Attached files
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EXCEL - IDEA: XBRL DOCUMENT - WESTERN RESERVE BANCORP INC | Financial_Report.xls |
EX-31.2 - EX-31.2 - WESTERN RESERVE BANCORP INC | dex312.htm |
EX-31.1 - EX-31.1 - WESTERN RESERVE BANCORP INC | dex311.htm |
EX-32.2 - EX-32.2 - WESTERN RESERVE BANCORP INC | dex322.htm |
EX-32.1 - EX-32.1 - WESTERN RESERVE BANCORP INC | dex321.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period ended June 30, 2011
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 000-51264
WESTERN RESERVE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Ohio | 31-1566623 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
4015 Medina Road, Suite 100, P.O. Box 585, Medina, Ohio 44256
(Address of principal executive offices)
(330) 764-3131
Registrants telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such items). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] | Accelerated filer [ ] | |||||
Non-accelerated filer [ ] | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
586,648 shares of common stock, no par value, $1.00 stated value as of August 9, 2011.
Table of Contents
FORM 10-Q
Three and six months ended June 30, 2011
PART I--Financial Information | ||||||
Page | ||||||
ITEM 1 |
||||||
Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 |
3 | |||||
4 | ||||||
5 | ||||||
Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2011 and 2010 |
6 | |||||
7 | ||||||
ITEM 2 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
27 | ||||
ITEM 3 |
N/A | |||||
ITEM 4 |
44 | |||||
45 | ||||||
49 |
2
Table of Contents
CONSOLIDATED BALANCE SHEETS
(unaudited) June 30, 2011 |
December 31, 2010 |
|||||||
ASSETS |
||||||||
Cash and due from financial institutions |
$ | 2,998,471 | $ | 2,343,069 | ||||
Interest-bearing deposits in other financial institutions |
14,603,905 | 11,923,425 | ||||||
Federal funds sold |
345,000 | 230,000 | ||||||
|
|
|
|
|||||
Cash and cash equivalents |
17,947,376 | 14,496,494 | ||||||
Securities available for sale |
11,808,913 | 12,993,197 | ||||||
Loans held for sale |
0 | 236,000 | ||||||
Loans, net of allowance of $3,960,646 and $4,544,316 |
152,504,449 | 154,960,478 | ||||||
Restricted stock |
966,100 | 966,100 | ||||||
Other real estate owned |
1,072,386 | 991,450 | ||||||
Premises and equipment, net |
931,997 | 1,029,685 | ||||||
Bank owned life insurance |
2,483,914 | 2,434,183 | ||||||
Prepaid Federal Deposit Insurance Corporation premiums |
471,043 | 618,005 | ||||||
Accrued interest receivable and other assets |
2,789,519 | 2,838,804 | ||||||
|
|
|
|
|||||
$ | 190,975,697 | $ | 191,564,396 | |||||
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Deposits |
||||||||
Noninterest-bearing |
$ | 22,646,946 | $ | 22,934,531 | ||||
Interest-bearing |
148,254,065 | 148,704,510 | ||||||
|
|
|
|
|||||
Total deposits |
170,901,011 | 171,639,041 | ||||||
Federal Home Loan Bank advances |
1,500,000 | 1,900,000 | ||||||
Accrued interest payable and other liabilities |
663,980 | 688,299 | ||||||
|
|
|
|
|||||
Total Liabilities |
173,064,991 | 174,227,340 | ||||||
Shareholders Equity |
||||||||
Cumulative preferred stock, no par value, $1,000 per share liquidation value: |
||||||||
Series A, fixed rate, 4,700 shares authorized and issued at June 30, 2011 and December 31, 2010 |
4,700,000 | 4,700,000 | ||||||
Discount on Series A preferred stock |
(174,103 | ) | (204,381 | ) | ||||
Series B, fixed rate, 235 shares authorized and issued at June 30, 2011 and December 31, 2010 |
235,000 | 235,000 | ||||||
Premium on Series B preferred stock |
16,987 | 19,941 | ||||||
Common stock, no par value, $1 stated value, 1,500,000 shares authorized, 586,648 and 586,084 shares issued and outstanding as of June 30, 2011 and December 31, 2010 |
586,648 | 586,084 | ||||||
Additional paid-in capital |
9,987,883 | 9,981,912 | ||||||
Retained earnings |
2,265,539 | 1,809,618 | ||||||
Accumulated other comprehensive income |
292,752 | 208,882 | ||||||
|
|
|
|
|||||
Total Shareholders Equity |
17,910,706 | 17,337,056 | ||||||
|
|
|
|
|||||
$ | 190,975,697 | $ | 191,564,396 | |||||
|
|
|
|
See accompanying notes to consolidated financial statements.
3
Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest and dividend income |
||||||||||||||||
Loans, including fees |
$ | 2,017,920 | $ | 2,151,507 | $ | 4,071,473 | $ | 4,283,431 | ||||||||
Securities: |
||||||||||||||||
Taxable |
62,959 | 54,081 | 132,019 | 112,109 | ||||||||||||
Tax exempt |
42,433 | 44,460 | 87,024 | 88,843 | ||||||||||||
Dividends on restricted stock |
11,537 | 11,148 | 23,854 | 21,502 | ||||||||||||
Federal funds sold and short-term investments |
6,755 | 14,261 | 11,728 | 23,620 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
2,141,604 | 2,275,457 | 4,326,098 | 4,529,505 | |||||||||||||
Interest expense |
||||||||||||||||
Deposits |
406,830 | 556,221 | 820,465 | 1,111,831 | ||||||||||||
Borrowings |
17,374 | 20,395 | 33,945 | 51,264 | ||||||||||||
|
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|
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|
|
|||||||||
424,204 | 576,616 | 854,410 | 1,163,095 | |||||||||||||
|
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|
|
|
|
|
|
|||||||||
Net interest income |
1,717,400 | 1,698,841 | 3,471,688 | 3,366,410 | ||||||||||||
Provision for loan losses |
131,699 | 781,699 | 139,834 | 1,567,529 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income after provision for loan losses |
1,585,701 | 917,142 | 3,331,854 | 1,798,881 | ||||||||||||
Noninterest income |
||||||||||||||||
Service charges on deposit accounts |
45,061 | 46,878 | 88,074 | 97,942 | ||||||||||||
Net gains on sales of loans |
4,535 | 14,363 | 11,141 | 28,668 | ||||||||||||
Net gain on sales of available for sale securities |
3,934 | 0 | 3,934 | 0 | ||||||||||||
Other |
84,409 | 73,616 | 157,519 | 153,785 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
137,939 | 134,857 | 260,668 | 280,395 | |||||||||||||
Noninterest expense |
||||||||||||||||
Salaries and employee benefits |
590,329 | 589,856 | 1,185,209 | 1,224,802 | ||||||||||||
Occupancy and equipment |
221,782 | 226,888 | 446,728 | 442,360 | ||||||||||||
Federal deposit insurance |
67,288 | 76,395 | 162,413 | 148,240 | ||||||||||||
Data processing |
97,757 | 94,523 | 188,644 | 188,177 | ||||||||||||
Professional fees |
94,939 | 61,380 | 150,883 | 128,629 | ||||||||||||
Taxes other than income and payroll |
54,083 | 48,466 | 108,096 | 98,631 | ||||||||||||
Directors fees |
22,200 | 36,500 | 49,600 | 105,635 | ||||||||||||
Collection and other real estate owned |
82,541 | 32,671 | 189,820 | 113,986 | ||||||||||||
Marketing and community relations |
55,947 | 49,110 | 90,101 | 88,298 | ||||||||||||
Other |
91,983 | 113,288 | 159,987 | 178,528 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
1,378,849 | 1,329,077 | 2,731,481 | 2,717,286 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
344,791 | (277,078 | ) | 861,041 | (638,010 | ) | ||||||||||
Income tax expense (benefit) |
96,240 | (116,311 | ) | 249,721 | (260,808 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 248,551 | $ | (160,767 | ) | $ | 611,320 | $ | (377,202 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Preferred stock dividends and amortization, net |
77,699 | 77,700 | 155,399 | 155,400 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) available to common shareholders |
$ | 170,852 | $ | (238,467 | ) | $ | 455,921 | $ | (532,602 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings (loss) per common share: |
||||||||||||||||
Basic |
$ | 0.29 | $ | (0.41 | ) | $ | 0.78 | $ | (0.91 | ) | ||||||
|
|
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|
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|
|||||||||
Diluted |
$ | 0.29 | $ | (0.41 | ) | $ | 0.78 | $ | (0.91 | ) | ||||||
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|
|
|||||||||
Average shares outstanding (basic) |
586,417 | 585,075 | 586,253 | 584,904 | ||||||||||||
|
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|
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|
|||||||||
Average shares outstanding (diluted) |
586,417 | 585,075 | 586,253 | 584,904 | ||||||||||||
|
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|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
Table of Contents
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | 248,551 | $ | (160,767 | ) | $ | 611,320 | $ | (377,202 | ) | ||||||
Other comprehensive income, net of tax: |
||||||||||||||||
Unrealized gains on securities arising during the period |
82,361 | 27,128 | 87,804 | 78,016 | ||||||||||||
Less: reclassification adjustment for gains included in net income |
(3,934 | ) | 0 | (3,934 | ) | 0 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other comprehensive income (loss) |
78,427 | 27,128 | 83,870 | 78,016 | ||||||||||||
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|
|
|
|
|
|
|||||||||
Comprehensive income (loss) |
$ | 326,978 | $ | (133,639 | ) | $ | 695,190 | $ | (299,186 | ) | ||||||
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net income (loss) |
$ | 611,320 | $ | (377,202 | ) | |||
Adjustments to reconcile net income to net cash from operating activities: |
||||||||
Provision for loan losses |
139,834 | 1,567,529 | ||||||
Depreciation |
97,381 | 77,927 | ||||||
Net amortization (accretion) of securities |
15,828 | (5,522 | ) | |||||
Net gain on sale of securities available for sale |
(3,934 | ) | 0 | |||||
Stock-based compensation |
365 | 35,748 | ||||||
Loans originated for sale |
(517,000 | ) | (1,125,600 | ) | ||||
Proceeds from sales of loan originations |
764,141 | 1,844,268 | ||||||
Gains on sales of loans |
(11,141 | ) | (28,668 | ) | ||||
Loss on disposal of fixed assets |
561 | 3,408 | ||||||
Increase in cash surrender value of bank owned life insurance |
(49,731 | ) | (50,177 | ) | ||||
Net change in other assets and other liabilities |
128,723 | 54,421 | ||||||
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|
|||||
Net cash from operating activities |
1,176,348 | 1,996,132 | ||||||
Cash flows from investing activities |
||||||||
Available for sale securities: |
||||||||
Purchases |
(402,127 | ) | (270,880 | ) | ||||
Sales |
693,488 | 0 | ||||||
Maturities, repayments and calls |
1,008,104 | 799,618 | ||||||
Purchase of restricted stock |
0 | (139,200 | ) | |||||
Net decrease (increase) in loans |
2,235,259 | 892,279 | ||||||
Purchases of premises and equipment |
(254 | ) | (142,392 | ) | ||||
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|
|||||
Net cash from investing activities |
3,534,470 | 1,139,425 | ||||||
Cash flows from financing activities |
||||||||
Net (decrease) increase in deposits |
(738,030 | ) | 7,022,002 | |||||
Repayments of FHLB advances |
(1,400,000 | ) | (1,500,000 | ) | ||||
Proceeds from FHLB advances |
1,000,000 | 1,134,386 | ||||||
Dividends on preferred stock |
(128,075 | ) | (128,075 | ) | ||||
Proceeds from issuance of common stock under ESPP |
6,170 | 7,285 | ||||||
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|
|||||
Net cash from financing activities |
(1,259,935 | ) | 6,535,598 | |||||
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|
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Change in cash and cash equivalents |
3,450,883 | 9,671,155 | ||||||
Cash and cash equivalents at beginning of period |
14,496,494 | 18,178,601 | ||||||
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|
|||||
Cash and cash equivalents at end of period |
$ | 17,947,376 | $ | 27,849,756 | ||||
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|
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Supplemental cash flow information: |
||||||||
Interest paid |
$ | 855,667 | $ | 1,163,336 | ||||
Income taxes paid |
140,000 | 35,000 | ||||||
Supplemental disclosure of noncash investing activities: |
||||||||
Transfer from loans to other real estate owned |
$ | 80,936 | $ | 0 | ||||
Transfer from loans to other repossessed assets |
0 | 91,685 | ||||||
Transfer from loans to loans held for sale |
0 | 0 |
See accompanying notes to consolidated financial statements
6
Table of Contents
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: Western Reserve Bancorp, Inc. (the Company) was incorporated under the laws of the State of Ohio on February 27, 1997. The Company is a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended.
Western Reserve Bank (the Bank), which commenced operations on November 6, 1998, is chartered by the State of Ohio, and is a member of the Federal Reserve System. The Bank operates full-service locations in Medina and Brecksville, Ohio and a satellite office in a retirement community in Medina. Customer deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (FDIC).
Nature of Business: The Bank offers a full range of traditional banking services through full-service offices in Medina and Brecksville to consumers and businesses located primarily in Medina and Cuyahoga and surrounding counties. All of the financial services provided by the Bank are considered by management to be aggregated in one reportable operating segment, commercial banking.
Principles of Consolidation: The consolidated financial statements include the accounts of Western Reserve Bancorp, Inc. and its wholly-owned subsidiary, Western Reserve Bank. All material intercompany accounts and transactions have been eliminated.
Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and related disclosures, and actual results could differ. The allowance for loan losses, deferred tax assets, benefit plan accruals and the fair value of other financial instruments are particularly subject to change.
Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. It is the opinion of management that all adjustments necessary for a fair presentation have been made and that all adjustments were of a normal recurring nature. The Annual Report of the Company for the year ended December 31, 2010 contains consolidated financial statements and related notes, which should be read in conjunction with the accompanying consolidated financial statements.
Earnings per Common Share: Basic earnings per common share equal net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options. Earnings per common share are computed as follows:
7
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) |
$ | 248,551 | $ | (160,767 | ) | $ | 611,320 | $ | (377,202 | ) | ||||||
Preferred stock dividends and amortization, net |
(77,699 | ) | (77,700 | ) | (155,399 | ) | (155,400 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) available to common shareholders |
170,852 | (238,467 | ) | 455,921 | (532,602 | ) | ||||||||||
Denominator: |
||||||||||||||||
Denominator for basic earnings per share available to common shareholders-weighted average shares |
586,417 | 585,075 | 586,253 | 584,904 | ||||||||||||
Effect of dilutive shares: |
||||||||||||||||
Nonqualified stock options |
0 | 0 | 0 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Denominator for diluted earnings per share available to common shareholders |
586,417 | 585,075 | 586,253 | 584,904 | ||||||||||||
|
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|
|||||||||
Basic earnings (loss) per common share |
$ | 0.29 | $ | (0.41 | ) | $ | 0.78 | $ | (0.91 | ) | ||||||
|
|
|
|
|
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|
|
|||||||||
Diluted earnings (loss) per common share |
$ | 0.29 | $ | (0.41 | ) | $ | 0.78 | $ | (0.91 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Stock options not considered in computing diluted earnings per common share because they were antidilutive |
98,137 | 98,137 | 98,137 | 98,137 |
Income Taxes: The provision for income tax for the first six months of 2011 was $249,721 on pre-tax income of $861,041 as compared to a benefit of $260,808 on pre-tax loss of ($638,010) for the same period a year ago. The provision for federal income tax differs from pretax net income (loss) multiplied by the Companys effective tax rate due to the Companys tax exempt income which remained relatively consistent with the first six months of the prior year. The Company and its subsidiary file consolidated income tax returns.
The Company uses an asset and liability approach to financial accounting and reporting for income taxes. Deferred federal tax assets and liabilities are recognized for the expected future tax consequences of existing differences between financial statement and tax bases of existing assets and liabilities. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the related tax benefits will not be realized. When determining the amount of deferred tax assets that are more likely than not to be realized, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income, and projected reversal of deferred tax items. Specifically, management considered the Companys history of profitability, its history of paying income taxes, the trends in credit quality in its loan portfolio, and projections for 2011 and 2012. In managements opinion, it is more likely than not that the tax benefits will be realized, therefore no valuation allowance has been established at June 30, 2011.
Reclassifications: For comparative purposes, certain amounts in the 2010 consolidated financial statements have been reclassified to conform to the 2011 presentation.
8
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Adoption of New Accounting Standards:
In January 2010, the Financial Accounting Standards Board (FASB) issued guidance increasing fair value disclosure and to clarify some existing disclosure requirements about fair value measurement. It requires the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. This new disclosure requirement was adopted by the Company during the current period. The adoption of this standard did not have a significant impact on the Companys consolidated financial statements.
Accounting Standards Updates:
ASU No. 2011-02, Receivables (Topic 310) A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructurings constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 will be effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. Adoption of ASU 2011-02 is not expected to have a significant impact on the Companys financial statements.
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs, (ASU 2011-04). The amendments in ASU 2011-04 generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. ASU 2011-04 results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption to have a material impact on its consolidated statements of financial position, results of operation or cash flows.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, (ASU 2011-5). Under ASU 2011-5, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-5 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders equity. The amendments are effective for fiscal years, and interim periods within those years, beginning after
9
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
December 15, 2011. The amendments in ASU 2011-5 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.
NOTE 2 SECURITIES
The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
June 30, 2011 |
||||||||||||||||
Mortgage-backed residential: |
||||||||||||||||
Guaranteed by GNMA |
$ | 4,156,709 | $ | 33,031 | $ | (6,388 | ) | $ | 4,183,352 | |||||||
Issued by FHLMC |
998,387 | 66,287 | 0 | 1,064,674 | ||||||||||||
Issued by FNMA |
1,490,662 | 128,027 | 0 | 1,618,689 | ||||||||||||
Tax-free municipal |
4,466,180 | 221,296 | 0 | 4,687,476 | ||||||||||||
Taxable municipal |
253,411 | 1,311 | 0 | 254,722 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 11,365,349 | $ | 449,952 | $ | (6,388 | ) | $ | 11,808,913 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2010 |
||||||||||||||||
Mortgage-backed residential: |
||||||||||||||||
Guaranteed by GNMA |
$ | 4,048,961 | $ | 2,936 | $ | (45,584 | ) | $ | 4,006,313 | |||||||
Issued by FHLMC |
1,556,847 | 80,434 | 0 | 1,637,281 | ||||||||||||
Issued by FNMA |
1,927,112 | 131,517 | (174 | ) | 2,058,455 | |||||||||||
Tax-free municipal |
4,890,165 | 158,571 | (3,258 | ) | 5,045,478 | |||||||||||
Taxable municipal |
253,625 | 0 | (7,955 | ) | 245,670 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 12,676,710 | $ | 373,458 | $ | (56,971 | ) | $ | 12,993,197 | ||||||||
|
|
|
|
|
|
|
|
All mortgage-backed securities are residential mortgage-backed securities issued by U.S. government-sponsored entities.
10
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 2 SECURITIES (continued)
The proceeds from sales and calls of securities and the associated gains and losses are listed below:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Proceeds of sales |
$ | 693,488 | $ | 0 | $ | 693,488 | $ | 0 | ||||||||
Proceeds of calls |
0 | 0 | 200,000 | 0 | ||||||||||||
Gross gains |
23,158 | 0 | 23,158 | 0 | ||||||||||||
Gross losses |
(19,224 | ) | 0 | (19,224 | ) | 0 |
The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without prepayment penalties. Securities not due at a single maturity date are shown separately.
Amortized Cost |
Fair Value |
|||||||
Less than one year |
$ | 361,570 | $ | 366,710 | ||||
One to five years |
453,057 | 472,890 | ||||||
Five to ten years |
3,243,715 | 3,426,222 | ||||||
Ten to fifteen years |
661,249 | 676,376 | ||||||
Mortgage-backed residential |
6,645,758 | 6,866,715 | ||||||
|
|
|
|
|||||
$ | 11,365,349 | $ | 11,808,913 | |||||
|
|
|
|
Securities pledged to secure public deposits at June 30, 2011 and December 31, 2010 had carrying amounts of $5,171,641 and $6,588,820, respectively.
11
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 2 SECURITIES (continued)
The following table summarizes securities with unrealized losses at June 30, 2011 and December 31, 2010, aggregated by major security type and length of time in a continuous unrealized loss position:
Less than 12 Months | 12 Months or more | Total | ||||||||||||||||||||||
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
|||||||||||||||||||
June 30, 2011 |
||||||||||||||||||||||||
Guaranteed by GNMA |
$ | 920,111 | $ | (6,388 | ) | $ | 0 | $ | 0 | $ | 920,111 | $ | (6,388 | ) | ||||||||||
Issued by FNMA |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Tax-free municipal |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Taxable municipal |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 920,111 | $ | (6,388 | ) | $ | 0 | $ | 0 | $ | 920,111 | $ | (6,388 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Guaranteed by GNMA |
$ | 3,499,522 | $ | (45,584 | ) | $ | 0 | $ | 0 | $ | 3,499,522 | $ | (45,584 | ) | ||||||||||
Issued by FNMA |
48,751 | (174 | ) | 0 | 0 | 48,751 | (174 | ) | ||||||||||||||||
Tax-free municipal |
396,740 | (3,258 | ) | 0 | 0 | 396,740 | (3,258 | ) | ||||||||||||||||
Taxable municipal |
245,670 | (7,955 | ) | 0 | 0 | 245,670 | (7,955 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 4,190,683 | $ | (56,971 | ) | $ | 0 | $ | 0 | $ | 4,190,683 | $ | (56,971 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011 and December 31, 2010, there were no securities that were in an unrealized loss position greater than twelve months. Management has the intent and ability to hold the securities that were in an unrealized loss position for the foreseeable future and did not believe it was likely the Company would be required to sell the securities before recovery of their amortized cost.
At June 30, 2011 and December 31, 2010, there were no holdings of securities of any one issuer, other than Ginnie Mae, Fannie Mae and Freddie Mac, in an amount greater than 10% of shareholders equity. The U.S. Government has affirmed its support for the obligations of these entities.
12
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 3 LOANS
The composition of the loan portfolio at June 30, 2011 and December 31, 2010 was as follows:
June 30, 2011 |
December 31, 2010 |
|||||||
Commercial real estate |
$ | 109,107,050 | $ | 113,451,159 | ||||
Commercial business |
28,720,836 | 27,141,540 | ||||||
Residential mortgages: |
||||||||
Home equity lines of credit |
11,442,728 | 11,620,756 | ||||||
1-4 family residential |
1,101,027 | 806,411 | ||||||
Consumer: |
||||||||
Installment |
4,980,522 | 4,926,165 | ||||||
Purchased auto loans |
1,112,932 | 1,558,763 | ||||||
|
|
|
|
|||||
156,465,095 | 159,504,794 | |||||||
Less allowance for loan losses |
3,960,646 | 4,544,316 | ||||||
|
|
|
|
|||||
$ | 152,504,449 | $ | 154,960,478 | |||||
|
|
|
|
The following table presents the activity in the allowance for loans losses by portfolio segment for the three and six months ended June 30, 2011:
Three months ended June 30, 2011 |
||||||||||||||||||||||||
Allowance for loan losses: | Commercial Real Estate |
Commercial Business |
Residential | Consumer | Unallocated | Total | ||||||||||||||||||
Beginning Balance |
$ | 3,382,377 | $ | 513,518 | $ | 152,631 | $ | 33,500 | $ | 424,792 | $ | 4,506,818 | ||||||||||||
Loans charged off |
(568,815 | ) | (101,408 | ) | (27,047 | ) | (5,830 | ) | 0 | (703,100 | ) | |||||||||||||
Recoveries |
18,718 | 6,511 | 0 | 0 | 0 | 25,229 | ||||||||||||||||||
Provision for loan losses |
320,855 | 44,532 | 10,795 | 7,734 | (252,217 | ) | 131,699 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ending allowance balance |
$ | 3,153,135 | $ | 463,153 | $ | 136,379 | $ | 35,404 | $ | 172,575 | $ | 3,960,646 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Six months ended June 30, 2011 |
||||||||||||||||||||||||
Allowance for loan losses: | Commercial Real Estate |
Commercial Business |
Residential | Consumer | Unallocated | Total | ||||||||||||||||||
Beginning Balance |
$ | 3,466,505 | $ | 666,437 | $ | 162,372 | $ | 34,776 | $ | 214,226 | $ | 4,544,316 | ||||||||||||
Loans charged off |
(612,231 | ) | (101,408 | ) | (46,108 | ) | (9,352 | ) | 0 | (769,099 | ) | |||||||||||||
Recoveries |
31,321 | 13,842 | 0 | 432 | 0 | 45,595 | ||||||||||||||||||
Provision for loan losses |
267,540 | (115,718 | ) | 20,115 | 9,548 | (41,651 | ) | 139,834 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ending allowance balance |
$ | 3,153,135 | $ | 463,153 | $ | 136,379 | $ | 35,404 | $ | 172,575 | $ | 3,960,646 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the activity in the allowance for loan losses for the three and six months ended June 30, 2010:
Three months ended June 30, 2010 |
Six months ended June 30, 2010 |
|||||||
Beginning balance |
$ | 2,322,328 | $ | 2,316,715 | ||||
Provision for loan losses |
781,699 | 1,567,529 | ||||||
Loans charged off |
(46,121 | ) | (827,694 | ) | ||||
Recoveries |
294 | 1,650 | ||||||
|
|
|
|
|||||
Ending balance |
$ | 3,058,200 | $ | 3,058,200 | ||||
|
|
|
|
13
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 3 LOANS (continued)
There were no material changes to the Companys accounting policies or methodology for the periods indicated. The recorded investment in loans includes the unpaid principal balance and unamortized loan origination fees and costs, but excludes accrued interest receivable which is not considered to be material.
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2011 and December 31, 2010.
June 30, 2011 | Commercial Real Estate |
Commercial Business |
Residential Mortgages |
Consumer | Unallocated | Total | ||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 1,222,449 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 1,222,449 | ||||||||||||
Collectively evaluated for impairment |
1,930,686 | 463,153 | 136,379 | 35,404 | 172,575 | 2,738,197 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ending allowance balance |
$ | 3,153,135 | $ | 463,153 | $ | 136,379 | $ | 35,404 | $ | 172,575 | $ | 3,960,646 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Loans: |
||||||||||||||||||||||||
Loans individually evaluated for impairment |
$ | 7,055,858 | $ | 187,482 | $ | 334,686 | $ | 0 | $ | 0 | $ | 7,578,026 | ||||||||||||
Loans collectively evaluated for impairment |
102,051,192 | 28,533,354 | 12,209,069 | 6,093,454 | 0 | 148,887,069 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ending loans balance |
$ | 109,107,050 | $ | 28,720,836 | $ | 12,543,755 | $ | 6,093,454 | $ | 0 | $ | 156,465,095 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2010 | Commercial Real Estate |
Commercial Business |
Residential Mortgages |
Consumer | Unallocated | Total | ||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 1,574,734 | $ | 101,258 | $ | 28,303 | $ | 0 | $ | 0 | $ | 1,704,295 | ||||||||||||
Collectively evaluated for impairment |
1,891,771 | 565,179 | 134,069 | 34,776 | 214,226 | 2,840,021 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ending allowance balance |
$ | 3,466,505 | $ | 666,437 | $ | 162,372 | $ | 34,776 | $ | 214,226 | $ | 4,544,316 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Loans: |
||||||||||||||||||||||||
Loans individually evaluated for impairment |
$ | 8,429,959 | $ | 436,289 | $ | 292,483 | $ | 0 | $ | 0 | $ | 9,158,731 | ||||||||||||
Loans collectively evaluated for impairment |
105,021,200 | 26,705,251 | 12,134,684 | 6,484,928 | 0 | 150,346,063 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ending loans balance |
$ | 113,451,159 | $ | 27,141,540 | $ | 12,427,167 | $ | 6,484,928 | $ | 0 | $ | 159,504,794 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011 and December 31, 2010, loans totaling $6,092,562 and $7,546,298, respectively, were in nonaccrual status, defined as loans which management deems the full repayments to be in doubt, typically if payments are past due more than 90 days. Interest income is not recorded on these loans.
14
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 3 LOANS (continued)
The following table presents loans individually evaluated for impairment by class of loans as of and for the three and six months ended June, 2011:
Average Recorded Investment for the: |
||||||||||||||||||||
June 30, 2011 |
Unpaid Principal Balance |
Recorded Investment |
Allowance for Loan Losses Allocated |
Three Months ended June 30, 2011 |
Six Months ended June 30, 2011 |
|||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial real estate |
$ | 2,611,489 | $ | 2,771,318 | $ | 0 | $ | 2,200,579 | $ | 2,070,082 | ||||||||||
Commercial business |
187,482 | 187,482 | 0 | 189,885 | 196,853 | |||||||||||||||
Residential mortgage: |
||||||||||||||||||||
Home equity line of credit |
239,068 | 212,021 | 0 | 232,306 | 235,446 | |||||||||||||||
1-4 family residential |
122,665 | 122,665 | 0 | 86,384 | 86,963 | |||||||||||||||
Consumer: |
0 | 0 | ||||||||||||||||||
Installment |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Purchased auto loans |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial real estate |
5,246,434 | 4,284,540 | 1,222,449 | 4,153,112 | 4,419,299 | |||||||||||||||
Commercial business |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Residential mortgage: |
||||||||||||||||||||
Home equity line of credit |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
1-4 family residential |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Installment |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Purchased auto loans |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 8,407,138 | $ | 7,578,026 | $ | 1,222,449 | $ | 6,862,266 | $ | 7,008,643 | ||||||||||
|
|
|
|
|
|
|
|
The unpaid principal balance for purposes of this table includes $829,112 that has been partially charged off but not forgiven as of June 30, 2011.
15
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 3 LOANS (continued)
The following table presents information related to loans individually evaluated for impairment by class of loans as of December 31, 2010:
December 31, 2010 |
Unpaid Principal Balance |
Recorded Investment |
Allowance for Loan Losses |
|||||||||
With no related allowance recorded: |
||||||||||||
Commercial real estate |
$ | 3,854,343 | $ | 3,335,723 | $ | 0 | ||||||
Commercial business |
334,881 | 334,881 | 0 | |||||||||
Residential mortgage: |
||||||||||||
Home equity line of credit |
0 | 0 | 0 | |||||||||
1-4 family residential |
51,725 | 51,725 | 0 | |||||||||
Consumer: |
0 | 0 | ||||||||||
Installment |
0 | 0 | 0 | |||||||||
Purchased auto loans |
0 | 0 | 0 | |||||||||
With an allowance recorded: |
||||||||||||
Commercial real estate |
5,094,236 | 5,094,236 | 1,574,734 | |||||||||
Commercial business |
101,408 | 101,408 | 101,258 | |||||||||
Residential mortgage: |
||||||||||||
Home equity line of credit |
240,758 | 240,758 | 28,303 | |||||||||
1-4 family residential |
0 | 0 | 0 | |||||||||
Consumer: |
||||||||||||
Installment |
0 | 0 | 0 | |||||||||
Purchased auto loans |
0 | 0 | 0 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 9,677,351 | $ | 9,158,731 | $ | 1,704,295 | ||||||
|
|
|
|
|
|
The unpaid principal balance for purposes of this table includes $518,620 that has been partially charged off but not forgiven as of December 31, 2010. The average recorded investment in impaired loans was $7,649,218 for the year ended December 31, 2010. The average of individually impaired loans during the six months ended June 30, 2010 was $6,518,075. Interest income recognized during all periods was immaterial.
16
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 3 LOANS (continued)
The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of June 30, 2011 and December 31, 2010.
Nonaccrual | Loans Past Due Over 90 Days Still Accruing |
|||||||||||||||
June 30, 2011 |
December 31, 2010 |
June 30, 2011 |
December 31, 2010 |
|||||||||||||
Commercial real estate |
$ | 5,570,394 | $ | 6,866,564 | $ | 0 | $ | 0 | ||||||||
Commercial business |
187,482 | 387,251 | 0 | 0 | ||||||||||||
Residential mortgage: |
||||||||||||||||
Home equity line of credit |
212,021 | 240,758 | 0 | 0 | ||||||||||||
1-4 family residential |
122,665 | 51,725 | 0 | 0 | ||||||||||||
Consumer: |
||||||||||||||||
Installment |
0 | 0 | 0 | 0 | ||||||||||||
Purchased auto loans |
0 | 0 | 15,748 | 8,131 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 6,092,562 | $ | 7,546,298 | $ | 15,748 | $ | 8,131 | ||||||||
|
|
|
|
|
|
|
|
At June 30, 2011, there were $1,485,464 in restructured loans not included in nonaccrual loans, and $1,565,897 in restructured loans included in nonaccrual loans, all of which are considered impaired. At December 31, 2010, there were $1,612,433 in restructured loans not included in nonaccrual loans, and $1,566,748 in restructured loans included in nonaccrual loans, all of which were considered impaired. The restructured loans still on accrual status were performing in accordance with their modified terms.
Nonaccrual loans and loans past due 90 days or more and still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
The following tables present the aging of the recorded investment in past due loans by class of loans as of June 30, 2011 and December 31, 2010:
June 30, 2011 |
30 - 59 Days Past Due |
60 - 89 Days Past Due |
Over 90 Days Past Due |
Total Past Due | Not Past Due | Total | ||||||||||||||||||
Commercial real estate |
$ | 1,649,508 | $ | 89,021 | $ | 2,318,011 | $ | 4,056,540 | $ | 105,050,510 | $ | 109,107,050 | ||||||||||||
Commercial business |
91,176 | 58,299 | 169,911 | 319,386 | 28,401,450 | 28,720,836 | ||||||||||||||||||
Residential mortgage: |
||||||||||||||||||||||||
Home equity line of credit |
0 | 0 | 212,021 | 212,021 | 11,230,707 | 11,442,728 | ||||||||||||||||||
1-4 family residential |
0 | 0 | 122,665 | 122,665 | 978,362 | 1,101,027 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Installment |
0 | 0 | 0 | 0 | 4,980,522 | 4,980,522 | ||||||||||||||||||
Purchased auto loans |
2,040 | 0 | 15,748 | 17,788 | 1,095,144 | 1,112,932 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,742,724 | $ | 147,320 | $ | 2,838,356 | $ | 4,728,400 | $ | 151,736,695 | $ | 156,465,095 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011, included in loans not past due are $3,131,284 of the $6,092,562 of nonaccrual loans that are current in accordance with their original or modified contractual terms.
17
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 3 LOANS (continued)
December 31, 2010 |
30 - 59 Days Past Due |
60 - 89 Days Past Due |
Over 90 Days Past Due |
Total Past Due | Not Past Due | Total | ||||||||||||||||||
Commercial real estate |
244,449 | 0 | 2,485,133 | 2,729,582 | 110,721,577 | 113,451,159 | ||||||||||||||||||
Commercial business |
101,155 | 54,284 | 178,978 | 334,417 | 26,807,123 | 27,141,540 | ||||||||||||||||||
Residential mortgage: |
||||||||||||||||||||||||
Home equity line of credit |
0 | 0 | 0 | 0 | 11,620,756 | 11,620,756 | ||||||||||||||||||
1-4 family residential |
75,653 | 0 | 51,725 | 127,378 | 679,033 | 806,411 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Installment |
0 | 0 | 0 | 0 | 4,926,165 | 4,926,165 | ||||||||||||||||||
Purchased auto loans |
12,149 | 0 | 8,131 | 20,280 | 1,538,483 | 1,558,763 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 433,406 | $ | 54,284 | $ | 2,723,967 | $ | 3,211,657 | $ | 156,293,137 | $ | 159,504,794 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, included in loans not past due are $4,762,168 of the $7,546,298 of nonaccrual loans that are current in accordance with their original or modified contractual terms.
Troubled Debt Restructurings
Included in loans individually impaired as of June 30, 2011 are loans with a recorded investment of $3,051,361 whose terms have been modified in troubled debt restructurings (TDR.) Of this balance, $1,485,464 is accruing and $1,565,897 is considered nonaccrual. The Company has allocated reserves of $659,163 for the nonaccrual TDR loans. At December 31, 2010, the recorded investment of loans whose terms had been modified in troubled debt restructurings was $3,179,181. This included $1,612,433 of accruing loans and $1,566,748 of nonaccrual loans, with $279,960 of specific reserves for the nonaccrual TDR loans. There are no commitments to lend additional amounts to borrowers with loans that are classified as troubled debt restructurings at June 30, 2011 and December 31, 2010. The restructured loans are performing in accordance with their modified terms. Interest income recognized on impaired loans while considered impaired was immaterial for all periods.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, the underlying value of the collateral, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as all commercial real estate and commercial business loans. This analysis is performed at least annually, and more frequently if the Company has concerns about the status of a borrower. Loans that are rated Watch, Special Mention, Substandard or Doubtful receive increased monitoring, on at least a monthly basis.
The Company uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institutions credit position at some future date.
18
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 3 LOANS (continued)
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well- defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all of the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass-rated loans. Loans listed as not rated are included in groups of homogeneous loans. Loans graded other than pass are typically in industries displaying distress in the current economy. As the grades become more adverse, the related industry is likely displaying greater sensitivity to the current economic conditions and the borrowers financial strength may have deteriorated. Industries such as commercial real estate management and real estate development are particularly affected by current economic conditions.
Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
June 30, 2011 |
Pass | Special Mention | Substandard | Doubtful | Not Rated | Total | ||||||||||||||||||
Commercial real estate |
$ | 84,908,526 | $ | 10,109,235 | $ | 14,089,289 | $ | 0 | $ | 0 | $ | 109,107,050 | ||||||||||||
Commercial business |
25,537,202 | 1,549,391 | 1,634,243 | 0 | 0 | 28,720,836 | ||||||||||||||||||
Residential mortgage: |
||||||||||||||||||||||||
Home equity line of credit |
199,139 | 69,750 | 603,318 | 0 | 10,570,521 | 11,442,728 | ||||||||||||||||||
1-4 family residential |
0 | 72,562 | 50,103 | 0 | 978,362 | 1,101,027 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Installment |
53,990 | 0 | 0 | 0 | 4,926,532 | 4,980,522 | ||||||||||||||||||
Purchased auto loans |
0 | 0 | 0 | 0 | 1,112,932 | 1,112,932 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 110,698,857 | $ | 11,800,938 | $ | 16,376,953 | $ | 0 | $ | 17,588,347 | $ | 156,465,095 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2010 |
Pass | Special Mention | Substandard | Doubtful | Not Rated | Total | ||||||||||||||||||
Commercial real estate |
$ | 85,034,950 | $ | 10,717,741 | $ | 17,698,468 | $ | 0 | $ | 0 | $ | 113,451,159 | ||||||||||||
Commercial business |
24,023,215 | 1,229,339 | 1,888,986 | 0 | 0 | 27,141,540 | ||||||||||||||||||
Residential mortgage: |
||||||||||||||||||||||||
Home equity line of credit |
0 | 73,250 | 709,912 | 0 | 10,837,594 | 11,620,756 | ||||||||||||||||||
1-4 family residential |
0 | 0 | 51,725 | 0 | 754,686 | 806,411 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Installment |
0 | 0 | 0 | 0 | 4,926,165 | 4,926,165 | ||||||||||||||||||
Purchased auto loans |
0 | 0 | 0 | 0 | 1,558,763 | 1,558,763 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 109,058,165 | $ | 12,020,330 | $ | 20,349,091 | $ | 0 | $ | 18,077,208 | $ | 159,504,794 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
19
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 3 LOANS (continued)
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity.
Residential mortgage | Consumer | |||||||||||||||
June 30, 2011 |
Home equity lines of credit |
1-4 family residential |
Installment | Purchased auto loans |
||||||||||||
Performing |
$ | 11,230,707 | $ | 978,362 | $ | 4,980,522 | $ | 1,097,184 | ||||||||
Nonperforming |
212,021 | 122,665 | 0 | 15,748 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 11,442,728 | $ | 1,101,027 | $ | 4,980,522 | $ | 1,112,932 | ||||||||
|
|
|
|
|
|
|
|
Residential mortgage | Consumer | |||||||||||||||
December 31, 2010 |
Home equity lines of credit |
1-4 family residential |
Installment | Purchased auto loans |
||||||||||||
Performing |
$ | 11,379,998 | $ | 754,686 | $ | 4,926,165 | $ | 1,550,632 | ||||||||
Nonperforming |
240,758 | 51,725 | 0 | 8,131 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 11,620,756 | $ | 806,411 | $ | 4,926,165 | $ | 1,558,763 | ||||||||
|
|
|
|
|
|
|
|
The Company has no loans considered to be subprime.
NOTE 4 - DEPOSITS
Interest-bearing deposits at June 30, 2011 and December 31, 2010 were as follows:
June 30,
2011 |
December 31, 2010 |
|||||||
Interest-bearing demand |
$ | 11,867,670 | $ | 11,048,838 | ||||
Savings |
38,792,111 | 39,019,690 | ||||||
Money market |
30,001,983 | 30,463,427 | ||||||
Time under $100,000 |
28,873,929 | 28,641,574 | ||||||
Time $100,000 and over |
38,718,372 | 39,530,981 | ||||||
|
|
|
|
|||||
$ | 148,254,065 | $ | 148,704,510 | |||||
|
|
|
|
At June 30, 2011 and December 31, 2010, the Bank had $17,276,000 and $14,381,000, respectively, in national market certificates of deposit, primarily in amounts that qualify for FDIC insurance coverage.
NOTE 5 FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Federal Home Loan Bank (FHLB) advances were $1,500,000 and $1,900,000 at June 30, 2011 and December 31, 2010, respectively. The advances at June 30, 2011 are collateralized by approximately $51,345,000 of loans secured by real estate under a blanket lien agreement and $488,000 of FHLB
20
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 5 FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (continued)
stock. At June 30, 2011 borrowing capacity was $979,000 as a result of the repayment of a $1,000,000 advance on June 20, 2011. As of July 1, 2011, subsequent to a regular quarterly credit evaluation by the FHLB, the Companys available borrowing capacity increased to $16,471,000.
The Company has a $2,000,000 line of credit agreement with another financial institution to obtain funding to provide capital to the Bank as needed. The interest rate on the line is variable, at 50 basis points above the prime rate or LIBOR plus 3.00%, at the Companys option at the time the line is drawn. The line is secured by 100% of the stock of the Bank. There were no funds drawn on the line of credit at June 30, 2011 or December 31, 2010.
The Company has the ability to borrow under various other credit facilities that totaled $6,918,000 at June 30, 2011. Of this amount, $1,000,000 is available for short-term borrowing under an unsecured federal funds line through a correspondent bank at overnight borrowing rates and $5,918,000 is available from another correspondent bank secured by the Companys unpledged securities.
NOTE 6 STOCK-BASED COMPENSATION PLAN
The following is the stock option activity for the period indicated:
Six months ended June 30, 2011 | ||||||||
Shares | Weighted Average Exercise Price |
|||||||
Options outstanding, beginning of period |
98,137 | $ | 18.65 | |||||
Forfeited |
0 | $ | 0.00 | |||||
Exercised |
0 | $ | 0.00 | |||||
Granted
|
|
0
|
|
$
|
0.00
|
| ||
|
|
|||||||
Options outstanding, end of period |
98,137 | $ | 18.65 | |||||
|
|
|||||||
Options exercisable, end of period |
97,637 | $ | 18.60 |
Intrinsic value is defined as the excess of the price of the Companys stock over the exercise price of the option. The market price of the Companys stock was less than the exercise price of the options outstanding at June 30, 2011; therefore there was no intrinsic value of the options outstanding and exercisable at June 30, 2011.
In the first quarter of 2010, the Company extended the expiration date for an additional five years of 31,500 stock options expiring on April 11, 2010 and 10,000 stock options expiring March 15, 2011 previously issued to directors. The Company accounted for the extensions under the guidance for stock-based compensation and recognized a charge to income of $35,000. The related income tax benefit was
21
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 6 STOCK-BASED COMPENSATION PLAN (continued)
$11,912. The impact of the extension of the expiration date of director options also increased paid-in capital by $35,000 in 2010. The fair value of the modified options was determined using the following assumptions as of the modification date:
Risk free interest rate |
2.42% to 2.79% | |
Expected option life (years) |
5.00% to 6.00% | |
Expected stock price volatility |
22.90% to 24.40% | |
Dividend yield |
0.00% |
NOTE 7 FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entitys own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Investment Securities: The fair values for securities available for sale are determined by quoted market prices, if available (Level 1). For securities where quoted market prices are not available, fair values are calculated based on matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted securities (Level 2).
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in Level 3 classification of the inputs for determining fair value.
22
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 7 FAIR VALUE (continued)
Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Assets and liabilities measured at fair value are summarized below:
23
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 7 FAIR VALUE (continued)
Fair Value Measurements Using | ||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||
June 30, 2011 |
||||||||||||
Assets and liabilities measured at fair value |
||||||||||||
On a recurring basis |
||||||||||||
Investment securities available for sale |
||||||||||||
Mortgage backed residential |
||||||||||||
Guaranteed by GNMA |
$ | 0 | $ | 4,183,352 | $ | 0 | ||||||
Issued by FHLMC |
0 | 1,064,674 | 0 | |||||||||
Issued by FNMA |
0 | 1,618,689 | 0 | |||||||||
Tax free state and political subdivisions |
0 | 4,687,476 | 0 | |||||||||
Taxable state and political subdivisions |
0 | 254,722 | 0 | |||||||||
On a nonrecurring basis |
||||||||||||
Impaired loans |
||||||||||||
Commercial real estate |
0 | 0 | 2,829,136 | |||||||||
Commercial business |
0 | 0 | 0 | |||||||||
Home equity line of credit |
0 | 0 | 212,021 | |||||||||
Other real estate owned |
||||||||||||
Commercial real estate |
0 | 0 | 252,678 | |||||||||
Commercial business |
0 | 0 | 738,772 | |||||||||
Residential |
0 | 0 | 80,936 | |||||||||
December 31, 2010 |
||||||||||||
Assets and liabilities measured at fair value |
||||||||||||
On a recurring basis |
||||||||||||
Investment securities available for sale |
||||||||||||
Mortgage backed residential |
||||||||||||
Guaranteed by GNMA |
$ | 0 | $ | 4,006,313 | $ | 0 | ||||||
Issued by FHLMC |
0 | 1,637,281 | 0 | |||||||||
Issued by FNMA |
0 | 2,058,455 | 0 | |||||||||
Tax free state and political subdivisions |
0 | 5,045,478 | 0 | |||||||||
Taxable state and political subdivisions |
0 | 245,670 | 0 | |||||||||
On a nonrecurring basis |
||||||||||||
Impaired loans |
||||||||||||
Commercial real estate |
0 | 0 | 2,038,206 | |||||||||
Commercial business |
0 | 0 | 150 | |||||||||
Home equity line of credit |
0 | 0 | 212,455 | |||||||||
Other real estate owned |
0 | 0 | 991,450 |
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had total unpaid principal balances of $4,261,883 with valuation allowances of
24
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 7 FAIR VALUE (continued)
$1,220,775 at June 30, 2011. Excluded from the fair value of impaired loans is $1,485,464 of loans classified as troubled debt restructurings (TDR) which are evaluated for impairment using the present value of estimated future cash flows using the loans effective rate at inception.
At December 31, 2010, impaired loans had a principal balance of $3,950,803, with a valuation allowance of $1,699,992. Excluded from the fair value of impaired loans at December 31, 2010 disclosed above is $1,485,599 of loans classified as TDR using the method described above. Impairment charges of $487,000 were recorded through the provision for loan losses for the six months ended June 30, 2010.
Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $1,072,386 at June 30, 2011 after direct write-downs of $76,364 taken in 2010. Properties valued at $80,936 were added in the first six months of 2011.
The carrying amounts and estimated fair values of financial instruments, at June 30, 2011 and December 31, 2010 are as follows:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value |
|||||||||||||
Financial assets |
||||||||||||||||
Cash and cash equivalents |
$ | 17,947,376 | $ | 17,947,000 | $ | 14,496,494 | $ | 14,496,000 | ||||||||
Securities available for sale |
11,808,913 | 11,809,000 | 12,993,197 | 12,993,000 | ||||||||||||
Loans, net of allowance |
152,504,449 | 150,491,000 | 154,960,478 | 152,301,000 | ||||||||||||
Loans held for sale |
0 | 0 | 236,000 | 241,000 | ||||||||||||
Accrued interest receivable |
500,865 | 501,000 | 468,759 | 469,000 | ||||||||||||
Financial liabilities |
||||||||||||||||
Demand and savings deposits |
(108,308,710 | ) | (108,309,000 | ) | (103,466,486 | ) | (103,466,000 | ) | ||||||||
Time deposits |
(67,592,301 | ) | (66,841,000 | ) | (68,172,555 | ) | (67,553,000 | ) | ||||||||
Federal Home Loan Bank advances |
(1,500,000 | ) | (1,541,000 | ) | (1,900,000 | ) | (1,934,000 | ) | ||||||||
Accrued interest payable |
(75,309 | ) | (75,000 | ) | (76,566 | ) | (77,000 | ) |
For purposes of these disclosures of estimated fair values, the following assumptions were used. Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans and deposits that reprice frequently and fully. The fair values of securities are determined as discussed above. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of loans held for sale is valued as determined by outstanding commitments from third party investors. Fair value of debt is based on current rates for similar financing. Fair values of unrecorded commitments were not material. It is not practical to estimate the fair value of restricted stock due to restrictions placed on its transferability. These securities have been omitted from this disclosure.
25
Table of Contents
WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2011
NOTE 8 REGULATORY CAPITAL MATTERS
At June 30, 2011 and December 31, 2010, Western Reserve Banks risk-based capital ratios and the minimums to be considered well-capitalized under the Federal Reserve Boards prompt corrective action guidelines were as follows:
Western Reserve Bank | Minimum Required for Capital Adequacy Purposes |
Minimum To Be Well Capitalized under Prompt Corrective Action Provisions |
||||||||||||||||||||||
June 30, 2011 |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
||||||||||||||||||
Total Capital to risk-weighted assets |
$ | 19,089 | 12.2 | % | $ | 12,553 | 8.0 | % | $ | 15,691 | 10.0 | % | ||||||||||||
Tier 1 (Core) Capital to risk-weighted assets |
17,106 | 10.9 | % | 6,276 | 4.0 | % | 9,414 | 6.0 | % | |||||||||||||||
Tier 1 (Core) Capital to average assets |
17,106 | 9.1 | % | 7,482 | 4.0 | % | 9,353 | 5.0 | % | |||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Total Capital to risk-weighted assets |
18,060 | 11.3 | % | 12,766 | 8.0 | % | 15,958 | 10.0 | % | |||||||||||||||
Tier 1 (Core) Capital to risk-weighted assets |
16,029 | 10.0 | % | 6,383 | 4.0 | % | 9,575 | 6.0 | % | |||||||||||||||
Tier 1 (Core) Capital to average assets |
16,029 | 8.0 | % | 8,017 | 4.0 | % | 10,021 | 5.0 | % |
As of June 30, 2011 and December 31, 2010, the Bank met the requirements to be considered well capitalized. Due to the operating losses of the Bank in 2010, regulatory approval would be needed to pay dividends from the Bank to the Holding Company.
26
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
OVERVIEW
The following discussion compares the financial condition of Western Reserve Bancorp, Inc. (the Company) and its wholly-owned subsidiary, Western Reserve Bank (the Bank) at June 30, 2011, to that of December 31, 2010, and the results of operations for the three and six months ended June 30, 2011 and 2010. You should read this discussion in conjunction with the interim financial statements and footnotes included herein.
Certain statements contained in this report that are not historical facts are forward looking statements 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 Companys actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, the interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services.
FINANCIAL CONDITION
Assets
Total assets as of June 30, 2011 decreased $588,000 or 0.3%, to $190,976,000 compared with $191,564,000 at December 31, 2010.
Cash and cash equivalents increased $3,451,000, or 23.8%, to $17,947,000 from $14,496,000 at year-end 2010 as part of normal business operations.
Total loans before the allowance for loan losses decreased by $3,040,000 during the first six months of the year. The Company has traditionally focused on growth in the loan portfolio, and making loans to qualified borrowers remains a tenet of the Companys business model. However, in 2010 the weak economy had a negative impact on existing and potential borrowers, hampering growth for the year. Although there has been some improvement in the local economy in 2011, it has yet to result in increased loan demand.
As of June 30, 2011, commercial real estate and commercial business loans totaled $137,828,000, or 88.1% of total loans. Home equity lines and residential real estate loans totaled $12,544,000, or 8.0% of total loans and consumer and other loans totaled $6,093,000, or 3.9% of total loans.
The Companys loan-to-deposit ratio decreased to 91.6% at June 30, 2011, compared to 92.9% at December 31, 2010. The Companys loan-to-assets ratio also decreased in the first six months of 2011, to 81.9% at June 30, 2011 from 83.3% at December 31, 2010. Management anticipates that the loan-
27
Table of Contents
WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
FINANCIAL CONDITION (continued)
to-deposit ratio for the remainder of 2011 will be in the range of 85% to 95% and the loan-to-assets ratio will be approximately 75% to 85%.
Of the total loans at June 30, 2011, approximately $112,019,000 or 71.6% are at a variable interest rate, and $44,446,000 or 28.4% are at a fixed interest rate. Including scheduled principal repayments, approximately $85,331,000, or 54.5%, of loans mature or are scheduled to reprice within twelve months. An additional $63,186,000 or 40.4% of loans mature or are scheduled to reprice within five years.
The allowance for loan losses is maintained at a level considered by management to be adequate to cover probable incurred credit losses in the loan portfolio. Managements determination of the appropriate provision for loan losses and the adequacy of the allowance for loan losses is based on the Companys historical losses by portfolio segment, adjusted for environmental factors which management believes are representative of the probable expected loss experience of the Company. Other factors considered by management include the composition of the loan portfolio, economic conditions, the creditworthiness of the Companys borrowers and other related factors. The Companys loan loss methodology provides larger allowances for loans with risk grades indicating increased risk characteristics. The Company believes the allowance for loan losses at June 30, 2011, is adequate to absorb probable incurred losses in the loan portfolio.
Loans charged off totaled $703,000 and $769,000 for the three and six months ended June 30, 2011 Specific reserves of $608,000 and $668,000 had been provided in prior periods. Recoveries for the same periods were $20,000 and $46,000. Although the impact of the higher charge-offs in the second quarter caused the calculated loss ratio component of the ALLL to increase, since the majority of the loans charged off had been reserved for in prior periods, management determined it was not necessary to provide additional funds, resulting in a $252,000 reduction in the unallocated portion of the allowance. In the like period in 2010, loans totaling $828,000 were charged off and $2,000 was recovered on loans previously charged off. The allowance for loan losses was 2.53% and 2.85% of total loans at June 30, 2011 and December 31, 2010, respectively. At June 30, 2011, $1,222,000 or 30.9% of the allowance for loan losses was allocated to impaired loan balances individually. At December 31, 2010, $1,704,000 or 37.5% of the allowance for loan losses was allocated to impaired loan balances individually.
At June 30, 2011, forty-one loans totaling $6,093,000 to twenty borrowers were in nonaccrual status, compared to fifty-one loans to twenty-two borrowers totaling $7,546,000 at year-end 2010. Additionally, at June 30, 2011, there were three loans to one borrower not on nonaccrual status totaling $1,485,000 classified as a TDR because a concession had been granted based on the borrowers financial difficulty. At December 31, 2010, there were eight loans to four borrowers not on nonaccrual status totaling $1,612,000 classified as TDRs. The borrowers with accruing TDR loans were making payments in accordance with their modified terms at June 30, 2011 and December 31, 2010.
28
Table of Contents
WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
FINANCIAL CONDITION (continued)
The Company is making every reasonable effort to work with its borrowers who are experiencing financial difficulty, many of whom have been customers for several years and have been negatively impacted by the recessionary economic conditions.
Loans graded other than Pass are typically in industries displaying distress in the current economy. As the grades become more adverse, the related industry is likely displaying greater sensitivity to the current economic conditions and the borrowers financial strength may have deteriorated. Industries such as commercial real estate management and real estate development are particularly affected by current economic conditions. The Company continues to receive and review financial information from its borrowers as part of the grading process. Improved financial results from borrowers may allow the Company to upgrade loan relationships.
At June 30, 2011, the Companys other real estate owned (OREO) totaled $1,072,000 and consisted of two commercial and one residential real estate properties. This amount represents the fair value of each property reduced by managements estimate of anticipated costs to market and sell the property. One property with a fair value less costs to sell of $81,000 was added in 2011. The Company entered into lease arrangements for the commercial OREO properties in 2009 resulting in rental income of $30,000 and $33,000 in the first six months of 2011 and 2010, respectively. The lessee of one of the properties has the right to purchase the property during the three-year lease term. A second OREO property is leased on a short-term basis.
Liabilities
Deposits were $170,901,000 at June 30, 2011, a decrease of 0.4% from $171,639,000 at December 31, 2010. Deposits consisted of the following:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Amount | Percent of Portfolio |
Amount | Percent of Portfolio |
|||||||||||||
Noninterest bearing demand deposits |
$ | 22,647,000 | 13.3 | % | $ | 22,934,000 | 13.4 | % | ||||||||
Interest-bearing NOW accounts |
11,868,000 | 6.9 | % | 11,049,000 | 6.4 | % | ||||||||||
Savings and money market accounts |
68,794,000 | 40.3 | % | 69,483,000 | 40.5 | % | ||||||||||
Certificates of deposit (CDs) |
59,295,000 | 34.7 | % | 59,625,000 | 34.7 | % | ||||||||||
Individual Retirement Arrangements |
8,297,000 | 4.8 | % | 8,548,000 | 5.0 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Deposits |
$ | 170,901,000 | 100.0 | % | $ | 171,639,000 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
29
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WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
FINANCIAL CONDITION (continued)
Included in the time deposits total at June 30, 2011 were $17,276,000 of national market CDs, primarily from other banks and credit unions, in amounts that qualify for FDIC insurance, with original terms ranging from eighteen months to five years, and rates ranging from .75% to 4.9%. As of June 30, 2011, the weighted average interest rate paid on these CDs was 2.0% and the weighted average remaining maturity was 22.9 months. As of December 31, 2010 there were $14,381,000 of the CDs with a weighted average rate of 2.3% and a weighted average remaining term of 19.7 months. Although management believes these CDs were obtained at market rates at the time they were originated, they may be more price sensitive than local deposits.
The Company participates in the Certificate of Deposit Account Registry Service (CDARS) program which allows depositors to maintain a deposit relationship with the Bank but place funds in amounts less than the FDIC insurance limit at various banks to maintain deposit insurance. In return, the Bank can receive reciprocal deposits from other institutions participating in the CDARS program. The Bank had $8,401,000 and $11,724,000 of customer funds placed in reciprocal deposits with the CDARS program at June 30, 2011 and December 31, 2010, respectively.
Federal Home Loan Bank (FHLB) advances decreased to $1,500,000 at June 30, 2011 from $1,900,000 at year-end 2010. One advance totaling $400,000 matured and was replaced with a $1,000,000 advance in the first quarter of 2011 to take advantage of lower long-term rates than are typically available for certificates of deposit with comparable maturities. A second advance of $1,000,000 was repaid in June. FHLB advances are collateralized by loans secured by real estate under a blanket lien agreement. At June 30, 2011 borrowing capacity was $979,000 as a result of the repayment of a $1,000,000 advance on June 20, 2011. As of July 1, 2011, subsequent to a regular quarterly credit evaluation by the FHLB, the Companys available borrowing capacity increased to $16,471,000.
Please refer to Note 5 and the discussion in this report, under the caption Liquidity and Capital Resources, for more information about the Companys additional sources of funding.
Shareholders Equity
Total shareholders equity increased $574,000 to $17,911,000 at June 30, 2011, from $17,337,000 at December 31, 2010. This increase was the result of net income of $611,000 for the first six months of 2011, offset in part by dividends on preferred stock of $128,000.
As of June 30, 2011, the book value per share of the Companys common stock was $22.39 compared with $21.48 at December 31, 2010.
30
Table of Contents
WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2011
Overview
Net income for the second quarter of 2011 was $249,000, a positive change of $410,000 from the net loss of ($161,000) in the same period in 2010. This change was primarily due to a significant decrease in the provision for loan losses of $650,000. Non-interest income was $3,000 higher in 2011 than in 2010 but was negatively impacted by an increase of $50,000 in non-interest expense. Net income available to common shareholders for the three months ended June 30, 2011 was $171,000 or $0.29 per basic and diluted share, after preferred stock dividends of $64,000 and the amortization of preferred stock premiums of $14,000. The net loss available to common shareholders was ($238,000) or ($0.41) per basic and diluted share for second quarter of 2010. On a pre-tax basis, income increased $622,000 to $345,000 from a loss of ($277,000.)
Net Interest Income
Net interest income before the provision for loan losses in the second quarter of 2011 was $1,717,000, an increase of $18,000, or 1.1%, from the $1,699,000 earned in the same period of 2010. The improvement was the result of a $152,000, or 26.4% decrease in interest expense, partially offset by a $134,000 decrease in interest income. Then net interest margin was 3.85% for the three months ended June 30, 2011, representing an increase of 40 basis points from 3.45% for the like period in 2010.
The following table illustrates the average balances and annualized interest rates for the three months ended June 30, 2011 and 2010. Loans on nonaccrual status are included in the average loan balance.
31
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WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2011
(continued)
Quarter ended June 30, 2011 |
Quarter ended June 30, 2010 |
|||||||||||||||||||||||
Average Balance |
Interest | Average Rate |
Average Balance |
Interest | Average Rate |
|||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Federal funds sold and other short term funds |
$ | 11,233 | $ | 7 | 0.25 | % | $ | 22,820 | $ | 14 | 0.25 | % | ||||||||||||
Securities taxable |
7,119 | 63 | 3.64 | % | 4,722 | 54 | 4.86 | % | ||||||||||||||||
Securities tax exempt |
4,727 | 62 | 5.50 | % | 4,798 | 65 | 5.62 | % | ||||||||||||||||
Restricted stock |
966 | 12 | 4.98 | % | 895 | 11 | 5.00 | % | ||||||||||||||||
Loans |
156,932 | 2,018 | 5.16 | % | 166,685 | 2,152 | 5.18 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-earning assets |
180,977 | 2,162 | 4.79 | % | 199,920 | 2,296 | 4.61 | % | ||||||||||||||||
Noninterest earning assets |
6,580 | 7,466 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 187,557 | $ | 207,386 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Transaction accounts (NOW) |
$ | 11,634 | 12 | 0.41 | % | $ | 9,988 | 12 | 0.48 | % | ||||||||||||||
Market rate savings accounts |
69,005 | 98 | 0.57 | % | 70,797 | 136 | 0.77 | % | ||||||||||||||||
Time deposits |
65,220 | 297 | 1.82 | % | 83,028 | 409 | 1.97 | % | ||||||||||||||||
Federal Home Loan Bank advances and other borrowings |
2,379 | 17 | 2.87 | % | 2,219 | 20 | 3.69 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
148,238 | 424 | 1.15 | % | 166,032 | 577 | 1.39 | % | ||||||||||||||||
Noninterest-bearing liabilities |
21,378 | 22,673 | ||||||||||||||||||||||
Shareholders equity |
17,941 | 18,681 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 187,557 | $ | 207,386 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income |
1,738 | 1,719 | ||||||||||||||||||||||
Tax equivalent adjustment |
(20 | ) | (23 | ) | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income per financial statements |
$ | 1,718 | $ | 1,696 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest margin |
||||||||||||||||||||||||
(Net yield on average earning assets) |
3.85 | % | 3.45 | % |
32
Table of Contents
WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2011
(continued)
The following table sets forth on a fully taxable-equivalent basis 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 is a change in volume multiplied by the previous years rate. Rate Variance is a change in rate multiplied by the previous years volume. Rate/Volume Variance is a 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.
Three months ended June
30, 2011 vs. 2010 Increase (Decrease) due to |
||||||||||||
Volume |
Rate |
Net |
||||||||||
($ in thousands) |
||||||||||||
Interest income: |
||||||||||||
Federal funds sold and other short term funds |
$ | (7 | ) | $ | (0 | ) | $ | (7 | ) | |||
Securities - taxable |
25 | (16 | ) | 9 | ||||||||
Securities - tax exempt |
(1 | ) | (2 | ) | (3 | ) | ||||||
Restricted stock |
1 | (0 | ) | 1 | ||||||||
Loans |
(87 | ) | (47 | ) | (134 | ) | ||||||
|
|
|||||||||||
Total interest-earning assets |
(69 | ) | (65 | ) | (134 | ) | ||||||
Interest expense: |
||||||||||||
Transaction accounts (NOW) |
(2 | ) | 2 | 0 | ||||||||
Market rate savings accounts |
3 | 35 | 38 | |||||||||
Time deposits |
90 | 22 | 112 | |||||||||
Federal Home Loan Bank advances and other borrowings |
(1 | ) | 4 | 3 | ||||||||
|
|
|||||||||||
Total interest-bearing liabilities |
90 | 64 | 153 | |||||||||
|
|
|||||||||||
Change in net interest income |
$ | 21 | $ | (2 | ) | $ | 19 | |||||
|
|
Interest Income
Interest and fee income on loans for the second quarter of 2011 was $2,018,000, a decrease of $134,000 or 6.2% from $2,152,000 for the second quarter of 2010, primarily due to lower average loan balances. Tax equivalent interest and dividend income from securities and short-term funds was unchanged at $144,000 for both periods.
33
Table of Contents
WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2011 (continued)
Interest Expense
Interest expense decreased $152,000 or 26.4% when comparing the three months ended June 30, 2011 with the same period in 2010. Total interest expense was $424,000 for the second quarter of the current year, compared to $577,000 in the prior year. Interest on deposits decreased $149,000, or 26.9%, to $407,000 in the second quarter of 2011, from $556,000 in the same period of 2010. The decrease in deposit interest expense was due to both lower balances and significantly lower rates on time deposits as part of a strategy to reduce the Banks emphasis on higher-cost certificates of deposit. Interest on borrowings was $17,000 for the three months ended June 30, 2011 compared to $20,000 for the second quarter of 2010 as a result of a decrease in both balances and rate. A $1,000,000 advance with a rate of 3.65% that matured during the quarter was not replaced.
Net Interest Margin
The net interest margin increased 40 basis points to 3.85% in the second quarter of 2011 from 3.45% in the like period of 2010, due to higher loan fees, a reduction in the volume of short term, low yielding funds held at the Federal Reserve Bank and a decrease in both the balance of and rates paid on time deposits.
The yield on earning assets increased 18 basis points to 4.79% for the three months ended June 30, 2011 compared to 4.61% in the same period of 2010. During the second quarter of 2011, the yield on loans was 5.16%, down 2 basis points from 5.18% in the second quarter of 2010. The yield on loans is negatively impacted by the high balance of loans placed on nonaccrual status because these loans are included in loans outstanding although they are not earning interest. Average nonaccrual loans were $6,887,000 in the second quarter of 2011 versus $7,464,000 in the second quarter of 2010.
In the second quarter of 2011, the cost of interest-bearing deposits was 1.12%, down 24 basis points from 1.36% in the like period in 2010. This decrease reflects lower overall market interest rates and the Companys strategy of allowing higher-cost maturing CDs to roll off or be replaced with lower-cost CDs in the current lower interest rate environment. The Companys borrowed funds portfolio also contributed to the higher margin, but represents a much smaller portion of the total funding base. The overall cost of interest-bearing funds, including deposits and borrowings, was 1.15% for the three months ended June 30, 2011, compared with 1.39% in the same period of 2010.
Provision for Loan Losses
The provision for loan losses was $132,000 and $782,000 for the quarters ended June 30, 2011 and 2010, respectively. The decrease of $650,000 in provision expense was due to prior period provisions for a significant level of current year charge-offs and a stabilization in the financial condition of impaired borrowers. Refer to the discussion of the allowance for loan losses in the asset section of the Managements Discussion and Analysis for detailed information related to the provision for loan losses.
34
Table of Contents
WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2011 (continued)
Noninterest Income
Total noninterest income for the second quarter of 2011 was $138,000, an increase of 2.3% from $135,000 for the same period in 2010. Decreases of $2,000 in deposit service charges and $10,000 in gains on loan sales were offset by gains on the sale of available for sale securities and other fee income.
Noninterest Expenses
Noninterest expenses were $1,379,000 for the second quarter of 2011, an increase of $50,000 or 3.7% from $1,329,000 for the same period in 2010. Professional fees increased $34,000 as a result of recruiting expenses for hiring employees to replace those who left the company in 2010 and were not immediately replaced. Collection and OREO expenses were $50,000 higher as a result of ongoing legal cost, costs to re-appraise properties securing nonaccrual and other troubled loans and the cost of maintaining current OREO properties. FDIC insurance premiums were $9,000 lower due to a change in the calculation of the premium from a percentage of deposits to a percentage of total assets. Directors fees were $14,000 lower as a result of the departure of one member from the board in 2010 and one in January of 2011 whose vacancies were not immediately filled.
Total other noninterest expense for the second quarters of 2011 and 2010 consisted of:
Three months ended June 30, 2011 |
||||||||
2011 | 2010 | |||||||
Loan expenses |
$ | 33,000 | $ | 13,000 | ||||
Insurance |
15,000 | 11,000 | ||||||
Supplies, printing and postage |
14,000 | 20,000 | ||||||
Travel and entertainment |
9,000 | 12,000 | ||||||
Dues & memberships |
7,000 | 7,000 | ||||||
Losses on other assets |
0 | 31,000 | ||||||
Telephone |
5,000 | 5,000 | ||||||
Other |
9,000 | 14,000 | ||||||
|
|
|
|
|||||
$ | 92,000 | $ | 113,000 | |||||
|
|
|
|
Income tax expense for the second quarter of 2011 was $96,000, compared to a benefit of $116,000 for the same period in 2010.
35
Table of Contents
WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011
Overview
Net income for the first six months of 2011 was $611,000, a positive change of $988,000 from the net loss of ($377,000) in the same period in 2010. This change was primarily due to a decrease in the provision for loan losses of $1,428,000 and an increase in net interest income of $106,000. Non-interest income was $20,000 lower in 2011 than in 2010, and was negatively impacted by an increase of $14,000 in non-interest expense. Net income available to common shareholders for the first half of 2011 was $456,000 or $0.78 per basic and diluted share, after preferred stock dividends of $128,000 and the amortization of preferred stock premiums of $28,000. The net loss available to common shareholders was ($533,000) or ($0.91) per basic and diluted share for the first six months of 2010. On a pre-tax basis, income increased $1,499,000 to $861,000 from a loss of ($638,000.)
Net Interest Income
Net interest income before the provision for loan losses in the first six months of 2011 was $3,472,000, an increase of $106,000, or 3.1%, from the $3,366,000 earned in the same period of 2010. The improvement was the result of a $309,000, or 26.5% decrease in interest expense, partially offset by a $203,000 decrease in interest income. The net interest margin was 3.92% for the six months ended June 30, 2011, representing an increase of 43 basis points from 3.49% for the like period in 2010.
The following table illustrates the average balances and annualized interest rates for the six months ended June 30, 2011 and 2010. Loans on nonaccrual status are included in the average loan balance.
36
Table of Contents
WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011 (continued)
Six months ended June 30, 2011 |
Six months ended June 30, 2010 |
|||||||||||||||||||||||
Average Balance |
Interest | Average Rate |
Average Balance |
Interest | Average Rate |
|||||||||||||||||||
($ in thousands) |
||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Federal funds sold and other short term funds |
$ | 9,894 | $ | 12 | 0.24 | % | $ | 19,164 | $ | 24 | 0.25 | % | ||||||||||||
Securities taxable |
7,411 | 132 | 3.67 | % | 4,919 | 112 | 4.84 | % | ||||||||||||||||
Securities tax exempt |
4,817 | 128 | 5.53 | % | 4,787 | 129 | 5.63 | % | ||||||||||||||||
Restricted stock |
966 | 24 | 5.01 | % | 897 | 21 | 4.83 | % | ||||||||||||||||
Loans |
157,615 | 4,071 | 5.21 | % | 167,022 | 4,283 | 5.17 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-earning assets |
180,703 | 4,367 | 4.87 | % | 196,789 | 4,569 | 4.68 | % | ||||||||||||||||
Noninterest earning assets |
10,273 | 7,583 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 190,976 | $ | 204,372 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Transaction accounts (NOW) |
$ | 11,302 | 23 | 0.41 | % | $ | 9,885 | 25 | 0.50 | % | ||||||||||||||
Market rate savings accounts |
68,808 | 194 | 0.57 | % | 68,388 | 265 | 0.78 | % | ||||||||||||||||
Time deposits |
65,880 | 603 | 1.85 | % | 82,333 | 822 | 2.01 | % | ||||||||||||||||
Federal Home Loan Bank advances and other borrowings |
2,164 | 34 | 3.16 | % | 2,789 | 51 | 3.71 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
148,154 | 854 | 1.16 | % | 163,395 | 1,163 | 1.44 | % | ||||||||||||||||
Noninterest-bearing liabilities |
25,364 | 21,686 | ||||||||||||||||||||||
Shareholders equity |
17,458 | 19,291 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 190,976 | $ | 204,372 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income |
3,513 | 3,406 | ||||||||||||||||||||||
Tax equivalent adjustment |
(41 | ) | (40 | ) | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income per financial statements |
$ | 3,472 | $ | 3,366 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest margin (Net yield on average earning assets) |
3.92 | % | 3.49 | % | ||||||||||||||||||||
|
|
|
|
The following table sets forth on a fully taxable-equivalent basis 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:
37
Table of Contents
WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011 (continued)
Volume Variance is a change in volume multiplied by the previous years rate. Rate Variance is a change in rate multiplied by the previous years volume. Rate/Volume Variance is a 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.
Six months ended June
30, 2011 vs. 2010 Increase (Decrease) due to |
||||||||||||
Volume | Rate | Net | ||||||||||
($ in thousands) |
||||||||||||
Interest income: |
||||||||||||
Federal funds sold and other short term funds |
$ | (11 | ) | $ | (1 | ) | $ | (12 | ) | |||
Securities - taxable |
52 | (32 | ) | 20 | ||||||||
Securities - tax exempt |
1 | (2 | ) | (1 | ) | |||||||
Restricted stock |
2 | 1 | 3 | |||||||||
Loans |
(180 | ) | (32 | ) | (212 | ) | ||||||
|
|
|||||||||||
Total interest-earning assets |
(136 | ) | (67 | ) | (203 | ) | ||||||
Interest expense: |
||||||||||||
Transaction accounts (NOW) |
(3 | ) | 5 | 2 | ||||||||
Market rate savings accounts |
(2 | ) | 73 | 71 | ||||||||
Time deposits |
72 | 147 | 219 | |||||||||
Federal Home Loan Bank advances and other borrowings |
10 | 7 | 17 | |||||||||
|
|
|||||||||||
Total interest-bearing liabilities |
77 | 231 | 309 | |||||||||
|
|
|||||||||||
Change in net interest income |
$ | (59 | ) | $ | 164 | $ | 106 | |||||
|
|
Interest Income
Interest and fee income on loans for the first six months of 2011 was $4,071,000, a decrease of $212,000 or 4.9% from $4,283,000 for the same period of 2010, primarily due to lower average loan balances. The 2011 total included $117,000 in loan fees, compared to $31,000 in the same period in 2010. Current year results comprise $61,000 of prepayment penalties and $13,000 of fees collected from borrowers for appraisal expenses recorded in prior years. Tax equivalent interest and dividend income from securities and short-term funds increased to $296,000 from $286,000 in the previous year due to higher average securities balances.
Interest Expense
Interest expense decreased 26.6% when comparing the six months ended June 30, 2011 with the same period in 2010. Total interest expense was $854,000 for the first half of the current year, compared to $1,163,000 in the prior year. Interest on deposits decreased $292,000, or 26.2%, to $820,000 in the first
38
Table of Contents
WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011 (continued)
six months of 2011, from $1,112,000 in the same period of 2010. The decrease in deposit interest expense was due to lower balances in time deposits and corresponding lower rates as a result of managements decision in 2010 to allow higher cost maturing CDs to roll off. Interest on borrowings was $34,000 for the six months ended June 30, 2011 compared to $51,000 for the first half of 2010 as a result of a decrease in both balances and rate. An advance for $400,000 with a rate of 3.06% that matured in March 2011 was replaced with $1,000,000 at 1.92%. A second advance of $1,000,000 that matured in June 2011 with a rate of 3.65% was paid off.
Net Interest Margin
The net interest margin increased 43 basis points to 3.92% in the first half of 2011 from 3.49% in the like period of 2010 due to the higher loan fees and the decrease in the balance of higher cost deposits.
The yield on earning assets increased 19 basis points to 4.87% for the first six months of 2011 compared to 4.68% in the same period of 2010. In the first half of 2011, the yield on loans was 5.21%, up 4 basis points from 5.17% in the first six months of 2010. Loan fees, which included significant one-time prepayment penalties in 2011, contributed $117,000 for the period, compared to $31,000 in the prior period. The yield on loans is negatively impacted by the high balance of loans placed on nonaccrual status because these totals are included in loans outstanding although they are not earning interest. Average nonaccrual loans were $7,144,000 in the first half of 2011 versus $6,588,000 in the first six months of 2010.
In the first half of 2011, the cost of interest-bearing deposits was 1.13%, down 27 basis points from 1.40% in the like period in 2010. This decrease reflects lower overall market interest rates and the Companys strategy of allowing higher-cost maturing CDs to roll off or be replaced with lower-cost CDs in the current lower interest rate environment. The Companys borrowed funds portfolio also contributed to the higher margin, but represents a much smaller portion of the total funding base. The overall cost of interest-bearing funds, including deposits and borrowings, was 1.16% in the first six months of 2011, compared with 1.44% in the same period of 2010.
Provision for Loan Losses
The provision for loan losses was $140,000 and $1,568,000 for the six months ended June 30, 2011 and 2010, respectively, representing a decrease of $1,428,000. The decline in provision expense was due to both stabilization in the financial condition of impaired borrowers and the specific reserves provided in prior periods for the majority of loans charged off during the first half of the year. Refer to the discussion of the allowance for loan losses in the asset section of the Managements Discussion and Analysis for detailed information related to the provision for loan losses.
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WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011 (continued)
Noninterest Income
Total noninterest income for the first six months of 2011 was $261,000, a decrease of 7.0% from $280,000 for the same period in 2010. Service charges declined $10,000 or 10.1%, due primarily to changes in regulations that restrict the assessment of fees on deposit accounts. Gains on the sale of loans, which tend to fluctuate from quarter to quarter, dropped by $18,000 or 61.1% for the comparable periods. The Company recognized a gain of $4,000 on the sale of available for sale securities.
Noninterest Expenses
Noninterest expenses were $2,731,000 for the first six months of 2011, an increase of $14,000 or 0.5% from $2,717,000 for the same period in 2010. Salaries and benefits declined $40,000 due to managements decision in 2010 to freeze salaries and reduce staff through attrition. Directors fees were $56,000 lower as a result of approximately $35,000 in expenses that were recorded in the first quarter of 2010 to extend stock options that would have expired in 2010 and 2011 and the temporary vacancy of two board seats. Professional fees were $22,000 higher due in part to recruiting fees paid as part of a search for employees hired in positions that were vacated in 2010 and not refilled as part of cost cutting measures. Collection and OREO expenses were $76,000 higher as a result of ongoing legal cost, costs to re-appraise properties securing nonaccrual and other troubled loans and the cost of maintaining current OREO properties. FDIC insurance premiums were $14,000 higher, reflecting the final quarter of the higher rate structure implemented in 2009 and the first quarter of a new method based on total assets rather than total deposits.
Total other noninterest expense for the first six months of 2011 and 2010 consisted of: the following
Six months ended June 30, 2011 |
||||||||
2011 | 2010 | |||||||
Loan expenses |
$ | 52,000 | $ | 25,000 | ||||
Insurance |
18,000 | 15,000 | ||||||
Supplies, printing and postage |
30,000 | 40,000 | ||||||
Travel and entertainment |
17,000 | 19,000 | ||||||
Dues & memberships |
14,000 | 14,000 | ||||||
Losses on other assets |
0 | 31,000 | ||||||
Telephone |
10,000 | 10,000 | ||||||
Other |
19,000 | 25,000 | ||||||
|
|
|
|
|||||
$ | 160,000 | $ | 179,000 | |||||
|
|
|
|
Income tax expense for the first half of 2011 was $250,000, compared to a benefit of $261,000 in 2010.
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WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability to fund loan demand, meet deposit customers withdrawal needs and provide for operating expenses. As summarized in the Statement of Cash Flows, the main sources of cash flow are receiving deposits from customers and, to a lesser extent, the repayment of principal and interest on loans and investments, proceeds from FHLB advances and borrowings. The primary uses of cash are making loans to borrowers and, secondarily, 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, loans held for sale and available-for-sale securities. These assets are commonly referred to as liquid assets. Liquid assets were $29,756,000 at June 30, 2011, compared to $27,726,000 at December 31, 2010.
At June 30, 2011, the Holding Company had approximately $157,000 in cash available to meet its obligations, primarily the payment of dividends on preferred stock, subject to prior regulatory approval.
If additional liquidity is needed, the Company has several possible sources which include purchasing federal funds, selling loans, additional national market CDs or brokered deposits. The Company also can borrow under various lines of credit.
As discussed previously, total shareholders equity increased $574,000 to $17,911,000 at June 30, 2011 from $17,337,000 at December 31, 2010. The increase was due to net income of $611,000 for the first six months of 2011, an increase of $84,000 in the net unrealized gains on available for sale securities and proceeds from the Employee Stock Purchase Plan of $7,000. These were offset by dividends on preferred stock of $128,000.
The Companys continued growth has required management and the Board to consider capital strategies to support that growth. Traditional capital sources include issuing common or preferred stock or other capital instruments, but the market for these has diminished in the current economy. Refer to Note 8 of the unaudited consolidated financial statements for more information regarding the Banks regulatory capital position.
The Company has a $2,000,000 line of credit for capital purposes through an unaffiliated financial institution. By borrowing against the line of credit and then investing the funds in the Bank as capital, the Company is able to help the Bank manage its capital ratios. The Company had no outstanding balance on this line of credit at June 30, 2011 and December 31, 2010.
In 2003, the Board of Directors approved The Western Reserve Bancorp, Inc. Employee Stock Purchase Plan. A Form S-8 Registration Statement was filed with the SEC on April 1, 2004, and the Plan became effective on that date. The Company filed an amended form S-8 Registration Statement on March 23, 2010 to increase the number of shares of authorized but unissued shares of stock allocated to the Plan. Under this Plan, each employee is eligible to purchase, through payroll deduction or direct payment to the Company, up to $3,000 worth of common stock per year at market prices and without brokerage commissions. There were 16,250 shares of authorized but unissued shares of stock allocated to the Plan, of which 8,752 remain to be issued. Because the Plan has been registered with the SEC, there are no
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WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
restrictions on the resale of the stock, other than those applicable to affiliates as defined in Rule 144 of the Securities and Exchange Commission. As of June 30, 2011, a total of 6,540 shares of common stock are held by 31 participants through the Plan.
INTEREST RATE RISK
Management seeks to manage volatility caused by changes in market interest rates. The Companys results are, by their nature, sensitive to changes in interest rates, which can affect the Companys net interest income and therefore its net income. The primary source of interest rate risk in the Companys balance sheet is repricing risk, which results from differences in the timing and velocity with which interest rates earned on assets or paid on liabilities can change in relation to market interest rates.
The Companys balance sheet gap divides interest-bearing assets and liabilities into maturity and repricing categories, and measures the gap in each category. From this perspective, at June 30, 2011 the Company was slightly asset sensitive in the one-year category, with $122.2 million in assets and $120.6 million in liabilities subject to repricing during the next year. Management has the ability to control the repricing on non-maturity deposits, such as checking and savings accounts. A significant portion of the Companys liabilities are Market Rate Savings accounts on which the Company generally sets the interest rate based on a national money market index. However, since early 2009, management has not reduced the interest rates paid on Market Rate Savings accounts to the extent indicated by the index because the competitive banking environment in the Companys market area would not have supported such low interest rates.
From an income statement perspective, based on the model utilized by the Company to analyze its interest rate sensitivity, the Companys net interest income will benefit modestly from a 200 basis point increase in interest rates, since interest income will increase more rapidly than interest expense. As of June 30, 2011, the model indicates that if market interest rates were to experience an immediate increase of 100 basis points, the Companys net interest income would increase by approximately 0.53%, while if rates were to increase by 200 points, the Companys net interest income would increase by approximately 1.0%. Modeling for a 100 basis points decrease in interest rates is not meaningful, due to the current rate environment. Modeling interest rate sensitivity is highly dependent on numerous assumptions used in the modeling process, and actual changes in interest income and expense may be different than projected.
CRITICAL ACCOUNTING POLICIES
The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and recoveries and decreased by charge-offs. Management estimates the level of the provision for loan losses and the allowance balance by considering its historical loss experience, the nature, volume and risk characteristics in the loan portfolio, information about specific borrower circumstances and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for
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WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2011
any loan that, in managements judgment, should be charged-off. Loan losses are charged against the allowance when management believes the loan balance cannot be collected. Loan quality is monitored on a monthly basis by management and at least twice annually by an independent third party. The Companys Loan Review Committee, which is comprised of three independent members of the Companys Board of Directors, is responsible for reviewing the results of this independent third party assessment and monitoring the credit quality of the loan portfolio.
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CONTROLS AND PROCEDURES
June 30, 2011
The Company carried out an evaluation, under the supervision and with the participation of the Companys management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of June 30, 2011, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were, to the best of their knowledge, effective as of June 30, 2011, in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Companys periodic SEC filings.
There was no change in the Companys internal control over financial reporting that occurred during the Companys fiscal three months ended June 30, 2011, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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WESTERN RESERVE BANCORP, INC.
FORM 10-Q
June 30, 2011
Item 1. |
Legal Proceedings | None | ||
Item 1a. |
Risk Factors | Not applicable | ||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | None | ||
Item 3. |
Defaults Upon Senior Securities | None | ||
Item 4. |
Removed and Reserved | |||
Item 5. |
Other Information | None |
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Item 6 Exhibits
WESTERN RESERVE BANCORP, INC.
FORM 10-Q
June 30, 2011
Exhibit No. |
Description of Exhibits |
|||
3.1 |
Amended and Restated Articles of Incorporation of Western Reserve Bancorp, Inc. (incorporated by reference to the Companys Report on Form 10-QSB filed with the Commission on August 14, 2008) | * | ||
3.2 |
Code of Regulations of Western Reserve Bancorp, Inc. (incorporated by reference to the Companys Report on Form SB-2 filed with the Commission on December 29, 1997) | * | ||
10.1 |
Employment Agreement of Edward J. McKeon Dated December 15, 2005, as amended November 19, 2009. (incorporated by reference to the Companys Report on Form 8-K filed with the Commission on December 19, 2005 and the Companys Report on Form 8-K filed with the Commission on November 25, 2009) | * | ||
10.2 |
Lease Agreement by and between Michael Rose DBA Washington Properties and Western Reserve Bancorp, Inc. (incorporated by reference to the Companys Report on Form 10-KSB filed with the Commission on March 31, 1999) | * | ||
10.3 |
Western Reserve Bancorp, Inc. 1998 Stock Option Plan, Amended and Restated as of August 21, 2008 (incorporated by reference to the Companys Report on Form 8-K filed with the Commission on August 26, 2008) | * | ||
10.4 |
Agreement by and between Western Reserve Bancorp, Inc. and Brian K. Harr, dated June 18, 2001, as amended February 20, 2002 and November 19, 2009 (incorporated by reference to the Companys Report on Form 10-KSB filed with the Commission on March 28, 2003 and Companys Report on Form 8-K filed with the Commission on November 25, 2009) | * | ||
10.5 |
Agreement by and between Western Reserve Bancorp, Inc. and Cynthia A. Mahl, dated June 18, 2001, as amended February 20, 2002 and November 19, 2009 (incorporated by reference to the Companys Report on Form 10-KSB filed with the Commission on March 28, 2003 and the Companys Report on Form 8-K filed with the Commission on November 25, 2009) | * | ||
10.6 |
Loan Agreement between Western Reserve Bancorp, Inc. and TCF National Bank, dated May 5, 2003 (incorporated by reference to the Companys Report on Form 10-QSB filed with the Commission on August 14, 2003) | * | ||
10.7 |
Western Reserve Bank Supplemental Executive Retirement Plan, Amended and restated as if December 21, 2006 (incorporated by reference to the Companys Report on Form 8-K filed with the Commission on December 27, 2006) | * | ||
10.8 |
Western Reserve Bancorp, Inc. Employee Stock Purchase Plan (incorporated by reference to the Companys Form S-8 filed with the Commission on March 23, 2010) | * | ||
10.9 |
Lease Agreement by and between Western Reserve of Brecksville, LLC and Western Reserve Bank (incorporated by reference to the Companys Report on Form 10-KSB filed with the Commission on March 30, 2005) | * | ||
* Previously filed and incorporated herein by reference. |
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Table of Contents
WESTERN RESERVE BANCORP, INC.
FORM 10-Q
June 30, 2011
Exhibit No. |
Description of Exhibits |
|||
10.10 |
First amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated March 31, 2005 (incorporated by reference to the Companys Report on Form 10-QSB filed with the Commission on May 16, 2005) | * | ||
10.11 |
Second amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated June 30, 2005 (incorporated by reference to the Companys Report on Form 10-QSB filed with the Commission on August 15, 2005) | * | ||
10.12 |
Western Reserve Bancorp, Inc. and Western Reserve Bank Incentive Compensation Plan, Amended and Restated as of May 1, 2008 (incorporated by reference to the Companys Report on Form 8-K filed with the Commission on May 7, 2008) | * | ||
10.13 |
Third amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated July 20, 2006 (incorporated by reference to the Companys Report on Form 10-QSB filed with the Commission on November 14, 2006) | * | ||
10.14 |
Fourth Amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated February 6, 2007 (incorporated by reference to the Companys Report on Form 10-QSB filed with the Commission on August 14, 2007) | * | ||
10.15 |
Fifth Amendment to the Loan Agreement and Waiver by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated June 21, 2007 (incorporated by reference to the Companys Report on Form 10-QSB filed with the Commission on August 14, 2007) | * | ||
10.16 |
Sixth Amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated September 28, 2007 (incorporated by reference to the Companys Report on Form 10-QSB filed with the Commission on November 14, 2007) | * | ||
10.17 |
Seventh Amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated July 1, 2008 (incorporated by reference to the Companys Report on Form 10-Q filed with the Commission on November 14, 2008) | * | ||
10.18 |
Form of Amendment to the Western Reserve Bancorp, Inc. Stock Option Grant Agreement as of October 16, 2008 (incorporated by reference to the Companys Report on Form 8-K filed with the Commission on October 22, 2008) | * | ||
10.19 |
Eighth Amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated July 1, 2009 (incorporated by reference to the Companys Report on Form 10-Q filed with the Commission on August 14, 2009) | * | ||
10.20 |
Ninth Amendment to the Loan Agreement and Waiver by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated September 17, 2010 (incorporated by reference to the Companys Report on Form 10-Q filed with the Commission on November 15, 2010) | * | ||
10.21 |
Tenth Amendment to the Loan Agreement and Waiver by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated March 31, 2011 | * | ||
* Previouslyfiled and incorporated herein by reference. |
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Table of Contents
WESTERN RESERVE BANCORP, INC.
FORM 10-Q
June 30, 2011
Exhibit No. |
Description of Exhibits |
|||
11 |
Statement re: Computation of Per Share Earnings (incorporated by reference to the Companys Report on Form 10-Q filed with the Commission on August 15, 2011) | * | ||
14 |
Western Reserve Bancorp, Inc. Code of Ethics and Business Conduct (incorporated by reference to the Companys Report on Form 10-KSB filed with the Commission on March 30, 2004) | * | ||
31.1 |
Certification under Section 302 of the Sarbanes-Oxley Act by Edward J. McKeon, President and Chief Executive Officer | |||
31.2 |
Certification under Section 302 of the Sarbanes-Oxley Act by Cynthia A. Mahl, Executive Vice President and Chief Financial Officer | |||
32.1 |
Certification under Section 906 of the Sarbanes-Oxley Act by Edward J. McKeon, President and Chief Executive Officer | |||
32.2 |
Certification under Section 906 of the Sarbanes-Oxley Act by Cynthia A. Mahl, Executive Vice President and Chief Financial Officer | |||
101 |
The following materials from Western Reserve Bancorp, Inc. on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income and Comprehensive Income; (iii) the Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text. | ** |
* Previously filed and incorporated herein by reference.
** As provided in Rule 406T of Regulation S-T, this information shall not be deemed filed for the purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.
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WESTERN RESERVE BANCORP, INC.
FORM 10-Q
Three months ended June 30, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Western Reserve Bancorp, Inc. | ||||||
Date: August 15, 2011 |
By: |
/s/ Edward J. McKeon | ||||
Edward J. McKeon | ||||||
President and Chief Executive Officer | ||||||
(Principal Executive Officer) | ||||||
/s/ Cynthia A. Mahl | ||||||
Cynthia A. Mahl | ||||||
Executive Vice President/Chief Financial Officer | ||||||
(Principal Financial Officer) |
49