The primary investment activity of the Company for the three months ended March 31, 2002 was the purchase of mortgage-backed securities. The most significant source of funds for the three months ending March 31, 2002, was the repayment of $3.7 million in mortgage loans.
The Bank is required to maintain a minimum level of liquidity consistent with the safe and sound operation of the institution. 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, 2002, assets qualifying for short-term liquidity, including cash and short-term investment, totaled approximately $6.7 million.
At March 31, 2002, 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 9.13% and 17.79%, respectively.
Comparison of Results of Operations For The Three Months Ended March 31, 2002 and 2001.
GENERAL.The Company reported net income of $65,000 for the three months ending March 31, 2002, which represents a 76% increase of net income reported for the three months ended March 31, 2001.
Comprehensive income for the three months ending March 31, 2002 was $43,000 compared to a comprehensive loss of $90,000 for the three months ending March 31, 2001. 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.
INTEREST AND DIVIDEND INCOME.Interest and dividend income for the three months ended March 31, 2002 decreased 18.5%. Interest income on loans decreased by 11.8% to $1.0 million for the three months ended March 31, 2002. This was primarily due to a lower average balance of loans. Other investments and investment bearing deposits decreased by 55.6% to $87,000 for the three months ended March 31, 2002, mainly due to lower average investments and a lower interest rate environment.
INTEREST EXPENSE. Interest expense for the three months ended March 31, 2002 was $600,000 compared to $879,000 for the three months ended March 31, 2001, a decrease of 31.7%. Interest expense on deposits decreased 37.8% due to lower interest rates paid on deposits. Interest expense on borrowed money decreased by $114,000 to $329,000 for the three months ended March 31, 2002 due to lower average FHLB advances outstanding.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income before provision for loan losses increased 10.0% to $449,000 for the three months ended March 31, 2002.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased from $9,000 for the three months ending March 31, 2001 to $15,000 for the three months ended March 31, 2002. The loan loss was increased to reflect the increase in the amount of loans secured by non-owner occupied real estate located outside the Cincinnati lending area.
The Company uses different formulas to determine the appropriate level of provision necessary for the allowance for loan losses to cover the losses in the loan portfolio. Because future events affecting the loan portfolio cannot be predicted with complete accuracy, there can be no assurances that management’s estimates are correct and that the existing allowance for loan losses is adequate. However, management believes that based on the information available to it on March 31, 2002, the Company’s allowance for loan losses is sufficient to cover losses inherent in the Company’s current loan portfolio.
OTHER INCOME. Other income decreased by $1,000 to $130,000 for the three months ended March 31, 2002.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the three months ended March 31, 2002 were $469,000 compared to $470,000 for the three months ended March 31, 2001. Compensation and benefits increased $19,000, primarily due to the increased wages for loan origination volume.
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INCOME TAXES.Income taxes for the three months ended March 31, 2002 increased by $7,000 to $30,000 due to an increase in pretax earnings. Net income before tax provision was $95,000 for the three months ended March 31, 2002, compared to net income of $60,000 for the same period ending March 31, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS. On July 29, 2001, the FASB issued SFAS 141 and 142. SFAS 141 requires that all business combinations be accounted for under a single method, the purchase method. The use of the pooling of interest method is no longer permitted. SFAS 141 requires that the purchase method be used for combinations initiated after September 30, 2001. SFAS 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. These statements have no material effect on the Company at this time since it has not been involved in a business combination subject to SFAS 141 and does not have goodwill or other intangible aseets subject to SFAS 142.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On September 25, 2001, Virginia M. Heitzman, the former CEO and President of Lenox and the Bank, filed with the American Arbitration Association a demand for arbitration with the Lenox and the Bank. Ms. Heitzman’s demand sets forth claims for, among other things, reinstatement of employment and an unspecified amount of damages, including punitive damages, as a result of alleged wrongful termination of her employment agreements with Lenox and the Bank. On July 13, 2001 the Boards of Directors of Lenox and the Bank notified Ms. Heitzman of the termination of her employment agreements for cause. Lenox and the Bank have accrued for the potential payout of the employment agreements and are contesting the arbitration demands of Ms. Heitzman. The matter is currently pending before the American Arbitration Association panel. Lenox and the Bank have filed a motion to stay or dismiss the case. The motion to dismiss was denied by the arbitrator who also ruled that Ms. Heitzman was entitled to compensation from Lenox only (and not the Bank) during the pendency of the arbitration. Lenox has filed a complaint with the Federal District Court for the Southern District of Ohio to vacate that award. Lenox and the Bank submitted to the FDIC the question as to whether Ms. Heitzman is entitled to any payment under applicable federal regulations prohibiting such payments by certain institutions regulated by the FDIC and the Holding Company. On March 29, 2002, the FDIC determined that Ms. Heitzman was not entitled to any of the payments she is seeking. Nevertheless, Ms. Heitzman continues to pursue her arbitration claims.
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.
None
Item 5. Other Information.
None.
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Item 6. Exhibits and Reports on Form 8-K (ss.249.308 of this Chapter).
(a) Exhibits
None
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LENOX BANCORP, INC.
Dated: May 8, 2002
Dated: May 8, 2002 | By:/s/ John C. Lame
John C. Lame
President and Chief Executive Officer
(principal executive officer)
By:/s/ Jane Schank
Jane Schank
Secretary and Treasurer |
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