short term liquidity,
including cash and short term investment, totaled $8.0 million.
At June 30, 1998, the Bank exceeded all the capital requirements of the
FDIC. The Bank's Tier 1 leverage and total capital to risk-weighted
capital ratios were 10.95% and 24.34%, respectively.
Comparison of Results of Operations for the Three Months Ended June 30, 1998,
and 1997
General. Net income for the three months ended June 30, 1998, decreased
$8,000 to $53,000 from $61,000 for the three months ended June 30, 1997. This
decrease was primarily due to the expenses related to the Hyde Park branch that
opened in October 1997.
10
Interest Income and Dividend Income. Interest income and dividend
income for the three months ended June 30, 1998, was $971,000 compared to
$894,000 for the three months ended June 30, 1997, an increase of $77,000 or
8.6%. Interest earned on loans decreased $21,000 or 2.8%, to $727,000 for the
three months ended June 30, 1998, from $748,000 for the three months ended June
30, 1997, due to management's decision to sell low yielding fixed rate loans, to
protect the Bank when interest rates begin to rise. Investment interest
decreased $42,000, or 35.6%, for the three months ended June 30, 1997, from
$117,000 to $75,000 for the same period ended June 30, 1998. The decrease in
interest income was due to $6.1 million of investments at June 30, 1997 being
called, thereby reducing the balance to $2.4 million at June 30, 1998. Interest
income on CMO's for the three months ended June 30, 1998, was $138,000. There
were no CMO's for the same period in 1997.
Interest Expense. Interest expense for the three months ended June 30,
1998, was $601,000 compared to $500,000 for the three months ended June 30,
1997, an increase of $101,000 or 20.2%. Interest expense on deposits was
$385,000 for the three months ended June 30, 1998, as compared to $370,000 for
the three months ended June 30, 1997, an increase of $15,000 or 4.0%. The
increase was due to higher average deposits for the three months ended June 30,
1998. Interest expense on borrowed money and capitalized leases was $216,000 for
the three months ended June 30, 1998, as compared to $130,000 for the three
months ended June 30, 1997, an increase of $86,000 or 66.2%. The increase was
due to an increase in outstanding Federal Home Loan Bank advances for the period
ended June 30, 1998, as compared to the period ended June 30, 1997.
Net Interest Income. Net interest income before the provision for loan
losses decreased $24,000, or 6.1%, for the three months ended June 30, 1998, to
$370,000 from $394,000 for the three months ended June 30, 1997. The decrease in
net interest income was a result of higher yielding investments being called and
loans being refinanced to lower rates.
Other Income. Other income increased $29,000, or 90.6%, for the three
months ended June 30, 1998, to $61,000 from $32,000 for the three months ended
June 30, 1997. Service fee income increased $5,000 or 15.6% from $32,000 for the
three months ended June 30, 1997, to $37,000 for the three months ended June 30,
1998. In February 1998, the Bank received approval to sell loans to the Freddie
Mac. During the three months ended June 30, 1998, the Bank sold $1.5 million in
loans. Gain on the sale of loans for the three months ended June 30, 1998, was
$24,000 compared to no income from the sale of loan for the same period ended
June 30, 1997.
General and Administrative Expenses. General and administrative
expenses for the three months ended June 30, 1998, were $346,000 compared to
$330,000 for the three months ended June 30, 1997, an increase of $16,000 or
4.8%. Compensation and employee benefits increased $27,000, or 21.3%, to
$154,000 for the three months ended June 30, 1998, primarily related to staffing
of the new branch. Occupancy and equipment increased $14,000 or 37.8% for the
three months ended June 30, 1998, to $51,000 from $37,000 for the three months
ended June 30, 1997, due to the additional expenses of the Hyde Park branch. The
decrease in other expenses of $24,000, or 17.3%, to $115,000 for the three
months ended June 30, 1998, from $139,000 for the three months ended June 30,
1997 was due to the absence of annual meeting expenses in the three months ended
June 30, 1998 versus those expenses in the three months ended June 30, 1997.
11
Income Taxes. Income taxes for the three months ended June 30, 1998,
decreased $4,000 to $27,000 from $31,000 for the three months ended June 30,
1997. This was the result of a decrease in pre-tax income of $12,000, to $80,000
for the three months ended June 30, 1998, compared to $92,000 for the same
period in 1997.
Comparison of Results of Operations for the Six Months Ended June 30, 1998,
and 1997
General. Net income for the six months ended June 30, 1998, decreased
by $18,000 to $118,000 from $136,000 for the six months ended June 30, 1997.
This decrease was primarily due to the expenses related to the Hyde Park branch
that opened in October 1997.
Interest Income and Dividend Income. Interest income and dividend
income for the six months ended June 30, 1998, was $1.9 million compared to $1.8
million for the six months ended June 30, 1997, an increase of $167,000 or 9.4%.
The increase was primarily due to the increase in interest income on CMO's for
the six months ended June 30, 1998, from zero for the six months ended June 30,
1997 to $222,000 for the same period in 1998. Interest earned on loans also
increased $19,000 or 1.3% to $1.50 million for the six months ended June 30,
1998, from $1.48 million for the six months ended June 30, 1997. The increase
was offset by an $82,000, or 34.2%, decrease in investment interest, from
$240,000 for the six months ended June 30, 1997, to $158,000 for the six months
ended June 30, 1998. The decrease in interest income was due to a decrease in
the investment portfolio.
Interest Expense. Interest expense increased $182,000 or 18.4%, for the
six months ended June 30, 1998, to $1.2 million from $1.0 million for the six
months ended June 30, 1997. Interest expense on deposits remain relatively
stable at $752,000 for the six months ended June 30, 1998 compared to $745,000
for the six months ended June 30, 1997, an increase of $7,000 or 0.9%. Interest
expense on borrowed money and capitalized leases increased $175,000, or 72.3%,
from 242,000 for the six months ended June 30, 1997, to $417,000 for the six
months ended June 30, 1998. The increase was due to an increase in outstanding
Federal Home Loan Bank advances for the period ended June 30, 1998, which was
used to purchase CMO's.
Net Interest Income. Net interest income before the provision for loan
losses for the six months ended June 30, 1998, was $770,000 compared to $785,000
for the six months ended June 30, 1997, a decrease of $15,000 or 1.9%. This
decrease was a result of the flat yield curve that the industry was
experiencing. The refinance of loans and the higher yielding investments being
called reduced the Bank's net interest margin from 3.35% at June 30, 1997 to
2.88% at June 30, 1998.
Other Income. Other income increased to $124,000 for the six months
ended June 30, 1998, from $58,000 for the six months ended June 30, 1997, an
increase of $66,000 or 113.8%. Service fee income increased $15,000 or 25.9%,
from $58,000 for the six months ended June 30, 1997, to $73,000 for the six
months ended June 30, 1998. In February 1998, the Bank received approval to sell
loans to Freddie Mac. During the six months ended June 30, 1998, the Bank sold
$3.6 million in loans. Gain on the sale of loans for the six months ended June
30, 1998, was $51,000 compared to no income from the sale of loan for the same
period ended June 30, 1997.
12
General and Administrative Expenses. General and administrative
expenses increased $80,000, or 12.7%, for the six months ended June 30, 1998, to
$711,000 compared to $631,000 for the six months ended June 30, 1997.
Compensation and employee benefits for the six months ended June 30, 1998, was
$316,000 compared to $265,000 for the six months ended June 30, 1997, an
increase of $51,000 or 19.2%, primarily related to staffing of the new branch
and normal salary increases. Occupancy and equipment increased $29,000, or
38.7%, for the six months ended June 30, 1998, to $104,000 from $75,000 for the
six months ended June 30, 1997, due to additional expenses associated with the
opening of the Hyde Park Branch.
Income Taxes. Income taxes for the six months ended June 30, 1998,
decreased $10,000 to $60,000 from $70,000 for the six months ended June 30,
1997. This was the result of a $28,000 decrease in pre-tax income to $178,000
for the six months ended June 30, 1998, compared to $206,000 for the same period
of the prior year.
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 vendor is in the process of modifying, upgrading or
replacing 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 Vendor also has engaged various
consultants to review its "Year 2000" issues and has begun to implement a "Year
2000" compliance program. The Bank has prepared a "Year 2000" Plan and is in the
process of testing internal systems for compliance. The Bank is currently
obtaining information concerning the compliance status of its suppliers and
customers. In the event that any of the Bank's significant suppliers do
not successfully and timely achieve "Year 2000" compliance, the Bank's
business or operations could be adversely affected. The cost arise from "Year
2000" issues will not materially impact the institution.
Recent Accounting Pronouncements
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights." This statement requires that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. A mortgage banking
enterprise that acquires mortgage servicing rights through either the purchase
or origination of mortgage loans and sells or securities those loans with
servicing rights retained would allocate the total cost of the mortgage loans to
the mortgage servicing rights and the loans based on their relative fair value.
Statement No. 122 is effective for fiscal years beginning after December 15,
1995. There was no impact from the adoption of this standard in 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation". This statement establishes accounting and reporting
standards for stock-based employee compensation plans including stock options.
The statement defines a "fair value based
13
method" for employee stock options and encourages all entities to adopt that
method for such options. However, it allows an entity to continue to measure
compensation cost for those plans using the "intrinsic value based method" of
accounting prescribed by APB Opinion No. 25. Entities electing to remain with
the accounting in Opinion 25 must make pro forma disclosures of net income and
earnings per share, as if the fair value method of accounting defined in this
statement had been applied. The Company has elected to remain with the
accounting requirements of APB Opinion No. 25.
In June 1997, the FASB issued SFAS No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" which
established accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The standards are based on
a consistent application of a financial components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. SFAS No. 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 125 supersedes No. 122. SFAS No.
125 was effective for transactions occurring after December 31, 1996. The
adoption of this standard did not have a material impact on the financial
statements.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" which
replaces the current presentation of "primary" and "fully diluted" earning per
share with newly defined "basic" and "diluted" earnings per share. "Basic"
earnings per share will not include dilutive effects on earnings. "Diluted"
earnings per share will reflect the potential dilution of securities that could
share in an enterprises earnings. The statement requires dual presentation of
basic and diluted earnings per share on the income statement for all entities
having complex capital structures. It is effective for all financial statements
issued for periods ending after December 15, 1997. This standard was adopted for
the year ended December 31, 1997.
SFAS No. 130, "Reporting Comprehensive Income" was issued by the FASB
in June 1997. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. For interim period reporting, an enterprise is
required to report a total for comprehensive income. The Company adopted SFAS
No. 130 beginning January 1, 1998.
Comprehensive income for the six months ended June 30, 1998 and 1997
was $146,000 and $119,000, 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.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K (ss249.308 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.*
11.0 Statement re: Computation of Per Share Earnings
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None.
- ----------------------
* Incorporated herein by reference to the Company's Form 10-KSB, filed on March
25, 1998.
15
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 13, 1998 By: /s/ Virginia M. Deisch
-----------------------------
Virginia M. Deisch
President and Chief Executive Officer
(principal executive officer)
Dated: August 13, 1998 By: /s/ Michael P. Cooper
-----------------------------
Michael P. Cooper
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
16
EXHIBIT INDEX
Pages
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11.0 Statement re: Computation of Per Share Earnings......................................................18-19
27.0 Financial Data Schedule (submitted only with electronic filing)...................................... --
17