10-Q 1 wrbo_10q-093012.htm FORM 10-Q wrbo_10q-093012.htm
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 September 30, 2012

[  ] 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   (IRS Employer  
  incorporation or organization)   Identification No.)  
 
4015 Medina Road, Suite 100, P.O. Box 585, Medina, Ohio  44256
(Address of principal executive offices)

(330) 764-3131
Registrant’s 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]

587,337 shares of common stock, no par value, $1.00 stated value as of November 9, 2012.
 
 
 

 

PART I--Financial Information
 
   
Page
ITEM 1
FINANCIAL STATEMENTS
 
     
 
Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011
3
     
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011
4
     
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011
5
     
 
Notes to Consolidated Financial Statements
6
     
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
29
     
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A
     
ITEM 4
CONTROLS AND PROCEDURES
42
   
PART II--Other Information
43
     
SIGNATURES
47
 
 
 

 
 
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
   
September 30,
2012
   
December 31,
2011
 
ASSETS
           
Cash and due from financial institutions
  $ 3,930,637     $ 4,348,105  
Interest-bearing deposits in other financial institutions
    19,135,034       23,100,910  
Federal funds sold
    326,000       243,000  
Cash and cash equivalents
    23,391,671       27,692,015  
Securities available for sale
    16,711,902       15,813,031  
Loans held for sale
    0       516,000  
Loans, net of allowance of $2,897,764 and $3,009,909
    136,878,893       140,607,520  
Restricted stock
    983,594       966,100  
Other real estate owned
    1,082,312       1,048,824  
Premises and equipment, net
    764,102       865,861  
Bank owned life insurance
    2,611,910       2,535,119  
Prepaid Federal Deposit Insurance Corporation premiums
    154,652       333,002  
Accrued interest receivable and other assets
    2,177,469       2,152,257  
    $ 184,756,505     $ 192,529,729  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Deposits
               
Noninterest-bearing
  $ 27,543,348     $ 25,145,714  
Interest-bearing
    136,090,278       146,605,482  
Total deposits
    163,633,626       171,751,196  
Federal Home Loan Bank advances
    1,500,000       1,500,000  
Accrued interest payable and other liabilities
    907,574       942,040  
Total Liabilities
    166,041,200       174,193,236  
                 
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 September 30, 2012 and December 31, 2011
    4,700,000       4,700,000  
Discount on Series A preferred stock
    (98,406 )     (143,824 )
Series B, fixed rate, 235 shares authorized and issued at September 30, 2012 and December 31, 2011
    235,000       235,000  
Premium on Series B preferred stock
    9,601       14,033  
Common stock, no par value, $1 stated value, 1,500,000 shares authorized, 587,337 and 587,136 shares issued and outstanding as of September 30, 2012 and December 31, 2011
    587,337       587,136  
Additional paid-in capital
    10,013,251       9,994,348  
Retained earnings
    2,811,128       2,552,118  
Accumulated other comprehensive income
    457,394       397,682  
Total Shareholders' Equity
    18,715,305       18,336,493  
    $ 184,756,505     $ 192,529,729  
 
See accompanying notes to consolidated financial statements.
 
 
3

 
 
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Interest and dividend income
                       
Loans, including fees
  $ 1,786,247     $ 2,009,163     $ 5,450,284     $ 6,080,636  
Securities:
                               
Taxable
    65,118       62,391       201,459       194,410  
Tax exempt
    53,640       43,298       160,289       130,322  
Dividends on restricted stock
    12,015       11,650       34,951       35,504  
Federal funds sold and short-term investments
    12,587       12,091       36,539       23,819  
      1,929,607       2,138,593       5,883,522       6,464,691  
Interest expense
                               
Deposits
    285,511       413,970       926,394       1,234,435  
Borrowings
    7,438       8,190       22,086       42,135  
      292,949       422,160       948,480       1,276,570  
Net interest income
    1,636,658       1,716,433       4,935,042       5,188,121  
Provision for loan losses
    0       21,814       280,000       161,648  
Net interest income after provision for loan losses
    1,636,658       1,694,619       4,655,042       5,026,473  
Noninterest income
                               
Service charges on deposit accounts
    45,879       45,027       137,108       133,101  
Net gains on sales of loans
    33,693       4,257       71,267       15,398  
Net gain on sales of available for sale securities
    0       0       0       3,934  
Other
    99,263       82,728       286,220       240,247  
      178,835       132,012       494,595       392,680  
Noninterest expense
                               
Salaries and employee benefits
    668,188       645,017       1,987,700       1,830,226  
Occupancy and equipment
    208,846       221,638       628,153       668,366  
Federal deposit insurance
    62,091       73,477       187,014       235,890  
Data processing
    104,329       104,518       310,471       293,162  
Professional fees
    56,661       65,412       179,602       216,295  
Taxes other than income and payroll
    55,944       50,418       168,827       158,514  
Directors' fees
    31,125       25,400       112,325       75,000  
Collection and other real estate owned
    56,198       73,343       207,991       263,163  
Marketing and community relations
    42,052       32,474       146,795       122,575  
Merger costs
    82,621       0       242,525       0  
Other
    103,388       77,698       292,962       237,685  
      1,471,443       1,369,395       4,464,365       4,100,876  
Income before income taxes
    344,050       457,236       685,272       1,318,277  
Income tax expense
    105,497       134,129       193,164       383,850  
Net income
    238,553       323,107       492,108       934,427  
                                 
Preferred stock dividends and amortization, net
    77,699       77,700       233,099       233,099  
                                 
Net income available to common shareholders
  $ 160,854     $ 245,407     $ 259,009     $ 701,328  
                                 
Earnings per common share:
                               
Basic
  $ 0.27     $ 0.42     $ 0.44     $ 1.20  
Diluted
  $ 0.26     $ 0.42     $ 0.44     $ 1.20  
                                 
Comprehensive income
  $ 280,249     $ 406,733     $ 551,820     $ 1,101,923  
 
See accompanying notes to consolidated financial statements.
 
 
4

 
 
WESTERN RESERVE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
Nine months ended September 30,
 
   
2012
    2011  
Cash flows from operating activities
           
Net income
  $ 492,108     $ 934,427  
Adjustments to reconcile net income to net cash from operating activities:
               
Provision for loan losses
    280,000       161,648  
Depreciation
    124,206       144,576  
Net amortization of securities
    81,961       21,040  
Loss on disposition or write down of other real estate owned
    33,397       0  
Net realized gain on sale of securities
    0       (3,934 )
Net gain on sale of loans
    (71,267 )     (15,398 )
Stock-based compensation expense
    0       547  
Origination of loans held for sale
    (2,353,400 )     (517,000 )
Proceeds from loans held for sale
    2,940,667       768,398  
Loss on disposal of fixed assets
    (1,118 )     1,228  
Earnings on bank owned life insurance
    (76,791 )     (74,891 )
Net change in other assets and other liabilities
    87,912       522,498  
Net cash from operating activities
    1,537,675       1,943,139  
                 
Cash flows from investing activities
               
Available for sale securities:
               
Sales
    0       689,555  
Maturities, repayments and calls
    1,742,273       1,412,440  
Purchases
    (2,632,633 )     (4,425,479 )
Purchase of restricted stock
    (1,300 )     0  
Loan originations and payments, net
    3,327,867       3,624,870  
Proceeds from sale of other real estate owned
    53,875       0  
Additions to premises and equipment
    (21,329 )     (1,551 )
Net cash from investing activities
    2,468,753       1,299,835  
                 
Cash flows from financing activities
               
Net change in deposits
    (8,117,570 )     3,287,933  
Proceeds from FHLB advances and other debt
    0       1,500,000  
Repayments of FHLB advances and other debt
    0       (1,900,000 )
Cash dividends paid
    (192,112 )     (192,112 )
Proceeds from issuance of common stock under ESPP
    2,910       9,530  
Net cash from financing activities
    (8,306,772 )     2,705,351  
                 
Net change in cash and cash equivalents
    (4,300,344 )     5,948,325  
Beginning cash and cash equivalents
    27,692,015       14,496,494  
Ending cash and cash equivalents
  $ 23,391,671     $ 20,444,819  
                 
Supplemental cash flow information:
               
Interest paid
  $ 942,763     $ 1,273,023  
Income taxes paid
    193,164       140,000  
                 
Supplemental disclosure of noncash investing activities:
               
Transfer from loans to other real estate owned
  $ 120,760     $ 80,936  
Transfer from loans to other repossessed assets
    0       15,748  
 
See accompanying notes to consolidated financial statements.
 
 
5

 
 
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
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, 2011 contains consolidated financial statements and related notes, which should be read in conjunction with the accompanying consolidated financial statements.
 
 
6

 
 
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
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:

   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Numerator:
                       
Net income
  $ 238,553     $ 323,107     $ 492,108     $ 934,427  
Less: Preferred stock dividends and amortization, net
    (77,699 )     (77,700 )     (233,099 )     (233,099 )
Net income available to common shareholders
  $ 160,854     $ 245,407     $ 259,009     $ 701,328  
                                 
Denominator:
                               
Denominator for basic earnings per share available to common shareholders-weighted average shares
    587,337       586,651       587,271       586,387  
                                 
Effect of dilutive shares:
                               
Nonqualified stock options
    20,853       0       7,627       0  
                                 
Denominator for diluted earnings per share available to common shareholders
    608,190       586,651       594,898       586,387  
                                 
Basic earnings per common share
  $ 0.27     $ 0.42     $ 0.44     $ 1.20  
                                 
Diluted earnings per common share
  $ 0.26     $ 0.42     $ 0.44     $ 1.20  
                                 
Stock options not considered in computing diluted earnings per common share because they were antidilutive
    8,014       98,137       22,021       98,137  
 
Income Taxes:  The provision for income tax for the first nine months of 2012 was $193,164 on pre-tax income of $685,272 as compared to $383,850 on pre-tax income of $1,318,277 for the same period a year ago. The provision for federal income tax differs from pretax net income (loss) multiplied by the Company’s effective tax rate due primarily to the Company’s tax exempt interest income and earnings on Bank Owned Life Insurance (BOLI). 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 Company’s history of profitability, its history of paying income taxes, the trends in credit quality in its loan portfolio, and projections for 2012 and 2013. In management’s opinion, it is more likely than not that the tax benefits will be realized, therefore no valuation allowance has been established at September 30, 2012.

Reclassifications: For comparative purposes, certain amounts in the 2011 consolidated financial statements have been reclassified to conform to the 2012 presentation.

Adoption of New Accounting Standards:

In May, 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The effect of adopting this standard did not have a material effect on the Company’s operating results or financial condition, but the additional disclosures are included in Note 7.
 
 
7

 
 
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. The adoption of this amendment changed the presentation of the statement of comprehensive income for the Company to one continuous statement instead of presented as part of the consolidated statement of shareholders’ equity. The effect of adopting this amendment was not material.

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
 
September 30, 2012
                       
U.S. Treasury and federal agency
  $ 1,472,033     $ 52,552     $ 0     $ 1,524,585  
Mortgage-backed residential:
                               
Guaranteed by GNMA
    5,095,425       103,294       (1,562 )     5,197,157  
Issued by FHLMC
    965,259       44,803       0       1,010,062  
Issued by FNMA
    879,893       91,218       0       971,111  
Tax-free municipal
    6,781,237       364,665       (1,524 )     7,144,378  
Taxable municipal
    825,034       39,575       0       864,609  
    $ 16,018,881     $ 696,107     $ (3,086 )   $ 16,711,902  
 
December 31, 2011
                               
U.S. Treasury and federal agency
  $ 1,512,594     $ 10,079     $ 0     $ 1,522,673  
Mortgage-backed residential:
                               
Guaranteed by GNMA
    4,577,382       64,360       (6,828 )     4,634,914  
Issued by FHLMC
    1,303,203       49,088       0       1,352,291  
Issued by FNMA
    1,242,627       112,280       0       1,354,907  
Tax-free municipal
    5,746,801       355,410       0       6,102,211  
Taxable municipal
    827,875       20,437       (2,277 )     846,035  
    $ 15,210,482     $ 611,654     $ (9,105 )   $ 15,813,031  
 
All mortgage-backed securities are residential mortgage-backed securities issued by U.S. government sponsored entities.
 
 
8

 
 
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SECURITIES (continued)

Sales and calls of securities during the three and nine months ended September 30, 2012 and 2011 were as follows:

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Proceeds of sales
  $ 0     $ 0     $ 0     $ 693,489  
Proceeds of calls
    0       0       0       200,000  
Gross gains
    0       0       0       23,158  
Gross losses
    0       0       0       (19,224 )
 
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. Mortgage-backed securities, which are not due at a single maturity date, are shown separately.

   
Amortized
Cost
   
Fair
Value
 
Less than one year
  $ 220,058     $ 221,338  
One to five years
    3,359,494       3,590,136  
Five to ten years
    4,634,429       4,804,453  
Ten to fifteen years
    864,323       917,645  
Mortgage-backed residential
    6,940,577       7,178,330  
    $ 16,018,881     $ 16,711,902  
 
Securities pledged to secure public deposits at September 30, 2012 and December 31, 2011 had carrying amounts of $7,033,532 and $9,391,611, respectively.
 
 
9

 
 
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 2 – SECURITIES (continued)

The following table summarizes securities with unrealized losses at September 30, 2012 and December 31, 2011, 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
 
September 30, 2012
                                   
Mortgage backed residential:
                                   
Guaranteed by GNMA
  $ 0     $ 0     $ 301,905     $ (1,562 )   $ 301,905     $ (1,562 )
Issued by FNMA
    0       0       0       0       0       0  
Issued by FHLMC
    0       0       0       0       0       0  
Tax-free municipal
    453,359       (1,524 )     0       0       453,359       (1,524 )
Taxable municipal
    0       0       0       0       0       0  
Total
  $ 453,359     $ (1,524 )   $ 301,905     $ (1,562 )   $ 755,264     $ (3,086 )
 
December 31, 2011
                                               
Mortgage backed residential:
                                               
Guaranteed by GNMA
  $ 789,603     $ (6,828 )   $ 0     $ 0     $ 789,603     $ (6,828 )
Issued by FNMA
    0       0       0       0       0       0  
Issued by FHLMC
    0       0       0       0       0       0  
Tax-free municipal
    0       0       0       0       0       0  
Taxable municipal
    261,585       (2,277 )     0       0       261,585       (2,277 )
Total
  $ 1,051,188     $ (9,105 )   $ 0     $ 0     $ 1,051,188     $ (9,105 )
 
At September 30, 2012 there was one Ginnie Mae mortgage backed security that was in an unrealized loss position greater than twelve months. Management has the intent and ability to hold the security that was in an unrealized loss position for the foreseeable future and does not believe it is likely the Company will be required to sell the security before recovery of its amortized cost. At December 31, 2011, there were no securities that were in an unrealized loss position greater than twelve months.

At September 30, 2012 and December 31, 2011, 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.
 
 
10

 
 
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 3 – LOANS

The composition of the loan portfolio at September 30, 2012 and December 31, 2011 was as follows:

   
September 30,
2012
   
December 31,
2011
 
Commercial real estate
  $ 99,776,369     $ 99,920,808  
Commercial business
    22,746,676       24,568,450  
Residential mortgages:
               
Home equity lines of credit
    12,122,536       12,691,997  
1-4 family residential
    1,662,721       857,847  
Consumer:
               
Installment
    3,110,111       4,856,881  
Purchased auto loans
    358,244       721,446  
      139,776,657       143,617,429  
Less allowance for loan losses
    2,897,764       3,009,909  
    $ 136,878,893     $ 140,607,520  
 
The following table presents the activity in the allowance for loans losses by portfolio segment for the three and nine months ended September 30, 2012:

Three months ended
                                   
September 30, 2012                                    
Allowance for loan losses:
 
Commercial
Real Estate
   
Commercial
Business
    Residential     Consumer     Unallocated     Total  
Beginning Balance
  $ 2,154,885     $ 527,296     $ 106,207     $ 25,782     $ 24,631     $ 2,838,801  
Loans charged off
    (7,946 )     0       (7,601 )     0       0       (15,547 )
Recoveries
    23,397       51,000       0       113       0       74,510  
Provision for loan losses
    (45,562 )     (94,504 )     38,471       (10,954 )     112,549       0  
Total ending allowance balance
  $ 2,124,774     $ 483,792     $ 137,077     $ 14,941     $ 137,180     $ 2,897,764  
 
Nine months ended
                                               
September 30, 2012                                                
Allowance for loan losses:
 
Commercial
Real Estate
   
Commercial
Business
   
Residential
   
Consumer
   
Unallocated
   
Total
 
Beginning Balance
  $ 2,292,656     $ 495,964     $ 117,182     $ 42,039     $ 62,068     $ 3,009,909  
Loans charged off
    (308,086 )     (173,243 )     (46,161 )     0       0       (527,490 )
Recoveries
    84,009       51,000       0       336       0       135,345  
Provision for loan losses
    56,195       110,071       66,056       (27,434 )     75,112       280,000  
Total ending allowance balance
  $ 2,124,774     $ 483,792     $ 137,077     $ 14,941     $ 137,180     $ 2,897,764  
 
 
 
11

 
 
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 3 – LOANS (continued)

The following table presents the activity in the allowance for loans losses by portfolio segment for the three and nine months ended September 30, 2011:

Three months ended
                                   
September 30, 2011
                                   
Allowance for loan losses:
 
Commercial
Real Estate
   
Commercial
Business
   
Residential
   
Consumer
   
Unallocated
   
Total
 
Beginning Balance
  $ 3,153,135     $ 463,153     $ 136,379     $ 35,404     $ 172,575     $ 3,960,646  
Loans charged off
    (851,663 )     0       0       (3,240 )     0       (854,903 )
Recoveries
    12,179       3,120       0       38       0       15,337  
Provision for loan losses
    10,961       (70,770 )     5,137       4,770       71,716       21,814  
Total ending allowance balance
  $ 2,324,612     $ 395,503     $ 141,516     $ 36,972     $ 244,291     $ 3,142,894  
 
Nine months ended
                                               
September 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
    (1,463,894 )     (101,408 )     (46,108 )     (12,592 )     0       (1,624,002 )
Recoveries
    43,500       16,962       0       470       0       60,932  
Provision for loan losses
    278,501      
(186,488
)     25,252       14,318       30,065       161,648  
Total ending allowance balance
  $ 2,324,612     $ 395,503     $ 141,516     $ 36,972     $ 244,291     $ 3,142,894  
 
There were no material changes to the Company’s 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 September 30, 2012 and December 31, 2011.

   
Commercial
Real Estate
   
Commercial
Business
   
Residential
Mortgages
   
Consumer
   
Unallocated
   
Total
 
September 30, 2012
                                   
Allowance for loan losses
                                   
Ending allowance balance attributable to loans:
                                   
Individually evaluated for impairment
  $ 502,519     $ 464     $ 0     $ 0     $ 0     $ 502,983  
Collectively evaluated for impairment
    1,622,255       483,328       137,077       14,941       137,180       2,394,781  
Total ending allowance balance
  $ 2,124,774     $ 483,792     $ 137,077     $ 14,941     $ 137,180     $ 2,897,764  
                                                 
Loans
                                               
Loans individually evaluated for impairment
  $ 7,674,297     $ 336,019     $ 219,418     $ 896     $ 0     $ 8,230,630  
Loans collectively evaluated for impairment
    92,102,072       22,410,657       13,565,839       3,467,459       0       131,546,027  
Total ending loans balance
  $ 99,776,369     $ 22,746,676     $ 13,785,257     $ 3,468,355     $ 0     $ 139,776,657  
 
December 31, 2011
                                               
Allowance for loan losses
                                               
Ending allowance balance attributable to loans:
                                               
Individually evaluated for impairment
  $ 568,235     $ 729     $ 0     $ 0     $ 0     $ 568,964  
Collectively evaluated for impairment
    1,724,421       495,235       117,182       42,039       62,068       2,440,945  
Total ending allowance balance
  $ 2,292,656     $ 495,964     $ 117,182     $ 42,039     $ 62,068     $ 3,009,909  
                                                 
Loans
                                               
Loans individually evaluated for impairment
  $ 6,257,562     $ 157,991     $ 324,066     $ 0     $ 0     $ 6,739,619  
Loans collectively evaluated for impairment
    93,663,246       24,410,459       13,225,778       5,578,327       0       136,877,810  
Total ending loans balance
  $ 99,920,808     $ 24,568,450     $ 13,549,844     $ 5,578,327     $ 0     $ 143,617,429  
 
 
12

 
 
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 3 – LOANS (continued)

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2012:

September 30, 2012
 
Unpaid Principal Balance
   
Recorded Investment
   
Allowance for Loan Losses Allocated
 
With no related allowance recorded:
                 
Commercial real estate
  $ 4,504,458     $ 3,411,074     $ 0  
Commercial business
    286,467       286,467       0  
Residential mortgage:
                       
Home equity lines of credit
    239,007       165,799       0  
1-4 family residential
    53,619       53,619       0  
Consumer:
                       
Installment
    896       896       0  
Purchased auto loans
    0       0       0  
 
                       
With an allowance recorded:
                       
Commercial real estate
    4,263,223       4,263,223       502,519  
Commercial business
    49,552       49,552       464  
Residential mortgage:
                       
Home equity lines of credit
    0       0       0  
1-4 family residential
    0       0       0  
Consumer:
                       
Installment
    0       0       0  
Purchased auto loans
    0       0       0  
Total
  $ 9,397,222     $ 8,230,630     $ 502,983  
 
The recorded investment in loans excludes accrued interest receivable due to immateriality. The unpaid principal balance for purposes of this table includes $1,166,593 that has been partially charged off but not forgiven as of September 30, 2012.
 
 
13

 
 
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 3 – LOANS (continued)

The following table presents information related to loans individually evaluated for impairment by class of loans as of December 31, 2011:

December 31, 2011
 
Unpaid Principal Balance
   
Recorded Investment
   
Allowance for Loan Losses Allocated
 
With no related allowance recorded:
                 
Commercial real estate
  $ 5,242,788     $ 4,019,778     $ 0  
Commercial business
    150,164       150,164       0  
Residential mortgage:
                       
Home equity lines of credit
    239,007       211,960       0  
1-4 family residential
    112,106       112,106       0  
Consumer:
                       
Installment
    0       0       0  
Purchased auto loans
    0       0       0  
 
                       
With an allowance recorded:
                       
Commercial real estate
    2,237,784       2,237,784       568,235  
Commercial business
    7,827       7,827       729  
Residential mortgage:
                       
Home equity lines of credit
    0       0       0  
1-4 family residential
    0       0       0  
Consumer:
                       
Installment
    0       0       0  
Purchased auto loans
    0       0       0  
Total
  $ 7,989,676     $ 6,739,619     $ 568,964  
 
The recorded investment in loans excludes accrued interest receivable due to immateriality. The unpaid principal balance for purposes of this table includes $1,250,057 that has been partially charged off but not forgiven.

Interest income recognized during impairment for all periods was immaterial.
 
 
14

 
 
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 3 – LOANS (continued)

The following table presents the average recorded investment in loans individually evaluated for impairment as of and for the three months and nine months ended September 30:

   
Average Recorded Investment for the:
 
   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
With no related allowance recorded:
                       
Commercial real estate
  $ 3,464,859     $ 4,074,418     $ 3,166,738     $ 4,672,267  
Commercial business
    306,081       168,901       216,916       182,507  
Residential mortgage:
                               
Home equity lines of credit
    171,500       120,025       191,042       78,477  
1-4 family residential
    54,318       212,006       57,145       228,412  
Consumer:
                               
Installment
    224       0       90       0  
Purchased auto loans
    0       0       0       0  
 
                               
With an allowance recorded:
                               
Commercial real estate
    3,030,558       1,714,202       2,472,549       1,729,938  
Commercial business
    12,388       10,212       4,955       5,259  
Residential mortgage:
                               
Home equity lines of credit
    0       0       0       0  
1-4 family residential
    0       0       0       0  
Consumer:
                               
Installment
    0       0       0       0  
Purchased auto loans
    0       0       0       0  
Total
  $ 7,039,928     $ 6,299,764     $ 6,109,435     $ 6,896,860  
 
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 September 30, 2012 and December 31, 2011.

   
Nonaccrual
   
Loans Past Due Over
90 Days Still Accruing
 
   
September 30,
2012
   
December 31,
2011
   
September 30,
2012
   
December 31,
2011
 
Commercial real estate
  $ 4,727,939     $ 4,058,439     $ 0     $ 0  
Commercial business
    286,467       157,991       0       0  
Residential mortgage:
                               
Home equity lines of credit
    165,799       211,960       0       0  
1-4 family residential
    53,619       112,106       0       0  
Consumer:
                               
Installment
    896       0       0       0  
Purchased auto loans
    0       0       0       0  
Total
  $ 5,234,720     $ 4,540,496     $ 0     $ 0  
 
At September 30, 2012, there was $2,995,909 in restructured loans not included in nonaccrual loans, and $2,909,553 in restructured loans included in nonaccrual loans, all of which are considered impaired. At December 31, 2011, there was $2,199,123 in restructured loans not included in nonaccrual loans, and $968,033 in
 
 
15

 
 
WESTERN RESERVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 3 – LOANS (continued)

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 ninety 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 September 30, 2012 and December 31, 2011:

September 30, 2012
 
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
  $ 1,205,122     $ 94,336     $ 1,787,736     $ 3,087,194     $ 96,689,175     $ 99,776,369  
Commercial business
    581,774       0       49,552       631,326       22,115,350       22,746,676  
Residential mortgage:
                                               
Home equity lines of credit
    246,792       0       165,799       412,591       11,709,945       12,122,536  
1-4 family residential
    159,604       0       0       159,604       1,503,117       1,662,721  
Consumer:
                                               
Installment
    0       4,378       896       5,274       3,104,837       3,110,111  
Purchased auto loans
    8,556       0       0       8,556       349,688       358,244  
Total
  $ 2,201,848     $ 98,714     $ 2,003,983     $ 4,304,545     $ 135,472,112     $ 139,776,657  

At September 30, 2012, included in loans not past due are $3,226,670 of the $5,234,720 of nonaccrual loans that are current in accordance with their original or modified contractual terms.

December 31, 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
  $ 370,075     $ 468,600     $ 2,549,067     $ 3,387,742     $ 96,533,066     $ 99,920,808  
Commercial business
    74,959       159,348       63,634       297,941       24,270,509       24,568,450  
Residential mortgage:
                                               
Home equity lines of credit
    0       0       211,960       211,960       12,480,037       12,691,997  
1-4 family residential
    0       110,121       0       110,121       747,726       857,847  
Consumer:
                                               
Installment
    0       0       0       0       4,856,881       4,856,881  
Purchased auto loans
    561       0       0       561       720,885       721,446  
Total
  $ 445,595     $ 738,069     $ 2,824,661     $ 4,008,325