<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarter ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number 333-43361
---------
WESTERN RESERVE BANCORP, INC.
-----------------------------
(Exact name of small business issuer as specified in its charter)
Ohio 31-1566623
---- -----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4015 Medina Road, Suite 100, P.O. Box 585, Medina, Ohio 44256
-------------------------------------------------------------
(Address of principal executive offices)
(330) 764-3131
----------------
Issuer's telephone number, including area code
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock, no par value, $1.00 stated value
----------------------------------------------
(Class of Stock)
320,267 common shares
---------------------
(number of shares outstanding as of July 31, 2000)
1
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WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2000
PART I--FINANCIAL INFORMATION
Page
ITEM 1 FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition as
of June 30, 2000 and December 31, 1999 ...................... 3
Consolidated Statements of Operations for the three
months and six months ended June 30, 2000 and 1999........... 4
Consolidated Statements of Comprehensive Income for
the three months and six months ended June 30, 2000
and 1999..................................................... 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999.......................... 6
Notes to Consolidated Financial Statements..................... 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 11
PART II--OTHER INFORMATION
OTHER INFORMATION ............................................. 17
SIGNATURES .................................................... 18
2
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<TABLE>
<CAPTION>
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
2000 1999
------------------- -------------------
<S> <C> <C>
Assets
Cash and due from banks $ 1,139,378 $ 1,263,553
Interest-bearing deposits in other banks - 8,063
Federal funds sold 2,172,000 166,000
------------------- -------------------
Cash and cash equivalents 3,311,378 1,437,616
Securities available-for-sale, at fair value 5,881,215 5,892,340
Loans 31,742,669 23,371,219
Less allowance for loan losses (400,309) (307,000)
------------------- -------------------
Net loans 31,342,360 23,064,219
Federal Reserve Bank stock 144,200 174,050
Federal Home Loan Bank stock 87,000 -
Premises and equipment, net 730,976 759,355
Accrued interest receivable and other assets 299,299 215,272
------------------- -------------------
Total Assets $ 41,796,428 $ 31,542,852
=================== ===================
Liabilities
Deposits
Noninterest-bearing $ 4,936,859 $ 3,639,186
Interest-bearing 31,726,003 22,964,282
------------------- -------------------
Total deposits 36,662,862 26,603,468
Securities sold under agreements to repurchase 160,666 -
Accrued interest payable and other liabilities 78,926 71,141
------------------- -------------------
Total Liabilities 36,902,454 26,674,609
Shareholders' Equity
Common stock, without par value, $1 stated value:
750,000 shares authorized, 320,267 shares
issued and outstanding at June 30, 2000 and
December 31, 1999 320,267 320,267
Additional paid-in capital 6,048,232 6,048,232
Retained deficit (1,357,332) (1,394,542)
Accumulated other comprehensive (loss) (117,193) (105,714)
------------------- -------------------
Total Shareholders' Equity 4,893,974 4,868,243
------------------- -------------------
Total Liabilities and Shareholders' Equity $ 41,796,428 $ 31,542,852
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income
Loans $682,015 $ 115,847 $1,246,285 $ 144,720
Investment securities 91,440 36,368 182,062 38,979
Federal funds sold and other
short-term funds 44,667 154,383 66,072 314,000
--------- ----------- ----------- -----------
Total interest income 818,122 306,598 1,494,419 497,699
Interest Expense
Deposits 377,045 147,417 675,613 239,264
Other short-term funds 2,653 - 5,403 -
--------- ----------- ----------- -----------
Total interest expense 379,698 147,417 681,016 239,264
--------- ----------- ----------- -----------
Net interest income 438,424 159,181 813,403 258,435
Provision for Loan Losses 49,500 85,300 106,000 111,300
--------- ----------- ----------- -----------
Net interest income after
provision for loan losses 388,924 73,881 707,403 147,135
Other income
Service charges on deposit accounts 13,054 3,891 25,183 7,004
Gains on sales of mortgage loans 4,842 5,100 12,744 11,683
Other income 9,045 4,138 16,587 7,085
--------- ----------- ----------- -----------
Total other income 26,941 13,129 54,514 25,772
Other expenses
Salaries and benefits 178,168 156,650 345,627 315,580
Premises and equipment 69,998 60,119 134,659 121,577
Data processing 35,253 25,599 68,863 52,691
Professional fees 28,986 8,348 37,629 13,437
Taxes other than income and payroll 15,750 22,194 31,550 42,481
Marketing, public relations and contrib. 14,281 14,910 32,405 24,051
Supplies, printing and postage 9,864 11,766 21,055 18,595
Other expenses 27,391 24,374 52,919 46,605
--------- ----------- ----------- -----------
Total noninterest expense 379,691 323,960 724,707 635,017
--------- ----------- ----------- -----------
Net income (loss) $ 36,174 $ (236,950) $ 37,210 $ (462,110)
========= =========== =========== ===========
Average shares outstanding 320,267 320,267 320,267 320,267
========= =========== =========== ===========
Basic and diluted earnings (loss) per share $ 0.11 $ (0.74) $ 0.12 $ (1.44)
========= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ 36,174 $(236,950) $ 37,210 $(462,110)
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising
during the period 3,249 (45,590) (11,479) (45,590)
--------- ---------- --------- ----------
Unrealized gains (losses) on securities 3,249 (45,590) (11,479) (45,590)
--------- ---------- --------- ----------
Comprehensive income $ 39,423 $(282,540) $ 25,731 $(507,700)
========= ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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<TABLE>
<CAPTION>
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
2000 1999
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 37,210 $ (462,110)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Provision for loan losses 106,000 111,300
Depreciation 50,318 44,407
Net accretion of discounts on securities (353) (20)
Loans originated for sale (1,697,650) (1,322,300)
Proceeds from sales of loan originations 1,610,394 1,134,983
Gains on sales of loans (12,744) (11,683)
Net change in interest receivable (38,213) (79,767)
Net change in interest payable 37,437 3,186
Net change in other assets (45,814) (82,506)
Net change in other liabilities (29,653) (517,322)
------------- ------------
Net cash from operating activities 16,932 (1,181,832)
Cash flows from investing activities
Purchases of securities available-for-sale - (5,997,813)
Redemption of Federal Reserve Bank stock 29,850
Purchase of Federal Home Loan Bank stock (87,000)
Net change in loans (8,284,141) (7,975,298)
Purchases of premises and equipment (21,939) (22,842)
------------- ------------
Net cash from investing activities (8,363,230) (13,995,953)
Cash flows from financing activities
Net increase in deposits 10,059,394 14,592,916
Net change in short-term funds 160,666 -
------------- ------------
Net cash from financing activities 10,220,060 14,592,916
------------- ------------
Change in cash and cash equivalents 1,873,762 (584,869)
Cash and cash equivalents at beginning of period 1,437,616 10,391,933
------------- ------------
Cash and cash equivalents at end of period $ 3,311,378 $ 9,807,064
============= ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 643,580 $236,078
Taxes 0 0
</TABLE>
See accompanying notes to consolidated financial statements.
6
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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: Western Reserve Bancorp, Inc. (the Company) was incorporated under
the laws of the State of Ohio on February 27, 1997. Until November 6, 1998, the
Company was a development stage company, and its efforts had been devoted to the
offering of its common shares to the general public and to obtaining regulatory
approvals, recruiting personnel and financial planning relating to the
organization of Western Reserve Bank (the Bank). The Company completed its
public stock offering on July 1, 1998. A total of 320,267 shares of the
Company's common stock were sold. Proceeds, net of offering costs, were
$6,368,499. Approximately $5,800,000 of the proceeds was used to purchase all of
the capital stock of the Bank. The Bank, which commenced operations on November
6, 1998, is chartered by the State of Ohio, and is a member of the Federal
Reserve System, the Federal Deposit Insurance Corporation (FDIC) and the Federal
Home Loan Bank. The Company is a bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended.
Nature of Business: The Bank offers a full range of commercial and consumer
banking services primarily in its defined market area of Medina County, Ohio.
Principles of Consolidation: The consolidated financial statements include the
accounts of Western Reserve Bancorp, Inc. and its wholly-owned subsidiary,
Western Reserve Bank. All material intercompany accounts have been eliminated.
Cash Equivalents: For purposes of the Statements of Cash Flows, cash equivalents
include amounts due from banks and federal funds sold. Generally, federal funds
are sold for periods of less than thirty days.
Use 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. These
estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided, and future results could differ. Areas
involving the use of management's estimates and assumptions include the
allowance for loan losses, the realization of deferred tax assets and the
depreciation of premises and equipment.
Basis of Presentation: The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. It is the opinion of management that all adjustments necessary for a
fair
7
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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
presentation have been made and that all adjustments were of a normal recurring
nature. The Annual Report of the Company for the year ended December 31, 1999
contains consolidated financial statements and related notes which should be
read in conjunction with the accompanying consolidated financial statements.
Reclassifications: Certain amounts in the 1999 consolidated financial statements
have been reclassified to conform to the 2000 presentation.
NOTE 2 - LOANS
Loans at June 30, 2000 and December 31, 1999, were as follows:
June 30, December 31,
2000 1999
---- ----
Commercial $ 24,748,885 $ 18,459,745
Home equity 3,273,981 2,091,354
Residential mortgage
and construction 2,236,397 1,563,911
Consumer installment 1,374,832 1,184,246
Credit card 108,574 71,963
------------ -------------
$ 31,742,669 $ 23,371,219
============ =============
NOTE 3 - DEPOSITS
Deposits at June 30, 2000 and December 31, 1999, were as follows:
June 30, December 31,
2000 1999
---- ----
Noninterest-bearing demand $ 4,936,859 $ 3,639,186
Interest-bearing demand 2,499,290 2,132,099
Savings 14,189,026 11,107,154
Money market 8,607,802 6,960,429
Time under $100,000 3,047,275 1,623,193
Time $100,000 and over 3,382,610 1,141,407
------------ -------------
$ 36,662,862 $ 26,603,468
============ =============
8
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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company and the Bank lease their facility 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. The Company has recorded $54,202 of rent expense
under the lease year-to-date through June 30, 2000.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company has an employment agreement with the Chief Executive Officer. The
agreement, which expires December 31, 2001, provides a base annual salary of
$125,000. 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 $195,000.
NOTE 6 - 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. The net tax benefit associated with these
temporary differences has been offset with a valuation allowance as of June 30,
2000, since the Company has a limited history of generating taxable income.
Also, the unrealized loss on available-for-sale securities is presented on a
gross basis, since any related deferred tax asset has been offset with a
valuation allowance.
NOTE 7 - STOCK OPTIONS
The Company has a nonqualified stock option plan. Under the plan as amended and
restated, options to buy a total of 100,000 shares of the Company's common stock
may be granted to directors, officers and employees. 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. During the first
six months of 2000, 2,500 options with an exercise price of $21.00 were granted
to officers of the company. Additionally, options for 36,000 shares were granted
to the Company's nine non-officer directors, with each receiving 4,000 options
at $22.00 per share. These options were granted above the then-current market
value of $21.00 per share. As of June 30, 2000 and December 31, 1999, there were
a total of 81,762 and 43,262 options outstanding, respectively, with exercise
prices ranging from $20.00 to $40.00.
9
<PAGE> 10
<TABLE>
<CAPTION>
WESTERN RESERVE BANCORP, INC.
JUNE 30, 2000
SELECTED QUARTERLY FINANCIAL INFORMATION
($000's except per share data) 6/30/00 3/31/00 12/31/99 9/30/99 6/30/99 3/31/99
------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 41,796 $ 38,464 $31,543 $ 28,433 $ 25,835 $ 20,105
Securities available for sale 5,881 5,878 5,892 5,921 5,952 --
Total loans 31,743 27,364 23,371 15,953 9,039 2,734
Allowance for loan losses 400 349 307 209 123 38
Total deposits 36,663 33,288 26,603 23,371 20,584 14,552
Shareholders' equity 4,894 4,855 4,868 5,011 5,184 5,467
Income Statement Data:
Total interest income $ 818 $ 676 $ 561 $ 445 $ 307 $ 191
Total interest expense 380 301 240 191 147 92
--------- --------- --------- -------- -------- ---------
Net interest income 438 375 321 254 159 99
Provision for loan losses 49 57 98 86 85 26
--------- --------- --------- -------- -------- ---------
Net interest income after provision
for loan losses 389 318 223 168 74 73
Noninterest income 27 28 19 17 13 13
Noninterest expense 380 345 356 328 324 311
--------- --------- --------- -------- -------- ---------
Net income (loss) before income tax $ 36 $ 1 $ (113) $ (142) $ (237) $ (225)
========= ========= ========= ======== ======== =========
PER SHARE DATA:
Basic and diluted earnings (loss)
per common share $ 0.11 $ 0.00 $ (0.35) $ (0.44) $ (0.74) $ (0.70)
Book value per share 15.28 15.16 15.20 15.64 16.19 17.07
Cash dividends per share 0.00 0.00 0.00 0.00 0.00 0.00
Average shares used for net earnings
per share calculations - basic 320,267 320,267 320,267 320,267 320,267 320,267
Average shares used for net earnings
per share calculation - diluted 321,324 321,324 320,529 320,267 320,267 320,267
OPERATING RATIOS (%):
Total net loans to total deposits 85.49% 81.16% 86.70% 67.36% 43.32% 18.53%
Total shareholders' equity
to total assets 11.71 12.62 15.43 17.62 20.07 27.19
Average shareholders' equity
to average assets 12.14 13.93 16.14 18.89 22.94 33.12
Return on avg. equity (annualized) 2.97 0.09 (9.16) (11.18) (17.80) (16.13)
Return on avg. assets (annualized) 0.36 0.01 (1.48) (2.11) (4.08) (5.34)
Allowance for loan losses
to total loans 1.26 1.27 1.31 1.31 1.36 1.38
QUARTERLY AVERAGE BALANCES:
Average assets $ 40,127 $ 34,769 $ 30,707 $ 26,957 $ 23,208 $ 16,859
Average shareholders' equity 4,873 4,843 4,955 5,092 5,325 5,584
</TABLE>
10
<PAGE> 11
WESTERN RESERVE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
OVERVIEW
The following discussion compares the financial condition of Western Reserve
Bancorp, Inc. (the Company) and its wholly-owned subsidiary, Western Reserve
Bank (the Bank) at June 30, 2000, to December 31, 1999, and the results of
operations for the three months and six months ended June 30, 2000 and 1999.
This discussion should be read in conjunction with the interim financial
statements and footnotes included herein.
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, the interest rate environment, competitive
conditions in the financial services industry, changes in law, governmental
policies and regulations, and rapidly changing technology affecting financial
services.
FINANCIAL CONDITION
Total assets as of June 30, 2000 increased 32.5%, or $10,253,576, to
$41,796,428, compared with $31,542,852 at December 31, 1999. The increase in
total assets was funded primarily by the Bank's continuing growth of new deposit
accounts. Deposits increased to $36,662,862 at June 30, 2000, an increase of
$10,059,394, or 37.8%, compared to the $26,603,468 at December 31, 1999. Of the
increased deposits, approximately $8,284,000 was used to make loans to the
bank's borrowers, and $2,006,000 was placed in short-term federal funds sold in
anticipation of continuing loan demand and for liquidity purposes. Cash and cash
equivalents increased $1,873,762 to $3,311,378 at June 30, 2000 from $1,437,616
at December 31, 1999.
Total loans at June 30, 2000, were $31,742,669, compared to $23,371,219 at
December 31, 1999, an increase of $8,371,450, or 35.8%. As of June 30, 2000,
commercial loans to businesses were $24,748,885, or 77.97% of total loans.
$5,510,378, or 17.36%, of total loans were residential real estate and home
equity loans, and $1,483,406, or 4.67%, were consumer installment and credit
card loans. There were $100,000 and $-0- in mortgage loans held for sale at June
30, 2000 and December 31, 1999, respectively. At June 30, 2000 and December 31,
1999, there were no loans that were more than 30 days past due and no loans
considered to be impaired. Management anticipates that loan demand will continue
to be strong, especially in the commercial loan segment. The Bank's
loan-to-deposit ratio as of June 30, 2000, was 86.6%. Management expects that
the loan-to-deposit ratio will remain in the range of approximately 85%-90%.
11
<PAGE> 12
WESTERN RESERVE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
FINANCIAL CONDITION (CONTINUED)
The majority of the Bank's loan growth has been in commercial loans in the
Bank's primary market area of Medina County and adjacent counties. Since
December 31, 1999, commercial loans increased $6,289,000. This growth consisted
of approximately $2,029,000 in commercial loans to businesses, $1,696,000 in
commercial real estate loans, $882,000 in commercial lines of credit, $680,000
in SBA-guaranteed loans (of which $517,000 is guaranteed by the SBA), $311,000
in short-term commercial construction loans, and $775,000 in dealer-owned leases
to businesses. Additional growth of $1,806,000 was realized in the residential
real estate, residential construction and home equity areas in the first six
months of 2000.
Of the total loans in the Bank's portfolio, $24,720,000 are at a variable rate
of interest. Of the total loans, $18,827,000 mature or are able to be repriced
within twelve months. Only $431,000 of the Bank's total loans mature or reprice
in more than five years.
The Bank currently holds approximately $6 million of short-term U.S. government
agency securities in its available-for-sale investment portfolio. These
securities were purchased in the second quarter of 1999 to enhance yield. As
loan demand continues to increase, if the Bank needs additional funds it could
sell these securities or use them as collateral for short-term borrowings. As of
June 30, 2000, the maturity dates of these securities ranged from April 2001 to
October 2003.
As discussed above, total deposits increased to $36,662,862 at June 30, 2000,
compared to $33,288,038 at March 31, 2000 and $26,603,468 at December 31, 1999.
Deposits at June 30, 2000 consisted of $4,936,859 or 13.47% in
noninterest-bearing demand deposits, $2,499,290 or 6.82% in interest-bearing NOW
accounts, $22,796,828 or 62.18% in savings and money market accounts, $5,380,528
or 14.68% in certificates of deposit, and $1,049,357 or 2.86% in IRAs. During
the first quarter of 2000, deposits increased more rapidly than in the second
quarter or in the last two quarters of 1999. This was due in part to the Bank
obtaining approximately $1,550,000 in six-month CDs through the State of Ohio's
Bid Ohio program. The rates on these CDs range from 6.01% to 6.25%. Also, the
Bank offered a 13-month CD special that brought in approximately $1,041,600 at
an average rate of 6.14% in the first quarter of 2000. As anticipated, much of
the deposit growth continues to be in Market Rate Savings accounts. This product
is a liquid savings account that offers tiered rates which, at balances of
$15,000 or more, are indexed to a national money-market average, plus 5 to 15
basis points. The weighted average cost of all market rate savings accounts
during the second quarter of 2000 was 5.34%, compared with 5.00% in the first
quarter.
12
<PAGE> 13
WESTERN RESERVE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
FINANCIAL CONDITION (CONTINUED)
Total shareholders' equity increased $25,731, to $4,893,974 at June 30, 2000,
from $4,868,243 at December 31, 1999. This increase was due to net income of
$37,210, which was partially offset by $11,479 in additional unrealized losses
on available-for-sale securities during the first half of 2000.
RESULTS OF OPERATIONS
The Bank recorded its first monthly profit in February 2000, and has continued
to be profitable from that point. For the first six months of 2000, consolidated
net income was $37,210, compared to a net loss of $462,110 for the same period
in 1999. To facilitate understanding of the Bank's growth and activities during
1999 and year-to-date 2000, results from the first and second quarters of 2000
will be presented in addition to comparisons of prior periods.
The Corporation's net income for the first six months of 2000 was $37,210, of
which $36,174 was earned in the second quarter, and $1,036 in the first quarter.
This compares with 1999 quarterly net losses of $(113,488) in the fourth
quarter, and $(142,323), $(236,950) and $(225,160) in the third, second and
first quarters, respectively.
The Bank's net interest income before the provision for loan losses for the
first half of 2000 was $813,403, of which $438,424 was earned in the second
quarter, up from $374,979 in the first quarter. This compares with $258,435 in
the first half of 1999. Interest income on loans for the first six months of
2000 was $1,246,285, of which $682,015 was earned in the second quarter, up from
$564,270 in the first quarter 2000. This compares with $144,720 for the first
half of 1999. Interest income from investments and short-term funds was $248,134
in the first half of 2000 ($136,107 in the second quarter and $112,027 in the
first quarter). In the first half of 1999, interest income on investment and
short-term funds was $352,979. The decrease in 2000 was due to more of the
Bank's funds being used to fund higher-yielding loans. Interest expenses totaled
$681,016 in the first six months of 2000, of which $379,698 was incurred in the
second quarter and $301,318 in the first quarter. This compares with $239,264
for the first six months of 1999.
The Bank's net interest margin for the second quarter of 2000 was 4.56%
(including loan fees of $15,301 which contributed 0.16% to the net interest
margin), compared to 4.53% in the first three months of 2000. In 1999, the net
interest margin by quarter (including loan fees) was 4.45% in the fourth
quarter, 4.04% in the third, 3.01% in the second and 2.62% in the first quarter.
The net interest margin has continued to improve as more of the Bank's assets
have been shifted from short-term investments and federal funds sold to
higher-yielding loans. The Bank's yield on earning assets continues to
strengthen, to 8.52%, up from 8.17% in the first quarter of 2000, and
13
<PAGE> 14
WESTERN RESERVE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
RESULTS OF OPERATIONS (CONTINUED)
7.76% in the fourth quarter of 1999, 7.08% during the third quarter, 5.80% in
the second quarter and 5.04% in the first quarter. The cost of interest-bearing
funds has increased as well, to 5.05% in the second quarter of 2000, up from
4.70% in the first quarter of 2000. The cost of interest-bearing funds was 4.37%
in the fourth quarter 1999, 4.11% in the third quarter, 3.99% in the second
quarter and 4.10% in the first quarter of 1999.
The provision for loan losses is directly related to the rapid loan growth
experienced by the Bank. In the first six months of 2000, the Bank provided
$106,000 for future loan losses. This amounted to $49,500 in the second quarter
and $56,500 in the first quarter. During 1999, $98,000 was expensed in the
fourth quarter, $86,000 in the third quarter, $85,300 in the second quarter and
$26,000 in the first quarter. Management's determination of the appropriate
level of the provision for loan losses and the adequacy of the allowance for
loan losses is based, in part, on the consideration of historical loss
experiences of other similar community financial institutions which management
believes are representative of the expected loss experience of the Bank. Other
factors considered by management include the composition of the loan portfolio,
current and anticipated economic conditions, the creditworthiness of the Bank's
borrowers and other related factors. As of June 30, 2000 and December 31, 1999,
there were no loans more than 30 days delinquent.
Total noninterest income for the first six months of 2000 was $54,514, up from
$25,772 for the same period in 1999. Noninterest income was $26,941 in the
second quarter of 2000, compared to $27,573 in the first quarter. In 1999,
noninterest income was $19,182 in the fourth quarter, compared with $16,983,
$13,129 and $12,643 in the third, second and first quarters, respectively. Aside
from service charges on deposit accounts and gains on sales of long-term,
fixed-rate mortgages, the largest components of other noninterest income are fee
income from the bank's credit card and ATM programs, the rental of safe deposit
boxes, and the sales of checks to depositors.
Noninterest expenses were $724,707 for the first six months of 2000, compared
with $635,017 in the same period of 1999. Quarterly noninterest expenses
increased slightly in the second quarter of 2000, to $379,691, compared to
$345,016 in the first quarter. The $34,675 increase in the second quarter is
primarily attributable to additional salaries and benefits associated with
increased staffing in the lending area, increased professional fees, and
increased depreciation. During 1999, noninterest expenses were relatively level,
with $355,885 in the fourth quarter, $327,712 in the third quarter, $323,960 in
the second quarter and $311,057 in the first quarter. Total "other expenses" in
the first six months of 2000 and 1999 consisted primarily of the following:
14
<PAGE> 15
WESTERN RESERVE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
RESULTS OF OPERATIONS (CONTINUED)
Six months ended June 30,
2000 1999
---- ----
Loan expenses $ 16,937 $ 9,198
Insurance 11,920 11,748
Travel and entertainment 6,909 4,949
Telephone 6,490 8,113
Other 10,663 12,597
----------- ----------------
$ 52,919 $ 46,605
=========== ================
Management expects that noninterest expenses will continue to increase slightly
during the next several quarters in conjunction with the growth of the Bank.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the Company's ability to fund loan demand, meet deposit
customers' withdrawal needs and provide for operating expenses. As summarized in
the Statement of Cash Flows, the Company's main source of cash flow is from
receiving deposits from its customers, and to a lesser extent, repayment of loan
principal and the interest income on loans and investments. The primary uses of
cash are lending to the Bank's borrowers, and investing in securities and
short-term interest-earning assets. Management believes its current liquidity
level is sufficient to meet future anticipated growth. However, if loan demand
significantly outpaces deposit growth, alternative sources of liquidity include
the sale of available-for-sale securities from the Bank's investment portfolio,
Federal Home Loan Bank advances, the purchase of federal funds, repurchase
agreements, or brokered deposits.
At June 30 and March 31, 2000 and December 31, 1999, Western Reserve Bank's
risk-based capital ratios based on Federal Reserve Board guidelines were as
follows:
<TABLE>
<CAPTION>
June 30, March 31, Dec. 31, Well-
2000 2000 1999 Capitalized
---- ---- ---- -----------
<S> <C> <C> <C> <C>
Tier 1 "core capital" to risk-weighted assets 13.9% 15.1% 17.6% 6.0%
Total capital to risk-weighted assets 15.0 16.1 18.7 10.0
Tier 1 leverage ratio 12.4 14.1 16.0 5.0
</TABLE>
As the Bank continues to grow, management expects its risk-based capital ratios
to continue to decrease to more typical levels.
15
<PAGE> 16
WESTERN RESERVE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
As a de novo, or start-up, institution, the Bank is required, under the terms of
its approval order from the State of Ohio, to maintain a minimum ratio of its
Tier 1 capital to total assets of at least 9% during its first three years of
operations. At June 30, 2000, the Bank's ratio of shareholders' equity to total
assets was 11.89%, compared to 12.78% at March 31, 2000 and 15.57% at December
31, 1999.
As discussed above, total shareholders' equity increased $25,731, to $4,893,974
at June 30, 2000 from $4,868,243 at December 31, 1999. The increase was due to
the Corporation's net income, partially offset by an increase in the unrealized
losses on available-for-sale securities.
The Company is planning to do an intrastate stock offering of no more than
$2,000,000 in the third quarter of 2000. Current shareholders will be given the
opportunity to maintain their pro-rata share of the Company's total
capitalization before the stock is offered to non-shareholders.
OTHER
The Bank has received permission from the Ohio Division of Financial
Institutions to open a limited-hours branch in The Oaks at Medina, a retirement
community located near Route 18 and Interstate 71. It is expected that the
branch will open on July 17, 2000. No additional personnel will be required to
staff the branch.
16
<PAGE> 17
WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2000
PART II--OTHER INFORMATION
Items 1 - 3 and 5 are not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The annual meeting of the shareholders of Western Reserve Bancorp,
Inc. was held on April 26, 2000, in accordance with the notice of
meeting and proxy statement mailed to shareholders. Each of the
following Class III directors was re-elected to a three-year term
ending in 2003: Michael R. Rose, Glenn M. Smith and Thomas A. Tubbs.
A total of 254,265 shares were represented at the meeting. Of these,
proxies representing -0- shares withheld their votes for all
nominees. Each nominee received 254,265 votes. The shareholder
proposal regarding corporate democracy was defeated, with 2,875
votes "for," 241,740 votes "against," 2,060 broker nonvotes and
7,050 votes abstaining.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
-------- ----------- ----
<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, Amended and Restated as of 19
April 20, 2000
11 Earnings per Share 28
27.1 Financial Data Schedule **
</TABLE>
* Previously filed and incorporated herein by reference.
** Filed only in electronic format pursuant to Item 601(b)(27) of Regulation
S-K.
(b) No current reports on Form 8-K were filed by the Company during the
quarter ended June 30, 2000
17
<PAGE> 18
WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Western Reserve Bancorp, Inc.
Date: August 14, 2000 /s/ Edward J. McKeon
Edward J. McKeon
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Cynthia A. Mahl
Cynthia A. Mahl
Senior Vice President/Chief Financial
Officer
(Principal Financial Officer)
18
