-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B5v1mskEbE9Tby4u3A8oZjny5pZpIucAfPmfWnRNCqiwSpFBPrlLYYCGOXiOEOfU bItrrXbwYvvz/JZAKjH7LQ== 0000950169-98-001132.txt : 19981116 0000950169-98-001132.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950169-98-001132 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LENOX BANCORP INC CENTRAL INDEX KEY: 0001000050 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 311445959 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-28162 FILM NUMBER: 98747247 BUSINESS ADDRESS: STREET 1: 5255 BEECH ST CITY: CINCINNATI STATE: OH ZIP: 45217 BUSINESS PHONE: 5132426900 MAIL ADDRESS: STREET 1: 5255 BEECH STREET CITY: CINCINNATI STATE: OH ZIP: 45217 10QSB 1 LENOX BANCORP, INC. 10QSB 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 ----- 11.0 Statement re: Computation of Per Share Earnings 19-20 27.0 Financial Data Schedule (submitted only with electronic filing) -- 18 EX-11 2 EXHIBIT 11 EXHIBIT 11.0 COMPUTATION OF PER SHARE EARNINGS
Three Months Ended September 30, --------------------- 1998 1997 -------- -------- (In thousands, except per share data) Net income............................................ $ 44 $ 70 Average shares outstanding............................ 397 410 ----- ----- Per share amount...................................... 0.11 0.17 ===== ===== Net income............................................ 44 70 Average shares outstanding............................ 397 410 Net effect of dilutive stock options based on the -- -- treasury stock method using the average market price or quarter end price, whichever is greater............................... Total shares outstanding........................ 397 410 ----- ----- Per share amount...................................... $0.11 $0.17 ===== =====
19 EXHIBIT 11.0 COMPUTATION OF PER SHARE EARNINGS
Nine Months Ended September 30, --------------------- 1998 1997 -------- -------- (In thousands, except per share data) Net income............................................ $ 162 $ 206 Average shares outstanding............................ 397 410 ----- ----- Per share amount...................................... 0.41 0.49 ===== ===== Net income............................................ 162 206 Average shares outstanding............................ 397 410 Net effect of dilutive stock options based on the treasury stock method using the average market price or quarter end price, whichever is greater............................... -- -- ----- ----- Total shares outstanding........................ 397 410 ----- ----- Per share amount...................................... $0.41 $0.49 ===== =====
20 EX-27 3 FDS FOR LENOX BANCORP, INC.
9 This schedule contains summary financial information extracted from the Form 10-QSB and is qualified in its entirety by reference to the unaudited financial statements contained herein. 0001000050 LENOX BANCORP, INC. 1,000 USD 9-MOS DEC-31-1997 JAN-01-1998 SEP-30-1998 1,000 3,407 180 0 0 5,603 5,926 0 37,008 65 53,840 32,404 312 365 13,708 0 0 0 7,051 53,840 2,224 635 41 2,900 1,162 610 1,128 10 12 1,067 245 245 0 0 162 .41 .41 7.34 0 44 0 0 66 14 3 65 0 0 65
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