<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 September 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)
379,497 common shares
---------------------
(number of shares outstanding as of October 31, 2000)
1
<PAGE> 2
WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2000
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
ITEM 1 FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition as of September 30, 2000
and December 31, 1999 .......................................................... 3
Consolidated Statements of Operations for the three months and nine
months ended September 30, 2000 and 1999 ....................................... 4
Consolidated Statements of Comprehensive Income for the three
months and nine months ended September 30, 2000 and 1999........................ 5
Consolidated Statements of Cash Flows for the nine months
ended September 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 .................................................................18
SIGNATURES ........................................................................20
</TABLE>
2
<PAGE> 3
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Assets
Cash and due from banks $ 1,162,426 $ 1,263,553
Interest-bearing deposits in other banks -- 8,063
Federal funds sold 3,841,000 166,000
------------ ------------
Cash and cash equivalents 5,003,426 1,437,616
Securities available-for-sale, at fair value 5,925,795 5,892,340
Loans 33,863,116 23,371,219
Less allowance for loan losses (442,309) (307,000)
------------ ------------
Net loans 33,420,807 23,064,219
Federal Reserve Bank stock 144,200 174,050
Federal Home Loan Bank stock 88,600 --
Premises and equipment, net 729,433 759,355
Accrued interest receivable and other assets 363,350 215,272
------------ ------------
Total Assets $ 45,675,611 $ 31,542,852
============ ============
Liabilities
Deposits
Noninterest-bearing $ 5,987,784 $ 3,639,186
Interest-bearing 34,000,609 22,964,282
------------ ------------
Total deposits 39,988,393 26,603,468
Securities sold under agreements to repurchase 382,686 --
Accrued interest payable and other liabilities 56,966 71,141
------------ ------------
Total Liabilities 40,428,045 26,674,609
Shareholders' Equity
Common stock, without par value, $1 stated value:
750,000 shares authorized, 320,267 shares
issued and outstanding at September 30, 2000 and
December 31, 1999 320,267 320,267
Additional paid-in capital 6,048,232 6,048,232
Common stock subscribed (10,324 shares) 244,050 --
Retained deficit (1,292,255) (1,394,542)
Accumulated other comprehensive (loss) (72,728) (105,714)
------------ ------------
Total Shareholders' Equity 5,247,566 4,868,243
------------ ------------
Total Liabilities and Shareholders' Equity $ 45,675,611 $ 31,542,852
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest Income
Loans $ 779,565 $ 273,361 $2,025,850 $ 418,081
Investment securities 91,481 90,192 273,543 129,171
Federal funds sold and other
short-term funds 46,128 81,667 112,200 395,667
---------- ---------- ---------- ----------
Total interest income 917,174 445,220 2,411,593 942,919
Interest Expense
Deposits 446,775 190,814 1,122,388 430,078
Other short-term funds 3,810 -- 9,213 --
---------- ---------- ---------- ----------
Total interest expense 450,585 190,814 1,131,601 430,078
---------- ---------- ---------- ----------
Net interest income 466,589 254,406 1,279,992 512,841
Provision for Loan Losses 42,000 86,000 148,000 197,300
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 424,589 168,406 1,131,992 315,541
Other income
Service charges on deposit accounts 12,052 6,128 37,235 13,132
Gains on sales of mortgage loans 11,103 3,057 23,847 14,740
Other income 9,911 7,798 26,498 14,883
---------- ---------- ---------- ----------
Total other income 33,066 16,983 87,580 42,755
Other expenses
Salaries and benefits 188,956 157,532 534,583 473,112
Premises and equipment 68,868 60,607 203,527 182,184
Data processing 37,278 27,913 106,141 80,604
Professional fees 17,952 8,653 55,581 22,090
Taxes other than income and payroll 15,620 21,242 47,170 63,723
Marketing, public relations and contrib 17,258 21,498 49,663 45,549
Supplies, printing and postage 11,462 9,141 32,517 27,736
Other expenses 35,184 21,126 88,103 67,731
---------- ---------- ---------- ----------
Total noninterest expense 392,578 327,712 1,117,285 962,729
---------- ---------- ---------- ----------
Net income (loss) $ 65,077 $ (142,323) $ 102,287 $ (604,433)
========== ========== ========== ==========
Average shares outstanding (basic) 320,267 320,267 320,267 320,267
========== ========== ========== ==========
Average shares outstanding (diluted) 322,178 320,267 321,609 320,267
========== ========== ========== ==========
Basic and diluted earnings (loss) per share $ 0.20 $ (0.44) $ 0.32 $ (1.89)
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 65,077 $(142,323) $ 102,287 $(604,433)
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising
during the period 44,465 (31,282) 32,986 (76,872)
--------- --------- --------- ---------
Unrealized gains (losses) on securities 44,465 (31,282) 32,986 (76,872)
--------- --------- --------- ---------
Comprehensive income $ 109,542 $(173,605) $ 135,273 $(681,305)
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 102,287 $ (604,433)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Provision for loan losses 148,000 197,300
Depreciation 76,061 67,329
Net accretion of discounts on securities (469) (38)
Loans originated for sale (2,974,550) (1,428,950)
Proceeds from sales of loan originations 2,998,397 1,443,690
Gains on sales of loans (23,847) (14,740)
Net change in interest receivable (122,158) (179,740)
Net change in interest payable 21,097 4,196
Net change in other assets (25,920) (41,121)
Net change in other liabilities (35,272) (532,685)
------------ ------------
Net cash from operating activities 163,626 (1,089,192)
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 (88,600) --
Net change in loans (10,504,588) (15,087,480)
Purchases of premises and equipment (46,139) (31,158)
------------ ------------
Net cash from investing activities (10,609,477) (21,116,451)
Cash flows from financing activities
Net increase in deposits 13,384,925 17,379,026
Net change in short-term funds 382,686 --
Cash received for stock subscriptions 244,050 --
------------ ------------
Net cash from financing activities 14,011,661 17,379,026
------------ ------------
Change in cash and cash equivalents 3,565,810 (4,826,617)
Cash and cash equivalents at beginning of period 1,437,616 10,391,933
------------ ------------
Cash and cash equivalents at end of period $ 5,003,426 $ 5,565,316
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 643,580 $ 425,882
Taxes 0 0
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 presentation have been made and that all adjustments were of a normal
recurring nature. The
7
<PAGE> 8
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 September 30, 2000 and December 31, 1999, were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Commercial $ 27,008,590 $ 18,459,745
Home equity 2,742,663 2,091,354
Residential mortgage
and construction 2,397,994 1,563,911
Consumer installment 1,601,646 1,184,246
Credit card 112,223 71,963
---------------- ----------------
$ 33,863,116 $ 23,371,219
================ ================
</TABLE>
NOTE 3 - DEPOSITS
Deposits at September 30, 2000 and December 31, 1999, were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Noninterest-bearing demand $ 5,987,784 $ 3,639,186
Interest-bearing demand 2,291,453 2,132,099
Savings 15,282,453 11,107,154
Money market 9,078,737 6,960,429
Time under $100,000 4,025,300 1,623,193
Time $100,000 and over 3,322,666 1,141,407
---------------- ----------------
$ 39,988,393 $ 26,603,468
================ ================
</TABLE>
8
<PAGE> 9
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 $80,314 of rent expense
under the lease year-to-date through September 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 September
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
nine months of 2000, 2,500 options with exercise prices ranging from $21.00 to
$22.00 per share 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 September 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
WESTERN RESERVE BANCORP, INC.
SEPTEMBER 30, 2000
SELECTED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
($000's except per share data) 9/30/00 6/30/00 3/31/00 12/31/99 9/30/99 6/30/99
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 45,676 $ 41,796 $ 38,464 $ 31,543 $ 28,433 $ 25,835
Securities available for sale 5,926 5,881 5,878 5,892 5,921 5,952
Total loans 33,863 31,743 27,364 23,371 15,953 9,039
Allowance for loan losses 442 400 349 307 209 123
Total deposits 39,988 36,663 33,288 26,603 23,371 20,584
Shareholders' equity 5,248 4,894 4,855 4,868 5,011 5,184
Income Statement Data:
Total interest income $ 917 $ 818 $ 676 $ 561 $ 445 $ 307
Total interest expense 450 380 301 240 191 147
--------- --------- --------- --------- --------- ---------
Net interest income 467 438 375 321 254 159
Provision for loan losses 42 49 57 98 86 85
--------- --------- --------- --------- --------- ---------
Net interest income after provision
for loan losses 425 389 318 223 168 74
Noninterest income 33 27 28 19 17 13
Noninterest expense 393 380 345 356 328 324
--------- --------- --------- --------- --------- ---------
Net income (loss) before income tax $ 65 $ 36 $ 1 $ (113) $ (142) $ (237)
========= ========= ========= ========= ========= =========
PER SHARE DATA:
Basic and diluted earnings (loss)
per common share $ 0.20 $ 0.11 $ 0.00 $ (0.35) $ (0.44) $ (0.74)
Book value per share 15.87 15.28 15.16 15.20 15.64 16.19
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 calculations--diluted 322,178 321,324 321,324 320,529 320,267 320,267
OPERATING RATIOS (%):
Total net loans to total deposits 83.58% 85.49% 81.16% 86.70% 67.36% 43.32%
Total shareholders' equity
to total assets 11.49 11.71 12.62 15.43 17.62 20.07
Average shareholders' equity
to average assets 11.59 12.14 13.93 16.14 18.89 22.94
Return on avg. equity (annualized) 5.19 2.97 0.09 (9.16) (11.18) (17.80)
Return on avg. assets (annualized) 0.60 0.36 0.01 (1.48) (2.11) (4.08)
Allowance for loan losses
to total loans 1.31 1.26 1.27 1.31 1.31 1.36
QUARTERLY AVERAGE BALANCES:
Average assets $ 43,237 $ 40,127 $ 34,769 $ 30,707 $ 26,957 $ 23,208
Average shareholders' equity 5,012 4,873 4,843 4,955 5,092 5,325
</TABLE>
10
<PAGE> 11
WESTERN RESERVE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 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 September 30, 2000, to December 31, 1999, and the results of
operations for the three months and nine months ended September 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 September 30, 2000 increased 44.8%, or $14,132,759, to
$45,675,611, 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 $39,988,393 at September 30, 2000, an increase
of $13,384,925, or 50.3%, compared to the $26,603,468 at December 31, 1999. Of
the increased deposits, approximately $10,492,000 was used to make loans to the
bank's borrowers, and $3,675,000 was placed in short-term federal funds sold in
anticipation of continuing loan demand and for liquidity purposes. Cash and cash
equivalents increased $3,565,810 to $5,003,426 at September 30, 2000 from
$1,437,616 at December 31, 1999.
Total loans at September 30, 2000, were $33,863,116, compared to $23,371,219 at
December 31, 1999, an increase of $10,491,897, or 44.9%. As of September 30,
2000, commercial loans to businesses were $27,008,590, or 79.7% of total loans.
$5,140,657, or 15.2%, of total loans were residential real estate and home
equity loans, and $1,713,869, or 5.1%, were consumer installment and credit card
loans. There were no mortgage loans held for sale at September 30, 2000 and
December 31, 1999. At September 30, 2000 and December 31, 1999, there were five
loans totaling $214,053 and $-0- loans, respectively, that were 30-59 days past
due. 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 September 30, 2000, was 84.7%. 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
SEPTEMBER 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 $8,549,000. This growth consisted
of approximately $2,244,000 in commercial loans to businesses, $4,102,000 in
commercial real estate loans, $234,000 in commercial lines of credit, $820,000
in SBA-guaranteed loans (of which $627,000 is guaranteed by the SBA), $619,000
in loan participations purchased from other financial institutions and $884,000
in dealer-owned leases to businesses. Short-term commercial construction loans
decreased $286,000 during the same period. Additional growth of $1,485,000 was
realized in the residential real estate, residential construction and home
equity areas in the first nine months of 2000.
Of the total loans in the Bank's portfolio, $26,482,000 are at a variable rate
of interest. Of the total loans, $18,743,000 mature or are able to be repriced
within twelve months. Only $462,000 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
September 30, 2000, the maturity dates of these securities ranged from April
2001 to October 2003.
As discussed above, total deposits increased to $39,988,393 at September 30,
2000, compared to $36,662,862 at June 30, 2000, $33,288,038 at March 31, 2000
and $26,603,468 at December 31, 1999. Deposits at September 30, 2000 consisted
of $5,987,784 or 15.0% in noninterest-bearing demand deposits, $2,291,453 or
5.7% in interest-bearing NOW accounts, $24,361,190 or 60.9% in savings and money
market accounts, $6,077,082 or 15.2% in certificates of deposit, and $1,252,240
or 3.1% in IRAs. During the first quarter of 2000, deposits increased more
rapidly than in other quarters. 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
third quarter of 2000 was 5.72%, compared with 5.34% in the second quarter and
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
SEPTEMBER 30, 2000
FINANCIAL CONDITION (CONTINUED)
Total shareholders' equity increased $379,323, to $5,247,566 at September 30,
2000, from $4,868,243 at December 31, 1999. This increase was due to net income
of $102,287, a decrease of $32,986 in unrealized losses on available-for-sale
securities, and $244,050 in proceeds from the common stock offering in progress.
Refer to the section of this report called Liquidity and Capital Resources for
further discussion of the common stock offering.
RESULTS OF OPERATIONS
The Bank recorded its first monthly profit in February 2000, and has continued
to generate positive earnings each subsequent month. For the first nine months
of 2000, consolidated net income was $102,287, compared to a net loss of
$604,433 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,
second and third quarters of 2000 will be presented in addition to comparisons
of prior periods.
The Corporation's net income for the first nine months of 2000 was $102,287, of
which $65,077 was earned in the third quarter, $36,174 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 nine months of 2000 was $1,279,992, of which $466,589 was earned in the
third quarter, up from $438,424 in the second quarter and $374,979 in the first
quarter. This compares with a total of $512,841 in the nine months of 1999.
Interest income on loans for the first nine months of 2000 was $2,025,850, of
which $779,565 was earned in the third quarter, compared to $682,015 in the
second quarter and $564,270 in the first quarter 2000. This compares with a
total of $418,081 for the first nine months of 1999. Interest income from
investments and short-term funds was $385,743 in the first nine months of 2000
($137,609 in the third quarter, $136,107 in the second quarter and $112,027 in
the first quarter). In the first nine months of 1999, interest income on
investment and short-term funds totaled $524,838. The decrease in 2000 was due
to more of the Bank's funds being used to fund higher-yielding loans. Interest
expenses totaled $1,131,601 in the first nine months of 2000, of which $450,585
was incurred in the third quarter, $379,698 in the second quarter and $301,318
in the first quarter. This compares with a total of $430,078 for the first nine
months of 1999.
13
<PAGE> 14
WESTERN RESERVE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
RESULTS OF OPERATIONS (CONTINUED)
Year-to-date through September 30, 2000, the Bank's net interest margin was
4.52%. This includes year-to-date loan fees of $47,824 which contributed 0.17%
to the net interest margin. The Bank's net interest margin was slightly
compressed in the third quarter due to an increase in the cost of funds, which
has been somewhat offset as yields on earning assets have 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. For the third quarter, the Bank's
net interest margin was 4.47% (including loan fees of $17,106 which contributed
0.116% to the net interest margin). This compares to 4.56% in the second quarter
and 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 Bank's yield on
earning assets continues to strengthen, to 8.78% in the third quarter, up from
8.52% in the second quarter and 8.17% in the first quarter of 2000. In 1999, the
yield on earning assets was 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 5.46% in the third
quarter, up from 5.05% in the second quarter and 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 nine months of 2000, the Bank provided
$148,000 for expected future loan losses. This amounted to $42,000 in the third
quarter, $49,500 in the second quarter and $56,500 in the first quarter. During
1999, $98,000 was provided 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 an evaluation of
specific loans, as well as 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.
Total noninterest income for the first nine months of 2000 was $87,580, up from
$42,755 for the same period in 1999. Noninterest income was $33,066 in the third
quarter of 2000, compared to $26,941 in the second quarter and $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.
14
<PAGE> 15
WESTERN RESERVE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
RESULTS OF OPERATIONS (CONTINUED)
Noninterest expenses were $1,117,285 for the first nine months of 2000, compared
with $962,729 in the same period of 1999. Quarterly noninterest expenses
increased slightly in the third quarter of 2000, to $392,578, compared to
$379,691 in the second quarter and $345,016 in the first quarter. The increases
of $12,887 in the third quarter and $34,675 in the second quarter are primarily
attributable to additional salaries and benefits associated with the general
growth of the Bank and increased staffing in the lending area, increased
professional fees, and increased depreciation. A new lending officer joined the
Bank in May 2000, and a commercial loan documentation administrator was added in
September 2000. 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 nine months of 2000 and 1999 consisted primarily of the following:
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
---- ----
<S> <C> <C>
Loan expenses $ 28,414 $ 12,036
Insurance 18,531 19,131
Travel and entertainment 12,223 8,752
Telephone 10,511 11,355
Other 18,424 16,457
---------------- ----------------
$ 88,103 $ 67,731
================ ================
</TABLE>
Management expects that noninterest expenses will continue to increase 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.
15
<PAGE> 16
WESTERN RESERVE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
At September 30, 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>
Sept. 30, June 30, March 31, Dec. 31, Well-
2000 2000 2000 1999 Capitalized
---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
Tier 1 "core capital" to
risk-weighted assets 13.0% 13.9% 15.1% 17.6% 6.0%
Total capital to risk-weighted assets 14.2 15.0 16.1 18.7 10.0
Tier 1 leverage ratio 11.7 12.4 14.1 16.0 5.0
</TABLE>
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 September 30, 2000, the Bank's ratio of Tier 1 capital to total
assets was 11.04%, compared to 11.89% at June 30, 2000, 12.78% at March 31, 2000
and 15.57% at December 31, 1999.
As discussed above, total shareholders' equity increased $379,323, to $5,247,566
at September 30, 2000 from $4,868,243 at December 31, 1999. The increase was due
to the Corporation's net income of $102,287, a decrease of $32,986 in the
unrealized losses on available-for-sale securities and $244,050 from the common
stock offering in process, as discussed below.
The Company began an intrastate common stock offering of up to 87,000 shares on
September 15, 2000. Current shareholders were given the opportunity to purchase
0.27 share of stock for each share owned at $23.00 per share in a "rights"
offering to allow them to maintain their pro-rata share of the Company's total
capitalization before the stock was offered to non-shareholders in a "community"
offering at $25.00 per share. The "rights" offering expired on October 15, 2000.
As of September 30, 2000, shareholders had subscribed to 7,025 shares at $23.00
under their rights, plus an additional 3,299 shares at $25.00, for a total of
$244,050. As of the end of the rights offering, a total of 46,370 "rights"
shares and 12,860 "community" shares were subscribed to by shareholders. The
remaining shares are currently being offered in the "community" offering that
will close on December 1, 2000. The Company has reserved the right to extend the
offering for an additional 60 days, or close the offering earlier than December
1, 2000.
At the close of the common stock offering, management anticipates that the
Corporation will infuse additional capital into the Bank, which will permit the
Bank to continue to grow, to increase its legal lending limit, and to take
advantage of opportunities that may present themselves in the future.
16
<PAGE> 17
WESTERN RESERVE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
OTHER
On July 17, 2000, the Bank opened a limited-hours branch in The Oaks at Medina,
a retirement community located near Route 18 and Interstate 71. No additional
personnel have been required to staff the branch. As of September 30, 2000,
there are approximately $269,000 in total deposits at the branch.
17
<PAGE> 18
WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2000
PART II--OTHER INFORMATION
Items 1, 3 and 5 are not applicable.
Item 2--Changes in Securities and Use of Proceeds
c) The Company commenced an offering of up to 87,000 shares of
its common stock on September 15, 2000. The offering was made
first to its existing shareholders granting each shareholder
the right to purchase 0.27 share for each common share owned
by them as of September 1, 2000. The purchase price to
existing shareholders was $23.00 per share. Shareholders were
also able to purchase additional shares beyond their "rights"
shares at $25.00 per share. As of September 30, 2000,
shareholders had subscribed to 7,025 shares at $23.00 under
the rights offering, plus an additional 3,299 shares at
$25.00, for a total of 10,324 shares aggregating $244,050. As
of the end of the rights offering on October 15, 2000, a total
of 46,370 rights shares and 12,860 community shares were
subscribed to by shareholders. Those shares were issued on
October 16, 2000. The Company continued the offering to
residents of the State of Ohio, whether or not they were
shareholders, commending October 16, 2000. Through October 31,
2000, an additional 2,300 shares had been subscribed at $25.00
per share for an aggregate of $57,500. The offering is still
continuing and is expected to be concluded as of the earlier
of December 1, 2000, or the sale of all 87,000 shares
available in the offering. However, the Company has reserved
the right to extend the offering for an additional 60 days.
The Company did not employ an underwriter or broker to sell
the shares. Instead, the shares have been sold directly by the
Company through its officers and directors without the payment
of any commissions. All shares have been sold for cash.
The shares have been sold in reliance upon Section 3(a)(11) of
the Securities Act of 1933 and Rule 147 promulgated thereunder
solely to residents of the State of Ohio. A registration
statement on Form 6(A)(1) was filed with the Ohio Division of
Securities pursuant to Section 1707.06(A)(1) of the Ohio
Revised Code. The Registration Statement was acknowledged as
having been filed and thus effective as of September 11, 2000.
Because of the requirements of Rule 147, the shares issued
under the offering can not be sold outside of the State of
Ohio for nine (9) months after issuance. The certificates
representing shares sold in the offering will bear a legend
noting such restriction. A copy of the legend to be placed on
the shares is attached hereto as Exhibit 4.2.
18
<PAGE> 19
WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2000
PART II--OTHER INFORMATION (CONTINUED)
Item 2--Changes in Securities and Use of Proceeds (continued)
The proceeds raised through the sale of the shares in the offering
will be used for general corporate purposes. The majority of the
proceeds will be used to augment the capital of Western Reserve
Bank, the Company's wholly owned commercial bank subsidiary.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) No matters were submitted to a vote of security holders in the
quarter ended September 30, 2000.
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. *
4.1 Stock Certificate of Western Reserve Bancorp, Inc. *
4.2 Legend to be Placed on Certificates Representing Shares Issued in the Offering 21
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 *
April 20, 2000
11 Earnings per Share 22
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 September 30, 2000
19
<PAGE> 20
WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 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: November 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)
20
