<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, 1999
-----------------
[ ] 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
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WESTERN RESERVE BANCORP, INC.
-----------------------------
(Name of Small Business Issuer in Its Charter)
Ohio 31-1566623
- ----------------------------------------- -----------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of 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 $1,565,648.
The aggregate market value of the voting stock held by non-affiliates of the
Issuer as of March 24, 2000 was approximately $5,633,607 (which excludes 52,000
shares held by directors and executive officers). As of said date, the Issuer
had 320,267 shares of Common Stock issued and outstanding.
Documents incorporated by reference:
Parts I and II: Portions of Registrant's 1999 Annual Report to Shareholders
Part III: Portions of Registrant's 1999 Proxy Statement for the Annual
Meeting of Shareholders to be held April 26, 2000
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ x ]
Page 1 of 24
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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 all types of commercial loans to businesses, consumer loans to
individuals for household, family and other personal expenditures, and real
estate loans including first mortgage loans, home equity loans and construction
loans. The Bank makes both fixed rate and variable rate residential mortgage
loans. Generally, the Bank keeps the variable rate and short-term fixed rate
mortgages in its portfolio, but sell substantially all of the long-term
fixed-rate loans (with servicing released) 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, a courier service for business deposits, cash
management services, 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, 1999, the Bank's
legal lending limit was approximately $767,000. 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.
Page 2 of 24
<PAGE> 3
The Bank's market area is competitive. There are many commercial banks, savings
institutions and credit unions with multiple offices in the Bank's primary
service area of Medina County. Also, during 1999, several banks and savings
institutions headquartered outside of Medina County acquired or opened new
branches in the Medina area. However, in the past few years, many of the area's
financial institutions have been acquired by large regional organizations
headquartered outside of the Medina area. As a result of such consolidation, the
organizers of the Company believed that the competitive and economic environment
was 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 rapid growth of the Bank in the 14 months since it opened has
confirmed that belief. 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, 1999, the Bank has 12 full-time and 4 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, the 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. As such, they 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
Page 3 of 24
<PAGE> 4
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 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 the Company, with certain limited exceptions, 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.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act (better known as the Financial Services Modernization Act of 1999) which,
effective March 11, 2000, permits bank holding companies to become financial
holding companies and thereby affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature. A bank
holding company may become a financial holding company if each of its subsidiary
banks is well capitalized under the Federal Deposit Insurance Corporation Act of
1999 prompt corrective action provisions, is well managed, and has at least a
satisfactory rating under the Community Reinvestment Act, by filing a
declaration that the bank holding company wishes to become a financial holding
company. No regulatory approval will be required for a financial holding company
to acquire a company, other than a bank or savings association, engaged in
activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Federal Reserve Board. The Financial
Services Modernization Act defines "financial in nature" to include securities
underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; merchant banking activities; and
activities that the Federal Reserve Board has determined to be closely related
to banking. The specific effects of the enactment of the Financial Services
Modernization Act on the banking industry in general and on Western Reserve
Bancorp, Inc. and Western Reserve Bank in particular have yet to be determined
due to the fact that the Financial Services Modernization Act was only recently
adopted.
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 for
other purposes by selling securities, as it did in its Offering.
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<PAGE> 5
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 Bank'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.
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.
Page 5 of 24
<PAGE> 6
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, 1999, Bank Insurance Fund ("BIF") assessments
ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment
period beginning January 1, 2000, 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 FDIC BIF 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,
1999 the FICO assessment rate for SAIF members was approximately 0.05925% of
deposits while the FICO assessment rate for BIF members was approximately
0.01174% of deposits. During the year ended December 31, 1999 the Bank paid
approximately $1,350 in FICO assessments. Beginning with assessments paid for
the period starting January 1, 2000, insured institutions will be assessed at
the same FICO rate for both BIF- and SAIF-insured deposits. As a result, BIF
FICO assessments will be higher than in previous periods while SAIF FICO
assessments will be lower. For the first quarter of 2000, the annualized FICO
assessment rate will be 0.0212%. Management expects the amounts paid for FICO
assessments to increase as the Bank's deposits continue to increase.
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.
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<PAGE> 7
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.
As of December 31, 1999, the Bank exceeded its minimum regulatory capital
requirements with a total risk-based capital ratio of 18.7%, a Tier 1 risk-based
capital ratio of 17.6% and a leverage ratio of 16.0%. These ratios are expected
to continue to decrease to more normal levels as the Bank increases its assets
through normal banking operations in 2000 and beyond.
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. Management anticipates that, due to the Bank's
rapid growth which is exceeding projections, additional capital will be required
in late-2000. It is expected that the Company will initiate a second equity
offering of the Company's stock this year.
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
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, 1999. However, since the Bank has not,
to date, recorded a profit, as of December 31, 1999, $-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.
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<PAGE> 8
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 additional
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 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. The Company
and the Bank are currently not under any such actions or plans.
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-Neal Act and authorized by Ohio law.
In February 2000, management filed an application with the State of Ohio to
establish a branch within The Oaks at Medina, a retirement and lifetime care
community located at 4931 Nettleton Road, Medina. Management currently has no
other plans to establish branch offices.
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<PAGE> 9
FEDERAL RESERVE SYSTEM. FRB regulations, as presently in effect, require
depository institutions to maintain noninterest earning reserves against their
transaction accounts (primarily regular and interest-bearing 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 and 1999, the Bank was not yet
subject to the foregoing requirements. However, management expects the Bank's
deposits to be at such a level that the Bank will become subject to maintaining
required reserves with the FRB.
PENDING LEGISLATION. Congress regularly considers legislation that may have an
impact upon the operation of the Company and the 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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<PAGE> 10
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>
-------------------------1999------------------------
----
Average Average
Balance Interest Rate
------- -------- -------
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Federal funds sold $ 7,608,273 $ 372,138 4.89%
Interest-bearing deposits in other
financial institutions 1,524,766 71,531 4.69
Securities available for sale 3,608,398 209,104 5.79
Federal Reserve Bank stock 174,050 10,443 6.00
Loans receivable (1) 9,720,768 802,327 8.25
------------- ----------
Total interest-earning assets 22,636,255 1,465,543 6.47
Noninterest-earning assets
Cash and due from banks 1,052,311
Unrealized gain (loss) on available-
for-sale securities (38,797)
Allowance for loan losses (118,594)
Premises and equipment, net 797,518
Accrued interest receivable and
other assets 144,117
-------------
$24,472,810
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing transaction accounts $ 1,628,717 25,928 1.59%
Savings and money market accounts 12,737,525 567,530 4.46
Certificates of deposit and IRAs 1,693,075 76,149 4.50
Federal funds purchased 1,052 48 4.56
------------- ----------
Total interest-bearing liabilities 16,060,369 669,655 4.17%
----------
Noninterest-bearing liabilities
Demand deposits 3,018,604
Accrued interest payable and
other liabilities 137,661
-------------
3,156,265
Shareholders' equity 5,256,176
-------------
$24,472,810
=============
Net interest income/spread $ 795,888 2.30%
========== =========
Net interest income as a percent
of average interest earning assets 3.52%
=========
Average interest earning assets to
interest bearing liabilities 40.94%
-----
</TABLE>
(1) Loan fees of $38,168 were excluded from the computation.
Page 10 of 24
<PAGE> 11
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL (Continued)
<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 423,830 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%
=========
Average interest earning assets to
interest bearing liabilities 786.43%
======
</TABLE>
(1) Loan fees of $2,025 were excluded from the computation.
Page 11 of 24
<PAGE> 12
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>
Summary of Changes in Net Interest Income
1999 vs. 1998 1998 vs. 1997
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------ --------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 797,873 $ 94 $ 797,967 $ 4,360 $ -- $ 4,360
Federal funds sold 368,416 13 368,429 3,709 -- 3,709
Interest-bearing deposits in
financial institutions (98,950) (16,753) (115,703) 185,581 540 186,120
Securities available-for-sale 209,104 -- 209,104 -- -- --
Federal Reserve Bank stock 8,929 (52) 8,877 1,566 -- 1,566
------------- ------------ ------------ ------------ --------------------------
Total interest-earning assets 1,285,372 (16,698) 1,268,674 195,215 540 195,755
Interest expense:
Interest-bearing transaction
accounts 25,459 (4) 25,455 471 -- 471
Savings and money market 551,631 (137) 551,494 16,038 -- 16,038
Certificates of deposit
and IRAs 74,435 8 74,443 1,706 -- 1,706
Federal funds purchased 48 -- 48 -- -- --
--------- ----------- --------- --------- ----------- ---------
Total interest-bearing
liabilities 651,573 (133) 651,440 18,215 -- 18,215
--------- ----------- --------- --------- ----------- ---------
Change in net interest income $ 633,799 $ (16,565) $ 617,234 $ 177,000 $ 540 $ 177,540
========= =========== ========== ========= ========== =========
</TABLE>
Page 12 of 24
<PAGE> 13
II. INVESTMENT PORTFOLIO
The amortized cost and estimated fair values of securities available for
sale at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross Weighted
Amortized Unrealized Unrealized Fair Average
Cost Gains Losses Value Yield
---- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
U.S. Agency Securities $ 5,998,054 $ -- $ (105,714) $ 5,892,340 5.79%
=========== ========== =========== ===========
</TABLE>
At December 31, 1999, all securities available for sale were scheduled to
mature within one to three years. Actual maturities may differ from
contractual maturities because issuers may have the right to call or
prepay obligations.
Neither the Company nor the Bank had any investment securities at
December 31, 1998.
III. LOAN PORTFOLIO
A. Types of Loans - Total loans on the balance sheet are comprised of
the following classifications at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commercial $ 18,459,745 $ 481,609
Home equity lines of credit 2,091,354 122,311
Residential mortgage and construction 1,563,911 --
Consumer installment 1,184,246 260,852
Credit card and other 71,963 325
------------- ------------
$ 23,371,219 $ 865,097
============= ============
</TABLE>
CONCENTRATIONS OF CREDIT RISK: The Company grants commercial,
residential real estate mortgage and installment loans to businesses
and individuals mainly in Medina and contiguous counties in Ohio.
Commercial loans include loans collateralized by business assets. At
December 31, 1999, commercial loans secured by real estate make up
approximately 36.0% of the loan portfolio. Other commercial loans to
businesses comprise 43.0% of total loans, and are expected to be
repaid from cash flows from operations of the businesses. Variable
rate home equity lines of credit make up approximately 8.9% of the
loan portfolio and are collateralized by residential real estate.
Residential mortgage and construction loans are 6.7% of the loan
portfolio and are secured primarily by first mortgages on residential
property. Installment and credit card loans to individuals make up
approximately 5.4% 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 maturity distribution and sensitivity
to changes in interest rates of loans outstanding as of December 31,
1999. Fixed rate loans are presented based on their maturity date,
and variable rate loans with floating or adjustable interest rates
are included based on their earliest repricing opportunity.
Page 13 of 24
<PAGE> 14
III. LOAN PORTFOLIO (CONTINUED)
Loan Maturities and Sensitivity to Changes in Interest Rates
<TABLE>
<CAPTION>
Within 1-5 After
1 year years 5 years Total
------ ----- ------- -----
<S> <C> <C> <C> <C>
Commercial $ 8,433,771 $ 9,588,219 $ 437,755 $ 18,459,745
Residential mortgage
and construction 814,600 653,751 95,560 1,563,911
Home equity lines
of credit 2,091,354 -- -- 2,091,354
Consumer installment 781,170 259,457 143,619 1,184,246
Credit card and other 71,963 -- -- 71,963
--------------- --------------- --------------- -------------
$ 12,192,858 $ 10,501,427 $ 676,934 $ 23,371,219
=============== =============== =============== =============
</TABLE>
Of the loans due after one year, approximately $6,505,402 have
variable interest rates, and $4,672,959 have fixed interest rates.
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>
1999 1998
---- ----
<S> <C> <C>
(a) Loans accounted for on a nonaccrual basis $ 0 $ 0
(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" -- --
---------- -----------
$ 0 $ 0
========== ===========
</TABLE>
Page 14 of 24
<PAGE> 15
III. LOAN PORTFOLIO (CONTINUED)
Management believes the allowance for loan losses at December
31, 1999 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 loss experience of comparable companies,
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>
1999
----
<S> <C>
Gross interest income that would have been recorded in 1999 on
nonaccrual loans outstanding at December 31, 1999 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>
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. In general,
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, 1999, 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
Page 15 of 24
<PAGE> 16
4. Loan Concentrations
As of December 31, 1999, commercial loans to entities
classified as real estate holding companies comprise
$4,675,000 of the total loan portfolio. However, approximately
$1,756,000 of this is to three separate single-purpose real
estate holding companies that hold property for their related
entities. Commercial loans to real estate development
companies total $2,453,000.
D. OTHER INTEREST-BEARING ASSETS
There are no other interest-bearing assets as of December 31, 1999
which would be required to be disclosed under Item III. C.1 or 2 if
such assets were loans.
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 years ended
December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
LOANS
Loans outstanding at end of period $ 23,371,219 $ 865,097
============= ============
Average loans outstanding during period $ 9,720,768 $ 54,100
============= ============
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 11,700 $ 0
Loans charged-off
Commercial -- --
Residential mortgage and construction -- --
Consumer installment -- --
------------- ------------
-- --
Recoveries of loans previously charged-off
Commercial -- --
Residential mortgage and construction -- --
Consumer installment -- --
------------- ------------
-- --
------------- ------------
Net loans charged-off -- --
Provision for loan losses 295,300 11,700
------------- ------------
Balance at end of period $ 307,000 $ 11,700
============= ============
Ratio of net charge-offs during the period to
average loans outstanding during the period 0% 0%
============= ============
</TABLE>
Page 16 of 24
<PAGE> 17
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
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.
B. The following schedule is a breakdown of the allowance for loan
losses allocated by type of loan and related ratios.
<TABLE>
<CAPTION>
Percentage of Loans in
Each Category to
Allowance Amount Total Loans
------------------------------ -------------------------
1999 1998 1999 1998
----------- ------------ --------- --------
<S> <C> <C> <C> <C>
Commercial $ 267,876 $ 6,983 79.0% 55.7%
Residential mortgage & construction 5,992 -- 6.7 0.0
Home equity lines of credit 10,457 612 8.9 14.1
Installment and credit card
loans to individuals 19,912 3,922 5.4 30.2
Unallocated 2,763 183 0.0 0.0
------------ ------------ --------- --------
Total $ 307,000 $ 11,700 100.0% 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>
1999 1998
---- ----
Average Average Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 3,018,604 0.00% $ 73,375 0.00%
Interest bearing demand deposits 1,628,717 1.59 29,359 1.60
Savings and money market accounts 12,737,524 4.46 356,897 4.49
Certificates of deposit and IRAs 1,693,075 4.50 37,573 4.54
------------- -----------
$ 19,077,920 $ 497,204
============= ===========
</TABLE>
At December 31, 1999, the Bank had $1,141,407 of time
certificates of deposit of $100,000 or more outstanding. Remaining
maturities of these time deposits are as follows:
<TABLE>
<CAPTION>
<S> <C>
Three months or less $ 464,773
Over three through six months 120,000
Over six through twelve months 105,171
Over twelve months 451,463
-------------
Total $ 1,141,407
=============
</TABLE>
Page 17 of 24
<PAGE> 18
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>
1999 1998
---- ----
<S> <C> <C>
Average total assets $ 24,472,810 $ 4,050,157
Average shareholders' equity $ 5,256,176 $ 2,993,597
Net loss $ (717,921) $ (620,952)
Return on average total assets (2.93)% (15.30)%
Return on average shareholders' equity (13.66)% (20.70)%
Cash dividends declared $ 0.00 $ 0.00
Dividend payout percentage n/a n/a
Average shareholders' equity to average total assets 21.48% 73.93%
</TABLE>
VII. SHORT-TERM BORROWINGS
The Company did not have any reportable categories 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. The annual lease payment for 1999 was $105,120 and $17,411
for the last two months in 1998 and is 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 5 on page 12 of the Company's 1999 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 1999.
Page 18 of 24
<PAGE> 19
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock was held by approximately 400 holders of record as of
March 24, 2000, 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.
In the fourth quarter of 1999, there was one transaction of 1,000 shares at
$21.00 (bid price) of the Company's common stock reported by the market maker in
the Company's stock. The Company is not aware of any other public 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 since the Company's inception
on February 25, 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 1999 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 1999 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 19 of 24
<PAGE> 20
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 1999 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 36, 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 in September 1998. 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 39, 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 page 9 of the 1999 Proxy Statement under the caption
"Compensation of Executive Officers" is incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information on page 4 of the 1999 Proxy Statement, under the caption
"Beneficial Ownership" in incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information on page 10 of the 1999 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 that 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 1999.
Page 20 of 24
<PAGE> 21
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 30, 2000.
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 30, 2000.
<TABLE>
<CAPTION>
<S> <C>
/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/ Glenn Smith /s/ Rory O'Neil
---------------------------------- ----------------------------------
Glenn Smith, Director Rory O'Neil, Director
/s/ R. Hal Nichols /s/ Ray E. Laribee
---------------------------------- ----------------------------------
R. Hal Nichols, Director Ray E. Laribee, Director
</TABLE>
Page 21 of 24
<PAGE> 22
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 26, 2000. (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 22 of 24
<PAGE> 1
[CROWE CHIZEK LOGO]
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. as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the years then ended. 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,
1999 and 1998, and results of its operations and cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Cleveland, Ohio
March 2, 2000
2.
<PAGE> 2
<TABLE>
<CAPTION>
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,263,553 $ 447,553
Interest-bearing deposits in other banks 8,063 7,019,380
Federal funds sold 166,000 2,925,000
----------------- -----------------
Cash and cash equivalents 1,437,616 10,391,933
Securities available for sale, at fair value 5,892,340 --
Loans 23,371,219 865,097
Allowance for loan losses (307,000) (11,700)
----------------- -----------------
Loans, net 23,064,219 853,397
Federal Reserve Bank stock 174,050 174,050
Premises and equipment, net 759,355 816,992
Accrued interest receivable and other assets 215,272 27,645
----------------- -----------------
Total assets $ 31,542,852 $ 12,264,017
================= =================
LIABILITIES
Deposits
Noninterest-bearing $ 3,639,186 $ 760,359
Interest-bearing 22,964,282 5,231,190
----------------- -----------------
Total deposits 26,603,468 5,991,549
Accrued interest payable and other liabilities 71,141 580,590
----------------- -----------------
Total liabilities 26,674,609 6,572,139
SHAREHOLDERS' EQUITY
Common stock, without par value, $1 stated value
750,000 shares authorized, 320,267 shares issued
and outstanding at December 31, 1999 and 1998 320,267 320,267
Additional paid-in capital 6,048,232 6,048,232
Retained deficit (1,394,542) (676,621)
Accumulated other comprehensive income (loss) (105,714) --
----------------- -----------------
Total shareholders' equity 4,868,243 5,691,878
----------------- -----------------
Total liabilities and shareholders' equity $ 31,542,852 $ 12,264,017
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
3.
<PAGE> 3
<TABLE>
<CAPTION>
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1999 and 1998
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
INTEREST INCOME
<S> <C> <C>
Loans $ 840,495 $ 6,386
Investment securities 219,547 1,566
Federal funds sold and other short-term funds 443,669 190,942
--------------- ---------------
Total interest income 1,503,711 198,894
INTEREST EXPENSE
Deposits 669,607 18,215
Other short-term funds 48 --
--------------- --------------
Total interest expense 669,655 18,215
--------------- ---------------
Net interest income 834,056 180,679
PROVISION FOR LOAN LOSSES 295,300 11,700
--------------- ---------------
Net interest income after
provision for loan losses 538,756 168,979
OTHER INCOME
Service charges on deposit accounts 22,339 310
Gains on sales of mortgage loans 19,060 --
Other income 20,538 989
--------------- ---------------
Total other income 61,937 1,299
OTHER EXPENSES
Salaries and benefits 652,177 409,342
Premises and equipment 245,643 60,919
Data processing 111,083 4,607
Taxes other than income and payroll 84,966 628
Marketing and advertising 43,233 19,904
Other expenses 181,512 137,982
--------------- ---------------
Total other expense 1,318,614 633,382
--------------- ---------------
Loss before cumulative effect
of change in accounting principle (717,921) (463,104)
Cumulative effect of change in
accounting principle -- (157,848)
--------------- ---------------
NET LOSS $ (717,921) $ (620,952)
=============== ===============
Basic and diluted loss per share
before cumulative effect of
change in accounting principle $ (2.24) $ (2.67)
Cumulative effect of change in
accounting principle -- (0.91)
--------------- --------------
Basic and diluted loss per share $ (2.24) $ (3.58)
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4.
<PAGE> 4
<TABLE>
<CAPTION>
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1999 and 1998
- -------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Shareholders'
Stock Capital Deficit Income (Loss) Equity
----- ------- ------- ------------- ------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 8,000 $ 152,000 $ (55,669) $ -- $ 104,331
Comprehensive income:
Net loss (620,952) (620,952)
--------------
Total comprehensive income (620,952)
Proceeds from issuance of
common stock, net of
stock offering costs 312,267 5,896,232 6,208,499
------------- ------------- ------------- ------------- --------------
Balance, December 31, 1998 320,267 6,048,232 (676,621) -- 5,691,878
Comprehensive income:
Net loss (717,921) (717,921)
Change in unrealized loss
on securities
available for sale (105,714) (105,714)
--------------
Total comprehensive income (823,635)
------------- ------------- ------------- ------------- --------------
Balance, December 31, 1999 $ 320,267 $ 6,048,232 $ (1,394,542) $ (105,714) $ 4,868,243
============= ============= ============= ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
5.
<PAGE> 5
<TABLE>
<CAPTION>
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (717,921) $ (620,952)
Adjustments to reconcile net loss to net cash from
operating activities
Depreciation 90,475 9,980
Provision for loan losses 295,300 11,700
Net accretion of discounts on securities (242) -
Loans originated for sale (1,862,850) -
Proceeds from sale of loan originations 1,881,910 -
Net change in interest receivable (161,662) (6,569)
Net change in interest payable 7,587 676
Net change in other assets (25,965) 43,156
Net change in other liabilities (517,036) 574,511
--------------- ---------------
Net cash from operating activities (1,010,404) 12,502
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available for sale securities (5,997,813) -
Purchase of Federal Reserve Bank stock - (174,050)
Net change in loans (22,525,181) (865,097)
Purchase of premises and equipment (32,838) (810,728)
--------------- ---------------
Net cash from investing activities (28,555,832) (1,849,875)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 20,611,919 5,991,549
Proceeds from issuance of common stock - 6,208,499
--------------- ---------------
Net cash from financing activities 20,611,919 12,200,048
--------------- ---------------
Change in cash and cash equivalents (8,954,317) 10,362,675
Cash and cash equivalents at beginning of period 10,391,933 29,258
--------------- ---------------
Cash and cash equivalents at end of period $ 1,437,616 $ 10,391,933
=============== ===============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 662,068 $ 17,539
Taxes - -
</TABLE>
See accompanying notes to consolidated financial statements.
6.
<PAGE> 6
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity and are carried at fair value with unrealized holding gains
and losses reported separately in shareholders' equity. All of the Corporation's
securities are classified as available for sale. Interest income includes
amortization and accretion of purchased premiums and discounts. Gains or losses
on sales are based on net proceeds and amortized cost of the securities sold,
using the specific identification method. 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, 1999, the
composition of the loan portfolio is approximately 36.0% commercial loans
secured by real estate, 43.0% other commercial loans,
(Continued)
7.
<PAGE> 7
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
8.9% home equity loans, 6.7% residential mortgage and construction loans and
5.4% consumer and credit card loans. At December 31, 1999, approximately 5.5% 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.
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 incurred 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.
(Continued)
8.
<PAGE> 8
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 1999, a valuation
allowance equal to the net deferred tax asset was recorded at December 31, 1999
and 1998, respectively. Therefore, no deferred tax asset or income tax benefit
has been recognized by the Company to date.
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 income.
LOSS PER COMMON 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 basic and diluted weighted average shares outstanding in 1999
and 1998 were 320,267 and 173,303, respectively.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity.
DIVIDEND RESTRICTIONS: See Note 12 for a discussion of banking regulations which
restrict dividends.
LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as discussed
in Note 10. 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.
(Continued)
9.
<PAGE> 9
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK OPTION PLAN: Expense for employee compensation under stock option plans is
reported only if options are granted below market price at grant date.
Disclosures of proforma net income or loss and earnings or loss per common share
are provided as if the fair value method of SFAS No. 123 were used for
stock-based compensation.
NEW ACCOUNTING PRONOUNCEMENTS: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, change in these fair values will be recorded in the income
statement. Fair value changes involving hedges will generally be recorded by
offsetting gains and losses on the hedge and on the hedged item, even if the
fair values of the hedged item is not otherwise recorded. This is not expected
to have a material effect but the effect will depend on derivative holdings when
this standard applies.
RECLASSIFICATIONS: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
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.
(Continued)
10.
<PAGE> 10
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES
The amortized cost and estimated fair values of securities available for sale at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. agency securities $ 5,998,054 $ -- $ (105,714) $ 5,892,340
=========== ========= =========== ============
</TABLE>
At December 31, 1999, all securities available for sale were scheduled to mature
within one to three years. Actual maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations.
No securities were sold during 1999. At December 31, 1999, securities with an
approximate par value of $3,500,000 were pledged to secure public deposits,
borrowings and for other purposes as required or permitted by law.
NOTE 4 - LOANS RECEIVABLE, NET
Loans at December 31, 1999, were as follows:
1999 1998
---- ----
Commercial $ 18,459,745 $ 481,609
Home equity 2,091,354 122,311
Residential mortgage
and construction 1,563,911 --
Consumer installment 1,184,246 260,852
Credit card and other 71,963 325
---------------- ----------------
$ 23,371,219 $ 865,097
================ ================
Activity in the allowance for loan losses was as follows:
1999 1998
---- ----
Beginning balance $ 11,700 $ --
Loans charged off -- --
Recoveries -- --
Provision for loan losses 295,300 11,700
---------------- ----------------
Ending balance $ 307,000 $ 11,700
================ ================
(Continued)
11.
<PAGE> 11
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE, NET (Continued)
At December 31, 1999 and 1998, there were no past-due, nonaccrual or impaired
loans.
Certain officers, directors and companies with which they are affiliated have
borrowed funds from the Bank. A summary of aggregate related party loan activity
for 1999 is as follows:
New loans $ 1,383,163
Repayments 17,510
---------------
Balance at end of year $ 1,365,653
===============
NOTE 5 - PREMISES AND EQUIPMENT, NET
At December 31, premises and equipment consisted of the following:
1999 1998
---- ----
Leasehold improvements $ 500,399 $ 500,399
Furniture and equipment 359,931 327,093
--------------- ---------------
Total cost 860,330 827,492
Accumulated depreciation (100,975) (10,500)
--------------- ---------------
Total, net of depreciation $ 759,355 $ 816,992
=============== ===============
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 $105,120 in
1999. At December 31, 1999, the total estimated future minimum rental payments
under the lease are as follows:
2000 $ 109,062
2001 113,385
2002 118,970
2003 122,005
2004 128,076
Thereafter 521,237
----------
$1,112,735
==========
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 in 1998.
(Continued)
12.
<PAGE> 12
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
At year-end, total interest-bearing deposits are as follows:
1999 1998
---- ----
Interest-bearing demand $ 2,132,099 $ 485,887
Savings 11,107,154 3,140,793
Money market 6,960,429 1,257,548
Time under $100,000 1,623,193 246,567
Time $100,000 and over 1,141,407 100,395
---------------- ----------------
Total $ 22,964,282 $ 5,231,190
================ ================
Scheduled maturities of time deposits are as follows:
1999 1998
---- ----
Three months or less $ 1,048,771 $ 14,693
Three through six months 579,789 58,519
Six through twelve months 352,303 263,878
Over twelve months 783,737 9,872
---------------- ----------------
$ 2,764,600 $ 346,962
================ ================
Deposits of $100,000 or greater totaled $10,879,366 and $2,169,280 at December
31, 1999 and 1998, respectively. Related party deposits totaled $1,267,000 at
year-end 1999.
NOTE 7 - OTHER EXPENSE
Year-end other expense amounts were as follows:
1999 1998
---- ----
Supplies, printing
and postage $ 41,861 $ 36,646
Professional fees 29,861 37,251
Insurance 23,094 9,200
Public relations and
contributions 17,974 20,498
Telephone 14,550 7,744
Travel and entertainment 13,133 22,317
Loan expenses 19,353 --
Other 21,686 4,326
---------------- ----------------
Total $ 181,512 $ 137,982
================ ================
(Continued)
13.
<PAGE> 13
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
There was no income tax expense for the years ended December 31, 1999 or 1998 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:
1999 1998
---- ----
Income tax benefit at
statutory rate $ (244,093) $ (211,124)
Effect of deferred tax
valuation allowance 279,045 208,350
Other, net (34,952) 2,774
--------------- ---------------
Total income tax expense $ -- $ --
=============== ===============
The components of the net deferred tax asset (liability) recorded in the
consolidated balance sheets as of December 31 are as follows:
1999 1998
---- ----
Deferred tax assets:
Net operating loss
carryforward $ 315,633 $ 25,417
Organizational costs
capitalized 137,389 172,849
Bad debt deduction 89,425 --
Donation carryforward 1,299 668
Deferred loan fees 5,206 --
Accrual to cash adjustment -- 31,621
Unrealized loss on securities
available for sale 35,943 --
--------------- ---------------
584,895 230,555
Deferred tax liabilities:
Accrual to cash adjustment (60,104) --
Depreciation (18,237) --
Bad debt deduction -- (3,278)
Other (232) --
--------------- ---------------
(78,573) (3,278)
Valuation allowance (506,322) (227,277)
--------------- ---------------
Net deferred tax asset $ -- $ --
=============== ===============
(Continued)
14.
<PAGE> 14
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES (Continued)
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.
At December 31, 1999, the Company had operating loss carryforwards of
approximately $928,000 which can be used to offset future taxable income. The
carryforwards are due to expire, for tax purposes, in 2018 through 2020.
NOTE 9 - 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:
1999 1998
---- ----
Commitments to extend
credit (net of
participated amounts) $ 2,164,000 $ 2,151,000
Unused credit card, home
equity and overdraft
lines of credit 3,272,000 265,884
Unused commercial lines
of credit 5,832,000 50,000
Letters of credit 873,000 --
Commitments to make loans are generally made for periods of one year or less. At
December 31, 1999, $1,017,000 of commitments had fixed rates and $11,124,000 had
adjustable rates. The fixed rate loan commitments have interest rates ranging
from 6.875% to 9.75% and maturities ranging from four months to one year.
(Continued)
15.
<PAGE> 15
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
Included in cash and cash equivalents at year-end 1999 was approximately
$100,000 required to be on deposit with the Independent State Bank of Ohio
related to the Bank's credit card program.
The bank has the ability to borrow under various credit facilities that totaled
$4,700,000 at year-end 1999.
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, 1999.
NOTE 10 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments at year-end are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,437,616 $ 1,438,000 $10,391,933 $10,392,000
Securities available for sale 5,892,340 5,892,000 -- --
Loans, net of allowance 23,064,219 22,987,000 853,397 853,000
Accrued interest receivable 168,231 168,000 6,569 7,000
Demand and savings deposits (23,838,868) (23,839,000) (5,644,587) (5,645,000)
Time deposits (2,764,600) (2,749,000) (346,962) (347,000)
Accrued interest payable (8,263) (8,000) (676) (1,000)
</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 current market interest
rates. Fair values of unrecorded commitments were not material.
(Continued)
16.
<PAGE> 16
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 10 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
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.
NOTE 11 - STOCK OPTIONS
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 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.
A summary of the activity in the plan for 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- ------------------------------------------
Weighted Weighted
Average Range of Average Range of
Exercise Option Price Exercise Option Price
Shares Price per Share Shares Price per Share
------ ----- ---------- ------ ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
at beginning of year 42,062 $23.66 $20.00-$40.00 0
Granted 1,200 20.00 $20.00 42,062 $23.66 $20.00-$40.00
Exercised 0 0
Forfeited 0 0
------ ------
Options outstanding
at end of year 43,262 $23.56 $20.00-$40.00 42,062 $23.66 $20.00-$40.00
====== ======
Remaining shares
available for grant
at year-end 6,738 7,938
Options exercisable
at year-end 10,515 0
Weighted-average
fair value of options
granted during the year $6.03 $4.37
</TABLE>
(Continued)
17.
<PAGE> 17
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 11 - STOCK OPTIONS (Continued)
Options outstanding at year-end 1999 were as follows:
<TABLE>
<CAPTION>
Outstanding Exerciseable
----------- ------------
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Number Life (years) Number Price
------ ------------ ------ -----
<S> <C> <C> <C> <C>
Range of Exercise Prices
$20.00-$29.99 33,644 8.8 8,111 $20.00
$30.00-$39.99 6,412 8.8 1,603 34.00
$40.00 3,206 8.8 801 40.00
------ -------
Outstanding at year-end 43,262 8.8 10,515 23.66
====== =======
</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.
1999 1998
---- ----
Net loss as reported $717,921 $620,952
Pro forma net loss 765,638 666,860
Basic and diluted loss per
share as reported $2.24 $3.58
Pro forma basic and diluted
loss per share $2.39 $3.85
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.
1999 1998
---- ----
Risk-free interest rate 5.80% 4.75%
Expected option life (years) 5 8
Expected stock price volatility 6.78% 0.00%
Dividend yield 0.00% 0.00%
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 is 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.
(Continued)
18.
<PAGE> 18
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 12 - 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. Thus, 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. Additionally, under the terms of the Bank's approval order from the
State of Ohio, the Bank is required to maintain a minimum ratio of its
shareholders' equity to total assets of at least 9% during its first three years
of operation. At December 31, 1999, the Bank's ratio of shareholders' equity to
total assets was 15.24%
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 1999 and 1998, the Bank was categorized as well-capitalized. At
year-end 1999 and 1998, the Bank's capital levels were as follows:
<TABLE>
<CAPTION>
Minimum To Be Well
Required for Capitalized
Capital Under Prompt
Adequacy Corrective Action
($ thousands) Actual Purposes Regulation
1999 Amount Ratio Amount Ratio Amount Ratio
- ---- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk-weighted
assets $ 5,219 18.7% $ 2,233 8.0% $ 2,791 10.0%
Tier 1 capital to risk-weighted
assets 4,912 17.6% 1,116 4.0% 1,675 6.0%
Tier 1 capital to average assets 4,912 16.0% 1,228 4.0% 1,535 5.0%
1998
- ----
Total capital to risk-weighted
assets $ 5,634 150.0% $ 300 8.0% $ 375 10.0%
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%
</TABLE>
(Continued)
19.
<PAGE> 19
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY
Condensed financial statements of Western Reserve Bancorp, Inc. (parent company
only) are as follows:
CONDENSED BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
---- ----
ASSETS
Cash and cash equivalents $ 62,255 $ 147,646
Investment in bank subsidiary 4,805,988 5,621,972
Other assets -- --
------------- -------------
Total assets $ 4,868,243 $ 5,769,618
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ -- $ 77,740
Shareholders' equity 4,868,243 5,691,878
------------- -------------
Total Liabilities and
Shareholder's Equity $ 4,868,243 $ 5,769,618
============= =============
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1999 and 1998
1999 1998
---- ----
Interest income $ 12 $ 122,625
Operating expenses 7,663 397,784
------------- -------------
Loss before income taxes and
equity in undistributed
loss of subsidiary (7,651) (275,159)
Equity in undistributed loss
of subsidiary (710,270) (187,945)
------------- -------------
Loss before cumulative
effect of change in accounting
principle (717,921) (463,104)
Cumulative effect of change in
accounting principle -- (157,848)
------------- -------------
Net loss $ (717,921) $ (620,952)
============= =============
(Continued)
20.
<PAGE> 20
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998
1999 1998
---- ----
Cash flows from operating
Activities
Net loss $ (717,921) $ (620,952)
Equity in undistributed
loss of subsidiary 710,270 187,945
Change in other assets
and liabilities (77,740) 129,715
------------- -------------
Net cash from operating
activities (85,391) (303,292)
Cash flows from investing
activities
Premises and equipment,
net -- (138,791)
Investment in subsidiary
bank -- (5,648,028)
------------- -------------
Net cash from investing
activities -- (5,786,819)
Cash flows from financing
activities
Proceeds from issuance of
common stock, net -- 6,208,499
------------- -------------
Net cash from financing
activities -- 6,208,499
------------- -------------
Change in cash and cash
equivalents (85,391) 118,388
Cash and cash equivalents at
beginning of year 147,646 29,258
------------- -------------
Cash and cash equivalents at
end of year $ 62,255 $ 147,646
============= =============
Noncash transfers to investment
in bank subsidiary:
Premises and equipment $ -- $ 152,621
Other assets -- 9,268
(Continued)
21.
<PAGE> 21
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 14 - BASIC AND DILUTED LOSS PER COMMON SHARE
Basic and diluted 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:
1999 1998
---- ----
Basic and Diluted Loss
per Common Share:
Loss before
cumulative effect of
change in accounting
principle $ (717,921) $ (463,104)
Cumulative effect of
change in accounting
principle -- (157,848)
------------- -------------
Net loss $ (717,921) $ (620,952)
============= =============
Weighted average
common shares
outstanding 320,267 173,303
Basic Loss per Common
Share Before
Cumulative Effect of
Change in Accounting
Principle $ (2.24) $ (2.67)
Basic Loss per Common
Share from Cumulative
Effect of Change in
Accounting Principle -0.00- $ (0.91)
------------- -------------
Basic and Diluted Loss
per Common Share $ (2.24) $ (3.58)
============= ============
Outstanding stock options for 43,262 and 42,062 shares of common stock were not
considered in computing diluted loss per common share for 1999 and 1998,
respectively, because they were antidilutive.
22.
<PAGE> 22
<TABLE>
<CAPTION>
COMPARATIVE SUMMARY OF
SELECTED FINANCIAL DATA
As of December 31, 1999 and 1998, and
for the Years ended December 31, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------------------------------
($000's except per share data) 1999 1998
---- ----
BALANCE SHEET DATA:
<S> <C> <C>
Total assets $ 31,543 $ 12,264
Securities available for sale 5,892 --
Total loans 23,371 865
Allowance for loan losses 307 12
Total deposits 26,603 5,992
Shareholders' equity 4,868 5,692
INCOME STATEMENT DATA:
Total interest income $ 1,504 $ 199
Total interest expenses 670 18
----------- ----------
Net interest income 834 181
Provision for loan losses 295 12
----------- ----------
Net interest income after provision for loan losses 539 169
Noninterest income 62 1
Noninterest expense 1,319 633
----------- ----------
Loss before income taxes and cumulative effect of
change in accounting principle (718) (463)
Cumulative effect of change in accounting principle -- (158)
----------- ----------
Net loss $ (718) $ (621)
============ ==========
PER SHARE DATA:
Basic and diluted (loss) per common share before
cumulative effect of change in accounting principle $ (2.24) $ (2.67)
(Loss) per share from cumulative effect of change in
accounting principle -- (0.91)
---------- -----------
Basic and diluted (loss) per common share (2.24) (3.58)
Book value per share at year-end 15.20 17.77
Cash dividends per share n/a n/a
Average shares used in net loss per share calculations 320,267 173,303
OPERATING RATIOS:
Total net loans to total deposits 86.70% 14.24%
Total shareholders' equity to total assets 15.43% 46.41%
Average shareholders' equity to average assets 21.48% 73.93%
Return on average equity (13.66)% (20.70)%
Return on average assets (2.93)% (15.30)%
Dividend payout ratio n/a n/a
Allowance for loan losses to total loans 1.31% 1.35%
Average assets $24,473 $ 4,050
Average shareholders' equity 5,256 2,994
</TABLE>
23.
<PAGE> 23
WESTERN RESERVE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
- --------
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
years ended December 31, 1999 and 1998. 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 1999 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.
RESULTS OF OPERATIONS
- ---------------------
Consolidated net loss for the Company for 1999 was $717,921, compared to a net
loss of $620,952 in 1998. Results for 1998 included 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. The increased loss in 1999 compared to 1998 was primarily a result of
expenses associated with operating the Bank in 1999, whereas the first ten
months on 1998 were devoted to development stage activities. Basic and diluted
loss per common share was $2.24 in 1999. In 1998, basic and diluted loss per
common share was $2.67 before the cumulative effect of the change in accounting
principle and $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. The larger
loss per share in 1998 was primarily due to fewer average shares outstanding in
1998 (173,303) as compared to 1999 (320,267). No dividends were paid in 1999 or
1998.
24.
<PAGE> 24
NET INTEREST INCOME
- -------------------
Net interest income for 1999 was $834,056, compared with $180,679 in 1998. This
was due primarily to growth in the Bank's loan portfolio in 1999, which was
funded primarily by deposit growth. In 1998, the Company's interest earning
assets consisted of short-term deposits for the majority of the year. The
average net interest margin during 1999 was 3.52%, compared to 4.76% in 1998.
The higher margin in 1998 was due to the fact that interest-earning assets were
funded by equity for a majority of the year. In 1999, the average yield on
interest earning assets was 6.47%, compared with 5.24% in 1998. During 1999,
loans yielded an average of 8.25%, investments yielded 5.79%, and short-term
funds yielded 4.86%. Throughout 1999, the yield on earning assets and net
interest margin improved as more assets were shifted from lower-yielding
short-term funds to higher-yielding loans. The average rate paid on
interest-bearing deposits was 4.17% during 1999, compared with 4.30% in 1998.
The decrease was due to a change in the mix of interest-bearing deposits, as
average rates paid were comparable in both years. Management expects that the
cost of funds will increase in 2000, due to generally rising interest rates and
the competition among all financial services firms for customers' deposits.
OTHER INCOME
- ------------
Total noninterest income was $61,937 in 1999, compared with $1,299 in 1998.
Service charges on deposits totaled $22,339 in 1999. Gains on sales of mortgage
loans of $19,060 were recorded. Other income includes safe deposit box rent,
credit card interchange income, and the sales of checks to depositors.
Management expects that other fee income will continue to increase as the bank
increases in size.
OTHER EXPENSE
- -------------
Total noninterest expense was $1,318,614 in 1999, compared with $633,382 in
1998, an increase of $685,232. Major components of this increase include
salaries and employee benefits (which increased $242,835 in 1999 when compared
to 1998), the cost of premises and equipment (an increase of $184,724 over the
prior year), and data processing (a $106,476 increase). The primary reason for
these increases is that the bank was fully operational for all of 1999, while in
1998 the first ten months were spent on pre-opening start-up activities with
limited staff and temporary office space. Additionally, the Company paid state
franchise taxes of $84,966 in 1999, compared to $628 in 1998. All of these
expenses in 1999 are considered by management to be typical for a newly-formed
bank, and are expected to remain near current levels in the near future.
Management also expects that, as the bank continues to grow, overhead costs as a
percentage of both interest income and total assets will continue to decrease.
25.
<PAGE> 25
PROVISION AND ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------
The allowance for loan losses is maintained by management at a level considered
adequate to cover probable future losses in the bank's loan portfolio.
Management's determination of the appropriate provision for loan losses and the
adequacy of the allowance for loan losses is based, in part, on the
consideration of historic loss histories of other similar community financial
institutions which management believes are representative of the probable
expected loss experience of the Bank. Other factors considered by management
include the composition of the loan portfolio, current economic conditions, the
creditworthiness of the Bank's borrowers and other related factors. The
provision for loan losses was $295,300 in 1999, compared with $11,700 in 1998.
The increased provision for loan losses is directly related to the rapid loan
growth experienced by the Bank. At December 31, 1999, the allowance was 1.31% of
total loans. Management allocated approximately 87.3% of the total allowance to
commercial loans, 5.4% to residential mortgage and home equity loans and 6.5% to
consumer and credit card loans to individuals, leaving approximately 0.8%
unallocated. No loans were charged off in 1999 or 1998. At December 31, 1999 and
1998, none of the allowance for loan losses was allocated to impaired loan
balances, as there were no loans considered to be impaired. At December 31,
1999, there were no loans more than fifteen days delinquent. Management believes
the allowance for loan losses at December 31, 1999, is adequate to absorb
probable losses in the loan portfolio.
INCOME TAXES
- ------------
The income tax benefit from the net operating losses in 1999 and 1998 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 can be carried
forward for twenty years from the time of the loss before they expire.
Accordingly, the Company's net operating loss carryforwards will expire in 2018
through 2020, if they were to remain unused at that time.
FINANCIAL CONDITION
- -------------------
Total assets at December 31, 1999, were $31,542,852, an increase of $19,278,835,
or 157%, when compared to $12,264,017 at December 31, 1998. Deposits increased
to $26,603,468 at December 31, 1999, an increase of $20,611,919, or 344%, from
$5,991,549 at the same date in 1998. The increased deposits were used primarily
to fund loan growth and to invest in U.S. government agency securities. Loans
increased by $22,506,122, to $23,371,219 at year-end 1999, from $865,097 at
year-end 1998. Additionally, the Bank purchased approximately $6,000,000 of
callable U.S. government agency securities for its available-for-sale portfolio
in the second quarter of 1999 to enhance overall yield. The maturities of these
securities range from April
26.
<PAGE> 26
2001 to October 2003. During 1999, cash and cash equivalents decreased to
$1,437,616 from $10,391,933 as interest bearing deposits in banks were shifted
to higher yielding securities and loans.
LOANS
- -----
Total loans grew $22,506,122 in 1999, to $23,371,219 at December 31, 1999,
compared to $865,097 at December 31, 1998. The net growth in the loan portfolio
during 1999 was comprised of $17,978,136 in commercial loans, $1,563,911 in
residential mortgage and construction loans, $1,969,043 in home equity loans,
$923,394 in consumer installment loans and $71,638 in credit card loans. As
expected by management, the bank's loan portfolio is heavily weighted toward
commercial loans to small businesses in the bank's market area. During 1999, the
bank originated and sold approximately $1,863,000 of fixed rate first mortgage
loans, including the related loan servicing. At December 31, 1999, the Bank's
loan-to-deposit ratio was 87.8%. Management expects loan demand to remain
strong, especially in the commercial loan segment, and anticipates the
loan-to-deposit ratio to increase to approximately 90% during the coming year.
DEPOSITS
- --------
Total deposits were $26,603,468 at December 31, 1999, compared with $5,991,549
the year before. At year-end 1999, $3,639,186, or 13.7% of the bank's total
deposits are in noninterest bearing demand deposit accounts, and $2,132,099, or
8.0% are in interest-bearing demand accounts. Savings accounts total
$11,107,154, or 41.8% of the bank's total deposits, and money market accounts
are $6,960,429, or 26.2%. Time deposits (certificates of deposit and IRAs) total
$2,764,600, or 10.4% of total deposits. This mix of deposits reflects
management's strategy to build multiple relationships with each customer, and to
minimize the bank's reliance on time deposits. Management expects deposits to
continue to grow during 2000 as the bank continues to attract new customers.
LIQUIDITY
- ---------
Liquidity relates primarily 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 receiving deposits from customers and, to a lesser extent, repayment of
loan principal and the interest 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. Assets available to satisfy those needs
include cash and due from banks, federal funds sold, interest-bearing deposits
in other banks, and available-for-sale investment securities. These assets are
commonly referred to as liquid assets.
27.
<PAGE> 27
Liquid assets were $7,329,956 at December 31, 1999, compared to $10,391,933 at
December 31, 1998. The decrease in liquid assets is due primarily to loan demand
outpacing deposit growth in 1999. Management expects loan demand to remain
strong and to continue to exceed deposit growth. If additional liquidity is
needed, the bank has several possible funding sources, including purchasing
federal funds, Federal Home Loan Bank advances, acquiring brokered deposits, and
borrowing under lines of credit. At December 31, 1999, these credit facilities
aggregated approximately $4,700,000.
INTEREST RATE SENSITIVITY/GAP
- -----------------------------
At year-end 1999, approximately 43.4% of the interest-bearing assets on the
Bank's balance sheet mature or reprice in one year or less. The bank currently
has one long-term fixed rate loan of $47,841 with a maturity greater than 10
years. Nearly all of the interest-bearing liabilities are variable-rate core
deposits. As of December 31, 1999, the Bank has approximately $12,865,000 of
assets and $22,181,000 of liabilities that mature or are able to reprice in one
year.
CAPITAL RESOURCES
- -----------------
Total shareholders' equity at December 31, 1999, was $4,868,243, compared with
$5,691,878 at December 31, 1998. The decrease of $823,635 was the result of the
net loss of $717,921 in 1999, and an unrealized loss of $105,714 on available
for sale securities.
Banking regulators have established minimum capital ratios for banks and bank
holding companies. 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 12
in the Company's consolidated financial statements for a more complete
discussion of risk-based capital. The Bank exceeded the applicable minimum
regulatory capital requirements at December 31, 1999 and 1998, and was
considered to be well-capitalized under the regulatory guidelines. Additionally,
under the terms of the Bank's approval order from the State of Ohio, the Bank is
required to maintain a minimum ratio of its shareholders' equity to total assets
of at least 9% during its first three years of operation (through late 2001). At
December 31, 1999, the Bank's ratio of shareholders' equity to total assets was
15.24%. Based on management's projections of continuing strong growth of the
bank, it is anticipated that the Bank will need additional capital in late 2000
to maintain this requirement. One possible source of additional capital for the
bank would be from the Company's raising additional capital through a limited
stock offering.
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
12. No cash or other dividends were declared or paid during the periods ended
December 31, 1999 and 1998.
28.
<PAGE> 28
As of December 31, 1999, 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 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.
YEAR 2000
- ---------
Throughout 1999, management devoted significant time and resources to addressing
the Year 2000 issue in accordance with guidelines issued by the Federal
Financial Institutions Examination Council (FFIEC). The Company spent
approximately $6,500 related to Year 2000 issues. Management believes that it
has successfully managed the transition to Year 2000, and, to date, has
experienced no adverse effects as a result of the century date change.
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, the interest rate environment, competitive
conditions in the financial services industry, changes in law, government
policies and regulations, and rapidly changing technology affecting financial
services.
29.
<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, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,263,553
<INT-BEARING-DEPOSITS> 8,063
<FED-FUNDS-SOLD> 166,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,998,054
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 23,371,219
<ALLOWANCE> 307,000
<TOTAL-ASSETS> 31,542,852
<DEPOSITS> 26,603,468
<SHORT-TERM> 0
<LIABILITIES-OTHER> 71,141
<LONG-TERM> 0
0
0
<COMMON> 320,267
<OTHER-SE> 4,547,976
<TOTAL-LIABILITIES-AND-EQUITY> 31,542,852
<INTEREST-LOAN> 840,495
<INTEREST-INVEST> 219,547
<INTEREST-OTHER> 443,669
<INTEREST-TOTAL> 1,503,711
<INTEREST-DEPOSIT> 669,607
<INTEREST-EXPENSE> 669,655
<INTEREST-INCOME-NET> 834,056
<LOAN-LOSSES> 295,300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,318,614
<INCOME-PRETAX> (717,921)
<INCOME-PRE-EXTRAORDINARY> (717,921)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (717,921)
<EPS-BASIC> (2.24)
<EPS-DILUTED> (2.24)
<YIELD-ACTUAL> 3.52
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,700
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 307,000
<ALLOWANCE-DOMESTIC> 307,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,763
</TABLE>
