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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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-28162
LENOX BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
Ohio 31-1445959
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(State or other jurisdiction of incorporation (I.R.S. Employer
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)
Not Applicable
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(Former name, former address and former fiscal year,
if changes since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
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: 285,028 shares of common stock,
par value $0.01 per share, were outstanding as of November 12, 1999.
Transitional Small Business Disclosure Format (check one): Yes No X
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LENOX BANCORP, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
Page
----
PART I. FINANCIAL INFORMATION..............................................3
Item 1. Financial Statements-Unaudited........................................3
Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998...........................3
Consolidated Statements of Operations - For the Three
Months and Nine Months Ended September 30, 1999 and 1998...........4
Consolidated Statements of Cash Flows - For the
Nine Months Ended September 30, 1999 and 1998......................6
Notes to Unaudited Consolidated Financial Statements...............7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................7
PART II: OTHER INFORMATION.................................................14
Item 1. Legal Proceedings....................................................14
Item 2. Changes in Securities and Use of Proceeds............................14
Item 3. Defaults Upon Senior Securities......................................14
Item 4. Submission of Matters to a Vote of Security Holders..................14
Item 5. Other Information....................................................14
Item 6. Exhibits and Reports on Form 8-K.....................................14
SIGNATURES....................................................................15
2
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
LENOX BANCORP, INC.
SEPTEMBER 30, 1999
Item 1. FINANCIAL STATEMENTS.
LENOX BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- --------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks......................................................... $ 1,200 $ 2,350
Certificates of deposit......................................................... 191 183
Investment securities - available for sale, at fair value (amortized cost of
$2,701 and $3,303 at September 30, 1999 and December 31, 1998)................ 2,570 3,301
Mortgage-backed securities - available for sale, at fair value (amortized
cost of $633 and $799 at September 30, 1999 and December 31, 1998)............ 623 805
Collateralized mortgage obligations - available for sale, at fair value
(amortized cost of $4,162 and $2,167 at September 30, 1999 and
December 31, 1998)........................................................... 4,199 2,179
Collateralized mortgage obligations - held to maturity, (fair value of
$0 and $5,992 at September 30, 1999 and December 31, 1998).................... - 5,925
Loan receivable, net............................................................ 60,079 38,308
Loans held for sale - at lower of cost or market................................ - 220
Accrued interest receivable:
Loans...................................................................... 316 161
Mortgage-backed securities................................................. 4 5
Collateralized mortgage obligation......................................... 21 40
Investments and certificates of deposit.................................... 38 63
Property and equipment, net..................................................... 443 564
Federal Home Loan Bank stock - at cost.......................................... 1,443 822
Prepaid expenses and other assets............................................... 322 157
Prepaid federal income taxes.................................................... 74 6
-- -
Total assets........................................................... $71,523 $55,089
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Savings, club and other accounts........................................... $ 6,072 $ 5,113
Money market and NOW accounts.............................................. 4,693 4,813
Certificate accounts....................................................... 28,502 23,141
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Total deposits......................................................... 39,267 33,067
Advances from Federal Home Loan Bank.......................................... 27,053 14,440
Advance payments by borrowers for taxes and insurance......................... 174 162
Accrued expenses.............................................................. 194 161
-- ---
Deferred federal income taxes................................................. 71 112
Total liabilities...................................................... $66,759 $47,942
======= =======
Stockholders' Equity:
Common stock - no par value: 2,000,000 authorized, 425,677 issued
and 285,028 outstanding at Sept. 30, 1999 and 404,413 issued
and outstanding at December 31, 1998.................................... - -
Additional paid in capital................................................. 3,743 3,743
Retained earnings - substantially restricted............................... 4,114 4,216
Unearned ESOP shares....................................................... (240) (240)
Share acquired for Stock Incentive Plan.................................... (217) (235)
Treasury stock 140,649 shares at Sept. 30, 1999 and 21,264 shares
at December 31, 1998..................................................... (2,567) (348)
Unrealized gain (loss) on available for sale securities net of taxes....... (69) 11
---- --
Total stockholders' equity............................................. $ 4,764 $ 7,147
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Total liabilities and stockholders' equity................................. $71,523 $55,089
======= =======
</TABLE>
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<TABLE>
<CAPTION>
LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
--------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C>
INTEREST INCOME AND DIVIDEND INCOME
Loans.................................................. 1,030 728
Mortgage-backed securities............................. 12 15
Collateralized mortgage obligations.................... 83 131
Investments and interest bearing deposits.............. 47 72
FHLB stock dividends................................... 24 15
-- --
Total................................................ 1,196 961
INTEREST EXPENSE
Deposits............................................... 442 401
Borrowed money and capitalized leases.................. 368 201
--- ---
Total................................................ 810 602
Net interest income before provision for loan losses... 386 359
Provision for loan losses............................... 10 5
-- --
Net interest income after provision for loan losses.... 376 354
OTHER INCOME
Service fee income..................................... 42 35
Gain on sale of loans.................................. 32 22
Gain on sale of assets................................. -- 1
Gain (Loss) on sale of investments..................... (18) 12
---- --
Total................................................ 56 70
GENERAL AND ADMINISTRATIVE EXPENSES
Compensation and employee benefits..................... 170 171
Occupancy and equipment................................ 187 54
Federal insurance premium.............................. 5 5
Franchise taxes........................................ 17 21
Other expenses......................................... 162 106
--- ---
Total................................................ 541 357
Income (Loss) before provision for income taxes....... (109) 67
Provision (Credit) for income taxes..................... (35) 23
---- --
Net income (loss)...................................... (74) 44
==== ==
Basic earnings (loss) per share........................ (0.30) 0.11
====== ====
Diluted earnings (loss) per share...................... (0.29) 0.11
====== ====
</TABLE>
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<TABLE>
<CAPTION>
LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
-------------- ---------------
(Unaudited)
(Dollars in thousands, except
per share data)
-------------------------------
<S> <C> <C>
INTEREST INCOME AND DIVIDEND INCOME
Loans................................................. 2,655 2,224
Mortgage-backed securities............................ 34 50
Collateralized mortgage obligations................... 249 354
Investments and interest-bearing deposits............. 161 231
FHLB stock dividends.................................. 54 41
-- --
Total........................................... 3,153 2,900
INTEREST EXPENSE
Deposits.............................................. 1,261 1,162
Borrowed money and capitalized leases................. 805 610
--- ---
Total........................................... 2,066 1,772
Net interest income before provision for loan losses.. 1,087 1,128
Provision for loan losses.............................. 28 10
-- --
Net interest income after provision for loan losses... 1,059 1,118
OTHER INCOME
Service fee income.................................... 102 108
Gain on sale of loans................................. 79 73
Gain on sale of assets................................ -- 1
Gain on sale of investments........................... 5 12
- --
Total........................................... 186 194
GENERAL AND ADMINISTRATIVE EXPENSES
Compensation and employee benefits.................... 497 487
Occupancy and equipment............................... 295 158
Federal insurance premiums............................ 15 14
Franchise taxes....................................... 62 61
Other expenses........................................ 447 347
--- ---
Total........................................... 1,316 1,067
Income (Loss) before provision for income taxes...... (71) 245
Provision (Credit) for income taxes................... (18) 83
---- --
Net income (loss)..................................... (53) 162
==== ===
Basic earnings (loss) per share....................... (0.17) 0.41
====== ====
Diluted earnings (loss) per share..................... (0.16) 0.40
====== ====
</TABLE>
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<TABLE>
<CAPTION>
LENOX BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
SEPTEMBER 30, 1999
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
-------------- ---------------
(Unaudited)
(Dollars in thousands)
-------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. (53) 162
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization................................... 222 52
Provision (credit) for losses on loans.......................... 28 10
Amortization of deferred loan fees.............................. (9) (22)
Deferred loan origination fees (cost)........................... (79) 3
FHLB stock dividends............................................ (54) (42)
Gain on sale of investments..................................... (5) (12)
Gain on sale of loans........................................... (80) (73)
Gain on sale of assets.......................................... -- (1)
Amortization of stock incentive plan award...................... 19 18
ESOP expense, net of tax benefit................................ 50 34
Effect of change in operating assets and liabilities:
Accrued interest receivable................................... (110) 32
Prepaid expenses.............................................. (165) (70)
Advances by borrowers for taxes and insurance................. 12 (40)
Accrued expenses.............................................. 33 48
Accrued federal income taxes.................................. (68) (40)
Deferred federal income taxes................................. (41) 7
---- --
Net cash provided (used) by operating activities.............. (300) 66
Cash flows from investing activities:
Property and equipment additions.................................. (66) (28)
Repayments of mortgage-backed securities.......................... 160 128
Purchase of certificates of deposits.............................. (8) (7)
Loan disbursements................................................ (34,749) (12,231)
Loan principal repayments......................................... 7,286 9,564
Proceeds from sale of investments................................. 2,348 612
Proceeds from sale of mortgage loans.............................. 5,997 4,861
Proceeds from sale of assets...................................... -- 1
Purchase of FHLB stock............................................ (567) (141)
Purchase of investments - HTM..................................... -- (1,858)
Purchase of investments - AFS..................................... -- (3,871)
Maturity of investments - HTM..................................... 1,337 698
Maturity of investments - AFS..................................... 867 2,800
Net cash used by investing activities........................... (17,395) 528
Cash flows from financing activities:
Net increase (decrease) in deposits............................... 6,200 537
Borrowings from FHLB.............................................. 21,000 4,050
Repayments of FHLB advances....................................... (8,387) (2,317)
Purchase Treasury Stock........................................... (2,223) (63)
Reissue Treasury Stock............................................ 4 --
Dividends paid.................................................... (49) (58)
---- ----
Net cash provided by financing activities....................... 16,545 2,149
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Increase (decrease) in cash and cash equivalents.................... (1,150) 2,743
Cash and cash equivalents at beginning of period.................... 2,350 664
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Cash and cash equivalents at end of period.......................... 1,200 3,407
===== =====
Supplemental disclosure:
Cash paid for:
Interest expense................................................. 2,026 1,795
Income taxes..................................................... 51 130
</TABLE>
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LENOX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1. Principles of Consolidation
---------------------------
The consolidated unaudited financial statements include the accounts of
Lenox Bancorp, Inc. ("Lenox" or the "Company"), its wholly-owned subsidiary
Lenox Savings Bank (the "Bank"), and the Bank's wholly-owned subsidiary Lenox
Mortgage Corp. All significant intercompany transactions have been eliminated in
consolidation. The investment in the Bank by the company on Lenox's financial
statements is carried at the parent Company's equity in the underlying net
assets.
The consolidated balance sheets as of September 30, 1999, and the related
consolidated statement of income and cash flows for the three and nine months
ending September 30, 1999 and 1998 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 and Regulation S-B. The interim statements are unaudited and should be
read in conjunction with the financial statements and notes thereto contained in
the Company's annual report for the year ended December 31, 1998.
2. Earnings Per Share
------------------
The net loss for the three months ended September 30, 1999, was $.30 per
share or $74,000 on an average of 246,992 shares, compared to net income for the
quarter ended September 30, 1998, of $44,000 or $.11 per share on an average of
396,729 shares. Loss for the nine months ending September 30, 1999, was $53,000
or $.17 per share on an average of 313,553 shares compared to a net income of
$162,000 or $.41 on an average of 397,294 shares for the nine months ended
September 30, 1998.
Item 2. Management 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,
1999, and should be read in conjunction with the Company'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 Bank 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.
7
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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
The Company's current strategic plan is to enhance its long-term
profitability, reduce the level of interest rate risk and improve market share.
Management is committed to achieving a substantial increase in the Company's
return on equity within the next three years. Improving earnings and reducing
capital levels are the two important steps toward meeting this objective.
Capital levels have been reduced through the Company's repurchase program, in
which approximately 120,000 shares were repurchased last quarter. Asset growth
has increased over 50% since the Bank's conversion from mutual to stock form in
1996. Asset growth is expected to continue due to special loan programs designed
for the Bank's niche market with Procter & Gamble employees, and an expansion of
the loan portfolio to include multi-family lending. The Company also intends to
enhance profitability by continuing to seek means of increasing non-interest
income through the generation of transaction fees, commissions and fees
generated from the newly formed Lenox Mortgage Corporation through the
origination and selling of mortgage loans. Management is committed to its goal
of 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 plan will enhance the long-term
profitability of the Company.
Comparison of Financial Condition at September 30, 1999 and December 31, 1998
- -----------------------------------------------------------------------------
ASSETS. Total assets increased by $16.4 million, or 29.8%, to $71.5
------
million at September 30, 1999 from $55.1 million at December 31, 1998. This
increase was due to a $21.8 million, or 56.8% increase in loans receivable from
$38.3 million at December 31, 1998, to $60.1 million at September 30, 1999. This
was due to an increase of $15.4 million, or 46.2%, in one-to four-family loans
from $33.3 million at December 31, 1998, to $48.6 million at September 30, 1999,
and an increase of $4.9 million, or 492.0%, in multi-family loans from $1.0
million at December 31, 1998 to $5.9 million at September 30, 1999, funded with
advances from the Federal Home Loan Bank ("FHLB"). The increase in loans were
obtained from third party originators. The FHLB stock increased $621,000 or
75.5%, from $822,000 at December 31, 1998, to $1.4 million at September 30, 1999
due to an increase in FHLB advances. The increase in assets was offset by a
$1.2 million decrease in cash and due from banks, from $2.4 million at December
31, 1998, to $1.2 million at September 30, 1999, as the cash was used to finance
the loans made. The increase in the assets was further reduced by a $913,000
decrease in investments and mortgage-backed securities to $3.2 million at
September 30, 1999, from $4.1 million at December 31, 1998, due to principal
payments and $700,000 in investment securities being called. Collateralized
Mortgage Obligations, ("CMOs") decreased $3.9 million, or 48.2%, to $4.2 million
at September 30, 1999 from $8.1 million at December 31, 1998, from the sale of
$2.4 million in CMOs and principal repayments on CMOs. The proceeds from the
sale of CMOs were used to fund higher yielding loans. On July 1, 1999, all CMOs
classified as "held to maturity" were moved to "available for sale" to increase
the Bank's liquidity level, as permitted under FASB, with SFAS No. 133, amended
by SFAS No. 137.
LIABILITIES. Total liabilities increased by $18.8 million or 39.2% from
-----------
$47.9 million at December 31, 1998 to $66.8 million at September 30, 1999,
primarily due to an increase in advances from the FHLB of $12.6 million, or
87.3%, from $14.4 million at December 31, 1998 to $27.1 million at September 30,
1999. The advances, with maturites of less than three years, were borrowed to
fund asset growth while lowering the cost of funds. Deposits increased $6.2
million or 18.7% to $39.3 million at September 30, 1999, from $33.1 million at
December 31, 1998. This increase in deposits was primarily due to a $5.4 million
increase in certificates of deposits to $28.5 million at September 30, 1999,
from $23.1 million at December 31, 1998, resulting from an aggressive approach
by management to attract deposits for loan demand, through competitive rates on
current products. Savings and other accounts also increased $959,000 to $6.1
million at September 30, 1999, from $5.1 million at December 31, 1998. These
increases were offset by a reduction of $120,000 in Money Market and NOW
accounts from $4.8 million at December 31, 1998 to $4.7 million at September 30,
1999.
8
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STOCKHOLDERS' EQUITY. Stockholders' equity decreased $2.4 million or 33.3%
--------------------
from $7.1 million at December 31, 1998, to $4.8 million at September 30, 1999.
The decrease was primarily due to the repurchase of 119,640 shares the Company's
outstanding common stock at a cost of $2.2 million, a decrease in market value
on securities of $80,000, net of taxes, the payment of a quarterly dividend, and
the net loss of $53,000. The repurchase of the Company's outstanding common
stock, completed in June 1999 was an important step in increasing the return on
equity over the next three years.
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, 1999, was the origination of mortgage (including multi-family) and
consumer loans in the amount of $34.7 million. The most significant source of
funds for the nine months ending September 30, 1999, was the borrowing of FHLB
advances totaling $21.0 million. Also, the repayment of loans totaled $7.3
million for the nine months ended September 30, 1999.
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, 1999, was 17.5%. 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
September 30, 1999, assets qualifying for short term liquidity, including cash
and short term investment, totaled $8.8 million.
At September 30, 1999, the Bank's capital exceeded all the capital
requirements of the FDIC, which are 4% for tier I capital and Tier II of 8%. The
Bank's tier 1 leverage and total capital to risk-wieghted capital ratios were
6.5% and 12.6%, respectively.
Comprehensive income (loss) for the nine months ending September 30, 1999,
and 1998 was ($130,000) and $197,000, 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.
At September 30, 1999, the Company had commitments to originate loans and
outstanding lines of credit and undisbursed proceeds of construction mortgages
totaling $3.9 million. The Company anticipates that it will have sufficient fund
available to meet its current loan origination commitments. Certificate
accounts, which are scheduled to mature in less than one year from September 30,
1999, totaled $ 15.1 million. The Company expects that substantially all of the
maturing certificate accounts will be retained by the Company at maturity.
Comparison of Results of Operations for the Three months ending September 30,
- -----------------------------------------------------------------------------
1999, and 1998.
- --------------
GENERAL. The Company reported a net loss of $74,000 for the three months
-------
ending September 30, 1999, representing a $118,000 decrease from the three
months ended September 30, 1998. This decrease was primarily attributable to an
increase in the Company's general and administrative expenses from $357,000 for
the three months ended September 30, 1998 to $541,000 for the same period ended
September 30, 1999, resulting from a one time acceleration of the amortization
of leasehold improvements resulting from the termination of the lease agreement
with Procter & Gamble. Excluding the one-time charge, general and administrative
expenses would have been $403,000 for the three months period, which represents
a $46,000, or 12.9% increase from the three months ended September 30, 1998. In
addition to the increase in general and administrative expenses, the Bank's net
interest margin was reduced by the refinancing of mortgage loans that took place
in late 1998 and the early months of 1999, due to a lower interest rate
environment.
In July 1999 Procter and Gamble (P&G) advised the Company that it will not
renew the Company's lease for its main office in St. Bernard, Ohio, when the
lease becomes due on December 31, 1999. Management is currently seeking
alternative office space in and around the St. Bernard, Ohio area and is
confident that a new location will be found at or below the cost of the
Company's current lease with P&G prior to December 31, 1999;
9
<PAGE> 10
however, no assurance can be given that acceptable office space will be found or
that the Company's non-interest expense will not increase as a result of the
change in office location. As per the lease agreement P&G will reimburse the
Company an estimated $22,000 for the leasehold improvements at the lease
termination date. During this quarter, the Bank recognized a one time charge of
$138,000 for the amortization of leasehold improvements for the St. Bernard
location.
INTEREST AND DIVIDEND INCOME. Interest and dividend income for the three
----------------------------
months ended September 30, 1999 was $1.2 million compared to $961,000 for the
three months ended September 30, 1998, an increase of $235,000 or 24.5%. The
increase was primarily due to the increase in the average balance of loans to
$58.3 million at September 30, 1999 compared to $37.1 million for the same
period ended September 30, 1998, a $21.2 million or a 57.1% increase. However,
such increase was offset by a decrease in the average yield on interest earning
assets from 7.27% for the three months ended September 30, 1998, to 6.95% for
the three months ended September 30, 1999, due to a lower interest rate
environment and lower income earrned on CMOs.
INTEREST EXPENSE. Interest expense for the three months ended September
----------------
30, 1999, was $810,000 compared to $602,000 for the three months ended September
30, 1998, an increase of $208,000, or 34.6%, due to the increase in deposits and
borrowings from the FHLB to fund the increase in loan demand. The interest
expense on borrowed funds increased $167,000 from $201,000 for the three months
ended September 30, 1998, to $368,000 for the three months ended September 30,
1999. Deposits interest increased $41,000, or 10.2%, from $401,000 for the three
months ended September 30, 1998 to $442,000 for the three months ended September
30, 1999. The increase in the interest expensed on deposits was offset by a
decrease in the average yield from 4.83% for the three months ended September
30, 1998, to a yield of 4.59% for the three months ended September 30, 1999.
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. Net interest income
---------------------------------------------------
after provision for loan losses increased $22,000, or 6.2%, for the three months
ended September 30, 1999, to $376,000 from $354,000 for the three months ended
September 30, 1998. This increase takes into account an increase of $5,000 in
the provision for loan losses for the three months ending September 30, 1999, to
$10,000 compared to $5,000 for the three months ended September 30, 1998, due to
an increase in the loan portfolio. The increase in loan loss reserve was to the
increase lending. The total loan loss allowance is .14% of total loans
outstanding and 161.54% of nonperforming loans.
OTHER INCOME. Other income decreased $14,000, or 20.0%, for the three
------------
months ended September 30, 1999 to $56,000 from $70,000 for the three months
ended September 30, 1998. This decrease was primarily due to the loss on the
sale of investments of $18,000 for the three months ended September 30, 1999, as
compared to a gain on the sale of investments of $12,000 for the same period
ended September 30, 1998. It was management's decision to sell a low yielding
investment with premium risk and reinvest the funds into higher yielding loans
and recapture the loss in less than a one year period. This decrease in gain on
sale of investments was offset by the increase on the gain of sale of loans for
the three months ending September 30, 1999, was $32,000 compared to $22,000, an
increase of $10,000 or a 45.5% from the sale of loans for the same period ending
September 30, 1998 and the increase in service fee income which increased from
$35,000 for the three months ended September 30, 1998 to 42,000 for the same
period ended September 30, 1999 an increase of $7,000 or 20.0%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
-----------------------------------
for the three months ended September 30, 1999, were $541,000 compared to
$357,000 for the three months ended September 30, 1998, an increase of $184,000
or 51.5%. The increase was primarily due a one time charge for the acceleration
of the amortization of leasehold improvements resulting from the termination of
the lease agreement with Procter & Gamble. This one time charge of $138,000 is
reflected in occupancy and equipment expense that increased from $54,000 for the
three months ended September 30, 1998 to $187,000 for the same period ended
September 30, 1999, an increase of $133,000 or 246.3%. The other expenses
increased $56,000 or 52.8% from $106,000 for the three months ended September
30, 1998 to $162,000 for the three months ended September 30, 1999, primarily
attributable to additional accounting and legal fees for both the Company and
the Bank, an increase in printing and postage related to customer education on
Y2K, and temporary staffing. The compensation and employee benefits decreased
$1,000, which was offset by the cost of temporary help as reflected in other
expenses.
INCOME TAXES. The Company received an income tax credit for the three
------------
months ended September 30, 1999, of $35,000 compared to taxes of $23,000 for the
three months ended September 30, 1998.
10
<PAGE> 11
Taxes are calculated on net income less Employee Stock Ownership Plan ("ESOP")
expense as to Statement of Position ("SOP") 93-6.
Comparison of Results of Operations for the Nine months ended September 30,
- ---------------------------------------------------------------------------
1999, and 1998.
- ---------------
GENERAL. The Company reported a net loss of $53,000 for the nine months
-------
ended September 30, 1999, which represents a $215,000 decrease from the $162,000
of net income reported for the nine months ended September 30, 1998. This
decrease was attributable to a decrease in the Bank's net interest margin
resulting from loan refinancing in the first half of the year, due to a lower
interest rate environment, whereas the yields on deposits only decreased
slightly. Net interest income also decreased due to the prepayment of mortgages
underlying a portion of the Company's CMO portfolio, resulted in the Company
having to amortize premiums. Additionally, the Bank's general and administrative
expenses increased to $1.3 million for the nine months ended September 30, 1999,
from $1.1 million for the same period ended September 30, 1998. This increase in
general and administrative expenses was primarily attributable to the one time
charge for acceleration of the amortization of leasehold improvements resulting
from the termination of the lease agreement with Procter & Gamble and to
additional expenses related to the Company's annual meeting. Excluding the
one-time charge, the net income for the nine months ended September 30, 1999
would have been $38,000.
INTEREST AND DIVIDEND INCOME. Interest and dividend income for the nine
----------------------------
months ended September 30, 1999 increased $253,000, or 8.7%, to $3.2 million
from $2.9 million for the nine months ended September 30, 1998, due to the
increase in the average interest-earning assets, which increased from $52.7
million for the nine months ended September 30, 1998, to $ 61.2 million for the
nine months ended September 30, 1999, due to increased lending. This increase
was offset by a decrease in the average yield from 7.34% for the nine months
ended September 30, 1998 to 6.87% for the nine months ended September 30, 1999.
The decrease in the yield on earning assets was primarily a result of
refinancing due to a lower interest rate environment and the amortization of the
premiums on a portion of the Bank's CMO portfolio were accelerated due to
increased prepayments during the first quarter of this year.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
----------------
1999, was $2.1 million compared to $1.8 million for the nine months ended
September 30, 1998, an increase of $294,000 or 16.6% due to the increase in
deposits and borrowings from the FHLB to fund the increase in loan demand.
Interest on deposits increased $99,000, or 8.5%, to $1.3 million for the nine
months ended September 30, 1999, from $1.2 million for the nine months ended
September 30, 1998. This increase was due to a $4.1 million increase in the
average balance of deposits from $32.9 million for the nine months ended
September 30, 1998 to $37.1 million for the nine months ended September 30,
1999. Such increase was offset by a 13 basis point decrease in the average yield
from 4.72% for the nine months ended September 30, 1998 to 4.59% for the nine
months ended September 30, 1999. The interest expense on borrowed funds
increased $195,000, or 32.0%, to $805,000 for the nine months ended September
30, 1999 from $610,000 for the nine months ended September 30, 1998. The average
balance on borrowed funds increased $4.9 million from $14.4 million for the nine
months ended September 30, 1998 to $19.3 million for the nine months ended
September 30, 1999. The increase of interest on borrowed funds was offset by a
19 basis point decrease in the average yield from 5.81% for the nine months
ended September 30, 1998 to 5.62% for the nine months ended September 30, 1999.
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. Net interest income
---------------------------------------------------
after provision for loan losses decreased $59,000, or 5.3%, for the nine months
ended September 30, 1999 compared to the nine months ended September 30, 1998.
This decrease takes into accounts an increase of $18,000 provision for loan
losses for the nine months ended September 30, 1999 to $28,000 compared to
$10,000 for the nine months ended September 30, 1998, due to an increase in the
loan portfolio and the additional risk with increasing multi-family lending. The
total loan loss allowance is .14% of total loans outstanding and 161.54% of
nonperforming loans. The remaining decrease is a result of the net interest
margin decreasing 48 basis points from 2.80% for the nine months ended September
30, 1998 to 2.32% for the nine months ended September 30, 1999.
OTHER INCOME. Other income decreased $8,000 or 4.1% for the nine months
------------
ended September 30, 1999, to $186,000 from $194,000 for the nine months ended
September 30, 1998. This decrease was due to a $7,000 decreasing the gain on the
sale of investments from $12,000 for the nine months ended September 30, 1998,
to $5,000 for the nine months ended September 30, 1999, a decrease in service
fee income from $108,000 for the nine months ended September 30, 1998 to
$102,000 for the same period ended September 30, 1999. These decreases
11
<PAGE> 12
were offset by an increase in loan sales of $6,000 to $79,000 for the nine
months ended September 30, 1999, from $73,000 for the nine months ended
September 30, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
-----------------------------------
for the nine months ended September 30, 1999, was $1.3 million compared to $1.1
million for the nine months ended September 30, 1998, an increase of $249,000 or
23.3%. The increase was primarily due to an increase of $137,000, or 86.7%, in
occupancy and equipment expenses from $158,000 for the nine months ended
September 30, 1998, to $295,000 for the nine months ended September 30, 1999,
due to a one time charge of $138,000 for the amortization of leasehold
improvements for the St. Bernard location. Other expenses also increased by
$100,000 or 28.8% from $347,000 for the nine months ended September 30, 1998 to
$447,000 for the nine months ended September 30, 1999, due to additional
expenses related to the Company's annual meeting. Included in other expenses are
expenses of temporary employees of $11,000 for the nine months ended September
30, 1999, compared to no expense for the nine months ended September 30, 1998,
this temporary employee expenses replace salaries that would normally been in
the compensation and employee benefits expense. In addition to other expenses,
compensation and employee benefits increased $10,000 or 2.1% from $487,000 for
the nine months ended September 30, 1998, to $497,000 for the nine months ended
September 30, 1999, due to normal salary adjustments.
INCOME TAXES. The Company received an income tax credit for the nine
------------
months ended September 30, 1999, of $18,000 compared to income taxes of $83,000
for the nine months ended September 30, 1998. Taxes are calculated on net income
less Employee Stock ownership Plan ("ESOP") expense as to Statement of Position
("SOP") 93-6.
RECENT ACCOUNTING PRONOUNCEMENTS.
--------------------------------
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." which significantly changed the way that
public business enterprises report information about operating segments in
annual and interim financial statements issued to shareholders. SFAS No. 131
uses a "management approach" to disclose financial and descriptive information
about an enterprise's reportable operating segments which is based on
management's method for making operating decisions and assessing performances.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. There was no effect from the adoption of this pronouncement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting. The definition of a derivative financial instrument is complex, but
in general, it is an instrument with one or more underlyings, such as an
interest rate or foreign exchange rate, that is applied to a notional amount,
such as an amount of currency, to determine the settlement amount(s). It
generally requires no significant initial investment and can be settled net or
by delivery of an asset that is readily convertible to cash. SFAS No. 133
applies to derivatives embedded in other contracts, unless the underlying of the
embedded derivative is clearly and closely related to the host contract.
SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. On adoption, entities are permitted to transfer
held-to-maturity debt securities to the available-for-sale or trading category
without calling into question their intent to hold other debt securities to
maturity in the future. SFAS No. 133 is not expected to have a material impact
on the Company's financial position or results of operations.
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",
(Y2K). The Bank primarily utilizes a third party vendor and such vendor's
proprietary software to process its electronic data.
12
<PAGE> 13
The third party data processor vender has modified, upgraded or replaced 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 and is deemed to be in compliance. The third party vendors also
have engaged various consultants to review its Year 2000 issues and have
implemented a Year 2000 compliance program. The Bank has received a
representation from its primary third party data processing vendor that it has
completed all of the Year 2000 problems in its software and is Year 2000
compliant. The Bank has also implemented its Year 2000 plan and tested its
internal system for compliance status and is deemed to be in compliance.
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-informational and technology systems. In the event that the Bank's
significant suppliers or other vendors prove not to be Year 2000 compliant, the
Bank has prepared a contingency plan, which uses a manual system, in the event
there are any system interruptions. There can be no assurance, however, that
such plan or the performances by any of the Bank's suppliers will be effective
to remedy all potential problems. In the worst case scenario, there could be a
run on the Bank or the Bank could lose communication with the data processing
center. In both cases, remedies have has been covered in the contingency plan.
The Bank has upgraded its' technology system 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, 1999,
the Bank has incurred cost of approximately $18,000. The current budget for Year
2000 issues is $20,000 but is not limited to that amount. The Bank's systems
have been tested and appear to be Year 2000 compliant, but additional cost may
be incurred in the education of the Bank's customers. Lenox has developed a
customer awareness plan for all customers which began in August and will
continue throughout the year. The awareness plan includes the education of Y2K,
preparation for Y2K, and scams that may occur during the change of the century.
After evaluating the customer base and because substantially all of which are
individuals rather than commercial enterprises, management believes that Year
2000 issues will not materially impair the ability of the Bank's borrowers to
repay their debts.
13
<PAGE> 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
None.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Other Information.
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K (Section 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,
1999.
14
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
LENOX BANCORP, INC.
Dated:November 12, 1999 By: /s/ Virginia M. Deisch
-------------------------------------
Virginia M. Deisch
President and Chief Executive Officer
(principal executive officer)
Dated:November 12, 1999 By: /s/ Michael P. Cooper
-------------------------------------
Michael P. Cooper
Chief Financial Officer and Treasurer
(principal financial and accounting
officer)
15
<PAGE> 16
EXHIBIT INDEX
PAGES
-----
11.0 Statement re: Computation of Per Share Earnings 17-18
27.0 Financial Data Schedule (submitted only with electronic filing) --
16
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 11.0
COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net income (Loss)..................................... (74) 44
Average shares outstanding............................ 247 397
--- ---
Per share amount...................................... (0.30) 0.11
====== ====
Net income (Loss)..................................... (74) 44
Average shares outstanding............................ 247 397
--- ---
Net effect of dilutive stock options based on the
treasury stock method using the average market
price or quarter end price, whichever is greater.. 12 6
-- --
Total shares outstanding.................... 259 403
--- ---
Per share amount...................................... (0.29) 0.11
====== ====
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
EXHIBIT 11.0
COMPUTATION OF PER SHARE EARNINGS
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
NET INCOME (LOSS)................................ (53) 162
AVERAGE SHARES OUTSTANDING....................... 314 397
--- ---
PER SHARE AMOUNT................................. (0.17) 0.41
====== ====
NET INCOME (LOSS)................................ (53) 162
AVERAGE SHARES OUTSTANDING....................... 314 426
--- ---
NET EFFECT OF DILUTIVE STOCK OPTIONS BASED ON THE
TREASURY STOCK METHOD USING THE AVERAGE MARKET
PRICE OR QUARTER END PRICE, WHICHEVER IS GREATER.. 11 6
-- -
TOTAL SHARES OUTSTANDING............... 325 403
--- ---
PER SHARE AMOUNT................................. (0.16) 0.40
====== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the Form 10-QSB
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001000050
<NAME> Lenox Bancorp, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,200
<INT-BEARING-DEPOSITS> 191
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,392
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 60,163
<ALLOWANCE> 84
<TOTAL-ASSETS> 71,523
<DEPOSITS> 39,267
<SHORT-TERM> 10,723
<LIABILITIES-OTHER> 439
<LONG-TERM> 16,769
0
0
<COMMON> 0
<OTHER-SE> 4,764
<TOTAL-LIABILITIES-AND-EQUITY> 71,523
<INTEREST-LOAN> 2,655
<INTEREST-INVEST> 498
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,153
<INTEREST-DEPOSIT> 1,261
<INTEREST-EXPENSE> 2,066
<INTEREST-INCOME-NET> 1,087
<LOAN-LOSSES> 28
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 1,316
<INCOME-PRETAX> (71)
<INCOME-PRE-EXTRAORDINARY> (71)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.16)
<YIELD-ACTUAL> 6.87
<LOANS-NON> 52
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 13
<ALLOWANCE-OPEN> 66
<CHARGE-OFFS> 14
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 84
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 84
</TABLE>
