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 March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-28162
LENOX BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 31-1445959
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5255 Beech Street, St. Bernard, Ohio 45217
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(Address of principal executive offices) (Zip Code)
(513) 242-6900
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(Issuer's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changes since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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: 404,413 shares of common
stock, par value $0.01 per share, were outstanding as of May 13, 1998
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
69317
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LENOX BANCORP, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
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Page
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PART I. FINANCIAL INFORMATION....................................................................................1
Item 1. Financial Statements.....................................................................................1
Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997............................................................2
Consolidated Statements of Operations - For the Three
Months Ended March 31, 1998 and 1997............................................................3
Consolidated Statements of Cash Flows - For the
Three Months Ended March 31, 1998 and 1997......................................................4
Notes to Consolidated Financial Statements......................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................................................6
PART II: OTHER INFORMATION..............................................................................11
Item 1. Legal Proceedings..............................................................................11
Item 2. Changes in Securities and Use of Proceeds......................................................11
Item 3. Defaults Upon Senior Securities................................................................11
Item 4. Submission of Matters to a Vote of Security Holders............................................11
Item 5. Other Information..............................................................................12
Item 6. Exhibits and Reports on Form 8-K...............................................................12
SIGNATURES.......................................................................................................13
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PART I. FINANCIAL INFORMATION
LENOX BANCORP, INC.
MARCH 31, 1998
Item 1. FINANCIAL STATEMENTS.
1
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LENOX BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- -----------
UNAUDITED
(DOLLARS IN THOUSANDS)
<S><C>
ASSETS
Cash and due from banks ...................................................... $ 3,210 $ 664
Certificates of deposit ...................................................... 175 173
Investment securities - available for sale, at fair value (amortized cost
of $3,394 and $4,294 at March 31, 1998 and December 31, 1997) ............. 3,400 4,291
Mortgage-back securities - available for sale, at fair value (amortized
cost of $1,009 and $1,026 at March 31, 1998 and December 31, 1997) ........ 1,015 1,030
Collateralized mortgage obligations - available for sale, at fair value
(amortized cost of $1,131 at March 31, 1998) .............................. 1,142 --
Collateralized mortgage obligations - held to maturity, (fair value of
$5,152 and $4,761 at March 31, 1998 and December 31, 1997) ................ 5,150 4,766
Loans receivable, net ........................................................ 37,419 39,002
Accrued interest receivable:
Loans ................................................................. 160 153
Mortgage-backed securities ............................................ 6 7
Collateralized mortgage obligation .................................... 31 27
Investments and certificates of deposit ............................... 62 84
Property and equipment, net .................................................. 592 598
Federal Home Loan Bank stock - at cost ....................................... 780 625
Prepaid expenses and other assets ............................................ 153 89
-------- --------
Total assets ....................................................... $ 53,295 $ 51,509
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Savings, club and other accounts ...................................... $ 5,074 $ 5,461
Money market and NOW accounts ......................................... 4,895 4,778
Certificate accounts .................................................. 20,632 21,628
-------- --------
Total deposits ..................................................... 30,601 31,867
Advances from Federal Home Loan Bank ...................................... 15,334 12,287
Advance payments by borrowers for taxes and insurance ..................... 96 134
Accrued expenses .......................................................... 144 118
Accrued federal income taxes .............................................. 28 40
Deferred federal income taxes ............................................. 106 98
-------- --------
Total liabilities .................................................. 46,309 44,544
Stockholders' Equity:
Common stock - no par value: 2,000,000 authorized, 396,729 issued and
outstanding at March 31, 1998 and 400,258 issued and outstanding
at December 31, 1997 .................................................. -- --
Additional paid in capital ................................................ $ 3,714 $ 3,713
Retained earnings - substantially restricted .............................. 4,138 4,073
Unearned ESOP shares ...................................................... (282) (282)
Share acquired for Stock Incentive Plan ................................... (123) (128)
Treasury stock 28,948 shares at March 31, 1998 and 25,419 shares at
December 31, 1997 ..................................................... (475) (412)
Unrealized gain on available for sale securities net of tax of $8 and $1 at
March 31, 1998 and December 31, 1997 .................................. 14 1
-------- --------
Total stockholders' equity ......................................... 6,986 6,965
-------- --------
Total liabilities and stockholders' equity ................................ $ 53,295 $ 51,509
======== ========
</TABLE>
2
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LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDING
MARCH 31,
----------------
1998 1997
------ ------
UNAUDITED
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
INTEREST INCOME AND DIVIDEND INCOME
Loans .............................................. $769 $729
Mortgage-backed securities ......................... 19 19
Collateralized mortgage obligations ................ 85 --
Investments and interest bearing deposits .......... 82 123
FHLB stock dividends ............................... 13 7
---- ----
Total .......................................... 968 878
INTEREST EXPENSE
Deposits ........................................... 363 375
Borrowed money and capitalized leases .............. 205 112
---- ----
Total .......................................... 568 487
Net interest income before provision for loan losses 400 391
Provision for loan losses ............................. -- 2
---- ----
Net interest income after provision for loan losses 400 389
OTHER INCOME
Service fee income ................................. 36 26
Gain on sale of loans .............................. 27 --
Gain on sale of investments ........................ -- --
---- ----
Total .......................................... 63 26
GENERAL AND ADMINISTRATIVE EXPENSES
Compensation and employee benefits ................. 162 138
Occupancy and equipment ............................ 52 38
Federal insurance premium .......................... 5 8
Franchise taxes .................................... 19 16
Other expenses ..................................... 126 101
---- ----
Total .......................................... 364 301
Income before provision for income taxes ........... 99 114
Provision for income taxes ............................ 34 39
---- ----
Net income ......................................... $ 65 $ 75
==== ====
Basic earnings per share ........................... $0.16 $0.18
==== ====
Diluted earnings per share ......................... $0.16 $0.18
==== ====
3
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LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
MARCH 31, 1988
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDING
MARCH 31,
---------------------
1998 1997
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UNAUDITED
(DOLLARS IN THOUSANDS)
<S><C>
Cash flows from operating activities:
Net income ........................................................ $ 65 $ 75
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization ............................ 17 8
Provision (credit) for losses on loans ................... -- 2
Amortization of deferred loan fees ....................... (4) --
Deferred loan origination fees (cost) .................... 2 14
FHLB stock dividends ..................................... (13) (8)
Gain on sale of loans .................................... (27) --
Amortization of stock incentive plan award ............... 6 --
ESOP expense, net of tax benefit ......................... 17 --
Effect of change in operating assets and liabilities:
Accrued interest receivable ..................... 12 22
Prepaid expenses ................................ (64) 59
Advances by borrowers for taxes and insurance ... (38) (38)
Accrued expenses ................................ 26 54
Accrued federal income taxes .................... (12) (5)
Deferred federal income taxes ................... 8 --
------- -------
Net cash provided (used) by operating activities (5) (183)
Cash flows from investing activities:
Property and equipment additions .................................. (11) (17)
Repayments of mortgage-backed securities .......................... 15 44
Purchase of certificates of deposits .............................. (2) (3)
Loan disbursements ................................................ (4,692) (2,914)
Loan principal repayments ......................................... 4,228 2,212
Proceeds from sale of mortgage loans .............................. 2,072 --
Purchase of FHLB stock ............................................ (142) --
Purchase of investments - HTM ..................................... (384) --
Purchase of investments - AFS ..................................... (1,131) --
Maturity of investments - AFS ..................................... 900 --
------- -------
Net cash used by investing activities .................... 853 (678)
Cash flows from financing activities:
Net increase (decrease) in deposits ............................... (1,266) (956)
Borrowings from FHLB .............................................. 3,200 975
Repayments of FHLB advances ....................................... (153) (97)
Payments on capitalized lease obligations ......................... -- (2)
Purchase Treasury Stock ........................................... (63) --
Dividends paid .................................................... (20) (21)
------- -------
Net cash provided by financing activities ................ 1,698 (101)
------- -------
Increase (decrease) in cash and cash equivalents ........................... 2,546 (596)
Cash and cash equivalents at beginning of period ........................... 664 1,115
------- -------
Cash and cash equivalents at end of period ................................. $ 3,210 $ 519
======= =======
Supplemental disclosure:
Cash paid for:
Interest expense ......................................... $ 549 $ 448
Income taxes ............................................. $ 45 $ 44
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4
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LENOX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 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 March 31, 1998, and related the
consolidated statement of income, cash flows and changes in stockholder's equity
for the three months ending March 31, 1998, and 1997 are unaudited. In the
opinion of management, all adjustments necessary for a fair presentation of such
financial statements have been included. Such adjustments consisted of normal
recurring items. Interim results are not necessarily indicative of results for a
full year.
The financial statements and notes are presented as permitted by Form
10-QSB. The interim statements are unaudited and should be read in conjunction
with the financial statements and notes thereto contained in the Bank's annual
report as presented in Lenox's Form 10-KSB dated December 31, 1997.
2. Conversion to Capital Stock Form of Ownership
---------------------------------------------
The Board of Directors of Lenox Savings Bank adopted a plan of
conversion, pursuant to which the Bank converted from an Ohio chartered mutual
savings bank to an Ohio chartered capital stock savings bank, with the
concurrent formation of the holding company, Lenox Bancorp, Inc. On July 17,
1996, the conversion from a mutual form of ownership to a stock form was
finalized. Lenox was capitalized through the initial sale of 425,677 shares of
common stock to eligible account holders, an employee benefit plan of the Bank,
supplemental eligible account holders, other members of the Bank and the general
public. Lenox then used a portion of the proceeds from the sale to purchase all
of the outstanding shares of the Bank. This transaction was accounted for in a
manner similar to the pooling of interest method.
The Bank may not declare or pay cash dividends on or repurchase any of
its shares of common stock if the effect thereof would cause equity to be
reduced below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements.
3. Earnings Per Share
------------------
Net income for the three months ended March 31, 1998, was $65,000 or
$.16 per share on an average of 398,444 shares, and the net income for the
quarter ending March 31, 1997, was $75,000 or $.18 per share.
5
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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 months ended March 31, 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 SEC.
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 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 in each of 1996 and 1997 from $29,000 for fiscal 1995 to $186,000 and
$195,000 for 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 MARCH 31, 1998 AND DECEMBER 31, 1997
Assets. Total assets increased by $1.8 million or 3.5% to $53.3 million
at March 31, 1998 from $51.5 million at December 31, 1997. This was primarily
attributable to cash and due from banks which increased $2.5 million from
proceeds from loan sales and advances from FHLB for the purchase of an
investment to settle April 1, 1998. Investments and mortgage-backed securities
increased $620,000 or 6.1% to $10.7 million at March 31, 1998, from $10.1
million at December 31, 1997 reflecting a $21,000 or .21% increase in market
value, principal reductions of $17,000 or 1.7% of mortgage-backed securities,
$900,000 in investment securities being called, and the purchase of $1.5 million
or 15.0% in Collateralized Mortgage Obligations, ("CMO's") during the
6
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same time period. Loans receivable, net decreased $1.6 million or 4.1% to $37.4
million from $39.0 million. The decrease in net loans was a result of loan
disbursements totaling $4.6 million, principal repayments of $4.2 million and a
loan sale to FHLMC totaling $2.1 million. The required amount of Federal Home
Loan Bank ("FHLB") stock increased $155,000 or 24.8% from $625,000 at December
31, 1997, to $780,000 at March 31, 1998, due to the Bank's increase in
borrowings from the FHLB.
Liabilities. Total liabilities increased by $1.8 million or 4.0% from
$44.5 million at December 31, 1997, to $46.3 million at March 31, 1998,
primarily due to an increase in advances from the FHLB of $3.0 million or 24.8%
from $12.3 million at December 31, 1997, to $15.3 million at March 31, 1998.
Advances from the FHLB increased primarily due an additional advance to purchase
investments. This increase was partially offset by a decrease in deposits
amounting to $1.3 million or 4.0% from $31.9 million to $30.6 million at March
31, 1998. Certificate accounts decreased $1.0 million or 4.6%, while money
market and NOW accounts increased $117,000 or 2.5%, and savings, club and other
accounts decreased $387,000 or 7.1%. The decrease in the certificate accounts
was a result of reducing the cost of funds. The changes in the other accounts
reflect the nature of those accounts.
Stockholders' Equity. Stockholders' equity increased $21,000 or .3%
from $6.97 million at December 31, 1997, to $6.99 million at March 31, 1998. The
increase is a combination of the decrease in net income of $10,000, an increase
of unrealized gain on securities available for sale of $13,000 net of tax,
offset by the cost associated with the Company's repurchase of 3,529 shares of
its common stock totaling $63,000.
Liquidity and Capital Resources. The Company's primary sources of funds
are deposits, FHLB advances, principal and interest payments on loans and loan
sale 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 three months
ended March 31, 1998, was the origination of mortgage and consumer loan in the
amount of $4.7 million and the purchase of $1.5 million of CMO's. The most
significant source of funds for the three months ending March 31, 1998, was the
repayment of mortgage loans totaling $4.2 million.
The Bank is required to maintain a minimum level of liquidity (net
cash, short term and marketable assets divided by total withdrawable deposits
and short term liabilities), as defined by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank's liquidity at March 31, 1998, was 27.1%. The
Bank's most liquid assets are cash, federal funds sold, and marketable
securities. The levels of the Bank's liquid assets are dependent on the Bank's
operation, financing, lending and investing activities during any given period.
At March 31, 1998, assets qualifying for short term liquidity, including cash
and short term investment, totaled $8.8 million.
At March 31, 1998, the Bank's capital exceeded all the capital
requirements of the FDIC. The Bank's tier 1 leverage and total capital to
risk-weighted capital ratios were 11.5% and 24.3%, respectively.
7
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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998,
AND 1997
General. Net income for the three months ending March 31, 1998,
decreased by $10,000 to $65,000 from $75,000 for the three months ended March
31, 1997. This decrease was primarily due to the expenses related to the Hyde
Park branch that was opened October 1997.
Interest Income and Dividend Income. Interest income and dividend
income for the three months ended March 31, 1998, was $968,000 compared to
$878,000 for the three months ended March 31, 1997, an increase of $90,000 or
10.3%. Interest earned on loans increased $40,000 or 5.5% to $769,000 for the
three months ended March 31, 1998, from $729,000 for the three months ended
March 31, 1997, and was the primary reason for the increase in interest income.
The increase in interest earned on loans was due to an increase in the average
balance of loans for the three months ended March 31, 1998, from the comparable
1997 period. The increase in loan interest was reduced by the decrease in
investments interest for the same period. Investment interest decreased $41,000
or 33.3% from the three months ending March 31, 1997, from $123,000 to $82,000
for the same period ending March 31, 1998. The decrease in interest income was
due to a decrease in the investment portfolio. Interest income on CMO's for the
three months ending March 31, 1998, was $85,000. There were no CMO's for the
same period ending 1997.
Interest Expense. Interest expense for the three months ended March 31,
1998, was $568,000 compared to $487,000 for the three months ended March 31,
1997, an increase of $81,000 or 16.6%. Interest expense on deposits was $363,000
for the three months ended March 31, 1998, as compared to $375,000 for the three
months ended March 31, 1997, a decrease of $12,000 or 3.2%. The decrease was due
to lower average deposits outstanding period to period. Interest expense on
borrowed money and capitalized leases was $205,000 for the three months ended
March 31, 1998, as compared to $112,000 for the three months ended March 31,
1997, an increase of $93,000 or 83.0%. The increase was due to an increase in
outstanding Federal Home Loan Bank advances for the period ending March 31,
1998, as compared to the period ending March 31, 1997.
Net Interest Income. Net interest income increased $9,000 or 2.3% for
the three months ended March 31, 1998, to $400,000 from $391,000 for the three
months ended March 31, 1997. The net interest income was not reduced by
provision for loan losses during the three months ended March 31, 1998, as
compared to a $2,000 reduction for the same period ending March 31, 1997.
Other Income. Other income increased $37,000 for the three months
ending March 31, 1998, to $63,000 from $26,000 for March 31, 1997, a 142.3%
increase. Service fee income increased $10,000 or 38.5% from $26,000 for the
three months ending March 31, 1997, to $36,000 for the three months ending March
31, 1998. In February 1998, the Bank received approval to sell loan to Federal
Home Loan Mortgage Corporation. During the three months ending March 31, 1998
the Bank sold $2.1 million in loans. Gain on sale of loans for the three months
ending March 31, 1998, was $27,000 compared to no income from the sale of loan
for the same period ending March 31, 1997.
General and Administrative Expenses. General and administrative
expenses for the three months ended March 31, 1998, were $364,000 compared to
$301,000 for the three months ended March 31, 1997, an increase of $63,000 or
20.9%. Compensation and employee benefits increased
8
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$24,000 or 17.4% to $162,000 for the three months ended March 31, 1998,
primarily related to staffing of the new branch. Occupancy and equipment
increased $14,000 or 36.8% for the three months ending March 31, 1998, to
$52,000 from $38,000 for the three months ending March 31, 1997. The increase in
other expenses to $126,000 for the three months ended March 31, 1998, from
$101,000 for the three months ending March 31, 1997, an increase of $25,000 or
24.8% was due to additional expenses of the Hyde Park Branch.
Income Taxes. Income taxes for the three months ended March 31, 1998,
decreased $5,000 to $34,000 from $39,000 for the three months ending March 31,
1997. This was the result of a decrease in income before taxes of $15,000. Net
income before tax provision was $99,000 for the three months ended March 31,
1998, compared to $114,000 for the same period of the prior year.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed without considering the impact
of the upcoming change in the century. If not corrected, many computer
applications and systems could fail or create erroneous results by or at the
year 2000. The Bank primarily utilizes a third party vendor and such vendor's
proprietary software to process its electronic data. The third party data
processor vendor is in the process of modifying, upgrading or replacing its
computer software applications and systems as necessary to accommodate the "year
2000" dating changes necessary to permit correct recording of year dates for
2000 or later years. The Vendor also has engaged various consultants to review
its "year 2000" issues and has begun to implement a "year 2000" compliance
program. The Bank has prepared a "year 2000" Plan and is in the process of
testing internal systems for compliance. The Bank is currently obtaining
information concerning the compliance status of its suppliers and customers. In
the event that any of the Bank's significant suppliers do not successfully and
timely achieve "year 2000" compliance, the Bank's business or operations could
be adversely affected. The cost, if any, that may arise from "year 2000" issues
is not currently determinable.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights". This statement requires that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. A mortgage banking
enterprise that acquires mortgage servicing rights through either the purchase
or origination of mortgage loans and sells or securitizes those loans with
servicing rights retained would allocate the total cost of the mortgage loans to
the mortgage servicing rights and the loans based on their relative fair value.
Statement No. 122 is effective for fiscal years beginning after December 15,
1995. There was no impact from the adoption of this standard in 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation". This statement establishes accounting and reporting
standards for stock-based employee compensation plans including stock options.
The statement defines a "fair value based method" for employee stock options and
encourages all entities to adopt that method for such
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options. However, it allows an entity to continue to measure compensation cost
for those plans using the "intrinsic value based method" of accounting
prescribed by APB Opinion No. 25. Entities electing to remain with the
accounting in Opinion 25 must make pro forma disclosures of net income and
earnings per share, as if the fair value method of accounting defined in this
statement had been applied. The Company has elected to remain with the
accounting requirements of APB Opinion No. 25.
In June 1997, the FASB issued SFAS No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" which
established accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The standards are based on
a consistent application of a financial components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. SFAS No. 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 125 supercedes No. 122. SFAS No.
125 was effective for transactions occurring after December 31, 1996. The
adoption of this standard did not have a material impact on the financial
statements.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" which
replaces the current presentation of "primary" and "fully diluted" earning per
share with newly defined "basic" and "diluted" earnings per share. "Basic"
earnings per share will not include dilutive effects on earnings. "Diluted"
earnings per share will reflect the potential dilution of securities that could
share in an enterprises earnings. The statement requires dual presentation of
basic and diluted earnings per share on the income statement for all entities
having complex capital structures. It is effective for all financial statements
issued for periods ending after December 15, 1997. This standard was adopted for
the year ended December 31, 1997.
SFAS No. 130, "Reporting Comprehensive Income" was issued by the FASB
in June 1997. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. For interim period reporting, an enterprise is
required to report a total for comprehensive income. The Company adopted SFAS
No. 130 beginning January 1, 1998.
Comprehensive income (loss) for the three months ending March 31, 1998
and 1997 was $78,000 and ($70,000), respectively. The difference between net
income and comprehensive income consists solely of the effect of unrealized gain
and losses, net of taxes, on available for sale securities.
10
<PAGE>
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. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
On April 8, 1998, the Company held its annual meeting of
stockholders for the purpose of the election of Directors to three-year terms
and the ratification of Clark, Schaefer, Hackett & Company. as the Company's
independent auditors. The number of votes cast at the meeting as to each matter
to be acted upon was as follows:
No. of Votes No. of Votes
FOR WITHHELD
--- --------
1. Election of Directors
William P. Riekert, Jr. 240,377 59,275
Henry E. Brown 240,377 59,275
The Directors whose terms continued and the years their terms expire
are as follows:
Virginia M. Deisch (1999), Gail R. Behymer (1999), Reba St. Clair
(1999), Richard C. Harmeyer (2000), Robert R. Keller (2000) and
Curtis L. Jackson (2000).
<TABLE>
<CAPTION>
No. of Votes No. of Votes No. of Votes
FOR AGAINST WITHHELD
--- ------- --------
<S><C>
2. Ratification of Clark, Schaefer,
Hacket & Co. as the Company's
Independent Auditors 279,252 18,800 1,600
</TABLE>
11
<PAGE>
Item 5. 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.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
LENOX BANCORP, INC.
Dated: May 15, 1998 By: /s/ Virginia M. Deisch
_____________________________________
Virginia M. Deisch
President and Chief Executive Officer
(principal executive officer)
Dated: May 15, 1998 By: /s/ Michael P. Cooper
_____________________________________
Michael P. Cooper
Chief Financial Officer and Treasurer
(principal financial and accounting
officer)
13
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S><C>
Net income .................................................................. $ 65 $ 75
---- ----
Average shares outstanding .................................................. 398 425
==== ====
Per share amount ............................................................ $0.16 $0.18
==== ====
Net income .................................................................. $ 65 $ 75
---- ----
Average shares outstanding .................................................. 398 425
==== ====
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 ........................................... 398 425
==== ====
Per share amount ............................................................ $0.16 $0.18
==== ====
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
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 therein.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 508
<INT-BEARING-DEPOSITS> 2,877
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,557
<INVESTMENTS-CARRYING> 5,150
<INVESTMENTS-MARKET> 0
<LOANS> 37,477
<ALLOWANCE> 58
<TOTAL-ASSETS> 53,295
<DEPOSITS> 30,601
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 374
<LONG-TERM> 14,620
0
0
<COMMON> 0
<OTHER-SE> 6,987
<TOTAL-LIABILITIES-AND-EQUITY> 53,295
<INTEREST-LOAN> 769
<INTEREST-INVEST> 186
<INTEREST-OTHER> 13
<INTEREST-TOTAL> 968
<INTEREST-DEPOSIT> 363
<INTEREST-EXPENSE> 568
<INTEREST-INCOME-NET> 400
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 364
<INCOME-PRETAX> 99
<INCOME-PRE-EXTRAORDINARY> 99
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
<YIELD-ACTUAL> 7.49
<LOANS-NON> 172
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 66
<CHARGE-OFFS> 8
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 58
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 58
</TABLE>
