UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





xQuarterly Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934





For
the Quarterly Period ended September 30, 2010





oTransition 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
      Employerincorporation
      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
o





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
o





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 o
              
              Accelerated
      filer oNon-accelerated
      filer o
              
              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 o   No
x





585,887
shares of common stock, no par value, $1.00 stated value as of November 12,
2010.









WESTERN
RESERVE BANCORP, INC.


FORM
10-Q


Nine
months ended September 30, 2010





PagePART
      I—Financial
      InformationITEM
      1
            
            FINANCIAL
      STATEMENTSConsolidated
      Balance Sheets as of September 30, 2010and
      December 31, 2009
            
            3Consolidated
      Statements of Operations for the three- and nine-monthperiods
      ended September 30, 2010 and 2009
            
            4Consolidated
      Statements of Comprehensive Income (Loss) for the three-and
      nine-month periods ended September 30, 2010 and 2009
            
            5Consolidated
      Statements of Cash Flows for the nine-month periodsended
      September 30, 2010 and 2009
            
            6Notes
      to Consolidated Financial Statements
            
            7ITEM
      2
            
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OFFINANCIAL
      CONDITION AND RESULTS OF OPERATIONS
            
            18ITEM
      3
            
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUTMARKET
      RISK
            
            N/AITEM
      4
            
            CONTROLS
      AND PROCEDURES
            
            33PART
      II—Other Information
            
            34SIGNATURES
            
            38





2




WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
BALANCE SHEETS





September
      30,
              
              
              December
      31,2010
              
              
              2009(Unaudited)ASSETSCash
      and due from financial institutions
              
              $
              2,681,744
              
              
              $
              2,657,830Interest-bearing
      deposits in other financial institutions
              
              
              19,440,743
              
              
              
              15,005,771Federal
      funds sold
              
              
              293,000
              
              
              
              515,000Cash
      and cash equivalents
              
              
              22,415,487
              
              
              
              18,178,601Securities
      available for sale
              
              
              12,741,290
              
              
              
              10,019,225Loans
      held for sale
              
              
              145,000
              
              
              
              690,000Loans,
      net of allowance of $3,919,077 and $2,316,715
              
              
              158,424,992
              
              
              
              164,860,130Restricted
      stock
              
              
              966,100
              
              
              
              826,900Other
      real estate owned
              
              
              1,019,583
              
              
              
              1,067,814Premises
      and equipment, net
              
              
              1,072,055
              
              
              
              950,848Bank
      owned life insurance
              
              
              2,409,224
              
              
              
              2,334,187Prepaid
      Federal Deposit Insurance Corporation premiums
              
              
              723,540
              
              
              
              971,938Accrued
      interest receivable and other assets
              
              
              2,448,115
              
              
              
              2,033,310$
              202,365,386
              
              
              $
              201,932,953LIABILITIES
      AND SHAREHOLDERS' EQUITYDepositsNoninterest-bearing
              
              $
              19,863,915
              
              
              $
              22,789,030Interest-bearing
              
              
              161,115,806
              
              
              
              155,453,259Total
      deposits
              
              
              180,979,721
              
              
              
              178,242,289Federal
      Home Loan Bank advances
              
              
              1,900,000
              
              
              
              3,400,000Accrued
      interest payable and other liabilities
              
              
              908,387
              
              
              
              807,324Total
      Liabilities
              
              
              183,788,108
              
              
              
              182,449,613Shareholders'
      EquityCumulative
      preferred stock, no par value, $1,000 liquidation value:Series
      A, fixed rate, 4,700 shares authorized and issued at September 30, 2010
      and December 31, 2009
              
              
              4,700,000
              
              
              
              4,700,000Discount
      on Series A preferred stock
              
              
              (219,521
              )
              
              
              (264,939
              )Series
      B, fixed rate, 235 shares authorized and issued at September 30, 2010 and
      December 31, 2009
              
              
              235,000
              
              
              
              235,000Premium
      on Series B preferred stock
              
              
              21,419
              
              
              
              25,850Common
      stock, no par value, $1 stated value, 1,500,000 shares authorized, 585,887
      and 584,727 shares issued and outstanding as of September 30, 2010 and
      December 31, 2009
              
              
              585,887
              
              
              
              584,727Additional
      paid-in capital
              
              
              9,978,783
              
              
              
              9,933,257Retained
      earnings
              
              
              2,876,173
              
              
              
              4,036,186Accumulated
      other comprehensive income
              
              
              399,537
              
              
              
              233,259Total
      Shareholders' Equity
              
              
              18,577,278
              
              
              
              19,483,340$
              202,365,386
              
              
              $
              201,932,953




See
accompanying notes to consolidated financial statements.




3





WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)





Three
      months ended
            
            
            Nine
      months endedSeptember
      30,
            
            
            September
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Interest
      and dividend incomeLoans,
      including fees
            
            $
            2,146,293
            
            
            $
            2,100,245
            
            
            $
            6,429,724
            
            
            $
            6,037,808Securities:Taxable
            
            
            69,960
            
            
            
            72,327
            
            
            
            182,069
            
            
            
            212,172Tax exempt
            
            
            45,980
            
            
            
            44,367
            
            
            
            134,823
            
            
            
            127,541Dividends
      on restricted stock
            
            
            12,258
            
            
            
            10,504
            
            
            
            33,760
            
            
            
            28,908Federal
      funds sold and short-term investments
            
            
            12,615
            
            
            
            11,061
            
            
            
            36,235
            
            
            
            47,3552,287,106
            
            
            
            2,238,504
            
            
            
            6,816,611
            
            
            
            6,453,784Interest
      expenseDeposits
            
            
            517,960
            
            
            
            638,454
            
            
            
            1,629,791
            
            
            
            2,039,118Borrowings
            
            
            16,822
            
            
            
            31,744
            
            
            
            68,086
            
            
            
            120,935534,782
            
            
            
            670,198
            
            
            
            1,697,877
            
            
            
            2,160,053Net interest income
            
            
            1,752,324
            
            
            
            1,568,306
            
            
            
            5,118,734
            
            
            
            4,293,731Provision
      for loan losses
            
            
            1,400,001
            
            
            
            186,700
            
            
            
            2,967,530
            
            
            
            668,700Net interest income after provision for loan losses
            
            
            352,323
            
            
            
            1,381,606
            
            
            
            2,151,204
            
            
            
            3,625,031Noninterest
      incomeService
      charges on deposit accounts
            
            
            47,186
            
            
            
            50,547
            
            
            
            145,128
            
            
            
            149,998Net
      gains on sales of loans
            
            
            75,528
            
            
            
            9,646
            
            
            
            104,196
            
            
            
            19,542Other
            
            
            87,733
            
            
            
            69,410
            
            
            
            241,518
            
            
            
            191,487210,447
            
            
            
            129,603
            
            
            
            490,842
            
            
            
            361,027Noninterest
      expenseSalaries
      and employee benefits
            
            
            626,005
            
            
            
            640,860
            
            
            
            1,850,807
            
            
            
            1,900,677Occupancy
      and equipment
            
            
            193,804
            
            
            
            222,806
            
            
            
            636,164
            
            
            
            666,180Federal
      deposit insurance
            
            
            117,699
            
            
            
            73,078
            
            
            
            265,939
            
            
            
            287,095Data
      processing
            
            
            138,790
            
            
            
            100,257
            
            
            
            326,967
            
            
            
            293,704Professional
      fees
            
            
            38,836
            
            
            
            41,936
            
            
            
            167,465
            
            
            
            147,899Taxes
      other than income and payroll
            
            
            47,050
            
            
            
            46,893
            
            
            
            145,681
            
            
            
            142,147Directors'
      fees
            
            
            27,150
            
            
            
            35,800
            
            
            
            132,785
            
            
            
            107,850Collection
      and other real estate owned
            
            
            96,907
            
            
            
            39,702
            
            
            
            210,893
            
            
            
            90,374Marketing
      and advertising
            
            
            14,662
            
            
            
            12,162
            
            
            
            65,365
            
            
            
            58,551Community
      relations and contributions
            
            
            10,110
            
            
            
            13,563
            
            
            
            47,705
            
            
            
            54,442Other
            
            
            116,107
            
            
            
            95,430
            
            
            
            294,635
            
            
            
            245,5701,427,120
            
            
            
            1,322,487
            
            
            
            4,144,406
            
            
            
            3,994,489Income
      (loss) before income taxes
            
            
            (864,350
            )
            
            
            188,722
            
            
            
            (1,502,360
            )
            
            
            (8,431
            )Income
      tax expense (benefit)
            
            
            (314,639
            )
            
            
            42,286
            
            
            
            (575,447
            )
            
            
            (65,428
            )Net
      income (loss)
            
            $
            (549,711
            )
            
            $
            146,436
            
            
            $
            (926,913
            )
            
            $
            56,997Preferred
      stock dividends and amortization, net
            
            
            77,699
            
            
            
            77,700
            
            
            
            233,099
            
            
            
            116,549Net
      income (loss) available to common shareholders
            
            $
            (627,410
            )
            
            $
            68,736
            
            
            $
            (1,160,012
            )
            
            $
            (59,552
            )Earnings
      (loss) per common share:Basic
            
            $
            (1.07
            )
            
            $
            0.12
            
            
            $
            (1.98
            )
            
            $
            (0.10
            )Diluted
            
            $
            (1.07
            )
            
            $
            0.12
            
            
            $
            (1.98
            )
            
            $
            (0.10
            )




See
accompanying notes to consolidated financial statements.




4





WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(UNAUDITED)




Three
      months ended
                September
      30,
              
              
              Nine
      months ended
                September
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009Net
      income  (loss)
              
              $
              (549,711
              )
              
              $
              146,436
              
              
              $
              (926,913
              )
              
              $
              56,997Other
      comprehensive income, net of tax:Unrealized
      gains on securities arising during the period
              
              
              88,262
              
              
              
              147,683
              
              
              
              166,278
              
              
              
              149,256Comprehensive
      income (loss)
              
              $
              (461,449
              )
              
              $
              294,119
              
              
              $
              (760,635
              )
              
              $
              206,253


See
accompanying notes to consolidated financial statements.




5





WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Nine
      months ended
              September
      30,2010
            
            
            2009Cash
      flows from operating activitiesNet
      income (loss)
            
            $
            (926,913
            )
            
            $
            56,997Adjustments
      to reconcile net income to net cashfrom
      operating activities:Provision for loan losses
            
            
            2,967,530
            
            
            
            668,700Depreciation
            
            
            123,492
            
            
            
            139,982Net accretion of securities
            
            
            (3,378
            )
            
            
            (9,109
            )Stock-based compensation
            
            
            36,104
            
            
            
            1,643Loans originated for sale
            
            
            (1,708,600
            )
            
            
            (1,110,100
            )Proceeds from sales of loan originations
            
            
            3,449,322
            
            
            
            1,129,642Gains on sales of loans
            
            
            (104,195
            )
            
            
            (19,542
            )Loss
      on disposal of fixed assets
            
            
            3,408
            
            
            
            -Write-down of other real estate owned
            
            
            48,231
            
            
            
            -Increase in cash surrender value of bank owned life
    insurance
            
            
            (75,037
            )
            
            
            (76,336
            )Net change in other assets and other liabilities
            
            
            (48,869
            )
            
            
            (53,349
            )Net cash from operating activities
            
            
            3,761,095
            
            
            
            728,528Cash
      flows from investing activitiesAvailable
      for sale securities:Purchases
            
            
            (3,651,210
            )
            
            
            (1,540,746
            )Maturities, repayments and calls
            
            
            1,184,460
            
            
            
            989,354Purchase
      of restricted stock
            
            
            (139,200
            )
            
            
            (53,500
            )Net
      increase in interest-bearing deposits in other banks
            
            
            -
            
            
            
            (2,000,000
            )Net
      decrease (increase) in loans
            
            
            2,273,946
            
            
            
            (18,038,572
            )Purchases
      of premises and equipment
            
            
            (248,107
            )
            
            
            (94,747
            )Net cash from investing activities
            
            
            (580,111
            )
            
            
            (20,738,211
            )Cash
      flows from financing activitiesNet
      increase in deposits
            
            
            2,737,432
            
            
            
            8,143,777Net
      (repayment) proceeds on line of credit
            
            
            -
            
            
            
            (500,000
            )Net
      repayment of FHLB advances
            
            
            (1,500,000
            )
            
            
            (3,100,000
            )Net
      proceeds from issuance of preferred stock
            
            
            -
            
            
            
            4,661,756Dividends
      on preferred stock
            
            
            (192,112
            )
            
            
            (64,037
            )Proceeds
      from issuance of common stock under ESPP
            
            
            10,582
            
            
            
            17,576Net cash from financing activities
            
            
            1,055,902
            
            
            
            9,159,072Change
      in cash and cash equivalents
            
            
            4,236,886
            
            
            
            (10,850,611
            )Cash
      and cash equivalents at beginning of period
            
            
            18,178,601
            
            
            
            21,302,463Cash
      and cash equivalents at end of period
            
            $
            22,415,487
            
            
            $
            10,451,852Supplemental
      cash flow information:Interest
      paid
            
            $
            1,665,546
            
            
            $
            2,121,629Income
      taxes paid
            
            
            35,000
            
            
            
            10,000Supplemental
      disclosure of noncash investing activities:Transfer
      from loans to other real estate owned
            
            $
            -
            
            
            $
            411,334Transfer
      from loans to other repossessed assets
            
            
            102,135
            
            
            
            10,300Transfer
      from loans to loans held for sale
            
            
            1,091,527
            
            
            
            -




See
accompanying notes to consolidated financial statements.




6




WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2010





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, a lending office in Wooster, 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, Brecksville and a lending office in Wooster, Ohio, to
consumers and businesses located primarily in Medina, Cuyahoga, Wayne 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 future
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, 2009 contains consolidated financial statements and related notes, which
should be read in conjunction with the accompanying consolidated financial
statements.




7




WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2010





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
            
            
            Nine
      months endedSeptember
      30,
            
            
            September
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Numerator:Net
      income  (loss)
            
            $
            (549,711
            )
            
            $
            146,436
            
            
            $
            (926,913
            )
            
            $
            56,997Preferred
      stock dividends and amortization, net
            
            
            (77,699
            )
            
            
            (77,700
            )
            
            
            (233,099
            )
            
            
            (116,549
            )Net
      income (loss) available to common shareholders
            
            
            (627,410
            )
            
            
            68,736
            
            
            
            (1,160,012
            )
            
            
            (59,552
            )Denominator:Denominator
      for basic earnings (loss) per share available to common
      shareholders-weighted average shares
            
            
            585,424
            
            
            
            584,260
            
            
            
            585,079
            
            
            
            583,852Effect
      of dilutive shares:Nonqualified
      stock options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Denominator
      for diluted earnings (loss) per share available to common
      shareholders
            
            
            585,424
            
            
            
            584,260
            
            
            
            585,079
            
            
            
            583,852Basic
      earnings (loss) per common share
            
            $
            (1.07
            )
            
            $
            0.12
            
            
            $
            (1.98
            )
            
            $
            (0.10
            )Diluted
      earnings (loss) per common share
            
            $
            (1.07
            )
            
            $
            0.12
            
            
            $
            (1.98
            )
            
            $
            (0.10
            )Stock
      options not considered in computing diluted earnings per common share
      because they were antidilutive
            
            
            98,137
            
            
            
            104,387
            
            
            
            98,137
            
            
            
            104,387





Income
Taxes:  The provision for income tax for the first nine months
of 2010 was a benefit of $575,447 on a pre-tax loss of $1,502,360 as compared to
a benefit of $65,428 on pre-tax loss of $8,431 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 to the Company’s tax
exempt income which remained relatively consistent with the first nine 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 a 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,




8





WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2010





NOTE 1 - ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(continued)





Reclassifications: For comparative purposes,
certain amounts in the 2009 consolidated financial statements have been
reclassified to conform to the 2010 presentation.





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 separate presentation of significant
transfers into and out of Levels 1 and 2 of the fair value hierarchy and
disclosure of the reasons for such transfers.  It will also require
the presentation of purchases, sales, issuances and settlements within Level 3
on a gross basis rather than a net basis.  The amendments also clarify
that disclosures should be disaggregated by class of asset or liability and that
disclosures about inputs and valuation techniques should be provided for both
recurring and non-recurring fair value measurements.  These new
disclosure requirements were adopted by the Company during the current period,
with the exception of the requirement concerning gross presentation of Level 3
activity, which is effective for fiscal years beginning after December 15,
2010.  With respect to the portions of this amendment that were
adopted during the current period, the adoption of this standard did not have a
significant impact on the Company’s consolidated financial
statements.  The Company believes that the adoption of the remaining
portion of this amendment will not have a significant impact on the consolidated
financial statements.





In July
2010, the FASB issued a statement which expands disclosures about credit quality
of financing receivables and the allowance for credit losses.  The
standard will require the Company to expand disclosures about the credit quality
of loans and the related reserves against them.  The additional
disclosures will include details on past due loans, credit quality indicators
and modifications of loans.  The statement is effective for interim
and annual reporting periods after December 15, 2010.  The Company
will include these disclosures beginning with its December 31, 2010 consolidated
financial statements.




9




WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2010





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:





Gross
            
            
            GrossAmortized
            
            
            Unrealized
            
            
            UnrealizedCost
            
            
            Gains
            
            
            Losses
            
            
            Fair
      ValueSeptember
      30, 2010Mortgage-backed
      residential
            
            $
            6,992,192
            
            
            $
            275,525
            
            
            $
            -
            
            
            $
            7,267,717Tax-exempt
      municipal
            
            
            4,890,008
            
            
            
            325,503
            
            
            
            -
            
            
            
            5,215,511Taxable
      municipal
            
            
            253,731
            
            
            
            4,331
            
            
            
            -
            
            
            
            258,062$
            12,135,931
            
            
            $
            605,359
            
            
            $
            -
            
            
            $
            12,741,290December
      31, 2009Mortgage-backed
      residential
            
            $
            5,048,768
            
            
            $
            215,372
            
            
            $
            -
            
            
            $
            5,264,140Tax-exempt
      municipal
            
            
            4,617,035
            
            
            
            141,682
            
            
            
            (3,632
            )
            
            
            4,755,085$
            9,665,803
            
            
            $
            357,054
            
            
            $
            (3,632
            )
            
            $
            10,019,225




All
mortgage-backed securities are residential mortgage-backed securities issued by
U.S. government-sponsored entities.





The
amortized cost and fair value of debt securities at September 30, 2010 by
contractual maturity were as follows.  Mortgage-backed securities
which are not due at a single maturity date are shown
separately.  Actual maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations.





Amortized
              Cost
            
            
            Fair
              ValueDue
      in less than one year
            
            $
            -
            
            
            $
            -Due
      from one to five years
            
            
            588,563
            
            
            
            624,955Due
      from five to ten years
            
            
            3,893,777
            
            
            
            4,157,925Due
      from ten to fifteen years
            
            
            661,399
            
            
            
            690,693Mortgage-backed
      residential
            
            
            6,992,192
            
            
            
            7,267,717$
            12,135,931
            
            
            $
            12,741,290




At
September 30, 2010, there were no securities that were in an unrealized loss
position.  At December 31, 2009, one municipal security with a value
of $220,527 and an unrealized loss of $3,632 had been in a continuous unrealized
loss position for less than twelve months and no other securities were in an
unrealized loss position.  Management had the intent and ability to
hold the security that was in an unrealized loss position at year-end for the
foreseeable future and did not believe it was likely the Company would be
required to sell the security before recovery of its amortized
cost.  Timely repayment of principal and interest on mortgage-backed
securities held by the Company is guaranteed by the U. S. government sponsored
enterprise issuers.




10





WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2010





NOTE
3 - LOANS





Loans at
September 30, 2010 and December 31, 2009 were as follows:





September
      30,
              
              
              December
      31,2010
              
              
              2009Commercial
      real estate
              
              $
              116,769,671
              
              
              $
              119,004,845Commercial
      construction
              
              
              5,615,877
              
              
              
              6,319,927Commercial
      business
              
              
              22,036,014
              
              
              
              23,998,524Home
      equity
              
              
              10,738,386
              
              
              
              10,211,566Residential
      mortgage and construction
              
              
              822,039
              
              
              
              933,687Consumer
      and other loans
              
              
              4,607,751
              
              
              
              4,096,687Purchased
      auto loans
              
              
              1,747,732
              
              
              
              2,589,488Other
              
              
              6,599
              
              
              
              22,121162,344,069
              
              
              
              167,176,845Less
      allowance for loan losses
              
              
              3,919,077
              
              
              
              2,316,715$
              158,424,992
              
              
              $
              164,860,130








Activity
in the allowance for loan losses for the three and nine months ended September
30, 2010 and 2009 was as follows:





Three
      months ended
              Sept.
      30,
            
            
            Nine
      months ended
              Sept.
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Beginning
      balance
            
            $
            3,058,200
            
            
            $
            2,088,569
            
            
            $
            2,316,715
            
            
            $
            1,743,470Provision
      for loan losses
            
            
            1,400,001
            
            
            
            186,700
            
            
            
            2,967,530
            
            
            
            668,700Loans
      charged off
            
            
            (575,718
            )
            
            
            (27,602
            )
            
            
            (1,403,412
            )
            
            
            (167,932
            )Recoveries
            
            
            36,594
            
            
            
            2,592
            
            
            
            38,244
            
            
            
            6,021Ending
      balance
            
            $
            3,919,077
            
            
            $
            2,250,259
            
            
            $
            3,919,077
            
            
            $
            2,250,259





At
September 30, 2010 and December 31, 2009, loans totaling $6,165,600 and
$3,698,621, respectively, were in nonaccrual status, defined as loans which
management deems the full repayment to be in doubt, typically if payments are
past due more than 90 days.  Interest income is not recorded on these
loans.  There was one consumer loan in the amount of $16,575 that was
more than 90 days past due and still accruing at September 30, 2010, compared
with none at December 31, 2009.  At September 30, 2010 there were
$3,969,478 in restructured loans not included in nonaccrual loans, and
$1,170,374 in restructured loans included in nonaccrual loans, all of which are
considered impaired. At December 31, 2009 there were $1,834,245 in restructured
loans not included in nonaccrual loans, and $1,723,982 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.




11




WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2010





NOTE
3 – LOANS (continued)





Loans
individually considered impaired were as follows:





September
      30,
            
            
            December
      31,2010
            
            
            2009Loans
      considered impairedWith
      no allocated allowance for loan losses
            
            $
            5,374,036
            
            
            $
            3,322,718With
      an allocated allowance for loan losses
            
            
            4,745,165
            
            
            
            2,103,343$
            10,119,201
            
            
            $
            5,426,061Amount
      of the allowance for loan losses allocated
            
            $
            1,576,672
            
            
            $
            361,000




NOTE
4 - DEPOSITS





Interest-bearing
deposits at September 30, 2010 and December 31, 2009 were as
follows:





September
      30,
            
            
            December
      31,2010
            
            
            2009Interest-bearing
      checking
            
            $
            9,992,785
            
            
            $
            9,772,226Savings
            
            
            39,650,872
            
            
            
            37,132,223Money
      market
            
            
            30,899,321
            
            
            
            29,107,414Time
      under $100,000
            
            
            32,421,525
            
            
            
            34,499,050Time
      $100,000 and over
            
            
            48,151,303
            
            
            
            44,942,346$
            161,115,806
            
            
            $
            155,453,259




At
September 30, 2010 and December 31, 2009, the Bank had $18,609,256 and
$19,356,801, 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 $1,900,000 and $3,400,000 at September 30,
2010 and December 31, 2009, respectively.  The advances at September
30, 2010 are collateralized by approximately $47,066,000 of loans secured by
real estate and $488,000 of FHLB stock under a blanket lien
agreement.  As of September 30, 2010 the Company’s available borrowing
capacity with the FHLB was $15,937,000, subject to the acquisition of additional
shares of FHLB stock.





12




WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2010





NOTE
5—FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (continued)





The
Company has a line of credit agreement with another financial institution to
obtain funding to provide capital and liquidity to the Bank as
needed.  This credit line was $3,000,000 at September 30, 2010, with
up to $2,000,000 for the purpose of providing additional capital to the Bank as
needed, and up to $1,000,000 for liquidity purposes.  The interest
rate on the line is variable, at 50 basis points (bp) above the prime rate or
LIBOR plus 3.00%, at the Company’s option at the time the line is
drawn.  The line is secured by 100% of the stock of the
Bank.  In the September 2010, the line was renewed and modified, with
a maturity of July 1, 2012.  There were no funds drawn on the line of
credit at September 30, 2010 or December 31, 2009.





There are
certain covenants on the line relating to the Company’s and the Bank’s operating
performance and capital status.  As part of the renewal and
modification, all covenant violations through June 30, 2010 were waived and
several covenants were modified.  As of September 30, 2010, the
Company and the Bank were in compliance with all but one of these covenants. The
Bank’s ratio of nonperforming loans, defined as nonaccruing loans and loans
delinquent 90 days or more to total assets was 3.05% at September 30, 2010,
above the covenant of 2.35% or less.





The
Company has the ability to borrow under various other credit facilities that
totaled $6,332,000 at September 30, 2010.  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 $5,332,000 is
available from another correspondent bank secured by the Company’s unpledged
securities.





NOTE
6 – STOCK COMPENSATION PLAN





The
following is the stock option activity for the period indicated:





Nine
      months ended
              September
      30, 2010Shares
            
            
            Weighted
      Average Exercise PriceOptions
      outstanding, beginning of period
            
            
            104,387
            
            
            $
            18.62Forfeited
            
            
            (6,250
            )
            
            
            18.00Exercised
            
            
            -
            
            
            
            -Granted
            
            
            -
            
            
            
            -Options
      outstanding, end of period
            
            
            98,137
            
            
            $
            18.65Options
      exercisable, end of period
            
            
            97,012
            
            
            $
            18.56





13




WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2010





NOTE
6 – STOCK COMPENSATION PLAN (continued)





Intrinsic
value is defined as the excess of the price of the Company’s stock over the
exercise price of the option.  The market price of the Company’s stock
was less than the exercise price of the options outstanding at September 30,
2010; therefore there was no intrinsic value of the options outstanding and
exercisable at September 30, 2010.





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
$35,035. The related income tax benefit was $11,912.  The impact of
the extension of the expiration date of director options also increased paid-in
capital by $35,000.





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 entity’s 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




14




WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2010





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:





Fair Value Measurements
    UsingQuoted
      Prices in Active Markets for Identical Assets(Level One)
            
            
            Significant
      Other Observable Inputs(Level
      Two)
            
            
            Significant
      Unobservable Inputs(Level
      Three)September 30,
      2010Assets
      and liabilities measured at fair value:·on a
      recurring basis:Investment
      securities available for saleMortgage-backed
      residential
            
            $
            -
            
            
            $
            7,267,717
            
            
            $
            -Tax-exempt
      municipal
            
            
            
            
            
            
            5,215,511
            
            
            
            -Taxable
      municipal
            
            
            -
            
            
            
            258,062
            
            
            
            -·on a
      nonrecurring basis:Impaired
      loans
            
            
            -
            
            
            
            -
            
            
            
            3,168,493Other
      real estate owned
            
            
            
            
            
            
            
            
            
            
            1,019,583


December 31,
      2009Assets
      and liabilities measured at fair value·on a
      recurring basis:Investment
      securities available for saleMortgage-backed
      residential
            
            
            -
            
            
            
            5,264,140
            
            
            
            -Tax-exempt
      municipal
            
            
            -
            
            
            
            4,755,085
            
            
            
            -·on a
      nonrecurring basis:Impaired
      loans
            
            
            -
            
            
            
            -
            
            
            
            1,742,343





Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had an unpaid principal balance of $4,745,165
with valuation allowances of $1,576,672 at September 30,
2010.  Impaired loans resulted in an additional provision for loan
losses of approximately $2,600,000 for the nine months ending September 30,
2010.  At December 31, 2009, impaired loans had a principal balance of
$2,103,343, with a valuation allowance of $361,000.




15




WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2010





NOTE 7 – FAIR VALUE(continued)





Impairment
charges of $319,000 were recorded through the provision for loan losses in the
nine months ended September 30, 2009.





Other
real estate owned, which is measured at the lower of carrying or fair value less
costs to sell, had a net carrying amount of $1,019,583, which is made up of the
outstanding balance of $1,067,514, net of a valuation allowance of $47,931 at
September 30, 2010, resulting in a write-down of $47,931 for the nine months
ended September 30, 2010.





The
carrying amounts and estimated fair values of financial instruments, at
September 30, 2010 and December 31, 2009 are as follows:





September 30, 2010
            
            
            December 31, 2009Carrying
              Amount
            
            
            Estimated
              Fair Value
            
            
            Carrying
              Amount
            
            
            Estimated
              Fair ValueCash
      and cash equivalents
            
            $
            22,415,487
            
            
            $
            22,415,000
            
            
            $
            18,178,601
            
            
            $
            18,179,000Securities
      available for sale
            
            
            12,741,290
            
            
            
            12,741,000
            
            
            
            10,019,225
            
            
            
            10,019,000Loans,
      net of allowance
            
            
            158,424,992
            
            
            
            156,910,000
            
            
            
            164,860,130
            
            
            
            164,395,000Loans
      held for sale
            
            
            145,000
            
            
            
            149,000
            
            
            
            690,000
            
            
            
            697,000Accrued
      interest receivable
            
            
            521,401
            
            
            
            521,000
            
            
            
            491,845
            
            
            
            492,000Demand
      and savings deposits
            
            
            (100,406,893
            )
            
            
            (100,407,000
            )
            
            
            (98,800,893
            )
            
            
            (98,801,000
            )Time
      deposits
            
            
            (80,572,828
            )
            
            
            (80,144,000
            )
            
            
            (79,441,396
            )
            
            
            (79,453,000
            )Federal
      Home Loan Bankadvances
            
            
            (1,900,000
            )
            
            
            (1,942,000
            )
            
            
            (3,400,000
            )
            
            
            (3,401,000
            )Accrued
      interest payable
            
            
            (148,404
            )
            
            
            (148,000
            )
            
            
            (116,073
            )
            
            
            (116,000
            )





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.




16




WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2010





NOTE
8 – REGULATORY CAPITAL MATTERS





During
the nine months ended September 30, 2010 the Bank had two intercompany
transactions with Western Reserve Bancorp, Inc (the Holding Company): 1) $4.0
million in subordinated debt which qualified as Tier-two regulatory capital at
December 31, 2009 was repaid to the Holding Company by the Bank and 2) of the
$4.0 million repaid, the Holding Company downstreamed $3.5 million to the Bank
as paid-in capital which qualifies as Tier-one regulatory capital.





At
September 30, 2010 and December 31, 2009, Western Reserve Bank’s risk-based
capital ratios and the minimums to be considered well-capitalized under the
Federal Reserve Board’s 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($
      in thousands)
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioSeptember 30,
      2010Total
      Capital to risk-weighted assets
            
            $
            19,764
            
            
            
            12.1
            %
            
            $
            13,052
            
            
            
            8.0
            %
            
            $
            16,314
            
            
            
            10.0
            %Tier
      1 (Core) Capital to risk-weighted assets
            
            
            17,702
            
            
            
            10.9
            %
            
            
            6,526
            
            
            
            4.0
            %
            
            
            9,789
            
            
            
            6.0
            %Tier
      1 (Core) Capital to average assets
            
            
            17,702
            
            
            
            8.5
            %
            
            
            8,288
            
            
            
            4.0
            %
            
            
            10,360
            
            
            
            5.0
            %December 31,
      2009Total
      Capital to   risk-weighted assets
            
            $
            21,270
            
            
            
            12.3
            %
            
            $
            13,835
            
            
            
            8.0
            %
            
            $
            17,294
            
            
            
            10.0
            %Tier
      1 (Core) Capital to risk-weighted assets
            
            
            15,106
            
            
            
            8.7
            %
            
            
            6,918
            
            
            
            4.0
            %
            
            
            10,376
            
            
            
            6.0
            %Tier
      1 (Core) Capital to average assets
            
            
            15,106
            
            
            
            7.7
            %
            
            
            7,824
            
            
            
            4.0
            %
            
            
            9,780
            
            
            
            5.0
            %





Due to
the current operating losses of the Bank, regulatory approval would be needed to
pay dividends from the Bank to the Holding Company.




17





WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





OVERVIEW





The
following discussion compares the financial condition of Western Reserve
Bancorp, Inc. (the Company) and its wholly-owned subsidiary, Western Reserve
Bank (the Bank) at September 30, 2010, to that of December 31, 2009, and the
results of operations for the three and nine months ended September 30, 2010 and
2009.  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 Company’s actual
results, performance or achievements may materially differ from those expressed
or implied in the forward-looking statements.  Risks and uncertainties
that could cause or contribute to such material differences include, but are not
limited to, general economic conditions, the interest rate environment,
competitive conditions in the financial services industry, changes in law,
governmental policies and regulations, and rapidly changing technology affecting
financial services.





FINANCIAL
CONDITION





Assets





Total
assets as of September 30, 2010 increased $432,000, or 0.2%, to $202,365,000
compared with $201,933,000 at December 31, 2009.





Growth in
deposits of $2,737,000, as well as a decrease of $4,833,000 in loans before the
allowance for loan losses, provided funds used to increase the
available-for-sale securities portfolio by $2,722,000, and increase
interest-bearing deposits in other banks (primarily the Federal Reserve Bank),
by $4,435,000.





Cash and
cash equivalents increased $4,237,000, or 23.3%, to $22,415,000 from $18,179,000
at year-end 2009.





During
the third quarter, the Company purchased an additional $3,380,000 in securities,
primarily residential mortgage-backed securities guaranteed by the U.S.
government.  As of September 30, 2010, there were approximately
$7,268,000 in mortgage-backed securities and $5,474,000 in primarily tax-exempt
municipal bonds in the available-for-sale securities portfolio.  These
totals include the effect of unrealized gains of $605,000 in the
available-for-sale securities portfolio as of September 30,
2010.  Municipal bonds generally have maturities of up to fifteen
years.




18





WESTERN RESERVE BANCORP,
INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





FINANCIAL CONDITION(continued)





Loans
before the allowance for loan losses decreased $4.8 million to $162,344,000 at
September 30, 2010, compared with $167,177,000 at December 31,
2009.   The Company has traditionally focused on growth in the
loan portfolio and making loans to qualified borrowers remains a tenet of the
Company’s business model.  However, in 2010 the Company’s focus on
growth has been less than in prior years in response to the continuing weak
economy and its negative impact on some borrowers and potential
borrowers.





As of
September30, 2010, commercial loans totaled $144,422,000, or 89.0% of total
loans.  Home equity lines and residential real estate loans totaled
$11,560,000, or 7.1% of total loans and consumer and other loans totaled
$6,362,000, or 3.9% of total loans.





The
Company’s loan-to-deposit ratio decreased to 89.7% at September 30, 2010,
compared to 93.8% at December 31, 2009.  The Company’s loan-to-assets
ratio also decreased in the first nine months of 2010, to 80.2% at September 30,
2010 from 82.8% at December 31, 2009.  Management anticipates that the
loan-to-deposit ratio for the remainder of 2010 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 September 30, 2010, approximately $115,962,000 or 71.4% are at a
variable interest rate, and $46,382,000 or 28.6% are at a fixed interest
rate.  Including scheduled principal repayments, approximately
$106,406,000, or 65.5%, of loans mature or are scheduled to reprice within
twelve months.  An additional $53,735,000 or 33.1% of loans mature or
are scheduled to reprice within five years.





The
Company sold the guaranteed portion of five Small Business Administration (SBA)
loans in the second quarter of 2010.  The sold portions of these loans
were carried as loans held for sale in accordance with accounting guidance on
transfers of financial assets until the 90-day warranty period expired in the
third quarter.  The funds received were carried as a secured
liability. The Company recognized a gain of $65,000 on these loan sales in the
third quarter of 2010.





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.  Management’s determination of the appropriate provision
for loan losses and the adequacy of the allowance for loan losses is based on
the Company’s historical losses 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 Company’s borrowers and other related factors.  The Company’s loan
loss methodology provides larger allowances for loans with risk grades
indicating increased risk characteristics.  The provision for loan
losses was $2,967,530 and $668,700 for the nine months ended
September 30, 2010 and 2009, respectively, representing an increase of
$2,298,830.  The Company believes the allowance for loan losses at
September 30, 2010, is adequate to absorb probable incurred losses in the loan
portfolio.




19




WESTERN RESERVE BANCORP,
INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





FINANCIAL CONDITION(continued)





The
allowance for loan losses and related information for the nine months ended
September 30, 2010 is included in the following table.





Commercial
                Real
      Estate
              
              
              Commercial
      & Industrial
              
              
              Residential
              
              
              Consumer
              
              
              TotalBeginning
      Balance
              
              $
              1,672,075
              
              
              $
              530,223
              
              
              $
              53,661
              
              
              $
              60,756
              
              
              $
              2,316,715Charge-offs
              
              
              (593,550
              )
              
              
              (766,894
              )
              
              
              (6,785
              )
              
              
              (36,183
              )
              
              
              (1,403,412
              )Recoveries
              
              
              15,311
              
              
              
              358
              
              
              
              17,475
              
              
              
              5,100
              
              
              
              38,244Provisions
              
              
              1,990,479
              
              
              
              944,394
              
              
              
              25,423
              
              
              
              7,233
              
              
              
              2,967,530Ending
      Balance
              
              $
              3,084,315
              
              
              $
              708,081
              
              
              $
              89,774
              
              
              $
              36,906
              
              
              $
              3,919,077Components
      of the Allowance for Loan Losses:General
      allowance
              
              $
              1,881,556
              
              
              $
              329,534
              
              
              $
              89,774
              
              
              $
              36,906
              
              
              $
              2,337,771Specific
      allowance
              
              
              1,202,759
              
              
              
              378,547
              
              
              
              -
              
              
              
              -
              
              
              
              1,581,306Subtotal
              
              $
              3,084,315
              
              
              $
              708,081
              
              
              $
              89,774
              
              
              $
              36,906
              
              
              $
              3,919,077Loans
      evaluated for impairment at period-end:Individually
              
              $
              8,823,705
              
              
              $
              1,051,464
              
              
              
              244,032
              
              
              
              N/A
              
              
              $
              10,119,201Collectively
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              15,877
              
              
              
              15,877




In the
first nine months of 2010, loans totaling $1,403,000 were charged off and
$38,000 was recovered on loans previously charged off.  In the like
period in 2009, loans totaling $168,000 were charged off and $6,000 was
recovered on loans previously charged off. The allowance for loan losses was
2.41% and 1.39% of total loans at September 30, 2010 and December 31, 2009,
respectively. At
September 30, 2010, $1,581,000 or 40.35% of the allowance for loan losses was
allocated to impaired loan balances individually.  At December 31,
2009, $361,000 or 15.58% of the allowance for loan losses was allocated to
impaired loan balances individually.





At
September 30, 2010, forty-three loans totaling $6,165,600 to seventeen borrowers
were in nonaccrual status, compared to twenty-six loans to sixteen borrowers
totaling $3,698,621 at year-end 2009.  At September 30, 2010, there
were eleven loans to six borrowers not on nonaccrual status totaling $3,969,478
classified as troubled debt restructurings (“TDR”) because a concession had been
granted based on the borrowers’ financial difficulty.  At December 31,
2009, there were eight loans to two borrowers not on nonaccrual status totaling
$1,834,245 classified as TDRs.  The borrowers with TDR loans were
making payments in accordance with their modified terms at September 30, 2010
and December 31, 2009.




20




WESTERN RESERVE BANCORP,
INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





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 hurt by the recessionary economic conditions.





Information
related to the Company’s credit risk profile by internally assigned grade at
September 30, 2010, is included in the following table.




Commercial
              Real
      Estate
            
            
            Commercial
      & Industrial
            
            
            Residential
            
            
            Consumer
            
            
            TotalGrade:Pass
            
            $
            85,926,371
            
            
            $
            18,777,422
            
            
            $
            11,316,393
            
            
            $
            6,346,205
            
            
            $
            122,366,391Watch
            
            
            8,140,590
            
            
            
            422,600
            
            
            
            
            
            
            
            
            
            
            
            8,563,190Special
      mention
            
            
            11,236,662
            
            
            
            792,541
            
            
            
            
            
            
            
            
            
            
            
            12,029,203Substandard
            
            
            8,258,220
            
            
            
            991,987
            
            
            
            
            
            
            
            
            
            
            
            9,250,207Nonaccruing
      and troubled debt restructurings
            
            
            8,823,705
            
            
            
            1,051,464
            
            
            
            244,032
            
            
            
            15,877
            
            
            
            10,135,078Total
            
            $
            122,385,548
            
            
            $
            22,036,014
            
            
            $
            11,560,425
            
            
            $
            6,362,082
            
            
            $
            162,344,069




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 borrower’s financial strength may have
deteriorated.  Industries such as commercial real estate management
and real estate development are particularly affected by current economic
conditions.





In the
third quarter of 2010, compared to the second quarter, loans graded lower than
“pass” increased by $4.7 million.  During the second and third
quarters, as the Company received and reviewed financial information from its
borrowers, management downgraded certain loans.  As a result,
additional amounts were set aside in the allowance for loan losses to reflect
the increased potential risk of loss in those loans.





The
Company’s delinquent loans are very low, with only $55,000 in loans past due
more than 30 days (excluding loans on nonaccrual status).  Delinquent
loans by type and number of days delinquent at September 30, 2010 are included
in the table below.





Commercial
              Real
      Estate
            
            
            Commercial
      & Industrial
            
            
            Residential
            
            
            Consumer
            
            
            TotalNumber
      of days past due on accruing loans:31
      to 60
            
            $
            -
            
            
            $
            401
            
            
            $
            -
            
            
            $
            -
            
            
            $
            40161
      to 90
            
            
            -
            
            
            
            30,000
            
            
            
            -
            
            
            
            8,131
            
            
            
            38,131Over
      90
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            16,575
            
            
            
            16,575Total
            
            $
            -
            
            
            $
            30,401
            
            
            $
            -
            
            
            $
            24,706
            
            
            $
            55,107





21




WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





FINANCIAL CONDITION(continued)





At
September 30, 2010, the Company’s other real estate owned (OREO) totaled
$1,020,000 and consisted of two commercial real estate
properties.  This amount represents the fair value of each property
reduced by management’s estimate of anticipated costs to market and sell the
property.  The Company entered into lease arrangements for the OREO
properties in 2009 resulting in rental income of $57,853 and $20,875 in the
first nine months of 2010 and 2009, respectively.  The lessee of one
of the properties has the right to purchase the property during the three-year
lease term.  The other OREO property is leased on a short-term
basis.





Liabilities





Deposits
were $180,980,000 at September 30, 2010, an increase of 1.5% from the
$178,242,000 at December 31, 2009.  Deposits at September 30, 2010
consisted of:





Type of deposit
            
            Balance
            
            
            % TotalNoninterest-bearing
      checking
            
            $
            19,864,000
            
            
            
            11.0
            %Interest-bearing
      checking
            
            
            9,993,000
            
            
            
            5.5
            %Variable
      rate savings/money market (Market Rate Savings Accounts)
            
            
            70,550,000
            
            
            
            39.0
            %Time
      deposits
            
            
            80.573,000
            
            
            
            44.5
            %Total
            
            $
            180,980,000
            
            
            
            100.0
            %





Included
in the time deposits total at September 30, 2010 and December 31, 2009 were
$18,609,000 and $19,357,000, respectively, of national market CDs, primarily
from other banks and credit unions, in amounts that qualify for FDIC insurance,
with original terms ranging from nine months to five years, and rates ranging
from 0.25% to 4.90%.  As of September 30, 2010, the weighted average
interest rate paid on these CDs was 2.02% and the weighted average remaining
maturity was 14.0 months.  Although management believes these CDs were
obtained at market rates at the time they were originated, they may be more
vulnerable to price sensitivity than local deposits.





Federal
Home Loan Bank (FHLB) advances decreased to $1.9 million at September 30, 2010
from $3.4 million at year-end 2009.  FHLB advances totaling $1,500,000
matured and were repaid in the first nine months of 2010.   FHLB
advances are collateralized by loans secured by real estate under a blanket lien
agreement.  At September 30, 2010 the Company’s available borrowing
capacity with the FHLB was $15.9 million, subject to the acquisition of
additional shares of FHLB stock.





Please
refer to Note 5 and the discussion in this report, under the caption “Liquidity
and Capital Resources,” for more information about the Company’s additional
sources of funding.





22





WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





FINANCIAL CONDITION(continued)





Shareholders’
Equity





Total
shareholders’ equity decreased $906,000 to $18,577,000 at September 30, 2010,
from $19,483,000 at December 31, 2009.  This decrease was a result of
net loss of $927,000 for the first nine months of 2010 and dividends on
preferred stock of $192,000, partially offset by the $35,000 impact on paid-in
capital of the extension of the expiration date of director stock options, the
issuance of $11,000 of common stock under the Employee Stock Purchase Plan, and
the increase in the fair value of available-for-sale securities, net of tax, of
$166,000.





As of
September 30, 2010, the book value per share of the Company’s common stock was
$23.62, compared with $25.29 at December 31, 2009.





RESULTS
OF OPERATIONS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010




Overview





Net loss
for the first nine months of 2010 was $927,000, a negative change from the
$57,000 net income in the same period in 2009.  This change was
primarily due to an increase in the provision for loan losses of $2,299,000 and
an increase in noninterest expense of $150,000.  These negatives were
partially offset by a $825,000 increase in net interest income and an increase
of $130,000 in noninterest income.  Net loss available to common
shareholders for the first nine months of 2010 was $1,160,000 or $1.98 loss per
basic and diluted share after preferred stock dividends of $192,000 and the
amortization of premiums of $41,000 in the first nine months of
2010.  Net loss available to common shareholders was $60,000 or $0.10
per basic and diluted share for the first nine months of 2009.





Net
Interest Income





Net
interest income before the provision for loan losses in the first nine months of
2010 was $5,119,000, an increase of $825,000, or 19.2%, from the $4,294,000
earned in the same period of 2009.  Net interest income increased for
the first nine months of 2010 from the comparable period of 2009 primarily due
to the increase in average loans outstanding combined with the decrease in
interest rates on time deposits.  Net interest margin was 3.45% for
the nine months ended September 30, 2010, representing an increase of 25 basis
points (bp) from the 3.20% for the like period in 2009.





The
following table illustrates the average balances and annualized interest rates
for the nine months ended September 30, 2010 and 2009.  Loans on
nonaccrual status are included in the average loan balance.




23




WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





RESULTS OF OPERATIONS – FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2010(continued)




Nine
      months ended
            
            
            Nine
      months endedSeptember
      30, 2010
            
            
            September
      30, 2009Average
            
            
            
            
            
            Average
            
            
            Average
            
            
            
            
            
            Average($ in thousands)
            
            Balance
            
            
            Interest
            
            
            Rate
            
            
            Balance
            
            
            Interest
            
            
            RateInterest-earning
      assets:Federal
      funds sold and other short term funds
            
            $
            19,635
            
            
            $
            36
            
            
            
            0.25
            %
            
            $
            17,722
            
            
            $
            47
            
            
            
            0.36
            %Securities
      — taxable
            
            
            5,642
            
            
            
            182
            
            
            
            4.53
            %
            
            
            5,933
            
            
            
            212
            
            
            
            4.96
            %Securities
      — tax exempt
            
            
            4,906
            
            
            
            196
            
            
            
            5.57
            %
            
            
            4,529
            
            
            
            183
            
            
            
            5.59
            %Restricted
      stock
            
            
            921
            
            
            
            34
            
            
            
            4.90
            %
            
            
            768
            
            
            
            29
            
            
            
            5.03
            %Loans
            
            
            169,843
            
            
            
            6,430
            
            
            
            5.06
            %
            
            
            152,649
            
            
            
            6,038
            
            
            
            5.29
            %Total
      interest-earning assets
            
            
            200,947
            
            
            
            6,878
            
            
            
            4.58
            %
            
            
            181,601
            
            
            
            6,509
            
            
            
            4.77
            %Noninterest
      earning assets
            
            
            7,722
            
            
            
            
            
            
            
            
            
            
            
            7,654Total
      assets
            
            $
            208,669
            
            
            
            
            
            
            
            
            
            
            $
            189,255Interest-bearing
      liabilities:Checking
      accounts
            
            $
            10,200
            
            
            
            34
            
            
            
            0.45
            %
            
            $
            8,045
            
            
            
            36
            
            
            
            0.59
            %Market
      rate savings accounts
            
            
            73,992
            
            
            
            381
            
            
            
            0.69
            %
            
            
            68,660
            
            
            
            477
            
            
            
            0.93
            %Time
      deposits
            
            
            81,926
            
            
            
            1,215
            
            
            
            1.98
            %
            
            
            70,092
            
            
            
            1,526
            
            
            
            2.91
            %Federal
      Home Loan Bank advances and other borrowings
            
            
            2,490
            
            
            
            68
            
            
            
            3.66
            %
            
            
            4,464
            
            
            
            121
            
            
            
            3.62
            %Total
      interest-bearing liabilities
            
            
            168,608
            
            
            
            1,698
            
            
            
            1.35
            %
            
            
            151,261
            
            
            
            2,160
            
            
            
            1.91
            %Noninterest-bearing
      liabilities
            
            
            20,784
            
            
            
            
            
            
            
            
            
            
            
            20,888Shareholders'
      equity
            
            
            19,277
            
            
            
            
            
            
            
            
            
            
            
            17,106Total
      liabilities and shareholders' equity
            
            $
            208,669
            
            
            
            
            
            
            
            
            
            
            $
            189,255Net
      interest income
            
            
            
            
            
            
            5,180
            
            
            
            
            
            
            
            
            
            
            
            4,349Tax equivalent adjustment
            
            
            
            
            
            
            (61
            )
            
            
            
            
            
            
            
            
            
            
            (55
            )Net
      interest income per financial statements
            
            
            
            
            
            $
            5,119
            
            
            
            
            
            
            
            
            
            
            $
            4,294Net
      interest margin(Net
      yield on average earning assets)
            
            
            
            
            
            
            
            
            
            
            3.45
            %
            
            
            
            
            
            
            
            
            
            
            3.20
            %




24





WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





RESULTS OF OPERATIONS – FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2010(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 year's
rate.  Rate Variance is a change in rate multiplied by the previous
year's 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.





Summary
      of Changes in
              Net
      Interest IncomeNine
      months ended September 30,
              2010
      vs. 2009Increase
      (Decrease) due to($ in thousands)
            
            Volume
            
            
            Rate
            
            
            NetInterest
      income:Federal
      funds sold and other short term funds
            
            $
            5
            
            
            $
            (16
            )
            
            $
            (11
            )Securities
      — taxable
            
            
            (12
            )
            
            
            (18
            )
            
            
            (30
            )Securities
      — tax exempt
            
            
            13
            
            
            
            -
            
            
            
            13Restricted
      stock
            
            
            6
            
            
            
            (1
            )
            
            
            5Loans
            
            
            654
            
            
            
            (262
            )
            
            
            392Total
      interest-earning assets
            
            
            666
            
            
            
            (297
            )
            
            
            369Interest
      expense:Transaction
      accounts (NOW)
            
            
            (8
            )
            
            
            10
            
            
            
            2Market
      rate savings accounts
            
            
            (35
            )
            
            
            131
            
            
            
            96Time
      deposits
            
            
            (208
            )
            
            
            519
            
            
            
            311Federal
      Home Loan Bank advances and other borrowings
            
            
            55
            
            
            
            (2
            )
            
            
            53Total
      interest-bearing liabilities
            
            
            (196
            )
            
            
            658
            
            
            
            462Change
      in net interest income
            
            $
            470
            
            
            $
            361
            
            
            $
            831




Interest
Income





Interest
and fee income on loans for the first nine months of 2010 was $6,430,000, an
increase of $392,000 or 6.5% from $6,038,000 for the first nine months of 2009
primarily due to the increase in average loans outstanding, partially offset by
decreases in the interest rates earned on loans.  Tax equivalent
interest and dividend income from securities and short-term funds decreased 4.9%
to $448,000 through the first nine months of 2010, from $471,000 in the same
period in 2009 primarily due to lower rates earned on Federal funds sold and
other short-term funds and lower rates earned on securities purchased in
2010.





25




WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





RESULTS OF OPERATIONS – FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2010(continued)





Interest
Expense





Interest
expense decreased 21.4% when comparing the nine months ended September 30, 2010
with the same period of 2009.  Total interest expense was $1,698,000
for the first nine months of 2010, compared to $2,160,000 in the same period of
2009.  Interest on deposits decreased $409,000, or 20.1%, to
$1,630,000 in the first nine months of 2010, from $2,039,000 in the same period
of 2009.  The decrease in deposit interest expense was primarily due
to lower rates paid on certificates of deposit (CDs) and market rate savings
accounts, partially offset by increased average CD volume.  Interest
on borrowings was $68,000 for the nine months ending September 30, 2010 compared
to $121,000 for the first nine months of 2009 due to a decrease in the average
balance in FHLB advances in 2010 as compared to 2009.





Net
Interest Margin





Net
interest margin increased 25 bp to 3.45% in the first nine months of 2010 from
3.20% in the like period of 2009 primarily due to the increase in average loan
volume and the decrease in interest rates paid on deposits.





The yield
on earning assets decreased 19 bp to 4.58% for the first nine months of 2010
compared to 4.77% in the same period of 2009.  In the first nine
months of 2010, the yield on loans was 5.06%, down 23 bp from 5.29% in the first
nine months of 2009.  The yield on loans is negatively impacted by the
increase in loans placed on nonaccrual status because these loans are included
in loans outstanding although they are not earning interest.





In the
first nine months of 2010, the cost of interest-bearing deposits was 1.31%, down
55 bp from 1.86% in the like period in 2009.  This decrease reflects
overall market interest rate decreases and the Company’s replacing higher-cost
maturing CDs with lower-cost CDs in the current lower interest rate
environment.  The overall cost of interest-bearing funds (deposits and
borrowings) was 1.35% in the first nine months of 2010, compared with 1.91% in
the same period of 2009.





Provision
for Loan Losses





The
provision for loan losses was $2,967,530 and $668,700 for the nine months ended
September 30, 2010 and 2009, respectively, representing an increase of
$2,298,830.  The increase in the provision was due to increases in
specific allocations on impaired loans, increases in classified loans and
increases in net charge-offs.  Refer to the discussion of the
allowance for loan losses in the asset section of the Management’s Discussion
and Analysis for detailed information related to the provision for loan
losses.





26




WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





RESULTS OF OPERATIONS – FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2010(continued)





Noninterest
Income





Total
noninterest income for the first nine months of 2010 was $491,000, an increase
of 36.0% from $361,000 for the same period in 2009, primarily due to increases
in rental income of $37,000, gains on sales of SBA loans of $65,000 and gains on
sales of mortgage loans of $20,000.  In the first nine months of 2010,
rental income from leasing the Company’s two OREO properties to three tenants
totaled $58,000 while in the same period in 2009 rental income from OREO
property leased to one tenant totaled $21,000. The increase in gains on loan
sales is due to the sale of fifteen residential mortgage loans totaling
$2,254,000 for a total gain of $39,000 in the 2010 nine months compared to the
sale of six mortgage loans totaling $1,110,000 for a total gain of $19,000 in
the 2009 nine months.





Noninterest
Expenses





Noninterest
expenses were $4,144,000 for the first nine months of 2010, an increase of
$150,000 or 3.8% over the $3,994,000 for the same period of
2009.  This increase is mainly attributable to increases in collection
and OREO expense of $121,000 related to the cost to re-appraise properties
securing nonaccrual and other troubled loans and the cost of maintaining current
OREO properties.  Other factors included an increase in directors’
fees of $28,000 related to extending stock options in the first quarter of 2010
that would have expired in 2010 and 2011 for an additional five years, an
increase of $33,000 in data processing costs related to the Company’s core data
processing conversion in the third quarter of 2010, and an increase in other
noninterest expenses detailed below.  These increases are partially
offset by reductions of $50,000 in salaries and benefits due to a reduction in
the number of full-time-equivalent employees, a decrease of $30,000 in occupancy
and equipment due to certain equipment purchased in 2004 in connection with the
opening of the Company’s Brecksville office being fully depreciated by late
2009  and a $21,000 decrease in FDIC insurance.  Related to
FDIC insurance, in 2009 there was a special FDIC assessment totaling $90,000,
while regular premiums have increased $69,000 in the current year due to premium
increases and the increase in the Company’s total deposits.





27




WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





RESULTS OF OPERATIONS – FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2010(continued)





Total
other noninterest expense for the first nine months of 2010 and 2009 consisted
of:





Nine
      months ended
              September
      30,2010
            
            
            2009Supplies,
      printing and postage
            
            $
            64,000
            
            
            $
            60,000Loan
      expenses
            
            
            43,000
            
            
            
            37,000Dues
      and memberships
            
            
            21,000
            
            
            
            20,000Travel
      and entertainment
            
            
            47,000
            
            
            
            32,000Insurance
            
            
            24,000
            
            
            
            26,000Telephone
            
            
            16,000
            
            
            
            19,000CDARS
      fees
            
            
            12,000
            
            
            
            18,000Losses
      on other assets
            
            
            32,000
            
            
            
            --Other
            
            
            36,000
            
            
            
            34,000$
            295,000
            
            
            $
            246,000





Included
in travel and entertainment in 2010 was $24,000 related to the Company’s data
processing conversion in the third quarter.





For the
first nine months of 2010, the Company recorded $575,000 of income tax benefit
arising from the net loss.  The Company’s effective tax rate for the
period was (38.3%).  Total income tax expense (benefit) differs from
amounts computed by applying the federal income tax rate of 34% of pre-tax
income in all periods presented mainly as a result of the favorable tax
treatment for municipal bond securities which are generally
tax-exempt.  Also contributing to this difference is the favorable tax
treatment of the Company’s investment in the single-premium cash surrender value
life insurance policies.





RESULTS
OF OPERATIONS – FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010





The
Company’s net loss for the third quarter of 2010 was $550,000, which was
$696,000 lower than the net income of $146,000 in the same period in
2009.  The decrease was primarily due to a $1,213,000 increase in the
provision for loan losses and a $105,000 increase in noninterest expenses,
partially offset by an increase of $184,000 in net interest income and a $81,000
increase in noninterest income.  Net loss available to common
shareholders was $627,000, or $1.07 loss per basic and diluted share after
dividends and amortization of premiums on preferred stock of $78,000 in the
third quarter of 2010. In the same quarter of 2009, net income available to
common shareholders was $69,000, or $0.12 per basic and diluted
share.




28








WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





RESULTS OF OPERATIONS – FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 2010(continued)





Net
Interest Income





Net
interest income before the provision for loan losses in the third quarter of
2010 was $1,752,000, an increase of $184,000, or 11.7%, from the $1,568,000 for
the same quarter of 2009.  The increase in net interest income is
primarily attributable to the higher volume of loans and lower cost of deposits
in 2010 compared to 2009, partially offset by the lower rates earned on loans
and the higher volume of deposits.  Interest income increased $49,000
and interest expense decreased $135,000 in the third quarter 2010 as compared to
the same quarter of 2009.  In the third quarter of 2010, the net
interest margin increased to 3.52%, up 13 bp from 3.39% for the same quarter of
2009.





The yield
on loans was 5.12% in the third quarter of 2010, down 13 bp from 5.25% for the
same quarter of 2009.  The overall cost of interest-bearing funds
(deposits and borrowings) was 1.27% for the third quarter of 2010, down 49 bp
from 1.76% for the same quarter of 2009.  The cost of interest-bearing
deposits was 1.25%, down 46 bp from 1.71% for the like quarter of
2009.





Provision
for Loan Losses





The
provision for loan losses was $1,400,000 in the 2010 third quarter, an increase
of $1,213,000 from the $187,000 provision in the 2009 quarter.  The
increase in the provision for loan losses for the current quarter was due to
increases in loans individually evaluated for impairment, increases in net
charge-offs and increases in classified loans.





Noninterest
Income





Total
noninterest income for the third quarter of 2010 was $210,000, an increase of
$80,000, or 62.4%, from $130,000 for the same period in 2009.  The
increase was primarily due to the recognition of $65,000 in gains on the sales
of five SBA-guaranteed loans





Noninterest
Expense





In the
third quarter of 2010, total noninterest expense increased $105,000, or 7.9%,
compared with the same quarter of 2009.  The increase in noninterest
expense was primarily due to increases in FDIC insurance of $45,000 and an
increase of $57,000 in costs associated with collection activities and OREO
properties.





29




WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





RESULTS OF OPERATIONS – FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 2010(continued)





Total
other noninterest expense for the three months ended September 30, 2010 and 2009
consisted of the following:





Three
      months ended
              September
      30,2010
            
            
            2009Supplies,
      printing and postage
            
            $
            24,000
            
            
            $
            21,000Loan
      expenses
            
            
            18,000
            
            
            
            16,000Travel
      and entertainment
            
            
            28,000
            
            
            
            13,000Insurance
            
            
            9,000
            
            
            
            10,000CDARS
      fees
            
            
            —
            
            
            
            2,000Telephone
            
            
            6,000
            
            
            
            6,000Dues
      and subscriptions
            
            
            7,000
            
            
            
            8,000Other
            
            
            24,000
            
            
            
            19,000$
            116,000
            
            
            $
            95,000





In the
third quarter of 2010, there were $21,000 in travel expenses related to the
Company’s data processing conversion.





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 $35,302,000
at September 30, 2010, compared to $28,888,000 at December 31,
2009.





At
September 30, 2010, the Holding Company had approximately $395,000 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 obtaining additional Federal Home Loan Bank advances, purchasing federal
funds, selling loans, or acquiring one-way buy CDARS, additional national market
CDs or brokered deposits.  The Company also can borrow under various
lines of credit.




30





WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





LIQUIDITY AND CAPITAL RESOURCES(continued)





As
discussed previously, total shareholders’ equity decreased $906,000, to
$18,577,000 at September 30, 2010 from $19,483,000 at December 31,
2009.  The decrease was due to net loss of $927,000 for the first nine
months of 2010 and dividends on preferred stock of $192,000, partially offset by
the $35,000 impact on paid-in capital of the extension of the expiration date of
director


stock
options, proceeds of $11,000 from the Employee Stock Purchase Plan (resulting in
1,160 shares issued), and an increase of $166,000 in the net unrealized gains on
available for sale securities.





The
Company’s 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 Bank’s regulatory capital position.





The
Company has a $2.0 million 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 September 30, 2010 and December
31, 2009.





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 are 16,250 shares of authorized but unissued
shares of stock allocated to the Plan.  Because the Plan has been
registered with the


SEC,
there are no 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 September 30, 2010, a total of 5,779 shares of
common stock are held by 28 participants through the Plan.





INTEREST
RATE RISK





Management
seeks to manage volatility caused by changes in market interest
rates.





The
Company’s results are, by their nature, sensitive to changes in interest rates,
which can affect the Company’s net interest income and therefore its net
income.  The primary source of interest rate risk in the Company’s
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.




31





WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2010





INTEREST RATE RISK(continued)





The
Company’s 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  September 30, 2010 the
Company was minimally liability sensitive in the one-year category, with $127.8
million in assets and $132.0 million in liabilities subject to repricing during
the next year.  However, most of the assets reprice more rapidly than
the liabilities (due to their respective contractual
provisions).  Management has the ability to control the repricing on
non-maturity deposits, such as checking and savings accounts.  A
significant portion of the Company’s liabilities are Market Rate Savings
accounts on which the Company generally sets the interest rate based on a
national money market index.  However, in 2009 and the first nine
months of 2010, management did not reduce the interest rates paid on Market Rate
Savings accounts to the extent indicated by the index because the competitive
banking environment in our 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 Company’s net interest income will
benefit modestly from a 200 bp increase in interest rates, since interest income
will increase more rapidly than interest expense.   As of
September 30, 2010, the model indicates that if market interest rates were to
experience an immediate increase of 100 bp, the Company’s net interest income
would decrease by approximately 0.2%, while if rates were to increase by 200 bp,
the Company’s net interest income would increase by approximately
0.9%.  Modeling for a 100 bp 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 any loan that, in management’s 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 Company’s Loan Review
Committee, which is comprised of three independent members of the Company’s
Board of Directors, is responsible for reviewing the results of this independent
third party assessment and monitoring the credit quality of the loan
portfolio.




32




WESTERN
RESERVE BANCORP, INC.


CONTROLS
AND PROCEDURES


September
30, 2010





The
Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company’s disclosure controls and procedures as of September 30, 2010,
pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were, to the best of their knowledge,
effective as of September 30, 2010, in timely alerting them to material
information relating to the Company (including its consolidated subsidiary)
required to be included in the Company’s periodic SEC filings.





There was
no change in the Company’s internal control over financial reporting that
occurred during the Company’s fiscal nine months ended September 30, 2010, that
has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.




33




WESTERN
RESERVE BANCORP, INC.


FORM
10-Q


September
30, 2010





PART
II–OTHER INFORMATION





Item 1.
            
            Legal
      Proceedings
            
            NoneItem
      1a.
            
            Risk
      Factors
            
            Not
      applicableItem
      2.
            
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            NoneItem
      3.
            
            Defaults
      Upon Senior Securities
            
            NoneItem
      4.
            
            Removed
      and ReservedItem
      5.
            
            Other
      Information
            
            None




34




Item 6 –
Exhibits




WESTERN
RESERVE BANCORP, INC.
 FORM
10-Q
 September
30, 2010


Exhibit No.
            
            Description of
    Exhibits3.1
            
            Amended
      and Restated Articles of Incorporation of Western Reserve Bancorp,
      Inc.  (incorporated by reference to the Company’s 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 Company’s 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 Company’s Report on Form 8-K
      filed with the Commission on December 19, 2005 and the Company’s 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 Company’s
      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 Company’s 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 Company’s Report on Form 10-KSB filed with the
      Commission on March 28, 2003 and Company’s 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 Company’s Report on Form 10-KSB filed
      with the Commission on March 28, 2003 and the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s Report on Form
      10-KSB filed with the Commission on March 30, 2005)
            
            *







*   Previously
      filed and incorporated herein by
reference.





35


WESTERN
RESERVE BANCORP, INC.
 FORM
10-Q
 September
30, 2010


Exhibit No.
            
            Description of
    Exhibits10.10
            
            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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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
      Company’s 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 Company’s 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,
    201011
            
            Statement
      re: Computation of Per Share Earnings (incorporated by reference to the
      Company’s Report on Form 10-Q filed with the Commission on November 15,
      2010)
            
            *14
            
            Western
      Reserve Bancorp, Inc. Code of Ethics and Business Conduct (incorporated by
      reference to the Company’s 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 Officer31.2
            
            Certification
      under Section 302 of the Sarbanes-Oxley Act by Cynthia A. Mahl, Executive
      Vice President and Chief Financial Officer




*   Previously
filed and incorporated herein by reference.




36




WESTERN
RESERVE BANCORP, INC.




FORM
10-Q




September
30, 2010




Exhibit No.
            
            Description of Exhibits32.1
            
            Certification
      under Section 906 of the Sarbanes-Oxley Act by Edward J. McKeon, President
      and Chief Executive Officer32.2
            
            Certification
      under Section 906 of the Sarbanes-Oxley Act by Cynthia A. Mahl, Executive
      Vice President and Chief Financial Officer







*   Previously
filed and incorporated herein by reference.




37




WESTERN
RESERVE BANCORP, INC.


FORM
10-Q


Nine
months ended September 30, 2010





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.




Western Reserve Bancorp,
      Inc.Date:
      November 15, 2010
              By:
              /s/
      Edward J. McKeonEdward
      J. McKeonPresident
      and Chief Executive Officer(Principal
      Executive Officer)
  /s/ Cynthia
      A. MahlCynthia
      A. MahlExecutive Vice President/Chief
      Financial Officer(Principal
      Financial Officer)





38