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 September 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.
(Exact name of small business issuer as specified in its charter)
Ohio 31-1445959
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
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: 396,729 shares of common stock,
par value $0.01 per share, were outstanding as of November 13, 1998.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
75639.1
LENOX BANCORP, INC.
FORM 10-QSB
For the Quarter Ended September 30, 1998
INDEX
Page
----
PART I. FINANCIAL INFORMATION............................................3
Item 1. Financial Statements-Unaudited...................................3
Consolidated Balance Sheets at
September 30, 1998 and December 31, 1997.........................3
Consolidated Statements of Operations - For the Three
Months and Nine Months Ended September 30, 1998 and 1997.........4
Consolidated Statements of Cash Flows - For the
Nine Months Ended September 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...............................................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..................................................................17
PART I. FINANCIAL INFORMATION
LENOX BANCORP, INC.
September 30, 1998
Item 1. FINANCIAL STATEMENTS.
LENOX BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
At At
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
(Dollars in thousands)
ASSETS
Cash and due from banks............................... $ 3,407 $ 664
Certificates of deposit............................... 180 173
Investment securities - available for sale, at
fair value (amortized cost of $2,503 and $4,294
at September 30, 1998 and December 31, 1997)........ 2,518 4,291
Mortgage-backed securities - available for sale, at
fair value (amortized cost of $892 and $1,026
at September 30, 1998 and December 31, 1997)........ 902 1,030
Collateralized mortgage obligations - available
for sale, at fair value (amortized cost of
$2,166 at September 30, 1998)....................... 2,183 --
Collateralized mortgage obligations - held to
maturity, (fair value of $5,981 and $4,761 at
September 30, 1998 and December 31, 1997)........... 5,926 4,766
Loans receivable, net................................. 36,943 39,002
Accrued interest receivable:
Loans............................................. 172 153
Mortgage-backed securities........................ 6 7
Collateralized mortgage obligations............... 43 27
Investments and certificates of deposit........... 18 84
Property and equipment, net........................... 575 598
Federal Home Loan Bank stock - at cost................ 808 625
Prepaid expenses and other assets..................... 159 89
------- -------
Total assets.................................... $53,840 $51,509
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Savings, club and other accounts.................. $ 5,137 $ 5,461
Money market and NOW accounts..................... 4,478 4,778
Certificate accounts.............................. 22,789 21,628
------- -------
Total deposits.................................. 32,404 31,867
Advances from Federal Home Loan Bank................ 14,020 12,287
Advance payments by borrowers for taxes and insurance 94 134
Accrued expenses.................................... 166 118
Accrued federal income taxes........................ - 40
Deferred federal income taxes....................... 105 98
------- -------
Total liabilities............................... $46,789 $44,544
======= =======
STOCKHOLDERS' EQUITY:
Common stock - no par value: 2,000,000 authorized,
425,677 issued and 400,258 outstanding at
September 30, 1998 and December 31, 1997......... $ -- $ --
Additional paid in capital.......................... 3,713 3,713
Retained earnings - substantially restricted........ 4,178 4,073
Unearned ESOP shares................................ (282) (282)
Shares acquired for Stock Incentive Plan............ (112) (128)
Treasury stock 28,948 shares at September 30, 1998
and 25,419 shares at December 31, 1997............ (474) (412)
Unrealized gain on available for sale securities
net of tax of $14 and $1 at September 30, 1998
and December 31, 1997............................. 28 1
Total stockholders' equity...................... 7,051 6,965
------- -------
Total liabilities and stockholders' equity.......... $53,840 $51,509
======= =======
3
LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended
September 30,
----------------------
1998 1997
--------- --------
(Unaudited)
(Dollars in thousands
except per share data)
INTEREST INCOME AND DIVIDEND INCOME:
Loans.................................................. $ 728 $ 744
Mortgage-backed securities............................. 15 20
Collateralized mortgage obligations.................... 131 --
Investments and interest bearing deposits.............. 72 109
FHLB stock dividends................................... 15 10
----- -----
Total............................................... $ 961 $ 883
===== =====
INTEREST EXPENSE:
Deposits............................................... $ 401 $ 360
Borrowed money and capitalized leases.................. 201 156
----- -----
Total............................................... 602 516
Net interest income before provision for loan losses... 359 367
Provision for loan losses................................. 5 5
----- -----
Net interest income after provision for loan losses.... $ 354 $ 362
===== =====
OTHER INCOME:
Service fee income..................................... $ 35 $ 46
Gain on sale of assets................................. 1 --
Gain on sale of loans.................................. 22 --
Gain on sale of investments............................ 12 --
----- -----
Total............................................... $ 70 $ 46
===== =====
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and employee benefits..................... $ 171 $ 146
Occupancy and equipment................................ 54 33
Federal insurance premium.............................. 5 8
Franchise taxes........................................ 21 23
Other expenses......................................... 106 92
----- -----
Total............................................... 357 302
Income before provision for income taxes............... 67 106
Provision for income taxes................................ 23 36
----- -----
Net income............................................. $ 44 $ 70
===== =====
Basic earnings per share.................................. $0.11 $0.17
===== =====
Diluted earnings per share................................ $0.11 $0.17
===== =====
4
LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended
September 30,
----------------------
1998 1997
-------- ---------
(Unaudited)
(Dollars in thousands, except per
share data)
INTEREST INCOME AND DIVIDEND INCOME:
Loans................................................... $2,224 $2,221
Mortgage-backed securities.............................. 50 59
Collateralized mortgage obligations..................... 354 _
Investments and interest-bearing deposits............... 231 349
FHLB stock dividends.................................... 41 26
------ ------
Total................................................ $2,900 $2,655
====== ======
INTEREST EXPENSE:
Deposits................................................ $1,162 $1,105
Borrowed money and capitalized leases................... 610 398
------ ------
Total................................................ 1,772 1,503
Net interest income before provision for loan losses.... 1,128 1,152
Provision for loan losses.................................. 10 11
------ ------
Net interest income after provision for loan losses..... $1,118 $1,141
====== ======
OTHER INCOME:
Service fee income...................................... $ 108 $ 104
Gain on sale of assets.................................. 1 --
Gain on sale of loans................................... 73 --
Gain on sale of investments............................. 12 --
------ ------
Total................................................ $ 194 $ 104
====== ======
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and employee benefits...................... $ 487 $ 411
Occupancy and equipment................................. 158 108
Federal insurance premiums.............................. 14 24
Franchise taxes......................................... 61 58
Other expenses.......................................... 347 332
------ ------
Total................................................ 1,067 933
Income before provision for income taxes................ 245 312
Provision for income taxes................................. 83 106
------ ------
Net income.............................................. $ 162 $ 206
====== ======
Basic earnings per share................................... $ 0.41 $ 0.49
====== ======
Diluted earnings per share................................. $ 0.41 $ 0.49
====== ======
5
LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
September 30, 1998
For the Nine Months Ended
September 30,
-------------------------
1998 1997
--------- ----------
(Unaudited)
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 162 $ 206
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization......................... 52 38
Provision (credit) for losses on loans................ 10 11
Amortization of deferred loan fees.................... (22) (4)
Deferred loan origination fees (cost)................. 3 17
FHLB stock dividends.................................. (42) (26)
Gain on sale of assets................................ (1) --
Gain on sale of investments........................... (12) --
Gain on sale of loans................................. (73) --
Amortization of stock incentive plan award............ 18 --
ESOP expense, net of tax benefit...................... 34 --
Effect of change in operating assets and liabilities:
Accrued interest receivable......................... 32 16
Prepaid expenses.................................... (70) (2)
Advances by borrowers for taxes and insurance....... (40) (23)
Accrued expenses.................................... 48 94
Accrued federal income taxes........................ (40) 5
Deferred federal income taxes....................... 7 --
-------- -------
Net cash provided (used) by operating activities.... 66 332
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions.......................... (28) (321)
Repayments of mortgage-backed securities.................. 128 97
Purchase of certificates of deposits...................... (7) (8)
Loan disbursements........................................ (12,231) (6,910)
Loan principal repayments................................. 9,564 5,191
Proceeds from sale of mortgage loans...................... 4,861 --
Proceeds from sale of assets.............................. 1 --
Proceeds from sale of investments......................... 612 --
Purchase of FHLB stock.................................... (141) (121)
Purchase of investments - HTM............................. (1,858) --
Purchase of investments - AFS............................. (3,871) --
Maturity on investments - HTM............................. 698 --
Maturity of investments - AFS............................. 2,800 950
-------- -------
Net cash used by investing activities................... 528 (1,121)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits....................... 537 (2,539)
Borrowings from FHLB...................................... 4,050 4,875
Repayments of FHLB advances............................... (2,317) (444)
Payments on capitalized lease obligations................. -- (5)
Purchase Treasury Stock................................... (63) (259)
Purchase stock for incentive Program...................... -- (274)
Dividends paid............................................ (58) (64)
-------- -------
Net cash provided by financing activities............... 2,149 1,290
-------- -------
Increase (decrease) in cash and cash equivalents............ 2,743 501
Cash and cash equivalents at beginning of period............ 664 1,115
-------- -------
Cash and cash equivalents at end of period.................. $ 3,407 $ 1,616
======== =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for:
Interest expense........................................ $ 1,795 $ 1,452
Income taxes............................................ 130 101
6
LENOX BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 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 September 30, 1998, and the related
consolidated statement of operations and cash flows for the three and nine
months ended September 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 for the fiscal year ended 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 September 30, 1998, was $44,000 or
$0.11 per share on an average of 396,729 shares, and the net income for the
quarter ended September 30, 1997, was $70,000 or $0.17 per share on an average
of 409,542. Earnings for the nine months ended September 30, 1998 was $162,000
or $0.41 per share on an average of 397,294 share compares to $206,000 or $0.49
per share on an average of 409,542 for the nine months ended September 30, 1997.
7
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 nine months ended September 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 loans tied to a lagging market index, some of
which had interest rate margins as
8
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 SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
ASSETS. Total assets increased by $2.3 million, or 4.6%, to $53.8 million,
at September 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
$2.7 million. Additionally, investment securities, mortgage-backed securities
and Collateralized Mortgage Obligations ("CMOs") increased $1.4 million, or 14%,
to $11.5 million at September 30, 1998, from $10.1 million at December 31, 1997,
reflecting a $41,000 increase in market value, the purchase of $4.0 million in
CMOs and the purchase of $1.7 million in other investments. This increase was
offset by principal reductions of $129,000, or 13.0%, of mortgage-backed
securities, $2.9 million in investment securities being called, principal
repayments of $700,000, and the sale of $600,000 in investments during the same
time period. Loans receivable, net decreased $2.0 million, or 5.3%, to $37.0
million from $39.0 million. The decrease in net loans was a result of loan
disbursements totaling $12.2 million, principal repayments of $9.6 million and
loan sales to
9
Freddie Mac totaling $4.8 million. The required amount of Federal Home Loan Bank
("FHLB") stock increased $183,000, or 29.3%, from $625,000 at December 31, 1997,
to $808,000 at September 30, 1998, due to the Bank's increase in borrowings from
the FHLB.
LIABILITIES. Total liabilities increased by $2.3 million, or 5.1%, from
$44.5 million at December 31, 1997, to $46.8 million at September 30, 1998, due
to an increase in advances from the FHLB and an increase in deposits. FHLB
advances increased $1.7 million, or 14.1%, from $12.3 million at December 31,
1997, to $14.0 million at September 30, 1998, in order to purchase other
investments. The new advances of $4.1 million were offset by payoff and
principal reduction of $2.4 million. Deposits increased $537,000, or 1.7%, from
$31.9 million at December 31, 1997, to $32.4 million at September 30, 1998.
Certificate accounts increased $1.1 million, or 5.4%, due to more attractive
rates being offered, while money market and NOW accounts decreased $300,000, or
6.3%, along with savings, club and other accounts decreasing $324,000, or 5.9%.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $86,000, or 1.2%,
from $7.0 million at December 31, 1997, to $7.1 million at September 30, 1998.
The increase was a combination of the $27,000, net of tax, increase of
unrealized gain on securities available for sale and net income of $162,000,
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 three quarterly dividends of
$0.05 per share for the nine months ended September 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 nine months ended
September 30, 1998, was the origination of mortgage and consumer loans in the
amount of $12.2 million and the purchase of $4.0 million of CMOs. This activity
was funded primarily by the repayment of mortgage loans which, for the nine
months ended September 30, 1998, totalled $9.6 million and, to a lesser extent,
FHLB advances.
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 September 30, 1998, was 26.6%. The Bank's most
liquid assets are cash and 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 September 30, 1998,
assets qualifying for short term liquidity, including cash and short term
investment, totaled $8.9 million.
10
At September 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 11.19% and 24.54%, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998, AND 1997
GENERAL. Net income for the three months ended September 30, 1998,
decreased $26,000 to $44,000 from $70,000 for the three months ended September
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 three months ended September 30, 1998, was $961,000 compared to $883,000
for the three months ended September 1997, an increase of $78,000, or 8.8%. This
increase was primarily attributable to a $131,000 increase in interest income on
CMOs for the three months ended September 30, 1998. There were no CMOs for the
same period in 1997. Interest earned on loans decreased $16,000 or 2.2%, to
$728,000 for the three months ended September 30, 1998, from $744,000 for the
three months ended September 30, 1997, due to management's decision to sell low
yielding fixed-rate loans, to protect the Bank when interest rates begin to
rise. Interest from investments and interest-bearing deposits decreased $37,000,
or 33.9%, for the three months ended September 30, 1997, from $109,000 to
$72,000 for the same period ended September 30, 1998. The decrease is due to a
reduction in the investment portfolio caused by the exercise of calls.
INTEREST EXPENSE. Interest expense for the three months ended September
30, 1998, was $602,000 compared to $516,000 for the three months ended September
30, 1997, an increase of $86,000 or 16.7%, due to increases in interest expense
on deposits, borrowed money and capitalized loans. Interest expense on deposits
was $401,000 for the three months ended September 30, 1998, as compared to
$360,000 for the three months ended September 30, 1997, an increase of $41,000,
or 11.4%. The increase was due to higher average deposits and higher yielding
deposits for the three months ended September 30, 1998. Interest expense on
borrowed money and capitalized leases was $201,000 for the three months ended
September 30, 1998, as compared to $156,000 for the three months ended September
30, 1997, an increase of $45,000, or 28.8%. The increase was due to an increase
in outstanding Federal Home Loan Bank advances for the period ended September
30, 1998, as compared to the period ended September 30, 1997.
NET INTEREST INCOME. Net interest income before the provision for loan
losses decreased $8,000, or 2.2%, for the three months ended September 30, 1998,
to $359,000 from $367,000 for the three months ended September 30, 1997.
OTHER INCOME. Other income increased $24,000, or 52.2%, for the three
months ended September 30, 1998, to $70,000 from $46,000 for the three months
ended September 30, 1997 primarily due to gains on the sale of loans and
investments offset by a decrease in service fee income. In February 1998, the
Bank received approval to sell loans to the Freddie Mac. During
11
the three months ended September 30, 1998, the Bank sold $1.2 million in loans.
Gain on the sale of loans for the three months ended September 30, 1998, was
$22,000 compared to no income from the sale of loan for the same period ended
September 30, 1997. The Bank also sold investments during the three months
ending September 30, 1998, with a gain of $12,000 compared to no gain on the
sale of investments for the same period ending September 30, 1997. Service fee
income decreased $11,000 or 23.9% from $46,000 for the three months ended
September 30, 1997, to $35,000 for the three months ended September 30, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended September 30, 1998, were $357,000 compared to
$302,000 for the three months ended September 30, 1997, an increase of $55,000,
or 18.2%. Compensation and employee benefits increased $25,000, or 17.1%, to
$171,000 for the three months ended September 30, 1998, primarily related to
staffing of the new branch. Occupancy and equipment increased $21,000 or 63.6%
for the three months ended September 30, 1998, to $54,000 from $33,000 for the
three months ended September 30, 1997, due to the additional expenses of the
Hyde Park branch. Other expenses increased $14,000 to $106,000 for the three
months ending September 30, 1998, from $92,000 for the three months ending
September 30, 1997.
INCOME TAXES. Income taxes for the three months ended September 30, 1998,
decreased $13,000 to $23,000 from $36,000 for the three months ended September
30, 1997. This was the result of a $39,000 decrease in pre-tax income to $67,000
for the three months ended September 30, 1998, compared to $106,000 for the same
period in 1997.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998, AND 1997
GENERAL. Net income for the nine months ended September 30, 1998,
decreased by $44,000 to $162,000 from $206,000 for the nine months ended
September 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 nine months ended September 30, 1998, was $2.9 million compared to $2.7
million for the nine months ended September 30, 1997, an increase of $245,000,
or 9.2%. The increase was primarily due to the increase in interest income on
CMOs for the nine months ended September 1998, from zero for the nine months
ended September, 1997 to $354,000 for the same period in 1998 due to a $4.0
million purchase in the first quarter of 1998. This increase was offset by a
$118,000, or 33.8%, decrease in investment interest, from $349,000 for the nine
months ended September 30, 1997, to $231,000 for the nine months ended September
30, 1998 due to a decrease in the investment portfolio. Interest earned on loans
remained relatively stable at $2.2 million for the nine months ended September
30, 1998, an increase of $3,000 or 0.1%.
INTEREST EXPENSE. Interest expense increased $269,000, or 17.9%, for the
nine months ended September 30, 1998, to $1.8 million from $1.5 million for the
nine months ended September 30, 1997. Interest expense on deposits increased
$57,000, or 5.1%, to $1.2 million
12
for the nine months ended September 30, 1998 compared to $1.1 million for the
nine months ended September 30, 1997. Interest expense on borrowed money and
capitalized leases increased $212,000, or 53.3%, from $398,000 for the nine
months ended September 30, 1997, to $610,000 for the nine months ended September
30, 1998. The increase was due to an increase in outstanding Federal Home Loan
Bank advances for the period ended September 30, 1998, which was used to
purchase CMOs.
NET INTEREST INCOME. Net interest income before the provision for loan
losses for the nine months ended September 30, 1998, was $1.1 million compared
to $1.2 million for the nine months ended September 30, 1997, a decrease of
$24,000, or 2.1%. This decrease was a result of the flat yield curve that the
industry is experiencing. The refinancing of loans and the higher yielding
investments being called reduced the Bank's net interest margin from 3.26% at
September 30, 1997 to 2.80% at September 30, 1998.
OTHER INCOME. Other income increased to $194,000 for the nine months ended
September 30, 1998, from $104,000 for the nine months ended September 30, 1997,
an increase of $90,000, or 86.5% primarily due to gains on the sale of loans and
investments. In February 1998, the Bank received approval to sell loans to
Freddie Mac. During the nine months ended September 30, 1998, the Bank sold $4.8
million in loans. Gain on the sale of loans for the nine months ended September
30, 1998, was $73,000 compared to no income from the sale of loans for the same
period ended September 30, 1997. Gain on sale of investments for the nine months
ending September 30, 1998 was $12,000, compared to no gains in the same period
ended September 30, 1997. Service fee income increased $4,000, or 3.8%, from
$104,000 for the nine months ended September 30, 1997, to $108,000 for the nine
months ended September 30, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $134,000, or 14.3%, for the nine months ended September 30, 1998, to
$1.1 million compared to $933,000 for the nine months ended September 30, 1997.
Compensation and employee benefits for the nine months ended September 30, 1998,
was $487,000 compared to $411,000 for the nine months ended September 30, 1997,
an increase of $76,000, or 18.5%, primarily related to staffing of the new
branch and normal salary increases. Occupancy and equipment increased $50,000,
or 46.3%, for the nine months ended September 30, 1998, to $158,000 from
$108,000 for the nine months ended September 30, 1997, due to additional
expenses associated with the opening of the Hyde Park Branch. Other expenses
increased $15,000 or 4.5%, to $347,000 for the nine months ended September 30,
1998, compared to $332,000 for the nine months ended September 30, 1997.
INCOME TAXES. Income taxes for the nine months ended September 30, 1998,
decreased $23,000 to $83,000 from $106,000 for the nine months ended September
30, 1997. This was the result of a $67,000 decrease in pre-tax income to
$245,000 for the nine months ended September 30, 1998, compared to $312,000 for
the same period of the prior year.
13
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 third party 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 has received representation from its primary
third party data processing vendor that it has nearly completed all of the Year
2000 problems in its software and will be Year 2000 compliant. The Bank
anticipates that all of its vendors also will have resolved any Year 2000
problems in their software by December 31, 1998. All Year 2000 issues for the
Bank, including testing, are expected to be addressed and any problems remedied
by March 31, 1999.
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-information and technology systems. The Bank has begun the process
of requesting information related to the Year 2000 compliance of its significant
suppliers and other vendors. However, the Bank does not currently have complete
information concerning the compliance status of its significant suppliers and
other vendors. In the event that the Bank's significant suppliers or other
vendors do not successfully achieve Year 2000 compliance in a timely manner, the
Bank's business or operations could be adversely affected. The Bank has prepared
a contingency plan in the event there are any system interruptions. As part of
the contingency plan, the Bank intends to engage alternative suppliers and other
vendors if its current significant suppliers or vendors fail to met Year 2000
operating requirements. There can be no assurances, however, that such plan or
the performances by any of the Bank's suppliers and vendors will be effective to
remedy all potential problems.
The Bank is currently engaging in an upgrade of its technology systems 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
of September 30, 1998, the Bank has incurred costs of approximately $7,000.
Material costs, if any, that may arise from the failure to achieve Year 2000
compliance by either the Bank's third party data processing vendor or its
significant suppliers and other vendors is not currently determinable. To the
extent that the Bank's systems are not fully Year 2000 compliant, there can be
no assurance that potential system interruptions or cost necessary to upgrade
software would not have a material adverse effect on the Bank's business,
financial condition, results of operation, cash flow or business prospects. In
the event that the Bank's progress towards becoming Year 2000 compliant is
deemed inadequate, regulatory action may be taken.
14
RECENT ACCOUNTING PRONOUNCEMENTS
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 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 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 on January 1, 1998.
Comprehensive income for the nine months ended September 30, 1998 and 1997
was $197,000 and $247,000, 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.
15
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 (ss.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.*
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.
16
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: November 13, 1998 By: /s/ Virginia M. Deisch
____________________________
Virginia M. Deisch
President and Chief Executive Officer
(principal executive officer)
Dated: November 13, 1998 By: /s/ Michael P. Cooper
____________________________
Michael P. Cooper
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
17
EXHIBIT INDEX
Pages
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11.0 Statement re: Computation of Per Share Earnings 19-20
27.0 Financial Data Schedule (submitted only with electronic filing) --
18