<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of
For the fiscal year ended December 31, 1998
-----------------
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ___________________ to ___________________
Commission file number 333-43361
------------
WESTERN RESERVE BANCORP, INC.
-----------------------------
(Name of Small Business Issuer in Its Charter)
Ohio 31-1566623
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4015 Medina Road, Suite 100, Medina, Ohio 44256
- ----------------------------------------- -----------------------
(Address of Principal Executive Offices) (Zip Code)
(330) 764-3131
------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value, $1.00 stated value
- --------------------------------------------------------------------------------
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the Issuer was required to file such reports), and
(2) has been subject to such filing requirements for past 90 days.
Yes [x] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B contained in this form, and no disclosure will be contained, to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [x]
The Issuer's gross revenues for its most recent fiscal year were $ 200,193.
The aggregate market value of the voting stock held by non-affiliates of the
Issuer as of March 24, 1999 was approximately $5,375,340. As of said date, the
Issuer had 320,267 shares of Common Stock issued and outstanding.
Documents incorporated by reference:
Part II--Portions of Registrant's 1998 Annual Report to Shareholders.
Part III--Portions of Registrant's 1998 Proxy Statement for Annual Meeting
of Shareholders to be held April 28, 1999
Transitional Small Business Disclosure Format (check one): Yes [ ] No [x]
Page 1 of 21
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
GENERAL
The Company, an Ohio corporation incorporated on February 25, 1997, is a bank
holding company that owns all of the capital stock of the Western Reserve Bank,
an Ohio state-chartered bank located in Medina, Ohio (the "Bank"). From the date
of the Company's inception through October 1998, the Company and the Bank
conducted no business other than matters incidental to their organization and
opening for business. On February 24, 1998, the Company commenced an initial
public offering (the "Offering") of up to 500,000 shares of its Common Stock
pursuant to a Registration Statement on Form SB-2 filed with the Securities and
Exchange Commission ("SEC") on February 12, 1998, as amended. The Offering was
concluded on July 1, 1998. A total of 320,267 shares of the Company's common
stock were sold, with proceeds, net of offering costs, of $6,368,499.
Approximately $5,800,000 of the proceeds was used to provide initial
capitalization for the Bank. The Bank commenced business on November 6, 1998.
The Company and the Bank currently maintain their offices at 4015 Medina Road,
Suite 100, Medina, Ohio 44256. The Company's telephone number is (330) 764-3131.
BUSINESS STRATEGY
In the past few years, many of the financial institutions in the Medina County
market area have been acquired by large regional organizations headquartered
outside of the area. As a result, the organizers believed that the competitive
and economic environment was right for a new, independent, locally owned and
managed bank to serve the financial needs of the residents and businesses in the
Medina area. The Company is a bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended. Currently, the only business the
Company is engaged in is the ownership of its wholly owned bank subsidiary,
Western Reserve Bank. However, in the future, the holding company structure
could provide flexibility for the expansion of the Company's business through
additional banking-related services which commercial banks are currently unable
to provide under current law.
The Bank offers a broad range of deposit services for consumers and businesses,
including noninterest-bearing and interest-bearing checking accounts, savings
and money market accounts, time certificates of deposit and individual
retirement accounts. The Bank engages in a full line of lending activities,
including commercial loans, consumer loans to individuals for household, family
and other personal expenditures, real estate loans, including first mortgage
loans, home equity loans and construction loans. While the Bank makes
residential mortgage loans, substantially all of such fixed-rate loans are sold
to a bank that specializes in serving the community bank mortgage market. The
Bank also offers other services, including credit, debit and ATM cards with
access to regional and national automated teller networks, safe deposit boxes,
cashiers checks, traveler's checks and an ATM.
Under applicable law, the Bank is permitted to make loans to individual
borrowers in aggregate amounts of up to 15 percent of the sum of the Bank's
total capital and allowance for loan losses. At December 31, 1998, the Bank's
legal lending limit was approximately $854,000. The Board of Directors has
established an "in-house" limit of $750,000. The Board may from time to time
raise or lower the "in-house" limit as it deems appropriate to comply with safe
and sound banking practices and respond to overall economic conditions. The
Company believes that the Bank's legal lending limit is adequate to satisfy the
credit needs of most of its clients. For credit needs that exceed the Bank's
legal lending limit, the Bank has the ability to participate with other banks to
meet the credit need. In such instances, the Bank intends to be the lead bank in
the loan arrangement.
The Bank's market area is competitive. There are many commercial banks,
savings institutions and credit unions with multiple offices in its primary
service area of Medina County. However, in the past few years, many of the
area's financial institutions have been acquired by large
Page 2 of 21
<PAGE> 3
regional organizations headquartered outside of the Medina area. As a result of
such consolidation, the Company believes that the competitive and economic
environment is right for a new, independent, locally owned and managed bank such
as Western Reserve Bank to serve the financial needs of Medina area residents
and businesses. The Bank also faces competition from finance companies,
insurance companies, mortgage companies, securities brokerage firms, money
market funds, loan production offices and other providers of financial services.
EMPLOYEES
At December 31, 1998, the Bank has 11 full-time and four part-time employees.
None of its employees are covered by a collective bargaining agreement. The
Company considers its employee relations to be excellent.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively regulated
under federal and state law. As a result, the growth and earnings performance of
the Company can be affected not only by management decisions and general
economic conditions, but also by the requirements of applicable state and
federal statutes and regulations and the policies of various governmental
regulatory authorities including, but not limited to, the Board of Governors of
the Federal Reserve System (the "FRB"), the Federal Deposit Insurance
Corporation (the "FDIC"), the Ohio Division of Financial Institutions (the
"Division"), the Internal Revenue Service and state taxing authorities and the
Securities and Exchange Commission (the "SEC"). The effect of such statutes,
regulations and policies can be significant, and cannot be predicted with a high
degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions such as the Company and the Bank regulate, among other things, the
scope of business, investments, reserves against deposits, capital levels
relative to operations, the nature and amount of collateral for loans, the
establishment of branches, mergers, consolidations and dividends. The system of
supervision and regulation applicable to the Company and the Bank establishes a
comprehensive framework for their respective operations and is intended
primarily for the protection of the FDIC's deposit insurance funds and the
depositors, rather than the shareholders, of financial institutions.
The following references to material statutes and regulations affecting the
Company and the Bank are brief summaries thereof and do not purport to be
complete, and are qualified in their entirety by reference to such statutes and
regulations. Any change in applicable law or regulations may have a material
effect on the business of the Company and the Bank.
THE COMPANY
GENERAL. The Company, as the sole stockholder of the Bank, is a bank holding
company. As a bank holding company, the Company is registered with, and is
subject to regulation by, the FRB under the Bank Holding Company Act of 1956
(the "BHCA") as amended. In accordance with FRB policy, the Company is expected
to act as a source of financial strength to the Bank and to commit resources to
support the Bank. Under the BHCA, the Company is subject to periodic examination
by the FRB and is required to file with the FRB periodic reports of its
operations and such additional information as the FRB may require. The Company
is also subject to regulation by the Division under Ohio law.
INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding company must obtain
FRB approval before acquiring substantially all the assets of any bank or bank
holding company or ownership or control of any voting shares of any bank or bank
holding company if, after such acquisition, it would
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own or control, directly or indirectly, more than five percent (5%) of the
voting shares of such bank or bank holding company.
The BHCA also prohibits, with certain limited exceptions, the Company from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company, and from
engaging in any business other than that of banking, managing and controlling
banks or furnishing services to banks and their subsidiaries. The principal
exception to this prohibition allows bank holding companies to engage in, and to
own shares of companies engaged in, certain businesses found by the FRB to be
"so closely related to banking ... as to be a proper incident thereto." Under
current regulations of the FRB, the Company is permitted to engage in, among
other activities, such banking-related activities as making or servicing loans
or certain types of leases; engaging in certain insurance and discount brokerage
activities; performing certain data processing services; acting in certain
circumstances as a fiduciary or investment or financial advisor; and making
investments in certain corporations or projects designed primarily to promote
community welfare. The Company has no present plans to engage in such
activities.
Bank holding companies are restricted in, and subject to, limitations regarding
transactions with subsidiaries and other affiliates. In addition, bank holding
companies and their subsidiaries are prohibited from engaging in certain
"tie-in" arrangements in connection with any extensions of credit, leases, sales
of property or furnishing of services.
Subject to certain restrictions, the Company will be able to borrow money to
make a capital contribution to the Bank and for other proper corporate purposes,
and such loans can be repaid from dividends paid by the Bank to the company.
There are no plans at the present time for the Company to borrow money under
such circumstances. The Company may also raise capital for the Bank and
otherwise by selling securities, as it did in its Offering.
Capital Requirements. Bank holding companies are required to maintain minimum
levels of capital in accordance with FRB capital adequacy guidelines. If capital
falls below minimum guideline levels, a bank holding company, among other
things, may be denied approval to acquire or establish additional banks or
non-bank businesses.
The FRB's capital guidelines establish the following minimum regulatory capital
requirements for bank holding companies: a risk-based requirement expressed as a
percentage of total risk-weighted assets, and a leverage requirement expressed
as a percentage of total assets. The risk-based requirement consists of a
minimum ratio of total capital to total risk-weighted assets of 8%, at least
one-half of which must be Tier 1 capital. The leverage requirement consists of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated
companies, with minimum requirements of 4% to 5% for all others. For purposes of
these capital standards, Tier 1 capital consists primarily of permanent
stockholders' equity less intangible assets (other than certain mortgage
servicing rights and purchased credit card relationships) and total capital
means Tier 1 capital plus certain other debt and equity instruments which do not
qualify as Tier 1 capital and a portion of the Company's allowance for loan and
lease losses.
The risk-based and leverage standards described above are minimum requirements,
and higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the FRB's capital guidelines contemplate that additional capital may be required
to take adequate account of, among other things, interest rate risk, or the
risks posed by concentrations of credit, nontraditional activities or securities
trading activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels.
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<PAGE> 5
Under the FRB's guidelines, the capital standards described above apply on a
consolidated basis to bank holding companies that have more than $150 million in
total consolidated assets, but generally apply on a bank-only basis to bank
holding companies, like the Company, that have less than $150 million in total
consolidated assets.
Dividends. The ability of the Company to obtain funds for the payment of
dividends and for other cash requirements will be largely dependent on the
amount of dividends which may be declared by its subsidiary, the Bank.
Generally, an Ohio state-chartered bank may not declare a dividend without the
approval of the Division, if the total of dividends declared by such bank in a
calendar year exceeds the total of its net profits for that year, combined with
its retained profits of the preceding two years. In addition, state-chartered
banks are subject to dividend regulation by the primary federal bank regulatory
agency in connection with general supervisory authority as it relates to a
bank's requirement to maintain adequate capital (See "Capital" above.)
THE BANK
GENERAL. The Bank is an Ohio-chartered bank and member of the Federal Reserve
System. The Bank is therefore regulated by the Division as well as the Board of
Governors of the Federal Reserve System. The regulatory agencies have the
authority to regularly examine the Bank and the Bank will be subject to the
regulations promulgated by its supervisory agencies. In addition, the deposits
of the Bank are insured by the FDIC to the fullest extent permitted by law and,
therefore, the Bank is subject to FDIC regulations.
DEPOSIT INSURANCE. As an FDIC-insured institution, the Bank is required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums based upon
their respective levels of capital and results of supervisory evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
For the year ended December 31, 1998, Bank Insurance Fund ("BIF") assessments
ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment
period beginning January 1, 1999, BIF assessment rates will continue to range
from 0% of deposits to 0.27% of deposits. Because the bank is "well capitalized"
for purposes of its deposit insurance premiums, it expects its initial annual
FDIC premium to be the statutory minimum.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during
the hearing process for a permanent termination of insurance if the institution
has no tangible capital. Management of the Company is not aware of any activity
or condition that could result in termination of the deposit insurance of the
Bank.
FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance assessments
paid by SAIF members has been used to cover interest payments due on the
outstanding obligations of the FICO, the entity created to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. Pursuant to federal legislation enacted
September 30, 1996, commencing January 1, 1997, both SAIF members and BIF
members became subject to assessments to cover the interest payments on
outstanding FICO obligations. Such FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. During the year ended December 31,
1998 the FICO assessment rate for SAIF members was approximately 0.063% of
deposits while the FICO assessment
Page 5 of 21
<PAGE> 6
rate for BIF members was approximately 0.013% of deposits. During the year ended
December 31, 1998 the Bank paid no FICO assessments. Management expects to be
subject to FICO assessments beginning in 1999.
CAPITAL REQUIREMENTS. The Federal Reserve, Division and FDIC require banks and
holding companies to maintain minimum capital ratios. The "risk-adjusted"
capital guidelines for the Bank and the Company involve a mathematical process
of assigning various risk weights to different classes of assets, then
evaluating the sum of the risk-weighted balance sheet structure against the
Bank's and Company's capital base. The rules set the minimum guidelines for the
ratio of capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) at 8%. Tier 1 Capital is
comprised of common equity, retained earnings, and a limited amount of perpetual
preferred stock less certain intangible items. At least half of the total
capital is to be Tier 1 Capital. The remainder may consist of a limited amount
of subordinated debt, other preferred stock, and a portion of the loan loss
reserves (not to exceed 1.25% of risk-weighted assets). The Bank anticipates
maintaining capital at a level sufficient to be classified as "well capitalized"
pursuant to the Federal Reserve guidelines.
In addition, the federal banking regulatory agencies have adopted leverage
capital guidelines for banks and bank holding companies. Under these guidelines,
banks and bank holding companies must maintain a minimum ratio of three percent
(3%) Tier 1 Capital to total assets. However, most banking organizations are
expected to maintain capital ratios well in excess of the minimum level and
generally must keep their Tier 1 ratio at or above 5%.
The Bank intends to maintain capital well above the regulatory minimum.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
FDIC provide that additional capital may be required to take adequate account
of, among other things, interest rate risk or the risks posed by concentrations
of credit, nontraditional activities or securities trading activities.
Pursuant to the Federal Reserve Bank's approval of Western Reserve Bank's
application for membership in the Federal Reserve System, the Bank is required
to maintain its Tier 1 tangible capital ratios at a minimum of 9.0% for its
first three years of operation. As of December 31, 1998, the Bank exceeded its
minimum regulatory capital requirements with a total risk-based capital ratio of
150.0%, a Tier 1 risk-based capital ratio of 150.0% and a leverage ratio of
60.8%. These ratios are expected to decrease to more normal levels as the Bank
increases its assets through normal banking operations in 1999 and beyond.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Depending upon the capital category to which an institution
is assigned, the regulators' corrective powers include: requiring the submission
of a capital restoration plan; placing limits on asset growth and restrictions
on activities; requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired; restricting transactions
with affiliates; restricting the interest rate the institution may pay on
deposits; ordering a new election of directors of the institution; requiring
that senior executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution. Management of the Company is not aware of any activity or condition
that could result in the aforementioned sanctions.
DIVIDENDS. Ohio law prohibits the Bank from paying dividends in an amount
greater than the total of its net profits for that year, combined with its
retained profits of the preceding two years without the prior approval of the
Division. The payment of dividends by any financial institution or its holding
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<PAGE> 7
company is also affected by the requirement to maintain adequate capital
pursuant to applicable capital adequacy guidelines and regulations, and a
financial institution generally is prohibited from paying any dividends if,
following payment thereof, the institution would be undercapitalized. As
described above, the Bank exceeded its minimum capital requirements under
applicable guidelines as of December 31, 1998. However, since the Bank has, to
date, not recorded a profit, as of December 31, 1998, $-0- was available to be
paid as dividends to the Company by the Bank. Additionally, as a condition of
its approval to commence operations, the Bank is prohibited from paying
dividends to the Corporation for a period of three (3) years without prior
written non-objection from the Board of Governors of the Federal Reserve .
ADDITIONAL REGULATION. The Bank is also subject to federal regulation as to such
matters as required reserves, limitations as to the nature and amount of its
loans and investments, regulatory approval of any merger or consolidation,
issuance or retirement by the Bank of its own securities, limitations upon the
payment of dividends and other aspects of banking operations. In addition, the
activities and operations of the Bank are subject to a number of addition
detailed, complex and sometimes overlapping laws and regulations. These include
state usury and consumer credit laws, state laws relating to fiduciaries, the
Federal Truth-in-Lending Act and Regulation Z, the Federal Equal Credit
Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth in
Savings Act, the Community Reinvestment Act, antiredlining legislation and
antitrust laws.
INSIDER TRANSACTIONS. The Bank is subject to certain restrictions imposed by the
Federal Reserve Act on extensions of credit by the Company and its subsidiary,
on investments in the stock or other securities of the Company and its
subsidiary and the acceptance of the stock or other securities of the Company or
its subsidiary as collateral for loans. Certain limitations and reporting
requirements are also placed on extensions of credit by the Bank to its
directors and officers, to directors and officers of the Company and its
subsidiary, to principal stockholders of the Company, and to "related interests"
of such directors, officers and principal stockholders. In addition, federal law
and regulations may affect the terms upon which any person becoming a director
or officer of the Company or its subsidiary or a principal stockholder of the
Company may obtain credit from banks with which the Bank maintains a
correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. In general, the guidelines prescribe the goals to be achieved in each
area, and each institution is responsible for establishing its own procedures to
achieve those goals. If an institution fails to comply with any of the standards
set forth in the guidelines, the institution's primary federal regulator may
require the institution to submit a plan for achieving and maintaining
compliance. The preamble to the guidelines states that the agencies expect to
require a compliance plan from an institution whose failure to meet one or more
of the guidelines is of such severity that it could threaten the safety and
soundness of the institution. Failure to submit an acceptable plan, or failure
to comply with a plan that has been accepted by the appropriate federal
regulator, would constitute grounds for further enforcement action.
BRANCHING AUTHORITY. Ohio banks, such as the Bank, have the authority under Ohio
law to establish branches anywhere in the State of Ohio, subject to receipt of
all required regulatory approvals.
In May 1997 Ohio adopted the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") which allows banks to establish
interstate branch networks through acquisitions of other banks, subject to
certain conditions, including certain limitations on the aggregate amount of
deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of de novo interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is allowed
by the Riegle-
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<PAGE> 8
Neal Act and authorized by Ohio law. Management currently has no plans to
establish any branch offices.
FEDERAL RESERVE SYSTEM. FRB regulations, as presently in effect, require
depository institutions to maintain noninterest earning reserves against their
transaction accounts (primarily NOW and regular checking accounts), as follows:
for transaction accounts aggregating $47.8 million or less, the reserve
requirement is 3% of total transaction accounts; and for transaction accounts
aggregating in excess of $47.8 million, the reserve requirement is $1.434
million plus 10% of the aggregate amount of total transaction accounts in excess
of $47.8 million. The first $4.7 million of otherwise reservable balances are
exempted from the reserve requirements. These reserve requirements are subject
to annual adjustment by the FRB. In 1998, the Bank was not yet subject to the
foregoing requirements. The Bank expects to be subject to these requirements in
1999.
PENDING LEGISLATION. Legislation is pending in the Congress that would allow
bank holding companies to engage in a wider range of nonbanking activities,
including greater authority to engage in securities and insurance activities.
Congress also regularly considers legislation that may have an impact upon the
operations of the Company and Bank. At this time, the Company is unable to
predict whether any proposed legislation will be enacted and, therefore, is
unable to predict the impact such legislation may have on the operations of the
Company and the Bank.
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ITEM 1. BUSINESS-STATISTICAL DISCLOSURE
-------------------------------
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
A. The following are the average balance sheets for the years ending
December 31:
<TABLE>
<CAPTION>
----------------------------1998--------------------------
----
Average Average
Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Federal funds sold $ 76,096 $ 3,709 4.87%
Interest-bearing deposits in other
financial institutions 3,601,472 187,234 5.20
Federal Reserve Bank stock 25,273 1,566 6.20
Loans receivable (1) 54,100 4,360 8.06
---------- ----------
Total interest-earning assets 3,756,941 196,869 5.24
Noninterest-earning assets
Cash and due from banks 81,219
Allowance for loan losses (213)
Premises and equipment, net 77,369
Accrued interest receivable and
other assets 134,841
----------
$4,050,157
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Savings, NOW and money markets $ 386,257 $ 16,509 4.27%
Certificates of deposits 37,573 1,706 4.54
---------- ----------
Total interest-bearing liabilities 423,810 18,215 4.30%
----------
Noninterest-bearing liabilities
Demand deposits 73,375
Accrued interest payable and
other liabilities 559,355
----------
1,056,560
Shareholders' equity 2,993,597
----------
$4,050,157
==========
Net interest income/spread $ 178,654 0.94%
========== =========
Net interest income as a percent
of average interest earning assets 4.76%
=========
</TABLE>
(1) Loan fees of $2,025 were excluded from the computation.
Page 9 of 21
<PAGE> 10
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
<TABLE>
<CAPTION>
------------------------------1997--------------------------
Average Average
Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Interest-bearing deposits in other
financial institutions $ 29,093 $ 1,114 3.83%
------------- --------
Total interest-earning assets 29,093 1,114 3.83%
Noninterest-earning assets
Cash and due from banks 944
Accrued interest receivable and
other assets 29,041
-------------
$ 59,078
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Deposits $ 0 $ 0 n/a
------------- --------
Total interest-bearing liabilities 0 0 n/a
--------
Noninterest-bearing liabilities
Accrued interest payable and
other liabilities 542
-------------
542
Shareholders' equity 58,536
-------------
$ 59,078
=============
Net interest income/spread $ 1,114 3.83%
======== =========
Net interest income as a percent
of average interest earning assets 3.83%
=========
</TABLE>
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<PAGE> 11
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
B. The following tables set forth the effect of volume and rate changes
on interest income and expense for the periods indicated. For
purposes of these tables, changes in interest due to volume and rate
were determined as follows:
Volume Variance - change in volume multiplied by the previous year's
rate. Rate Variance - change in rate multiplied by the previous
year's volume.
Rate/Volume Variance - change in volume multiplied by the change in
rate. This variance was allocated to volume variance and rate
variance in proportion to the relationship of the absolute dollar
amount of the change in each.
<TABLE>
<CAPTION>
Total Variance Attributable To
Variance ------------------------
1998/1997 Volume Rate
--------- ------ ----
<S> <C> <C> <C>
INTEREST INCOME
Federal funds sold $ 3,709 $ 3,709 $ -
Interest-bearing deposits in other
financial institutions 186,120 137,082 49,038
Federal Reserve Bank stock 1,566 1,566 -
Loans receivable 4,360 4,360 -
-------------- -------------- ----------------
195,755 146,717 49,038
INTEREST EXPENSE
Savings, NOW and money markets 16,509 16,509 -
Certificates of deposits 1,706 1,706 -
-------------- -------------- ----------------
18,215 18,215 -
-------------- -------------- ----------------
NET INTEREST INCOME $ 177,540 $ 128,502 $ 49,038
============== ============== ================
</TABLE>
II. INVESTMENT PORTFOLIO
Neither the Company nor the Bank had any investment securities at
December 31, 1998 or 1997.
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<PAGE> 12
III. LOAN PORTFOLIO
A. Types of Loans - Total loans on the balance sheet are comprised of
the following classifications at December 31, 1998. There
were no loans outstanding at December 31, 1997.
<TABLE>
<CAPTION>
1998
----
<S> <C>
Commercial $ 481,609
Home equity lines of credit 122,311
Installment and credit card loans to individuals 261,177
---------
$ 865,097
=========
</TABLE>
CONCENTRATIONS OF CREDIT RISK: The Company grants commercial,
residential real estate mortgage and installment loans to individuals
mainly in Medina and contiguous counties in Ohio. Commercial loans
include loans collateralized by business assets. Commercial loans
make up approximately 56% of the loan portfolio and the loans are
expected to be repaid from cash flow from operations of businesses.
Home equity lines of credit make up approximately 14% of the loan
portfolio and are collateralized by residential real estate.
Installment loans to individuals make up approximately 30% of the
loan portfolio and are primarily collateralized by consumer assets.
B. Maturities and Sensitivities of Loans to Changes in Interest Rates -
The following table shows the amounts of commercial loans outstanding
as of December 31, 1998 which, based on remaining scheduled
repayments of principal, are due in the periods indicated. Also, the
amounts have been classified according to sensitivity to changes in
interest rates for commercial loans due after one year.
(Variable-rate loans are those loans with floating or adjustable
interest rates.)
<TABLE>
<CAPTION>
Maturing Commercial
-------- ----------
<S> <C>
Within one year $ 60,656
After one year but within five years 420,953
After five years 0
---------
$ 481,609
---------
</TABLE>
<TABLE>
<CAPTION>
Commercial Loan Interest Sensitivity
------------------------------------
Fixed Variable
Rate Rate Total
---- ---- -----
<S> <C> <C> <C>
Due after one year but
within five years $ 340,953 $ 80,000 $ 420,953
Due after five years 0 0 0
----------- ---------- -----------
$ 340,953 $ 80,000 $ 420,953
=========== ========== ===========
</TABLE>
Page 12 of 21
<PAGE> 13
III. LOAN PORTFOLIO (Continued)
C. Risk Elements
-------------
1. Nonaccrual, Past Due, Restructured and Impaired Loans - The
following schedule summarizes nonaccrual, past due,
restructured and impaired loans at December 31.
<TABLE>
<CAPTION>
1998
----
<S> <C>
(a) Loans accounted for on a nonaccrual basis $ -
(b) Accruing loans which are contractually past due 90
days or more as to interest or principal payments -
(c) Loans not included in (a) or (b) which are "Troubled
Debt Restructurings" as defined by
Statement of Financial Accounting Standards No. 15 -
(d) Other loans defined as "impaired" -
------
$ -
------
</TABLE>
Management believes the allowance for loan losses at December
31, 1998 is adequate to absorb any losses on nonperforming
loans, as the allowance balance is maintained by management at
a level considered adequate to cover losses that are currently
anticipated based on past loss experience, general economic
conditions, information about specific borrower situations
including their financial position and collateral values, and
other factors and estimates which are subject to change over
time.
<TABLE>
<CAPTION>
1998
----
(In thousands)
<S> <C>
Gross interest income that would have been recorded in 1998 on
nonaccrual loans outstanding at December 31, 1998 if the loans
had been current, in accordance with their original terms and
had been outstanding throughout the period or since
origination if held for part of the period $ -
Interest income actually recorded on nonaccrual loans and
included in net income for the period -
---------
Interest income not recognized during the period
$ -
---------
</TABLE>
Page 13 of 21
<PAGE> 14
III. LOAN PORTFOLIO (Continued)
Discussion of the Nonaccrual Policy
The accrual of interest income is discontinued when the
collection of a loan or interest, in whole or in part, is
doubtful. When interest accruals are discontinued, interest
income accrued in the current period is reversed. While loans
which are past due 90 days or more as to interest or principal
payments are considered for nonaccrual status, management may
elect to continue the accrual of interest when the estimated
net realizable value of collateral, in management's judgment,
is sufficient to cover the principal balance and accrued
interest.
2. Potential Problem Loans
As of December 31, 1998, in addition to the $-0- of loans
reported under Item III, C.1., there are $-0- in other
outstanding loans where known information about possible
credit problems of the borrowers causes management to have
serious doubts as to the ability of such borrowers to comply
with the present loan repayment terms and which may result in
disclosure of such loans pursuant to Item III. C.1 at some
future date. There were no loans classified for regulatory
purposes as loss, doubtful, substandard, or special mention
that have not been disclosed in Section 1 above.
3. Foreign Outstandings
None
4. Loan Concentrations
None
D. Other Interest-Bearing Assets
-----------------------------
There are no other interest-bearing assets as of December 31, 1998
which would be required to be disclosed under Item III. C.1 or 2 if
such assets were loans.
Page 14 of 21
<PAGE> 15
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following schedule presents an analysis of the allowance for loan
losses, average loan data and related ratios for the year ended
December 31:
<TABLE>
<CAPTION>
1998
----
LOANS
<S> <C>
Loans outstanding at end of period $865,097
========
Average loans outstanding during period $ 54,100
========
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ -
Loans charged-off
Commercial -
Residential real estate mortgage -
Installment loans to individuals -
-------
-
Recoveries of loans previously charged-off
Commercial -
Residential real estate mortgage -
Installment loans to individuals -
-------
-
-------
Net loans charged-off -
Provision for loan losses 11,700
-------
Balance at end of period $11,700
=======
Ratio of net charge-offs during the period to
average loans outstanding during the period -%
=======
</TABLE>
The allowance for loan losses balance and the provision for loan
losses are judgmentally determined by management based upon periodic
reviews of the loan portfolio. In addition, management considered the
level of charge-offs on loans as well as the fluctuations of
charge-offs and recoveries on loans including the factors which
caused these changes. Estimating the risk of loss and the amount of
loss is necessarily subjective. Accordingly, the allowance is
maintained by management at a level considered adequate to cover
losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower
situations including their financial position and collateral values
and other factors and estimates which are subject to change over
time.
Page 15 of 21
<PAGE> 16
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
B. The following schedule is a breakdown of the allowance for loan
losses allocated by type of loan and related ratios.
<TABLE>
<CAPTION>
December 31, 1998
Allocation of the Allowance
-----------for Loan Losses------------
Percentage of Loans
In Each Category
Allowance to Total
Amount Loans
------ -----
<S> <C> <C>
Commercial $ 6,983 55.7%
Home equity lines of credit 612 14.1
Installment and credit card loans to individuals 3,922 30.2
Unallocated 183 -
---------- -----------
$ 11,700 100.0%
========== ===========
</TABLE>
While management's periodic analysis of the adequacy of the allowance
for loan losses may allocate portions of the allowance for specific
problem loan situations, the entire allowance is available for any
loan charge-offs that occur.
V. DEPOSITS
The average amount of deposits and average rates paid are
summarized as follows for the year ended December 31:
<TABLE>
<CAPTION>
1998
----
Average Average
Amount Rate
------ ----
(Dollars in thousands)
<S> <C> <C>
Savings, NOW and money markets $386,257 4.27%
Certificates of deposits 37,573 4.54
Demand deposits (noninterest-bearing) 73,375 -
--------
$497,205 3.66%
========
</TABLE>
At December 31, 1998, the Bank had one time certificate of deposit of
$100,000 or more outstanding, totaling $100,395, which matures in
November 1999.
Page 16 of 21
<PAGE> 17
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income (loss) to average shareholders' equity and
average total assets and certain other ratios are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Average total assets $4,050,157 $ 59,078
Average shareholders' equity $2,993,597 $ 58,536
Net loss $ (620,952) $(55,669)
Return on average total assets (15.3)% (94.2)%
Return on average shareholders' equity (20.7)% (95.1)%
Cash dividends declared $ 0.00 $ 0.00
Dividend payout percentage n/a n/a
Average shareholders'
equity to average total assets 73.9% 99.1%
</TABLE>
VII. SHORT-TERM BORROWINGS
The Company did not have any category of short-term borrowings during or
at the end of the reported periods.
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
The Company leases premises for the Bank's main office at 4015 Medina Road,
Suite 100, Medina, Ohio, which also serve as the Company's corporate
headquarters. The leased premises consist of approximately 7,884 square feet of
a three-story multi-tenant brick building constructed in 1998 with ample
parking. The building is located on State Route 18, a major thoroughfare in
Medina, approximately 1.5 miles west of Interstate 71 and 1 mile east of
downtown Medina.
The lease for the building has a primary term of ten years with options for two
five-year extensions. Under the lease, the aggregate lease payment was $17,411
for the last two months in 1998. The annual lease payment for the first year of
the lease is $104,463, subject to increases each subsequent year. The facility
is leased under an operating lease from a member of the Board of Directors.
Refer to Note 4 on page 11 of the Company's 1998 Annual Report to Shareholders
(incorporated herein by reference) for additional discussion about the lease.
The Bank has five interior teller stations (two of which are sit-down teller
desks, and three of which are traditional stand-up teller counters), a two-lane
drive-through, a drive-up ATM and a night depository facility. The Company
believes the facility will be adequate to meet the needs of the Company and the
Bank for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is not aware of any legal proceedings against it or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of 1998.
Page 17 of 21
<PAGE> 18
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------
The Company's Common Stock was held by approximately 418 holders of record as of
March 24, 1999, and is quoted on the OTC Bulletin Board. It has not yet been
assigned a symbol. To date there has been no regular and liquid market for the
common stock, and there can be no assurance that a regular and liquid trading
market will develop in the foreseeable future.
The Company is not aware of any transactions in its common stock since its stock
offering which closed on July 1, 1998. All shares were sold at $20.00 per share
in the Offering. Certain other private transactions may have occurred during the
periods indicated of which the Company has no knowledge.
No cash or other dividends were declared or paid during the fiscal year ended
December 31, 1998 or the period from February 25, 1997 through December 31,
1997. The Company expects that all Company and Bank earnings, if any, will be
retained to finance the growth of the Company and the Bank and that no cash
dividends will be paid for the foreseeable future. If and when dividends are
declared, the Company will probably be largely dependent upon dividends paid by
the Bank for funds to pay dividends on the Common Stock. It is also possible,
however, that the Company could pay dividends in the future generated from
investment income and other activities of the Company.
Under Ohio law, the Bank will be restricted as to the maximum amount of
dividends it may pay on its Common Stock. For additional discussion regarding
dividend restrictions, please refer to the discussion regarding Supervision and
Regulation in Part I of this Form 10-KSB.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
----------------------------------------------------------------------
OPERATION
---------
The information on pages 24-29 of the Company's 1998 Annual Report to
Shareholders under the caption "Management's Discussion and Analysis" is
incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS
--------------------
The following financial statements and related notes from the 1998 Annual Report
to Shareholders are incorporated by reference:
<TABLE>
<CAPTION>
Annual Report
Page No.
--------
<S> <C>
Report of Independent Auditors 2
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-22
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
Page 18 of 21
<PAGE> 19
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
-------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
A. Directors. The information on pages 5-7 of the Company's 1998 proxy
statement under the caption "Election of Directors" is incorporated by
reference.
B. Executive Officers. The Company's executive officers who are not also
directors are as follows:
BRIAN K. HARR, age 35, Senior Vice President of the Company and Senior Vice
President, Senior Lender of the Bank, served as Vice President, Business Banking
Manager of Bank One, Charleston, West Virginia from October, 1997 until joining
the company. Prior to that assignment, Mr. Harr served as Assistant Vice
President, Relationship Manager for Bank One, Columbus, Ohio from October 1994
until October 1997.
CYNTHIA A. MAHL, age 38, Senior Vice President, Secretary and Treasurer of the
Company and Senior Vice President, Secretary, Treasurer, Chief Financial Officer
and Senior Operations Officer of the Bank, was employed by PremierBank & Trust
located in Elyria, Ohio since 1985. From 1993 she served as its Vice President
and Controller until joining the Company in June 1998.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
The information on pages 9-10 of the 1998 Proxy Statement under the caption
"Executive Compensation" is incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information on page 4 of the 1998 Proxy Statement, under the caption
"Security Ownership of Certain Beneficial Owners" in incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information on page 11 of the 1998 Proxy Statement under the caption
"Transactions with Management and Others" is incorporated by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a)(1) Index to Financial Statements--See Part II, Item 7, Financial
Statements
(a)(2) Schedule of Exhibits--The Exhibit Index which immediately follows the
signature page to this Form 10-KSB is incorporated by reference. The
exhibits required to be filed with this Form 10-KSB are included with
this Form 10-KSB and are located immediately following the Exhibit
Index to this Form 10-KSB.
(b) Reports on Form 8-K--The Company did not file any Current Reports on
Form 8-K during the fourth quarter of 1998.
Page 19 of 21
<PAGE> 20
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, as amended, the
Issuer caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 31, 1999.
WESTERN RESERVE BANCORP, INC.
By: /s/ Edward J. McKeon
------------------------------------------------
Edward J. McKeon, President, Chief
Executive Officer and Director
By: /s/ Cynthia A. Mahl
------------------------------------------------
Cynthia A. Mahl, Principal Financial Officer
and Accounting Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Issuer and in the capacities noted below and
on March 31, 1999.
/s/ P.M. Jones /s/ Edward J. McKeon
---------------------------------- ------------------------------
P.M. Jones, Chairman of the Board Edward J. McKeon, President,
Chief Executive Officer and
Director
/s/ Ray E. Laribee /s/ Rory H. O'Neil
---------------------------------- ------------------------------
Ray E. Laribee, Director Rory H. O'Neil, Director
/s/ Hal Nichols, Director /s/ Michael R. Rose
---------------------------------- ------------------------------
R. Hal Nichols, Director Michael R. Rose, Director
Page 20 of 21
<PAGE> 21
WESTERN RESERVE BANCORP, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description of Exhibits Page Number
<S> <C> <C>
3.1 Certificate of Incorporation of Western Reserve Bancorp, Inc. *
3.2 Bylaws of Western Reserve Bancorp, Inc. *
4.0 Stock Certificate of Western Reserve Bancorp, Inc. *
10.1 Employment Contract of Edward J. McKeon *
10.2 Lease Agreement by and between Michael Rose DBA Washington < >
Properties and Western Reserve Bancorp, Inc.
10.3 Western Reserve Bancorp, Inc. 1998 Stock Option Plan < >
13.1 Annual Report to Shareholders (Except for sections incorporated by reference ()
into this Form 10-KSB, the Annual Report to Shareholders shall not be deemed
to be "filed" with the Commission.)
21.1 Subsidiary of Western Reserve Bancorp, Inc. ()
27.1 Financial Data Schedule **
99.1 Proxy Statement and form of proxy for the Annual Meeting of Shareholders to *
be held April 28, 1999. (Except for sections incorporated by reference into
this Form 10-KSB, the proxy materials shall not be deemed to be "filed" with
the Commission.)
</TABLE>
* Previously filed and incorporated herein by reference.
**Filed only in electronic format pursuant to Item 601(b)(27) of Regulation S-K.
Page 21 of 21
<PAGE> 1
Exhibit 10.2
LEASE
THIS INSTRUMENT OF LEASE made this 7th day of August, 1998, by and
between MICHAEL ROSE DBA WASHINGTON PROPERTIES, 23 Public Square, Suite 200,
Medina, Ohio 44256, (hereinafter called "LANDLORD") and WESTERN RESERVE BANCORP,
INC. (hereinafter called "TENANT").
WITNESSETH:
SPACE RENTED: That the Landlord does hereby let and lease to the Tenant
the space designated on Exhibit A attached hereto within the commercial office
building located at 4015 MEDINA ROAD, MEDINA, OHIO 44256 (the "Premises") and in
addition thereto Tenant's pro rata share of the common area space of the entire
office building. Together such total leased space is hereby described as the
"Leased Rentable Space."
TERM/EXTENSIONS: The Tenant shall have and hold the Leased Rentable
Space for the full term of Ten (10) year(s), beginning on November 1, 1998 and
terminating October 31, 2008, provided, however, at the expiration of the
initial ten (10) year term, the Tenant shall have the right and option to renew
the Lease for up to two (2) consecutive additional five (5) year terms, upon the
same terms and conditions provided in the original term of the Lease, unless the
Tenant is in default under the terms of the Lease.
RENT: The yearly rental for the first year which shall commence
November 1, 1998, shall be One Hundred Four Thousand Four Hundred Sixty Three
and 00/100 Dollars ($104,463) payable in equal monthly installments of Eight
Thousand Seven Hundred Five and 25/100 Dollars ($8,705.25), payable on the first
day of each and every month in advance during the term of the Lease. Commencing
with the fourth year of this Lease term and each year thereafter including each
year of any renewal term, the rent shall be increased by 2% over the prior
year's rent. Accordingly, the rent for each year of the term of the Lease shall
be as set forth on Schedule 1 attached hereto. Failure of the Tenant to make
monthly installments as required under the terms of this Agreement shall be
considered a violation of this Lease Agreement and the Landlord may take
whatever action is necessary to secure his rights under this Agreement. Failure
to make the monthly rental payment within five (5) days after the due date shall
result in a late charge of $100.00.
<PAGE> 2
UTILITIES: Tenant shall promptly pay for utilities rendered or
furnished to the premises and Tenant's pro rata share of the common area
utilities during the term of this Lease, including water, gas, electricity,
trash and sewer charges. Since utilities may not be individually metered, Tenant
is responsible for paying a "pro rata share" (as defined below) of all utilities
paid by Landlord. Landlord shall not be responsible to Tenant in damages or
otherwise if any one or more of said utility services or obligations is
interrupted or terminated by reason of any cause beyond Landlord's reasonable
control. No such interruption or termination of utility services shall relieve
Tenant from any of its obligations under this Lease, unless such interruption
causes the Leased Premises to be unusable by Tenant for in excess of three (3)
days in which case the rent shall be reduced accordingly.
COMMON AREA MAINTENANCE AND REPAIR: Tenant shall be responsible for its
pro rata share of all common area maintenance expenses and repairs, including
exterior, interior, roof, parking lot and all other exterior and interior
structural fixtures and equipment, including HVAC systems.
REAL ESTATE TAXES AND INSURANCE: Tenant shall also pay its pro rata
share of all real estate taxes and assessments levied on the leased premises and
insurance premiums for fire and extended hazard and all other insurance premiums
including liability insurance for the leased premises.
PRO RATA SHARE: Tenant's "pro rata share" shall be the ratio or
percentage which the number of leased rentable space bears to the total number
of square feet of gross rentable floor area of the entire office building. The
total gross rentable floor area of the office building is 32,759 square feet;
the number of leased rentable square feet of floor area of Tenant's suite is
7,884. Tenant's pro rata share is 24%.
TRIPLE NET LEASE: This Lease is and shall be deemed and construed to be
a "pure net" or "triple net" Lease and the fixed rent and supplemental payments
specified herein shall be net to the Landlord in each month during the term of
this Lease.
COVENANTS OF TENANT: Tenant does hereby covenant and agree with
Landlord as follows:
1. Tenant's premises shall be constructed according to the plans and
specifications attached hereto as Exhibit "B" and made a part hereof. Also
attached hereto as Exhibit "B" is the finish allowance description for Tenant's
office space identifying the base space provided to Tenant
2
<PAGE> 3
without improvements, Tenant's responsibility for improvements, and Tenant's
responsibility for excess costs of completing such improvements above Tenant's
allowance.
2. Tenant will pay said rent at the time and place in the manner
aforesaid.
3. Tenant will make all repairs to the interior of its premises and it
will indemnify and save harmless said Landlord from and against all liens,
claims or damages by reason of any repairs or improvements which may be made by
said Tenant on said premises. The Tenant will make no structural changes to the
premises without the consent of the Landlord.
4. Tenant will use and occupy said premises in a careful, safe and
proper manner.
5. Tenant will fully comply with and obey all laws, ordinances, rules,
regulations, and requirements of all regularly constituted authorities in any
way affecting said premises, or the use thereof, of this Lease.
6. Tenant will not commit or suffer any waste therein.
7. Tenant will not manufacture or sell, or permit to be sold on the
premises during said term, any intoxicating liquor.
8. Tenant will not assign this Lease, or under let said premises or any
part thereof, without the written consent of the Landlord, provided, however,
that Tenant may assign this Lease to Western Reserve Bank, a commercial bank in
organization pursuant to the laws of the State of Ohio, or another wholly owned
subsidiary without the consent of Landlord.
9. Tenant will make no change in the construction of the building on
said premises without the prior written consent of the Landlord.
10. Tenant will not cause damage or attach anything to the woodwork or
doors on said premises.
11. Tenant will permit said Landlord or agents of the Landlord upon
reasonable notice to enter upon said premises at all reasonable times to examine
the condition of said premises except notice may be dispensed with should entry
upon said premises by Landlord be necessitated by emergency.
12. Landlord shall not be liable to the Tenant or any other person for
any damage to person or property on said premises.
13. Tenant will pay all loss and damage to Landlord occasioned by or
growing out of the use and occupation of said premises by the Tenant and/or the
agents or employees of the Tenant, and that the Tenant will indemnify, protect
and save harmless the Landlord from and against any
3
<PAGE> 4
loss or liability thereby or therefrom; and from and against any expense, cost
and attorney fees incurred in connection with any such claim.
Tenant shall maintain, at its own expense, fire and extended coverage
insurance upon the Lease improvements and betterments, trade fixtures and
equipment, stock in trade, furnishings and other appurtenances to its business,
in an amount not less than 80 percent (80%) of its full insurable value. In
addition, Tenant agrees to maintain both Tenant and Landlord as insured with
single limits of $1,000,000.00 for bodily injury to or death of one or more
persons and $100,000.00 on account of damage to property arising out of the use
and occupancy by Tenant, its agents, employees, licensees and invitees of the
premises and/or common areas.
14. All property owned or belonging to Tenant in said building or upon
said premises shall be situated thereon at the sole risk of the Tenant. The
Tenant shall do nothing to increase the insurance risk to the building and any
conduct on the part of the Tenant which would increase the insurance premium
shall be considered a breach of this agreement.
15. Tenant will surrender and deliver up said premises at the end of
said term in as good order and condition as the same now are or may be put by
the Landlord, reasonable use and natural wear and tear, or casualty excepted.
16. Tenant will be responsible for the replacement of all light bulbs
and plunging of clogged toilets within the premises.
17. Tenant shall not permit animals of any kind, with the exception of
guide dogs for the handicapped, upon the premises nor in any way utilize the
premises for a purpose other than to conduct the activity which is set forth
under the section entitled Use of the Premises.
18. Tenant shall erect only such signs advertising Tenant's business as
shall be in conformity with all applicable codes and ordinances and shall be
approved by Landlord, in writing, as to the size, type, color, style and
location thereof, which approval shall not be unreasonably withheld. Upon
vacating the premises, Tenant agrees to remove all signs and repair all damages
caused by such removal.
19. Tenant shall be responsible for cleaning and maintaining its own
premises. Landlord shall be responsible for cleaning and maintaining the common
areas at Tenant's pro rata cost in accordance with the provisions on maintenance
and repair hereinabove set forth.
20. If Tenant changes the locks on its doors, at any time during the
term of the this Lease or any renewal of same, Tenant will cause the locksmith
to key new locks to the Landlord's master
4
<PAGE> 5
key and provide two (2) new keys to Landlord, subject to and restrictions
imposed by security laws governing banks in the State of Ohio.
21. If Tenant wishes to use elevators for moving furniture and
equipment to the premises, elevators must be reserved in advance, the
appropriate door stop key must be used, and Tenant must use elevator pads to
protect elevators from damage.
22. Tenant shall maintain the premises as a smoke-free environment.
23. Tenant is responsible for window cleaning inside the suite. If said
cleaning is not done on a regular basis, Landlord reserves the right to have the
window cleaning done and to bill Tenant accordingly.
24. Tenant shall have use of such parking spaces as are reasonably
designated by Landlord.
COVENANTS OF THE LANDLORD: And said Landlord, his heirs, successors,
or assigns, hereby covenants and agrees with said Tenant, its successors or
assigns:
1. Tenant paying the rents and keeping and performing the covenants of
this Lease on its part to be kept and performed, said Tenant shall peaceably and
quietly hold, occupy and enjoy said premises during said term, without any
hindrance or molestation by any person whatsoever.
2. Landlord will make all necessary repairs to the roof and exterior
walls of said building and keep in repair the electrical system, water system
and the HVAC system in said building and shall repair any damage due to ordinary
wear and tear on said systems. However, the cost of such repairs shall be
allocated to Tenant in accordance with the provisions on maintenance and repair
hereinabove set forth.
3. Landlord acknowledges that Tenant may assign this Lease to Western
Reserve Bank, a commercial bank in organization pursuant to the laws of the
State of Ohio, or another wholly owned subsidiary without the consent of
Landlord. Further, in the event that Tenant is unsuccessful in obtaining any
necessary approval from the Ohio Division of Financial Institutions, the Federal
Deposit Insurance Corporation, the Federal Reserve Bank or any other regulatory
entity, or Western Reserve Bank is unable to commence operations, this Lease
shall be deemed null and void and neither the Tenant nor any other party related
to the Tenant shall be obligated to Landlord pursuant to the terms of this
Lease; provided, however, that Tenant shall be obligated to reimburse Landlord
for all leasehold improvements to the Leased Space that are "unique" to the
operation of a bank at the Leased Space and not readily useable by another
tenant.
5
<PAGE> 6
4. Notwithstanding any other provisions contained in this Lease, in the
event (a) Tenant or its successors or assignees become insolvent or bankrupt, or
if it or their interests under this Lease shall be levied upon or sold under
execution or other legal process, or (b) the depository institution then
operating on the Leased Premises is closed or is taken over by any depository
institution supervisory authority ("Authority"), Landlord may, in either such
event, terminate this Lease only with the concurrence of any Receiver or
Liquidator appointed by such Authority; provided, that in the event this Lease
is terminated by the Receiver or Liquidator, the maximum claim of Landlord for
rent, damages, or indemnity for injury resulting from the termination,
rejection, or abandonment of the unexpired Lease shall by law in no event be in
an amount greater than all accrued and unpaid rent to the date of termination.
MUTUAL COVENANTS: The parties to this Lease hereby covenant and agree
as follows:
1. This Lease and all the covenants, provisions, terms, and conditions
and agreements herein contained shall inure to the benefit of and be binding
upon the heirs, successors, executors, administrators and assigns of the
parties. However, any assignment from, through or under the Tenant in violation
of the covenants, provisions, terms and conditions hereof, or any of them, shall
not vest any right, title or interest whatever in the assignee and shall be null
and void unless expressly assented to in writing by Landlord.
2. The Landlord and its assigns shall warrant and defend the Tenant in
the enjoyment and peaceable possession of the above demised premises, during the
term aforesaid, if the Tenant shall perform all and singular the covenants
herein agreed to be performed on the part of the Tenant.
USE OF THE PREMISES: The Tenant shall have the right to use the
premises for office space.
SECURITY DEPOSIT: Upon signing of this Lease agreement, a security
deposit in the amount of Eight Thousand Seven Hundred Five and 25/100 Dollars
($8,705.25) shall be paid to the Landlord. Said deposit shall be returned to the
Tenant without interest upon the completion of the Lease, provided the terms of
the Lease have been met and there has been no damage to the premises requiring
repair or cleaning.
DEFAULT: Except as expressly set forth herein, Landlord, in addition to
all other remedies given to Landlord in law or in equity, may, by written notice
to Tenant, terminate this Lease, or without terminating this Lease reenter the
premises by summary proceedings or otherwise, and may depossess Tenant in any of
the following circumstances:
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<PAGE> 7
a. In the event Tenant shall be in default in the payment of rent or
any other additional charge or charges, or in the payment of any other sums of
money required to be paid by Tenant to Landlord under this Lease, and such
default shall continue for a period of ten (10) days after written notice by
Landlord to Tenant to cure such default.
b. In the event Tenant shall be in default in the performance of any
other covenants, terms, conditions, provisions, rules and regulations of this
Lease, except those items listed in the above section (a) and if such default is
not cured within thirty (30) days after written notice thereof given by
Landlord, excepting such defaults that cannot be cured completely within such
thirty (30) day period, and Tenant, within said thirty (30) day period promptly
commences to proceed with diligence and in good faith to remedy such default.
c. If Tenant shall file a petition in bankruptcy; there be filed
against Tenant a petition in bankruptcy which has not been dismissed within
ninety (90) days of filing of said petition; or Tenant be adjudicated a
bankrupt; or if Tenant shall make application for relief under any state or
local insolvency law, or shall make a general assignment for the benefit of
creditors, or if a receiver or trustee shall be appointed for Tenant's property
and the same is not discharged within ninety (90) days, or if the interest of
Tenant in the premises shall be offered for sale or sold under execution or
other legal process.
d. If Tenant shall vacate the premises or fail to continuously occupy
and conduct Tenant's business in the premises.
Landlord shall have whatever legal rights Landlord is entitled to in
order to remove all persons therefrom, to recover possession thereof by legal
proceedings or otherwise and to use such reasonable force as is necessary to
enter and regain possession thereof as Landlord shall deem proper without being
liable to any civil action or prosecution therefore.
No such entry by Landlord shall be deemed a termination of this Lease
or an acceptance of a surrender of this Lease. In the event of such reentry,
Landlord shall have the right to relet or subdivide the premises for any period
equal to or greater than the remainder of the original term of this Lease, for
any rental which it may deem reasonable, to any other tenant which Landlord may
select, and for any use and purpose which Landlord may designate.
In the event of a reletting, Landlord may apply the rent therefrom
first to the payment of Landlord's expense, including, but not limited to,
reasonable attorney's fees incurred by reason of Tenant's default and the
reasonable expenses of reletting, including, but not limited to, repairs,
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<PAGE> 8
brokerage fees, subdividing, renovation or alteration of the premises, and then
to the payment of rent and all other sums due from Tenant hereunder, Tenant
remaining liable for any deficiency.
In the event of a default by Tenant of any of the terms, provisions,
covenants, conditions, rules and regulations of this Lease, Landlord shall have
the right to injunction and the right to invoke any remedy permitted to Landlord
in law or in equity. All remedies available to Landlord are declared to be
cumulative and concurrent. No termination of this Lease, nor any taking or
recovering of possession of the premises, shall deprive Landlord of any of its
remedies or actions against Tenant for past or future rent, nor shall the
bringing of any action for rent or other default be constructed as a waiver of
the right to obtain possession of the premises.
HOLDOVER BY TENANT: Unless ninety (90) days written notice, time being
of the essence, is given prior to the expiration of the Lease term by Tenant to
Landlord of its desire to exercise its renewal option(s) set forth above to
extend the term of this Lease, the Tenant shall be deemed to be occupying the
Premises as a tenant from month to month, at a monthly rental equal to one
hundred twenty five percent (125%) of the fixed minimum rent payable during the
last month of the Lease term, together with all additional charges set forth in
this Lease.
Notwithstanding the foregoing paragraph, the rent under any renewal
hereunder shall be governed by the provisions for increases in the yearly rent
and such increases shall be based on the yearly rent for the last year of the
Lease term prior to the automatic renewal provisions hereunder.
COMPLETE AGREEMENT: This Lease contains the entire agreement between
the parties and no agent, representative, salesmen or affiliate of Landlord
hereto has authority to make or has made any statement, agreement or
representation, either oral or written, in connection herewith, modifying,
adding or changing the terms and conditions herein set forth. No prior dealings
between the parties or custom shall be permitted to contradict, add to or modify
the terms hereof. No modification of this Lease shall have force or effect
unless and until same is returned to Tenant duly executed by Landlord.
SUCCESSORS AND ASSIGNS: The conditions, covenants and agreements
contained in this Lease shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, executors, administrators, successors
and permitted assigns.
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<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Lease on the
date and year first above written.
WITNESSES: MICHAEL ROSE DBA WASHINGTON PROPERTIES
(LANDLORD)
/s/ /s/ Mike Rose
- ----------------------- ---------------------------------
Signature
- -----------------------
Name
WESTERN RESERVE BANCORP, INC.
(TENANT)
/s/ BY: /s/ E.J. McKeon
- ---------------------- ------------------------------
Signature
NAME: Edward J. McKeon
----------------------------
- --------------------------------
Name TITLE: President/CEO
---------------------------
This instrument prepared by:
Washington Properties, Inc.
23 Public Sq., Suite 200
Medina, OH 44256
9
<PAGE> 10
STATE OF OHIO )
) SS
COUNTY OF MEDINA )
BEFORE ME, a Notary Public in and for said County and State, personally
appeared the above-named MICHAEL ROSE DBA WASHINGTON PROPERTIES, who
acknowledged that he did sign the foregoing instrument with full authority and
that the same was his free act and deed.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal at
this day of , 19 .
---------- -------------- ----------
----------------------
NOTARY PUBLIC
STATE OF )
)SS
COUNTY OF )
BEFORE ME, a Notary Public in and for said County and State, personally
appeared the above-named WESTERN RESERVE BANCORP, INC. by , its ,who
acknowledged that he did sign the foregoing instrument with full authority and
the same is his free act and deed and the free act and deed of such corporation.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at
this day of , 19 .
------ -----
------------------------
NOTARY PUBLIC
10
<PAGE> 11
Exhibit "B"
This Addendum to Lease Agreement, made this 28th day of April, 1998, by
and between MICHAEL ROSE DBA WASHINGTON PROPERTIES ("Landlord"), and WESTERN
RESERVE BANCORP ("Tenant").
FINISH ALLOWANCE DESCRIPTION
WESTERN RESERVE OFFICE BUILDING
Rental rates for the Western Reserve Office Building are based on a tenant
finish allowance of $25.00 per square foot or rental area exclusive of common
areas. The rental allowance is intended to be applied to the costs of
improvements of all spaces to the specifications of the individual tenants.
Tenants will be responsible for all improvement costs which are in excess of
this $25.00 allowance. These costs are to be amortized with interest at 9.75%
over the length of the lease, or the tenant may elect or pay directly for all
additional costs. Should improvement costs be less than the allowance amount,
the rental rate shall be adjusted to correspond.
Spaces are furnished to the tenants without improvements as follows:
a. Enclosing walls for the tenant space are provided with exposed stud and
insulation.
b. The floor is exposed unfinished concrete.
c. The ceiling is exposed steel joist and deck on the first two levels and will
be unfinished gypsum board attached to the bottom of the roof trusses on the
upper level.
d. Electrical is provided to each floor at a central location adjacent to one of
the stair towers.
e. Suite entrance door and lock set is provided.
f. Piping for the HVAC air handlers is provided in the area of the air
handlers.
Tenants are responsible for the costs associated with the design and
construction (labor & material) required to finish the space beyond the base
space as indicated above. The following is a brief outline of the typical
improvements for which the tenants will be responsible. There may be additional
items specifically associated with individual tenants which are not indicated
below.
a. All architectural and design costs associated specifically with the layout of
the individual tenant space.
b. All permit and inspection fees related to the
tenant improvements.
c. Construction of all partitions within the tenant space
including the installation of gypsum wallboard and insulation where requested.
d. Installation of gypsum wallboard on all tenant space perimeter walls.
e. Installation of all electrical power distribution from common panel located
in the building core.
f. Installation of all data, phone, and/or alarm systems from demarcation point
located in the utility room.
g. Installation of HVAC system from and including fan coil units, distribution
ducts and diffusers.
h. Installation of all lighting within the space including any required egress
lighting.
i. Installation of any plumbing, including bar sinks and toilet rooms.
<PAGE> 12
j. All floor finishes, including carpet, vinyl, ceramic, and wood as selected by
the tenant.
k. Suspended ceiling system.
l. All wall finishes, including painting and wall covering.
m. All doors and related hardware.
n. All running trim, including wood baseboard, chair rail, crown molding, window
and door casing, etc. as selected by tenant.
o. All built in cabinets and counter tops.
p. All pavement required for drive-through area.
q. Construction of drive-through area.
All tenant spaces shall be designed and constructed to conform with Ohio Basic
Building Code requirements and the general standard or construction within the
building. All improvements shall be approved by the building owners prior to the
installation to insure conformance with building quality standards and to avoid
conflicts with adjoining tenants. All construction shall be completed only by
contractors approved by the building owners. All tenants will be responsible for
the costs required to return their space to the original pre-improved condition
at the end of the lease unless other arrangements are made with the Landlord.
<PAGE> 13
<TABLE>
<CAPTION>
SCHEDULE 1
Square Footage 7,884
Base Rent $/Sq.Ft. $ Annually $ Monthly
--------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year 1 13.25 13.25 104,463.00 8,705.25
Year 2 13.75 13.75 108,405.00 9,033.75
Year 3 14.25 14.25 112,347.00 9,362.25
Year 4 14.75 15.04 118,575.36 9,881.28 2% increase of Year 3
Year 5 14.75 15.34 120,940.56 10,078.38 2% increase of Year 4
Year 6 15.25 16.15 127,326.60 10,610.55 2% increase of Year 5 + .50 difference
Year 7 15.50 16.72 131,820.48 10,985.04 2% increase of Year 6 + .25 difference
Year 8 15.50 17.05 134,422.20 11,201.85 2% increase of Year 7
Year 9 15.50 17.39 137,102.76 11,425.23 2% increase of Year 8
Year 10 15.50 17.74 139,862.16 11,655.18 2% increase of Year 9
</TABLE>
<PAGE> 1
Exhibit 10.3
WESTERN RESERVE BANCORP, INC.
1998 STOCK OPTION PLAN
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS: As used herein, the following terms shall have the
meaning set forth below, unless the context clearly requires otherwise:
(a) "Applicable Event" shall mean (i) the expiration of a tender offer or
exchange offer (other than an offer by the Company) pursuant to which
more than 30% of the Company's issued and outstanding stock has been
purchased, or (ii) the approval by the shareholders of the Company of
an agreement to merge or consolidate the Company with or into another
entity where the Company is not the surviving entity, an agreement to
sell or otherwise dispose of all or substantially all of the Company's
assets (including a plan of liquidation), or the approval by the
shareholders of the Company of an agreement to merge or consolidate
the Company with or into another entity where the Company is the
surviving entity, pursuant to which more than 25% of the Company's
issued and outstanding stock has been transferred.
(b) "Bank" shall mean the Western Reserve Bank, and any subsidiary of
Western Reserve Bank or Western Reserve Bancorp, Inc.
(c) "Committee" shall mean a Committee consisting of the members of the
Board of Directors of the Company or Bank.
(d) "Company" shall mean Western Reserve Bancorp, Inc.
(e) "Director" shall mean a member of the Board of Directors of the
Company and, or the Bank.
(f) "Effective Date" with respect to the Plan shall mean the date
specified in Section 2.3 as the Effective Date.
(g) "Fair Market Value" with respect to a share of Stock shall mean the
fair market value of the Stock, as determined by application of such
reasonable valuation methods as the Committee shall adopt or apply.
The Committee's determination of Fair Market Value shall be conclusive
and binding on the Company and the Optionee.
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<PAGE> 2
(h) "Option" shall mean an option to purchase Stock granted pursuant to
the provisions of the Plan. Options granted under the Plan shall be
Non-qualified Stock Options meaning that they will not be designated
as an Incentive Stock Option meeting the requirements of Section 422
of the Internal Revenue Code of 1986, as amended.
(i) "Optionee" shall mean a person to whom an Option has been granted.
(j) "Plan" shall mean the Western Reserve Bancorp, Inc. 1998 Stock Option
Plan, the terms of which are set forth herein.
(k) "Plan Year" shall mean the twelve-month period beginning on the
Effective Date, and each twelve-month period thereafter beginning on
the anniversary date of the Effective Date.
(l) "Stock" shall mean the Common Stock of the Company or, in the event
that the outstanding shares of Stock are changed into or exchanged for
shares of a different stock or securities of the Company or some other
entity, such other stock or securities.
(m) "Stock Option Agreement" shall mean the agreement between the Company
and the Optionee under which the Optionee may purchase Stock pursuant
to the terms of the Plan.
ARTICLE II
THE PLAN
SECTION 2.1 NAME. This plan shall be known as the "Western Reserve Bancorp, Inc.
1998 Stock Option Plan."
SECTION 2.2 PURPOSE. The purpose of the Plan is to advance the interests of the
Company and its shareholders by affording to officers and employees of the
Company and the Bank an opportunity to acquire or increase their proprietary
interest in the Company by the grant to such persons of Options under the terms
set forth herein. By encouraging such persons to become owners of the Company,
the Company seeks to attract, motivate, reward and retain those highly competent
individuals upon whose judgment, initiative, leadership and efforts the success
of the Company depends.
SECTION 2.3 EFFECTIVE DATE AND TERM. The Plan was approved by the Board of
Directors of the Company on October 22, 1998, and shall be effective on November
1, 1998. The Plan shall terminate upon the tenth anniversary of the Effective
Date.
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<PAGE> 3
ARTICLE III
ADMINISTRATION
SECTION 3.1 ADMINISTRATION.
(a) The Plan shall be administered by the Committee. Subject to the express
provisions of the Plan, the Committee shall have sole discretion and
authority to determine from time to time the individuals to whom Options
may be granted, the number of shares of Stock to be subject to each
Option, the period during which such Option may be exercised and the
price at which such Option may be exercised.
(b) Meetings of the Committee shall be held at such times and places as
shall be determined from time to time by the Committee. A majority of
the members of the Committee shall constitute a quorum for the
transaction of business and the vote of a majority of those members
present at any meeting shall decide any question brought before the
meeting. In addition, the Committee may take any action otherwise proper
under the Plan by the affirmative vote, taken without a meeting, of a
majority of the members.
(c) No member of the Committee shall be liable for any act or omission of
any other member of the Committee or for any act of omission on his own
part, including, but not limited to, the exercise of any power or
discretion given to him under the Plan, except those resulting from his
own gross negligence or willful misconduct. All questions of
interpretations and application with respect to the Plan or Options
granted thereunder shall be subject to the determination, which shall be
final and binding, of a majority of the whole Committee.
SECTION 3.2 COMPANY ASSISTANCE. The Company and the Bank shall supply full and
timely information to the Committee on all matters relating to eligible
employees, their employment, death, retirement, disability or other termination
of employment and such other pertinent facts as the Committee may require. The
Company and the Bank shall furnish the Committee with such clerical and other
assistance as is necessary in the performance of its duties.
ARTICLE IV
ELIGIBILITY
Officers of the Company and the Bank and such other employees as the Board of
Directors may from time to time designate shall be eligible to participate in
the Plan. The Committee may grant Options to any eligible individual subject to
the provisions of Section 5.1.
3
<PAGE> 4
ARTICLE V
SHARES OF STOCK SUBJECT TO PLAN
SECTION 5.1 GRANT OF OPTIONS AND LIMITATIONS.
(a) INITIAL PLAN YEAR. For the initial Plan Year, the Committee, subject to
and conditioned upon receipt of ratification by the Board of Directors,
shall grant Options according to the following schedule:
1. Edward J. McKeon shall receive Options for Thirty Two Thousand and
Sixty Two (32,062) shares of Stock which shall be granted pursuant
to the terms and conditions of the Employment Agreement by and
between Mr. McKeon and the Company dated August 25, 1997, as
modified by a Stock Option Grant Agreement and Second Addendum to
Employment Agreement substantially in the form attached hereto as
Exhibit A;
2. Such other individuals, as are designated by the Committee shall be
eligible to receive Options for the number of shares of Stock
determined by the Committee.
(b) SUBSEQUENT YEARS. In any subsequent Plan Year, the Committee may grant
Options, subject to and conditioned upon receipt of ratification by the
Board of Directors, to such other individuals as are designated by the
Committee to receive Options for the number of shares of Stock
determined by the Committee.
(c) STOCK AVAILABLE FOR OPTIONS. Subject to adjustment pursuant to the
provisions of Section 8.5 hereof, the aggregate number of shares with
respect to which Options may be granted during the term of the Plan
shall not exceed Fifty Thousand (50,000) shares of Company Stock. Shares
with respect to which Options may be granted may be either authorized
and unissued shares or shares issued and thereafter acquired by the
Company. No person shall receive Options for more than Thirty Two
Thousand and Sixty Two Shares (32,062) shares in any one year, except
for adjustments pursuant to the provisions set forth in Section 8.5
hereof.
SECTION 5.2 OPTIONS UNDER THE PLAN. Shares of Stock with respect to which an
Option granted hereunder shall have been exercised shall not again be available
for grant hereunder. If Options granted hereunder shall expire, terminate or be
canceled for any reason without being wholly exercised, new Options may be
granted hereunder covering the number of shares to which such Option expiration,
termination or cancellation relates.
ARTICLE VI
OPTIONS
SECTION 6.1 OPTION GRANT AND AGREEMENT. Each Option granted hereunder shall be
evidenced by minutes of a meeting or the written consent of at least a majority
of the
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<PAGE> 5
members of the Committee and by a written Stock Option Grant Agreement dated as
of the date of grant and executed by the Company and the Optionee. The Stock
Option Grant Agreement shall set forth such terms and conditions as may be
determined by the Committee consistent with the Plan.
SECTION 6.2 OPTION PRICE. The exercise price of the Stock subject to each Option
shall not be less than the Fair Market Value of the Stock on the date the Option
is granted.
SECTION 6.3 OPTION GRANT AND EXERCISE PERIODS. No Option may be granted after
the tenth anniversary of the Effective Date. The period for exercise of each
Option shall be determined by the Committee, but in no instance shall such
period extend beyond the tenth anniversary of the date of grant of the Option.
SECTION 6.4 OPTION EXERCISE.
(a) The Company shall not be required to sell or issue shares under any
Option if the issuance of such shares shall constitute or result in a
violation by the Optionee or the Company of any provisions of any law,
statute or regulation of any governmental authority. Specifically, in
connection with the Securities Act of 1933, (the "Act"), upon exercise
of any Option, the Company shall not be required to issue such shares
unless the Committee has received evidence satisfactory to it to the
effect that registration under the Act and applicable state securities
laws is not required, unless the offer and sale of securities under
the Plan is registered or qualified under the Act and applicable state
laws. Any determination in this connection by the Committee shall be
final, binding and conclusive. If shares are issued under any Option
without registrations under the Act of applicable state securities
laws, the Optionee may be required to accept the shares subject to
such restrictions on transferability as may in the reasonable judgment
of the Committee be required to comply with exemptions from
registrations under such laws. The Company may, but shall in no event
be obligated to, register any securities covered hereby pursuant to
the Act or applicable state securities laws. The Company shall not be
obligated to take any other affirmative action in order to cause the
exercise of an Option or the issuance of shares pursuant thereto to
comply with any law or regulation of any governmental authority.
(b) Subject to Section 6.4(c) and such terms and conditions as may be
determined by the Committee in its sole discretion upon the grant of
an Option, an Option may be exercised in whole or in part and from
time to time by delivering to the Company at its principal office
written notice of intent to exercise the Option with respect to a
specified number of shares.
(c) Except as otherwise set forth in a Stock Option Grant Agreement, an
Option granted pursuant to this Plan shall be subject to the following
vesting schedule: (i) 25% after one year from the date of grant; (ii)
50% after two years from the date of grant; and (iii) 100% after three
years from the date of grant.
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<PAGE> 6
(d) Payment for the shares to be acquired pursuant to exercise of the
Option shall be made by delivering to the Company at its principal
office a check payable to the order of the Company, in the amount of
the Option price for the number of shares of Stock with respect to
which the Option is then being exercised.
SECTION 6.5 RIGHTS AS SHAREHOLDER. An Optionee shall have no rights as a
Shareholder with respect to any share subject to such Option prior to the
exercise of the Option and the purchase of such shares.
SECTION 6.6 LIMITED RIGHTS. Within the earlier of (i) the occurrence of an
Applicable Event, or (ii) 30 days following the date on which the Company
obtains knowledge of and notifies an Optionee of an Applicable Event, an
Optionee shall have the right (without regard to the limitation on the exercise
of Options set forth in Section 6.4(c) of the Plan and similar limitations
in the Stock Option Grant Agreement) to exercise Options then held.
ARTICLE VII
TERMINATION, AMENDMENT AND MODIFICATION OF PLAN
The Plan shall expire with respect to the granting of Stock Options ten years
following the Effective Date. The Board of Directors of the Company may at any
time and from time to time and in any respect amend, modify or terminate the
Plan in its sole discretion.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 TRANSFERABILITY During the Grantee's Lifetime, any Option may be
exercised only by the Grantee or any guardian or legal representative of the
Grantee, and the Option shall not be transferable except (i) in case of the
death of the Grantee, by will or the laws of descent and distribution; (ii) as
specifically permitted by and solely to the extent permitted in the Stock Option
Grant Agreement, or (iii) to an immediate family member, a partnership
consisting solely of immediate family members or trusts for the benefit of
immediate family members.
SECTION 8.2 DESIGNATION OF BENEFICIARY A participant may file a written
designation of a beneficiary who is to receive any stock and/or cash. Such
designation of beneficiary may be changed by the participant at any time by
written notice to the Treasurer of the Company. Upon the death of a participant
and upon receipt by the Company of proof of identity and existence at the
participant's death of a beneficiary validly designated by him under the Plan,
the Company shall deliver such stock and/or cash to such beneficiary. In the
event of the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such stock and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed
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<PAGE> 7
(to the knowledge of the Company), the Company, in its discretion, may deliver
such stock and/or cash to the spouse or to any one or more dependents of the
participant as the Company may designate. No beneficiary shall, prior to the
death of the participant by whom he has been designated, acquire any interest in
the stock or cash credited to the participant under the Plan.
SECTION 8.3 EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH.
(a) If an Optionee's status as an Officer or as an employee of the Company
or the Bank terminates for any reason, other than the death,
disability or termination of service after attainment of age 65,
before the date of expiration of Stock Options held by such Optionee,
such Nonqualified Stock Options shall become null and void on the 90th
day following the date of such termination. The date of such
termination shall be the date the Optionee ceases to be a Director or
an employee of the Company or the Bank.
(b) If an Optionee dies before the expiration of Stock Options held by the
Optionee, such Stock Options shall terminate on the earlier of (i) the
date of expiration of the Stock Options or (ii) one year following the
date of the Optionee's death. The executor or administrator or
personal representative of the estate of a deceased Optionee, or the
person or persons to whom a Stock Option granted hereunder shall have
been validly transferred by the executor or the administrator or the
personal representative of the Optionee's estate, shall have the right
to exercise the Optionee's Stock Option. To the extent that such Stock
Options would otherwise by exercisable under the terms of the Plan and
the Optionee's Stock Option Grant Agreement, such exercise may occur
at any time prior to the termination date specified in this paragraph.
(c) If an Optionee separates from service after attainment of age 65
before the expiration of Stock Options held by the Optionee, such
Stock Options shall terminate on the earlier of (i) the date of
expiration of the Stock Options or (ii) three years following the date
of the Optionee's termination of service.
(d) If an Optionee becomes totally disabled before the expiration of Stock
Options held by the Optionee, such Stock Options shall terminate on
the earlier of (i) the date of expiration of the Stock Options or (ii)
one year following the date of the Optionee's termination of service
due to disability.
(e) With respect to any option granted pursuant to this Plan to an
employee of the Company or the Bank, in the event that such employee
shall be terminated "for cause", then all Options granted to such
employee shall be null an void as of 12:01 a.m. of the date of
termination of employment.
For purposes of this Plan, termination "for cause" shall be defined to
include, but shall not be limited to, termination resulting from acts
of the employee which constitute embezzlement, theft or similar
defalcation of the Company and/or Bank
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<PAGE> 8
or for a violation of FIRREA, FIDICIA, the Bank Secrecy Act, the Money
Laundering Control Act or Rule 10B-5 under the Securities and Exchange
Act of 1934 and any amendments thereof promulgated hereafter.
SECTION 8.4 ACCELERATION OF EXERCISE OR LOSS OF OPTION. Notwithstanding any
other provisions of this Plan or any Stock Option Grant Agreements entered into
pursuant to the Plan, an Optionee may be required to exercise or forfeit any
Option issued under the Plan in the event that the Company's or the Bank's
capital falls below minimum requirements and the Company or the Bank is required
by its primary federal or state banking regulator to demand that the Optionee
exercise or waive such Options. Upon receipt by the Company or the Bank of any
demand for an Optionee to exercise or waive such Options, the Company shall send
written notice of such demand to the Optionee within ten (10) days of receipt of
such notice from its or the Bank's primary federal or state regulator, as the
case may be. The Optionee shall have ninety (90) days after receipt of written
notice from the Company to exercise such Options. To the extent that the Options
have not been exercised by the end of such ninety (90) day period, such rights
shall be deemed forfeited.
SECTION 8.5 ANTIDILUTION. The provisions of subsections (a) and (b) shall apply
in the event that the outstanding shares of Stock of the Company are changed
into or exchanged for a different number or kind of shares or other securities
of the Company or another entity by reason of any merger, consolidation,
reorganization, recapitalization, reclassification, combination, stock split or
stock dividend.
(a) The aggregate number and kind of shares subject to Options which may be
granted hereunder shall be adjusted appropriately.
(b) Where dissolution or liquidation of the Company or any merger or
combination in which the Company is not a surviving company is involved,
each outstanding Option granted hereunder shall, subject to Section 6.6,
terminate.
The Foregoing adjustments and the manner of application of the foregoing
provisions shall be determined solely by the Committee and any such adjustment
may provide for the elimination of fractional share interests.
SECTION 8.6 APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of Stock pursuant to Options shall be used for general corporate purposes.
SECTION 8.7 TENURE. Nothing in the Plan or in any Option granted hereunder or in
any Stock Option Grant Agreement relating thereto shall confer upon any officer
or employee, the right to continue in such position with the Company or the
Bank.
SECTION 8.8 OTHER COMPENSATION PLANS. The adoption of the Plan shall not affect
any other stock option or incentive or other compensation plans in effect for
the Company or the Bank, nor shall the Plan preclude the Company or the Bank
from establishing any
8
<PAGE> 9
other forms of incentive or other compensation for officers or employees of the
Company or the Bank.
SECTION 8.9 NO OBLIGATION TO EXERCISE OPTIONS. The granting of an Option shall
impose no obligation upon the Optionee to exercise such Option.
SECTION 8.10 PLAN BINDING ON SUCCESSORS. The Plan shall be binding upon the
successors and assigns of the Company.
SECTION 8.11 SINGULAR, PLURAL GENDER. Whenever used herein, nouns in the
singular shall include the plural, and the masculine pronoun shall include
feminine.
SECTION 8.12 HEADINGS, ETC., NO PART OF PLAN. Headings of Articles and Sections
hereof are inserted for convenience of reference; they constitute no part of the
plan.
SECTION 8.13 GOVERNING LAW. Except as otherwise required by law, the validity,
construction and administration of this Plan shall be determined under the Laws
of the State of Ohio.
Approved this 22nd day of October, 1998.
WESTERN RESERVE BANCORP, INC.
By:/s/ P.M. Jones
--------------------------------------------------
P.M. Jones, Chairman of the Board of Directors
9
<PAGE> 1
Exhibit 13.1
[WESTERN RESERVE BANCORP, INC. LOGO]
ANNUAL REPORT
TO SHAREHOLDERS
December 31, 1998
<PAGE> 2
WESTERN RESERVE BANCORP, INC.
Medina, Ohio
ANNUAL REPORT
December 31, 1998
CONTENTS
<TABLE>
<S> <C>
LETTER TO SHAREHOLDERS ....................................................................................... 1
REPORT OF INDEPENDENT AUDITORS................................................................................ 2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS.......................................................................... 3
CONSOLIDATED STATEMENTS OF INCOME.................................................................... 4
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY............................................................................... 5
CONSOLIDATED STATEMENTS OF CASH FLOWS................................................................ 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................................................... 7
COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA................................................................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS.......................................................................... 24
</TABLE>
<PAGE> 3
Dear Fellow Shareholders:
As a shareholder, you are aware that Western Reserve bank opened in early
November of 1998. Even though it was an abbreviated year for the bank, it was
anything but dull.
During 1998, your Board initiated the sale of Western Reserve Bancorp stock and
we were very successful. On July 1, 1998, we closed the offering with over $6.4
million of owners' investments and 418 owners. Naturally, the ownership is
heavily concentrated in Medina County and surrounding areas.
Our new bank was the beneficiary of two mergers affecting three major
competitors in our primary marketplace. These mergers resulted in service
disruptions and fee increases for those banks' customers. Western Reserve Bank's
advertising, community reputation and network of shareholders and friends
directed many new customers to us. In many cases, the way these people were
treated by our staff resulted in even more referrals. We have been informed that
the stark contrast between the service levels of our bank and our competition
has become a subject of conversation within the community.
We are pleased with the initial growth of our bank. By year-end 1998, we had 573
new depository accounts and 32 loans on our books. Commercial loans were
anticipated to be a driving force behind much of the bank's asset growth and
there has, in fact, been sufficient activity in this area. However, the
complexity of these larger transactions results in longer periods from initial
discussions to eventual funding. Much of our effort in these start-up months
will result in loan growth in the first quarter of 1999.
We must report one unfortunate subsequent event. We have reluctantly accepted
George Klein's resignation from the Board of Directors. George's business is
demanding ever more of his time and requiring him to travel much more
frequently. We will miss George's advice and counsel and will proceed carefully
in replacing him on the board.
We are encouraged by Western Reserve Bank's strong start and see a continuation
of this exciting trend in 1999. We appreciate the spectacular support that you,
our owners, have given to the bank. Your role has been and will be essential to
the continued success of our joint venture.
Sincerely,
P.M. Jones Edward J. McKeon
Chairman of the Board President/CEO
1.
<PAGE> 4
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Western Reserve Bancorp, Inc.
Medina, Ohio
We have audited the accompanying consolidated statements of financial condition
of Western Reserve Bancorp Inc. (the Company) as of December 31, 1998 and 1997,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year ended December 31, 1998 and for the period
from February 27, 1997 (date of inception) to December 31, 1997. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1997, and results of its operations and cash flows for the year ended
December 31, 1998 and for the period from February 27, 1997 (date of inception)
to December 31, 1997 in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Cleveland, Ohio
February 19, 1999
2.
<PAGE> 5
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 447,553 $
Interest-bearing deposits in other banks 7,019,380 29,258
Federal funds sold 2,925,000
----------------- -----------------
Cash and cash equivalents 10,391,933 29,258
Loans 865,097
Allowance for loan losses (11,700)
----------------- -----------------
Loans, net 853,397
Federal Reserve Bank stock 174,050
Premises and equipment, net 816,992 16,244
Accrued interest receivable and other assets 27,645 64,232
----------------- -----------------
Total assets $ 12,264,017 $ 109,734
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 760,359
Interest bearing 5,231,190
-----------------
Total deposits 5,991,549
Checks paid in excess of cash balance $ 5,305
Accrued interest payable and other liabilities 580,590 98
----------------- -----------------
Total liabilities 6,572,139 5,403
SHAREHOLDERS' EQUITY
Common stock, without par value, $1 stated value 750,000 shares authorized,
320,267 and 8,000 shares issued and outstanding at December 31, 1998 and
December 31, 1997, respectively 320,267 8,000
Additional paid-in capital 6,048,232 152,000
Retained deficit (676,621) (55,669)
----------------- -----------------
Total shareholders' equity 5,691,878 104,331
----------------- -----------------
Total liabilities and shareholders' equity $ 12,264,017 $ 109,734
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
3.
<PAGE> 6
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31, 1998 and
the period from February 27, 1997 to December 31, 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME
Loans $ 6,386 $
Investment securities 1,566
Federal funds sold and other
short-term funds 190,942 $ 1,114
--------------- ---------------
Total interest income 198,894 1,114
INTEREST EXPENSE ON DEPOSITS 18,215
--------------- ---------------
Net interest income 180,679 1,114
Provision for loan losses 11,700
Net interest income after --------------- ---------------
provision for loan losses 168,979 1,114
OTHER INCOME
Service charges on deposit accounts 310
Other 989
--------------- ---------------
Total other income 1,299 -
OTHER EXPENSES
Salaries and benefits 409,342 41,804
Premises and equipment 60,919 8,326
Professional fees 37,251 545
Supplies, printing and postage 36,646 859
Other expenses 89,224 5,249
--------------- ---------------
Total noninterest expense 633,382 56,783
NET LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (463,104) (55,669)
Cumulative effect of change in
accounting principle (157,848)
--------------- ---------------
NET LOSS $ (620,952) $ (55,669)
=============== ===============
Basic and diluted loss per share
before cumulative effect of
change in accounting principle $ (2.67) $ (17.46)
Cumulative effect of change in
accounting principle (0.91)
--------------- --------------
Basic and diluted loss per share $ (3.58) $ (17.46)
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4.
<PAGE> 7
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the year ended December 31, 1998 and
the period from February 27, 1997 to December 31, 1997
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Retained Shareholders'
Stock Capital Deficit Equity
----- ------- ------- ------
<S> <C> <C> <C> <C>
Balance, February 27, 1997 $ - $ - $ - $ -
Proceeds from issuance of
common stock 8,000 152,000 160,000
Net loss (55,669) (55,669)
------------- ------------- ------------- -----------
Balance, December 31, 1997 8,000 152,000 (55,669) 104,331
Proceeds from issuance of
common stock net of
stock offering costs 312,267 5,896,232 6,208,499
Net loss (620,952) (620,952)
------------- ------------- ------------- ----------
Balance, December 31, 1998 $ 320,267 $ 6,048,232 $ (676,621) $5,691,878
============= ============= ============== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5.
<PAGE> 8
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 1998 and
the period from February 27, 1997 to December 31, 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (620,952) $ (55,669)
Adjustments to reconcile net loss to net cash from
operating activities
Depreciation 9,980 520
Provision for loan losses 11,700
Net change in interest receivable (6,569)
Net change in interest payable 676
Net change in other assets 43,156 (64,232)
Net change in other liabilities 574,511 5,403
--------------- ----------------
Net cash from operating activities 12,502 (113,978)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Federal Reserve Bank stock (174,050)
Net change in loans (865,097)
Purchase of premises and equipment (810,728) (16,764)
--------------- ----------------
Net cash from investing activities (1,849,875) (16,764)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 5,991,549
Proceeds from issuance of common stock 6,208,499 160,000
--------------- ----------------
Net cash from financing activities 12,200,048 160,000
--------------- ----------------
Increase in cash and cash equivalents 10,362,675 29,258
Cash and cash equivalents at beginning of period 29,258 -
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,391,933 $ 29,258
=============== ================
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 17,539 $ -
Taxes - -
</TABLE>
See accompanying notes to consolidated financial statements.
6.
<PAGE> 9
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
accounts of Western Reserve Bancorp, Inc. (the Company) and its wholly-owned
subsidiary, Western Reserve Bank (the Bank). All significant intercompany
accounts and transactions have been eliminated.
NATURE OF OPERATIONS: Western Reserve Bancorp, Inc. is a one-bank holding
company. Its subsidiary, Western Reserve Bank, is a state-chartered commercial
bank with a single location in Medina, Ohio, engaged in the single industry of
commercial banking. It offers a full range of traditional banking services to
consumers and businesses located primarily in Medina County, Ohio. Services
offered include commercial, real estate, home equity, consumer and credit card
loans, as well as deposit products such as checking accounts, savings and money
market accounts, certificates of deposit and individual retirement arrangements.
The Bank commenced operations on November 6, 1998.
USES OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS: In preparing financial
statements in conformity with generally accepted accounting principles,
management makes estimates and assumptions, based on available information,
which can affect the amounts reported in the financial statements and related
disclosures. Future results could differ from current estimates. Areas that
involve the significant use of estimates include the allowance for loan losses,
the fair values of financial instruments, the realization of deferred tax
assets, the fair value of stock options and the status of contingencies.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash, noninterest
bearing deposits with banks, interest bearing deposits with other banks and
federal funds sold. The Company reports cash flows from loans and deposits on a
net basis, as permitted.
SECURITIES: The Bank is a member of the Federal Reserve Bank. As such, it is
required to own stock of the Federal Reserve. The Company's balance sheet
reflects the Bank's investment of $174,050 in the equity securities of the
Federal Reserve Bank.
CONCENTRATIONS OF CREDIT RISK: Western Reserve Bank grants loans primarily to
customers in Medina and contiguous counties. At December 31, 1998, the
composition of the loan portfolio is approximately 32% commercial loans secured
by real estate, 24% other commercial loans, 14% home equity loans and 30%
consumer and credit card loans. At December 31, 1998, approximately 27% of the
Bank's total loan portfolio was unsecured.
LOANS HELD FOR SALE: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated fair value and
are included in real estate mortgage loans.
(Continued)
7.
<PAGE> 10
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS RECEIVABLE: Loans are reported at principal balance outstanding, net of
deferred loan fees and costs and an allowance for loan losses. Interest income
on loans is recognized over the loan term based on principal balances
outstanding. In the event management would deem the full repayment of a loan to
be in doubt, typically if payments were past due 90 days, interest income would
not be recorded. Payments received on such loans would be reported as principal
reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable credit losses established through a provision for loan
losses charged to expense. Management estimates the allowance for loan losses
deemed appropriate based on past experience, known or inherent risks in the
portfolio, information about specific borrowers' situations, economic conditions
and other factors. A loan which would be deemed uncollectible would be
charged-off and deducted from the allowance; recoveries on loans previously
charged-off would be added to the allowance. Allocations of the allowance may be
made for specific loans, but the entire allowance is available for any loan
that, in management's opinion, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 90 days or
more, or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
PREMISES AND EQUIPMENT: Fixed assets are reported at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from five to twenty years.
Maintenance and repairs are charged to expense as incurred.
INCOME TAXES: The Company records income taxes using the liability method. This
method provides that deferred tax assets and liabilities, which are the expected
future tax consequences of temporary differences between the carrying amounts
and tax bases of assets and liabilities, are computed using current tax rates
and recorded on the balance sheet. Due to net operating losses for each of the
years since its inception in 1997 through December 31, 1998, a valuation
allowance equal to the net deferred tax asset was recorded at December 31, 1998
and 1997, respectively. Therefore, no deferred tax asset or income tax benefit
has been recognized by the Company to date.
(Continued)
8.
<PAGE> 11
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
START-UP ACTIVITIES: At December 31, 1998, the Company elected to adopt
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities." SOP 98-5 requires start-up activities, including organizational
costs, to be expensed as incurred. As a result, the Company recorded an expense
of $157,848 for the year ended December 31, 1998 to write-off the remaining
unamortized organizational costs. The company disclosed the adoption of SOP 98-5
as the cumulative effect of a change in accounting principle in the 1998
statement of operations.
LOSS PER COMMON SHARE: Basic and diluted loss per share are computed under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share." Basic loss per share is based on net loss divided by the
weighted average number of shares outstanding during the period. Diluted loss
per share shows the dilutive effect of additional common shares issuable under
stock options. The weighted average shares outstanding in 1998 and 1997 were
173,303 and 3,188, respectively.
DIVIDEND RESTRICTIONS: See Note 10 for a discussion of banking regulations which
restrict dividends.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as discussed
in Note 9. Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments and other factors,
particularly in the absence of broad markets for particular types of
instruments. Changes in assumptions or in market conditions could significantly
affect the estimates.
STOCK OPTION PLAN: Expense for employee compensation under stock option plans is
based on Accounting Principles Board (APB) Opinion 25, with expense reported
only if options are granted below market price at grant date. If applicable,
disclosures of net income and earning or loss per common share are provided as
if the fair value method of SFAS No. 123 were used for stock-based compensation.
(Continued)
9.
<PAGE> 12
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 2 - ORGANIZATION
Western Reserve Bancorp, Inc. was incorporated under the laws of the State of
Ohio on February 27, 1997. During 1997 and a significant portion of 1998, the
Company's activities were limited to the organization of Western Reserve Bank
(the Bank), as well as preparation for and completion of a common stock offering
(the Offering). The Company sold 320,267 shares of common stock at a price of
$20 per share resulting in proceeds, net of offering costs, of approximately
$6,368,000. A substantial portion of the proceeds of the Offering were used by
the Company to provide the initial capitalization of the Bank which occurred in
November 1998, at which time the Bank began operations.
NOTE 3 - LOANS RECEIVABLE, NET
Loans at December 31, 1998, were as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Commercial $ 481,609
Home equity 122,311
Consumer installment 260,852
Credit card and other 325
---------
$ 865,097
=========
</TABLE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Beginning balance $ --
Loans charged off --
Recoveries of previous
charge-offs --
Provision for loan losses 11,700
-------
Ending balance $11,700
=======
</TABLE>
At December 31, 1998, there were no past-due, nonaccrual or impaired loans.
(Continued)
10.
<PAGE> 13
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 4 - PREMISES AND EQUIPMENT, NET
At December 31, premises and equipment consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Leasehold improvements $500,399 $ 0
Furniture and equipment 327,093 16,764
-------- -------
Total cost 827,492 16,764
Accumulated depreciation (10,500) (520)
-------- -------
Total, net of depreciation $816,992 $16,244
======== =======
</TABLE>
The Company's and Bank's facility is leased under an operating lease from a
member of the Board of Directors. The lease term is for ten years, with two
five-year renewal options. Total rent expense for this facility was $17,411 in
1998. At December 31, 1998, the total estimated future minimum rental payments
under the lease are as follows:
<TABLE>
<S> <C> <C>
1999 $ 105,120
2000 109,062
2001 113,385
2002 118,970
2003 122,005
Thereafter 649,313
----------
$1,217,855
==========
</TABLE>
Prior to the Bank's opening, the Company leased temporary office space on a
month-to-month basis from a member of the Board of Directors. Total rent expense
for that space was $17,033 and $5,209 in 1998 and 1997, respectively.
Additionally, the Company leases an automobile for the President and Chief
Executive Officer from a company affiliated with a member of the Board of
Directors. The lease is a 36-month closed-end lease that expires in September
2000. The aggregate annual lease payment is $5,488. Future minimum lease
payments are $5,488 in 1999 and $4,116 in 2000.
(Continued)
11.
<PAGE> 14
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 5 - DEPOSITS
At year-end, total interest-bearing deposits are as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Interest-bearing demand $ 485,887
Savings 3,140,793
Money market 1,257,548
Time under $100,000 246,567
Time $100,000 and over 100,395
----------
Total $5,231,190
==========
</TABLE>
Scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Three months or less $ 14,693
Three through six months 58,519
Six through twelve months 263,878
Over twelve months 9,872
--------
$346,962
</TABLE>
Deposits of $100,000 or greater totaled $2,169,280 at December 31, 1998.
NOTE 6 - OTHER EXPENSE
Year-end other expense amounts were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Data processing $ 4,607 $ 235
Insurance 9,200 365
Marketing and advertising 19,904
Public relations
and contributions 20,498
Telephone 7,744 790
Travel and entertainment 22,317 3,739
Other 4,954 120
------------ ----------
Total $ 89,224 $ 5,249
============ ==========
</TABLE>
(Continued)
12.
<PAGE> 15
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 7 - INCOME TAXES
There was no income tax expense for the year ended December 31, 1998 or for the
period from February 27, 1997 to December 31, 1997 as the Company has
experienced a tax net operating loss since its inception.
Total income tax expense differed from the amounts computed by applying the
federal income tax rate of 34% in all period presented to loss before income
taxes as a result of the following for the periods ended December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Income tax benefit at
statutory rate $(211,124) $ (18,927)
Effect of deferred tax
valuation allowance 208,350 18,927
Other, net 2,774 --
--------- ---------
Total income tax expense $ -- $ --
========= =========
</TABLE>
The components of the net deferred tax asset (liability) recorded in the
consolidated balance sheets as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss
carryforward $ 25,417 $ --
Organizational costs
capitalized 172,849 18,927
Donation carryforward 668 --
Accrual to cash
adjustment 31,621 --
--------- ---------
230,555 18,927
Deferred tax liabilities:
Bad debt deduction (3,278) --
--------- ---------
(3,278) --
Valuation allowance (227,277) (18,927)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
</TABLE>
A valuation allowance has been recorded to reduce the net deferred tax assets to
$0 as the Company has not yet paid any income taxes which would be refundable if
these timing differences reversed.
(Continued)
13.
<PAGE> 16
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 7 - INCOME TAXES (Continued)
At December 31, 1998, the Company had operating loss carryforwards of
approximately $73,000 which can be used to offset future taxable income. The
carryforwards are due to expire, for tax purposes, in 2018 and 2019.
NOTE 8 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some commitments are expected to expire
without being used, total commitments do not necessarily represent future cash
requirements. Exposure to credit loss if the other party does not perform is
represented by the contractual amount for commitments to extend credit. The same
credit policies are used for commitments and conditional obligations as are used
for loans.
A summary of contractual amounts of financial instruments with off-balance-sheet
risk at December 31 follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Commitments to extend
credit (net of
participated amounts) $2,151,000
Unused credit card, home
equity and overdraft
lines of credit 265,884
Unused commercial lines
of credit 50,000
</TABLE>
Included in cash and cash equivalents at year-end 1998 was approximately $59,694
required to be on deposit with the Independent State Bank of Ohio related to the
Bank's credit card program.
Under an employment agreement with an executive officer, in the event the
officer is terminated without cause, the Company has an obligation to pay the
officer's salary through the date of termination, plus eighteen months salary as
severance, which totals approximately $187,500 at December 31, 1998.
(Continued)
14.
<PAGE> 17
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 9 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments at year-end are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $10,391,933 $10,391,933 $29,258 $29,258
Loans, net of allowance 853,397 853,397
Accrued interest receivable 6,569 6,569
Demand and savings deposits (5,644,587) (5,644,587)
Time deposits (346,962) (346,962)
Accrued interest payable (676) (676)
</TABLE>
For purposes of these disclosures of estimated fair values, the following
assumptions were used. Estimated fair value for cash and cash equivalents,
accrued interest receivable and accrued interest payable is considered to
approximate cost due to their short-term nature. Carrying value is considered to
approximate fair value for variable rate loans and deposit liabilities subject
to immediate withdrawal. Fair values of fixed rate loans and time deposits are
approximated by a discounted cash flow analysis using estimated market interest
rates as of December 31, 1998. Fair values of unrecorded commitments are
December 31, 1998, are not material.
These estimates are based on management's judgment of the most appropriate
factors. However, there is no assurance that, had the Company liquidated these
items, the estimated fair values would have been realized. Estimated fair values
should not be assumed to apply at subsequent dates. Other assets and liabilities
of the Company, such as fixed assets or the value of its core deposits, customer
goodwill or workforce, may have value but are not included in the above
disclosures.
(Continued)
15.
<PAGE> 18
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 10 - REGULATORY MATTERS
The payment of dividends by the Bank to the Company is subject to restrictions
by its regulatory agencies. These restrictions generally limit dividends to
current and prior two years retained earnings, as defined. In addition,
dividends may not reduce capital levels below the minimum regulatory
requirements as described below. Furthermore, as part of the Bank's approval by
the regulatory agencies, it is prohibited from paying dividends to the Company
for a period of three years after inception without prior written non-objection
by the Federal Reserve Bank. Therefore, the Bank does not expect to pay
dividends to the Company prior to 2001.
The Bank is subject to regulatory capital requirement administered by state and
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities and
certain off-balance-sheet items calculated using regulatory accounting
practices.
The prompt corrective action regulations provide five classifications, including
well-capitalized, adequately-capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition.
At year-end 1998, the Bank's capital levels were as follows:
<TABLE>
<CAPTION>
Minimum Required to
be Well Capitalized
Minimum Required for Under Prompt
Capital Adequacy Corrective Action
($ thousands) Actual Purposes Regulation
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk-weighted $ 5,634 150.0% $ 300 8.0% $ 375 10.0%
assets
Tier 1 capital to risk-weighted
assets 5,622 150.0% 150 4.0% 225 6.0%
Tier 1 capital to average assets 5,622 60.8% 150 4.0% 187 5.0%
At year-end 1998, the Bank was categorized as well-capitalized.
</TABLE>
(Continued)
16.
<PAGE> 19
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 11 - PARENT COMPANY
Condensed financial statements of Western Reserve Bancorp, Inc. (parent
company only) are as follows:
CONDENSED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 147,646 $ 29,258
Investment in bank subsidiary 5,621,972
Other assets -- 80,476
---------- ----------
Total assets $5,769,618 $ 109,734
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 77,740 $ 5,403
Shareholders' equity 5,691,878 104,331
---------- ----------
Total Liabilities and
Shareholder's Equity $5,769,618 $ 109,734
========== ==========
</TABLE>
(Continued)
17.
<PAGE> 20
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 11 - PARENT COMPANY (Continued)
CONDENSED STATEMENTS OF INCOME
Year ended December 31, 1998 and period from
February 27, 1997 to December 31, 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
INCOME
Interest income $ 122,454 $ 1,114
Other income 171 0
--------- ---------
Total income 122,625 1,114
EXPENSES
Salaries and benefits 276,333 41,804
Other expenses 121,451 14,979
--------- ---------
Total expenses 397,784 56,783
--------- ---------
Loss before income taxes and
equity in undistributed
earnings of subsidiary (275,159) (55,669)
Equity in undistributed loss
of subsidiary (187,945) 0
--------- ---------
Net loss before cumulative
effect of change in accounting
principle (463,104) (55,669)
Cumulative effect of change in
accounting principle (157,848) 0
--------- ---------
Net loss $(620,952) $ (55,669)
========= =========
</TABLE>
(Continued)
18.
<PAGE> 21
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 11 - PARENT COMPANY (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31, 1998 and period from
February 27, 1997 to December 31, 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating
activities
Net loss $ (620,952) $ (55,669)
Equity in undistributed
loss of subsidiary 187,945
0
Other 129,715 (58,309)
----------- -----------
Net cash from operating
activities (303,292) (113,978)
Cash flows from investing
Activities
Premises and equipment, (138,791) (16,764)
net
Investment in subsidiary
bank (5,648,028) 0
----------- -----------
Net cash from investing
activities (5,786,819) (16,764)
Cash flows from financing
activities
Proceeds from issuance of
common stock, net 6,208,499 160,000
----------- -----------
Net cash from financing
activities 6,208,499 160,000
----------- -----------
Change in cash and cash
equivalents 118,388 29,258
Cash and cash equivalents at
beginning of year 29,258 0
----------- -----------
Cash and cash equivalents at
end of year $ 147,646 $ 29,258
=========== ===========
Noncash transfers to investment in bank subsidiary:
Premises and equipment $ 152,621
Other assets 9,268
</TABLE>
(Continued)
19.
<PAGE> 22
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 12 - EMPLOYEE BENEFIT PLANS
The Company has a nonqualified stock option plan. Under the plan, options to buy
a total of 50,000 shares of the Company's common stock may be granted. Pursuant
to an employment contract, the President and Chief Executive Officer was granted
options to buy up to 32,062 shares of common stock. The exercise price will be
the base price at which the initial public shares were offered ($20) for 70% of
the options, and 160%, 180% and 200% of the base price for each remaining 10%
increment, respectively. In addition, options to purchase 10,000 shares of
common stock were issued to two executive officers at the current market price
as of the date of grant during 1998. The maximum option term is ten years, and
options vest over three years as follows: 25% one year from the grant date, 50%
after two years, and 100% after three years.
A summary of the activity in the plan for 1998 is as follows:
<TABLE>
<CAPTION>
Weighted
Average Range of
Exercise Option Price
Shares Price per Share
------ ----- ---------
<S> <C> <C> <C>
Options outstanding at beginning
of year 0
Granted 42,062 $23.66 $20.00-$40.00
Exercised 0
Forfeited 0
------
Options outstanding at end of year 42,062 $23.66 $20.00-$40.00
======
Remaining shares available for
grant at year-end 7,938
Options exercisable at year-end
0
Weighted-average fair value of
options granted during the year $4.37
</TABLE>
(Continued)
20.
<PAGE> 23
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
Options outstanding at year-end 1998 were as follows:
<TABLE>
<CAPTION>
Outstanding Exerciseable
----------- ------------
Weighted
Average
Remaining Weighted
Contractual Average
Number Life (years) Number Exercise Price
------ ----------- ------ --------------
<S> <C> <C> <C>
Range of Exercise Prices
$20.00-$29.99 32,444 9.8 -0-
$30.00-$39.99 6,412 9.8 -0-
$40.00 3,206 9.8 -0-
------ ---
Outstanding at year-end 42,062 9.8 -0-
====== ===
</TABLE>
Had compensation cost for stock options been measured using FASB Statement No.
123, net loss and loss per share would have been the pro forma amounts indicated
below.
<TABLE>
<CAPTION>
1998
----
<S> <C>
Net loss as reported $620,952
Pro forma net loss 666,860
Basic and diluted loss per
share as reported $ 3.58
Pro forma basic and diluted
loss per share $ 3.85
</TABLE>
In future years, the pro forma effect of not applying this standard is expected
to increase as additional options are granted.
The pro forma effects are computed using option-pricing models, using the
following weighted-average assumptions as of grant date.
<TABLE>
<CAPTION>
1998
----
<S> <C>
Risk-free interest rate 4.75%
Expected option life (years) 8.0
Expected stock price volatility 0.00%
Dividend yield 0.00%
</TABLE>
(Continued)
21.
<PAGE> 24
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 13 - BASIC AND DILUTED LOSS PER COMMON SHARE
Loss per common and common equivalent share are based on the combined weighted
average number of common shares and common equivalent shares outstanding which
include, where appropriate, the assumed exercise or conversion of outstanding
stock options. In computing loss per common and common equivalent share, the
Company has utilized the treasury stock method.
The computation of loss per common share, weighted average common and common
equivalent shares used in the calculation of basic and diluted loss per common
share is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Basic and Diluted Loss
per Common Share:
Net loss before
cumulative effect of
change in accounting
principle $(463,104) $ (55,669)
Cumulative effect of
change in accounting
principle (157,848)
--------- ---------
Net loss $(620,952) $ (55,669)
========= =========
Weighted average
common shares
outstanding 173,303 3,188
========= =========
Basic Loss per Common
Share Before
Cumulative Effect of
Change in Accounting
Principle $ (2.67) $ (17.46)
Basic Loss per Common
Share from Cumulative
Effect of Change in
Accounting Principle $ (0.91) -0.00-
--------- ---------
Basic and Diluted Loss
per Common Share $ (3.58) $ (17.46)
========= =========
</TABLE>
Outstanding stock options for 42,062 shares of common stock at December 31, 1998
were not considered in computing diluted loss per common share for 1998 because
they were antidilutive.
(Continued)
22.
<PAGE> 25
COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA
As of December 31, 1998 and 1997, and for the Year ended December 31, 1998 and
the Period from February 27, 1997 to December 31, 1997
<TABLE>
<CAPTION>
($000's except per share data) 1998 1997
---- ----
<S> <C> <C>
BALANCE SHEET DATA:
Total assets $ 12,264 $ 110
Total loans 865
Allowance for loan losses 12
Total deposits 5,992
Shareholders' equity 5,692 104
INCOME STATEMENT DATA:
Total interest income $ 199 $ 1
Total interest expenses 18
--------- ---------
Net interest income 181 1
Provision for loan losses 12
--------- ---------
Net interest income after provision for loan losses 169 1
Noninterest income 1
Noninterest expense 633 57
--------- ---------
Loss before income taxes and cumulative effect of
change in accounting principle (463) (56)
Cumulative effect of change in accounting principle (158)
--------- ---------
Loss before income taxes (621) (56)
Income taxes --------- ---------
Net loss $ (621) $ (56)
========= =========
PER SHARE DATA:
Basic and diluted loss per common share before
cumulative effect of change in accounting principle $ (2.67) $ (17.46)
Loss per share from cumulative effect of change in
accounting principle (0.91)
Basic and diluted loss per common share (3.58) (17.46)
Book value per share at year-end 17.77 13.04
Cash dividends per share n/a n/a
Average shares used in net income per share calculations 173,303 3,188
OPERATING RATIOS:
Total net loans to total deposits 14.44% n/a
Total shareholders' equity to total assets 46.41% 95.08%
Average shareholders' equity to average assets 84.90% 99.20%
Return on average equity (20.70)% (95.10)%
Return on average assets (15.30)% (94.35)%
Total interest expense to interest income 9.16% 0.00%
Allowance for loan losses to total loans 1.35% n/a
Average assets $ 4,050 $ 59
Average shareholders' equity 2,994 58
</TABLE>
23.
<PAGE> 26
WESTERN RESERVE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
- ------------
In the following section, management presents an analysis of Western Reserve
Bancorp, Inc.'s financial condition and results of operations as of and for the
year ended December 31, 1998, and the period from February 27, 1997 to December
31, 1997. This discussion is provided to give shareholders a more comprehensive
review of the operating results and financial condition than could be obtained
from an examination of the financial statements alone. This analysis should be
read in conjunction with the consolidated financial statements and related
footnotes and the selected financial data elsewhere in this report.
Western Reserve Bancorp, Inc. (the Company) was incorporated under the laws of
the State of Ohio on February 25, 1997. During 1997 and the first ten months of
1998, the Company's activities were limited to the organization of Western
Reserve Bank (the Bank) and preparation for and completion of a common stock
offering (the Offering). The Company sold 320,267 shares of common stock at a
price of $20.00 per share in the Offering. Net proceeds from the Offering were
$6,208,499 in 1998 and $160,000 in 1997. Most of the proceeds of the Offering
were used by the Company to provide the initial capitalization of the Bank,
which occurred on November 6, 1998, at which time the Bank began operations.
Management believes that the Company's financial condition and results of
operations are as expected for a newly formed financial institution.
EARNINGS SUMMARY
- ----------------
Consolidated net loss for the Company for 1998 was $620,952, compared to a net
loss of $55,669 in 1997. Results for 1998 include a $157,848 charge due to the
Company's adoption of Statement of Accounting Position (SOP) 98-5, "Reporting on
the Costs of Start-Up Activities," which required the Company to write off its
organizational costs, rather than amortize them over 60 months as was previously
permitted. Basic and diluted loss per common share in 1998 was $2.67 before the
cumulative effect of the change in accounting principle, $0.91 loss per common
share due to the effect of the change in accounting principle, for a total of
$3.58 loss per common share. This compares with a $17.46 loss per share in 1997.
The larger loss per share in 1997 was primarily due to fewer average shares
outstanding in 1997 (3,188) as compared to 1998 (173,303). No dividends were
paid in 1998 or 1997.
RESULTS OF OPERATIONS--1998 COMPARED TO 1997
- --------------------------------------------
Net interest income for 1998 was $180,679, compared with $1,114 in 1997. This
was due primarily to the investment of the proceeds from the common stock
offering, as well as growth in the Bank's loan portfolio, funded by deposit
growth. The average yield on interest-earning assets in 1998 was 5.24%, which
included an average rate on federal funds sold and other short-term investments
of 5.19% and 8.06% on loans receivable. The average rate of return was
(continued)
24.
<PAGE> 27
significantly influenced by the fact that the Company's interest-earning assets
consisted of short-term deposits for the majority of the year. The average rate
paid on interest-bearing liabilities was 4.30%. The net interest margin was
4.76% in 1998. The net interest margin was influenced by the fact that
interest-earning assets were funded by equity for a majority of the year.
Management anticipates that the net interest margin in 1999 will decline from
1998 levels when it becomes more reflective of normal banking operations.
At December 31, 1998, total loans receivable was $865,097, compared to $0 at
December 31, 1997. Interest-bearing deposits in other banks and federal funds
sold amounted to $9,944,380 at year-end 1998, compared to $29,258 at year-end
1997. The increase in assets was funded by growth in deposits, which amounted to
$5,991,549 at December 31, 1998, as well as the sale of common stock, which
provided $6,208,499 in 1998 and $160,000 in 1997. The mix of total loans
receivable at December 31, 1998, was $481,609 or 55.7% in commercial loans,
$122,311 or 14.1% in home equity loans, and $261,177 or 30.2% in consumer,
credit card and other loans to individuals.
Total deposits at December 31, 1998, amounted to $5,992,000, compared to $0 at
the same date in 1997. These funds were invested primarily in interest-bearing
deposits in other banks, federal funds sold and loans receivable, as well as
cash and balances due from other banks and fixed and other assets. The increase
reflects the growth during the first two months of Bank operations. Management
anticipates the Bank will experience growth in all deposit accounts during 1999
as the Company continues to attract new customers.
The provision for loan losses charged to operations was based on management's
estimation of future losses and on an evaluation of portfolio risk and economic
factors. The provision for loan losses and the allowance for loan losses were
both $11,700 in 1998. No loans were charged off in 1998. At December 31, 1998,
none of the allowance for loan losses was allocated to impaired loan balances,
as there were no loans considered impaired.
At December 31, 1998, the allowance was 1.35% of total loans.
Management allocated approximately 59.7% of the allowance to commercial loans;
5.2% to home equity loans, and 33.5% to consumer and credit card loans to
individuals at December 31, 1997, leaving 1.6% unallocated. There were no
nonperforming loans at December 31, 1998. Management believes the allowance for
loan losses at December 31, 1998, is adequate to absorb probable losses in the
loan portfolio.
Total noninterest income was $1,299 in 1998. Noninterest income in 1998 resulted
primarily from gains on sales of mortgage loans and service charges on deposit
accounts.
Total noninterest expense increased $576,599 in 1998 due primarily to the
following factors. Salaries and employee benefits increased $367,538 to $409,342
in 1998, from $41,804 in 1997. This increase was due to hiring management and
staff of the Bank during mid- and late-1998. Occupancy and equipment costs
increased $52,593 to $60,919 in 1998, from $8,326 in 1997. This increase was due
to almost a full year's lease on the space used prior to opening the Bank and
the cost of the Bank facility for two months since the opening of the Bank's
offices in November 1998. Other expenses increased a total of $156,468 due
primarily to the following increases: $40,402 increase in marketing, advertising
and public relations, $18,578 in travel and
(continued)
25.
<PAGE> 28
entertainment, $8,835 in insurance, $4,372 in data processing, and $6,954 in
telephone costs. Management anticipates noninterest expense will increase during
1999 since the Bank will be operational for the full year in 1999 and the
expenses in 1998 and 1997 were reflective of start-up operations and not normal
banking operations.
The income tax benefit from the net operating losses in 1998 and 1997 has not
been reflected in the consolidated financial statements. A valuation allowance
has been recorded to reduce the deferred tax assets to $0. At such time when
management believes that it is more likely than not that the income tax benefit
will be used by the Company, the valuation allowance will be reduced and a tax
benefit will be realized. The income tax benefit from the losses in 1998 and
1997 can be carried forward for twenty years from the time of the loss before
they expire. Accordingly, the Company's net operating loss carryforwards for
1998 and 1997 will expire in 2019 and 2018, respectively, if they were to remain
unused at that time.
LIQUIDITY
- ---------
Liquidity relates primarily to the Company's ability to fund loan demand, meet
deposit customers' withdrawal needs and provide for operating expenses. Assets
used to satisfy those needs include cash and due from banks, federal funds sold,
interest-bearing deposits in other financial institutions and securities
available-for-sale. These assets are commonly referred to as liquid assets.
Liquid assets were $10,391,933 at December 31, 1998 compared to $29,258 at
December 31, 1997. The high degree of liquidity is reflective of the Bank having
only been open for two months in 1998. As the Bank grows and deposits are used
to fund loans, management anticipates liquidity will decrease. Management
believes its current liquidity level is sufficient to meet anticipated future
growth, and management monitors its liquidity position on a regular basis.
The Statements of Cash Flows for the periods presented provide an indication of
the Company's sources and uses of cash as well as an indication of the Company's
ability to maintain an adequate level of liquidity. During 1998 and 1997, the
Company experienced net decreases in cash flows from investing activities. In
1998, net cash from investing activities was $(1,849,875), due mainly to growth
in loans receivable, as well as the purchases of equipment and leasehold
improvements. Net cash flow from financing activities was $12,200,048 in 1998,
and $160,000 in 1997. In 1998 the increase was due to growth in total deposits
of $5,991,549, and net proceeds from issuance of common stock of $6,208,499. In
1997, issuance of common stock resulted in net cash flow from financing
activities of $160,000. As the Bank continues to grow, management anticipates
that cash flows will be provided by an increase in deposits and used to fund
loan growth, investment purchases and operations until the company reaches
break-even profitability.
INTEREST RATE SENSITIVITY/GAP
- -----------------------------
At year-end 1998, approximately 92% of the interest-bearing assets on the
Company's balance sheet mature in one year or less. The Bank currently has no
long-term fixed rate loans with a maturity greater than ten years. Nearly all of
the interest-bearing liabilities are variable-rate core deposits. The Bank does
not expect to be reliant on long-term fixed rate certificates of
(continued)
26.
<PAGE> 29
deposit. The short-term nature of the balance sheet is a result of the increase
in deposits upon the Bank's opening and the resulting investment of those
deposits in short-term funds. Management's strategy is to keep funds available
for anticipated loan demand. As the balance sheet matures, Management will use
interest rate modeling techniques to assist in managing the balance sheet to
reduce the impact of changes in interest rates on earnings and equity.
CAPITAL RESOURCES
- -----------------
Total shareholders' equity was $5,691,878 at December 31, 1998, an increase of
$5,587,547 from the $104,331 at December 31, 1997. The increase was a result of
net proceeds from the sale of common stock of $6,208,499, offset by a net loss
of $620,952 in 1998. Shareholders' equity in 1997 increased to $104,331 due to
proceeds of $160,000 from the sale of common stock, offset by the net loss of
$55,669 in 1997.
Total risk-based capital is made up of Tier 1 Capital and Tier 2 Capital. Tier 1
capital is total shareholders' equity less any intangible assets. Tier 2 capital
is Tier 1 capital plus the allowance for loan losses (includible up to a maximum
of 1.25% of risk-weighted assets). Refer to Note 10 in the Company's
consolidated financial statements for a complete discussion of risk-based
capital. The Bank exceeded the applicable minimum regulatory capital
requirements at December 31, 1997.
Restrictions exist regarding the ability of the Bank to transfer funds to the
Company in the form of cash dividends, loans or advances, as discussed in Note
10 to the consolidated financial statements. No cash or other dividends were
declared or paid during the periods ended December 31, 1998 or 1997.
As of December 31, 1998, management is not aware of any current recommendations
by the banking regulatory authorities which, if they were to be implemented,
would have, or are reasonably likely to have, a material adverse effect on the
Company's liquidity, capital resources or operations.
IMPACT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
The majority of assets and liabilities of the Company are monetary in nature and
therefore the Company differs greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
However, inflation does have an important impact on the growth of total assets
in the banking industry and the resulting need to increase equity capital at
higher than normal rates in order to maintain an appropriate equity to assets
ratio. Inflation significantly affects noninterest expense, which tends to rise
during periods of general inflation. Management believes the most significant
impact on financial results is the Company's ability to react to changes in
interest rates. Management seeks to maintain a fairly balanced position between
interest rate sensitive assets and liabilities and to actively manage the
balance sheet in order to protect against the effects of wide interest rate
fluctuations on net income and shareholders' equity.
(continued)
27.
<PAGE> 30
YEAR 2000
- ---------
The Year 2000 issue is the result of many computer programs being written using
two digits rather than four to define an applicable year. A company's hardware,
data-driven automated equipment, or computer programs that have date sensitive
software, may recognize a date using "00" as the year 1900 rather than the year
2000. This faulty recognition could result in a system failure of miscalculation
causing disruptions or operations, including, among other things, a temporary
inability to process transactions or engage in normal business activities.
The Company was a start-up in 1998, and acquired all of its systems in the
second half of 1998. Thus, there are no old or "legacy" systems that could have
extensive Year 2000 problems.
The Company's Year 2000 plan seeks to achieve operating readiness to ensure that
its customers are provided uninterrupted services. The Company has formed a Year
2000 Committee of Bank officers and staff. The Committee is conducting a
comprehensive review of all of its information technology and non information
technology systems to identify potential Year 2000 problems and will complete
testing of all hardware and software for compliance by March 31, 1999.
The Company has identified mission-critical applications. An application, system
or vendor is considered mission critical if it is vital to the successful
continuance of core business activity or is an application that interfaces with
a mission-critical system. The Company evaluates its Year 2000 preparedness
based on the guidelines issued by the Federal Financial Institutions Examination
Council (FFIEC) outline. The following five phases were identified by the FFIEC:
Awareness, Assessment, Renovation, Validation and Implementation. At December
31, 1998, the Awareness phase had been completed. The Company is in various
stages of Assessment, Renovation, Validation and Implementation on those
applications or systems identified as mission critical. Year 2000 compliance
testing for the Company's primary outsourced information systems applications is
to be completed by June 30, 1999. Based on this testing, management believes
that this system in Year 2000 ready.
The Company could experience higher funding costs if consumers react to
publicity about the Year 2000 issue by withdrawing deposits. In addition, the
Company could experience increases in problem loans and credit losses if
borrowers fail to respond to Year 2000 issues. The Year 2000 Committee is
reviewing all commercial loan customers and significant depositors to determine
the extent to which their Year 2000 readiness may affect the Company's
operations.
The Company is currently developing contingency plans and anticipates completion
by June 30, 1999. The Company anticipates that all systems will be Year 2000
compliant by mid-year 1999. On an ongoing basis, the Year 2000 Committee is
contacting key suppliers and third parties with which the Company conducts
business to determine their Year 2000 readiness. The Committee is reviewing the
progress of third party vendors by the Company can make no assurances that the
critical third parties with which the Company does business will adequately
address their Year 2000 issues. If suppliers and customers are not Year 2000
compliant by January 1, 2000, their noncompliance could materially affect the
Company's business and operating results. The Company is in the process of
developing contingency plans that focus on reducing any disruption that might be
created by third parties with whom the Company does
(continued)
28.
<PAGE> 31
business in the event they are not Year 2000 compliant. The Year 2000 Committee
will be completing and testing the business resumption plan and the plan is
anticipated to be in place and tested by September 30, 1999.
The Company currently anticipates that it will spend approximately $10,000
related to Year 2000 issues. The Year 2000 problem could have a material impact
on the operation of the Company if not properly addressed, but management
anticipates that the problem will be resolved and thus will not have a
significant impact on the Company's delivery of its services or its core
operations.
The aforementioned constitutes a Year 2000 Readiness Disclosure for purposes of
the Year 2000 Information and Readiness Disclosure Act.
FORWARD LOOKING STATEMENTS
- --------------------------
Certain statements contained in this report that are not historical facts are
forward looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates," "plans," "expects," "believes," and
similar expressions as they relate to the Company or its management are intended
to identify such forward looking statements. The Company's actual results,
performance or achievements may materially differ from those expressed or
implied in the forward-looking statements. Risks and uncertainties that could
cause or contribute to such material differences include, but are not limited
to, general economic conditions, interest rate environment, competitive
conditions in the financial services industry, changes in law, governmental
policies and regulations, and rapidly changing technology affecting financial
services.
IMPACT OF NEW ACCOUNTING STANDARDS
- ----------------------------------
Recent pronouncements by the Financial Accounting Standards Board ("FASB") will
have an impact on financial statements issued in current or subsequent periods.
Set forth below are summaries of such pronouncements. These statements are not
expected to have a material effect on the Company's consolidated financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 addresses the accounting for
derivative instruments and certain derivative instruments embedded in other
contracts, and hedging activities. The statement standardizes the accounting for
derivative instruments by requiring that an entity recognize those items as
assets or liabilities in the statement of financial position and measure them at
fair value. This statement is effective for all fiscal years beginning after
June 15, 1999.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." SFAS No. 134 will, in 1999, allow mortgage loans
that are securitized to be classified as trading, available for sale, or in
certain circumstances held to maturity. Currently these must be classified as
trading.
29.
<PAGE> 32
BOARD OF DIRECTORS (1)
P.M. Jones, Chairman President and Owner
Transport Corporation, Inc., TCI Leasing and
Leasing Times, Inc.
Medina, Ohio
Edward J. McKeon President and Chief Executive Officer
Western Reserve Bancorp, Inc. and
Western Reserve Bank
Medina, Ohio
Bijay K. Jayaswal, M.D. President
Bijay K. Jayaswal M.D., Inc.
Medina, Ohio
Ray E. Laribee Attorney and Partner
Laribee, Hertrick & Kray
Medina, Ohio
C. Richard Lynham Owner, President and CEO
Harbor Castings
North Canton, Ohio
R. Hal Nichols Chairman and Director
Austin Associates, Inc.
Toledo, Ohio
Rory H. O'Neil Cofounder and Partner
Liberty St. Brewing Company
Akron, Ohio
Michael R. Rose President
Washington Properties, Inc.
Medina, Ohio
Glenn M. Smith President
Smith Bros. Inc.
Medina, Ohio
Thomas A. Tubbs Chief Executive Officer
The Tubbs Group
Akron, Ohio
(1) All are Directors of Western Reserve Bancorp, Inc. and Western Reserve Bank
30.
<PAGE> 33
EXECUTIVE OFFICERS--WESTERN RESERVE BANCORP, INC.
P.M. Jones, Chairman of the Board
Edward J. McKeon, President and Chief Executive Officer
Cynthia A. Mahl, Secretary
EXECUTIVE OFFICERS--WESTERN RESERVE BANK
P.M. Jones, Chairman of the Board
Edward J. McKeon, President and Chief Executive Officer
Brian K. Harr, Senior Vice President-Lending
Cynthia A. Mahl, Senior Vice President, Secretary, Treasurer and Chief Financial
Officer
TRANSFER AGENT, REGISTRAR & DIVIDEND AGENT
Western Reserve Bank
4015 Medina Road, Suite 100
P.O. Box 585
Medina, Ohio 44258-0585
(330) 764-3131
ANNUAL REPORT ON FORM 10-KSB
A copy of Western Reserve Bancorp, Inc.'s Annual Report on Form 10-KSB for the
year ended December 31, 1998, as filed with the Securities and Exchange
Commission, may be obtained without charge by submitting a written request to
Cynthia A. Mahl, Chief Financial Officer, Western Reserve Bancorp, Inc., 4015
Medina Road, P.O. Box 585, Medina, Ohio 44258-0585.
ANNUAL MEETING
The Annual Shareholders' Meeting will be held Wednesday, April 28, 1999, at 9:30
a.m. at the Rustic Hills Country and Executive Club, 5399 River Styx Road,
Medina, Ohio.
31.
<PAGE> 1
EXHIBIT 21.1
------------
SUBSIDIARY OF WESTERN RESERVE BANCORP, INC.
Western Reserve Bank
Medina, Ohio
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION OF WESTERN RESERVE BANCORP, INC.
AS OF DECEMBER 31, 1998 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR
THE PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 447,553
<INT-BEARING-DEPOSITS> 7,019,380
<FED-FUNDS-SOLD> 2,925,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 865,097
<ALLOWANCE> 11,700
<TOTAL-ASSETS> 12,264,017
<DEPOSITS> 5,991,549
<SHORT-TERM> 0
<LIABILITIES-OTHER> 580,590
<LONG-TERM> 0
<COMMON> 0
0
320,267
<OTHER-SE> 5,371,611
<TOTAL-LIABILITIES-AND-EQUITY> 12,261,017
<INTEREST-LOAN> 6,386
<INTEREST-INVEST> 1,566
<INTEREST-OTHER> 190,942
<INTEREST-TOTAL> 198,894
<INTEREST-DEPOSIT> 18,215
<INTEREST-EXPENSE> 18,215
<INTEREST-INCOME-NET> 180,679
<LOAN-LOSSES> 11,700
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 633,382
<INCOME-PRETAX> (463,104)
<INCOME-PRE-EXTRAORDINARY> (463,104)
<EXTRAORDINARY> 0
<CHANGES> (157,848)
<NET-INCOME> (620,952)
<EPS-PRIMARY> (3.58)
<EPS-DILUTED> (3.58)
<YIELD-ACTUAL> 4.76
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 11,700
<ALLOWANCE-DOMESTIC> 11,700
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 183
</TABLE>
